Private enterpises are traditionally not required to have audits of their financials annually. If a non-public company is looking for some level of assurance, they are going to want to consider either having an audit performed, or a review performed. The following is a brief 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 (including banks offering financing) will demand 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 ensure that they'll be in a position to pay the interest and debt installments. An audit allows the banks to be safer and more secure about lending to firms, which could also allow them to lower the interest rate on the loan.
When an audit is performed, the accountants do in depth work with the business' internal controls. A review only is composed of dialogues with certain folks at the business, performing comparison testing with proportions and looking at prior financial reports to search for plausibility, and making enquiries about finance, operating and contractual details. A review doesn't involve examining the business' internal controls or any of the other highly detailed tests that are included in an audit.
While an audit provides an increased level of assurance and likely some ideas 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 (including banks offering financing) will demand 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 ensure that they'll be in a position to pay the interest and debt installments. An audit allows the banks to be safer and more secure about lending to firms, which could also allow them to lower the interest rate on the loan.
When an audit is performed, the accountants do in depth work with the business' internal controls. A review only is composed of dialogues with certain folks at the business, performing comparison testing with proportions and looking at prior financial reports to search for plausibility, and making enquiries about finance, operating and contractual details. A review doesn't involve examining the business' internal controls or any of the other highly detailed tests that are included in an audit.
While an audit provides an increased level of assurance and likely some ideas 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 content author for TWM & Co., a Vancouver Chartered Accountant firm.
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