Non-public corporations are generally not required to have audits of their financial statements every year. If a private company is hunting for some level of assurance, they're going to want to think about either having an audit performed, or a review performed. The following is a discussion on the differences.
An audit provides a much higher level of assurance than a review. The object of a review is to show that nothing came to the attention of the accountant to signal the financials were not legitimate. This negative assurance simply says that nothing stuck out to the accountant that seemed out of the ordinary. An audit on the other hand, provides a high level of assurance. The result of a clean audit is the statement that the financials are free from material misstatements. An audit can be trusted to prove the proper presentation of the financial statements way more than a review can.
Because of this, some places (such as banks offering financing) will require an audit of the financial statements before offering a company a loan, and can even require them to have an audit each year while they have the loan to make certain that they will be in a position to pay the interest and debt payments. An audit allows the banks to be more secure about lending to corporations, which could also allow them to lower the interest rate on the loan.
When an audit is performed, the public accountants do intensive work with the business' internal controls. A review only consists of discussions with certain individuals at the business, performing comparison testing with ratios and taking a look at previous financial statements to look for plausibility, and making enquiries about financial, operating and contractual info. A review does not involve inspecting the business' internal controls or any of the other highly detailed tests that are included in an audit.
While an audit provides a higher level of assurance and often some recommendations for enhancements regarding internal controls, it is also more costly. If an audit is not required by a financing company or the like, then there is not too much of a reason to have one performed when a review would be enough.
An audit provides a much higher level of assurance than a review. The object of a review is to show that nothing came to the attention of the accountant to signal the financials were not legitimate. This negative assurance simply says that nothing stuck out to the accountant that seemed out of the ordinary. An audit on the other hand, provides a high level of assurance. The result of a clean audit is the statement that the financials are free from material misstatements. An audit can be trusted to prove the proper presentation of the financial statements way more than a review can.
Because of this, some places (such as banks offering financing) will require an audit of the financial statements before offering a company a loan, and can even require them to have an audit each year while they have the loan to make certain that they will be in a position to pay the interest and debt payments. An audit allows the banks to be more secure about lending to corporations, which could also allow them to lower the interest rate on the loan.
When an audit is performed, the public accountants do intensive work with the business' internal controls. A review only consists of discussions with certain individuals at the business, performing comparison testing with ratios and taking a look at previous financial statements to look for plausibility, and making enquiries about financial, operating and contractual info. A review does not involve inspecting the business' internal controls or any of the other highly detailed tests that are included in an audit.
While an audit provides a higher level of assurance and often some recommendations for enhancements regarding internal controls, it is also more costly. If an audit is not required by a financing company or the like, then there is not too much of a reason to have one performed when a review would be enough.
About the Author:
Rob Green is an accounting article provider for TWM & Co., a Vancouver Chartered Accountant firm.
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