Audit and Reviews

A Comparative Overview Between a Review and Audit

The level of service is determined by your needs as the client, and what your creditors and/or investors require. The higher the level of service required, the more time the CPA needs to complete the engagement and therefore the more costly the engagements. While privately held companies opt for compiled or reviewed statements, credit agreements with lenders often require audited statements.

REVIEW

Reviewed financial statements provide the user with comfort that, based on the accountant’s review, the accountant is not aware of any material modifications that should be made to the financial statements for the statements to be in conformity with the applicable financial reporting framework. See R1 in summary chart below.
A review engagement involves the CPA performing procedures (primarily analytical procedures and inquiries) that will provide a reasonable basis for obtaining limited assurance that there are no material no material modifications that should be made to the financial statements for them to be in conformity with the financial reporting framework. See R2 in summary chart below.
In a review, the CPA designs and performs analytical procedures, inquires and other procedures, as appropriate, based on the accountant’s understanding of the industry, knowledge of the client, and awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated. A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit. See R2 in summary chart below.
The CPA issues a report stating the review was performed in accordance with Statements on Standards for Accounting and Review Services; that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework and for designing, implementing and maintaining internal control relevant to the preparation. See R3 in summary chart below.

AUDIT

Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. See A1 in summary chart below.
In an audit, the auditor is required by auditing standards generally accepted in the United States of America (GAAS) to obtain an understanding of the entity’s internal control and assess fraud risk. The auditor also is required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures. See A2 in summary chart below.
The auditor issues a report that states the audit was conducted in accordance with GAAS, the financial statements are the responsibility of management, provides an opinion that the financial statements present fairly in all material respects the financial position of the company and the results of operations are in conformity with the applicable financial reporting framework (or issues a qualified opinion if the financial statements are not in conformity with the applicable financial reporting framework. The auditor may also issue a disclaimer of opinion or an adverse opinion if appropriate). See A3 in summary chart below.

	Review	Audit
Level of Assurance Obtained by the Accountant/Auditor that the Financial Statements are Not Materially Misstated	R1 Accountant obtains limited assurance that there are no material modifications that should be made to the financial statements	A1 The auditor obtains a high, but not absolute, level of assurance about whether the financial statements are free of material misstatement
Objective	R2 To obtain limited assurance that there are no material modifications that should be made to the financial statements.	A2 To obtain a high level of assurance about whether the financial statements as a whole are free of material misstatement thereby enabling the auditor to express an opinion on whether the FS are presented fairly, in all material respects
Assurance Provided to the User of the Financial Statements.	R3 None – the report provides a statement that the accountant is not aware of any material modifications that should be made to the financial statements.	A3 None – the auditor provides an opinion as to whether the financial statements present fairly, in all material respects, the company’s financial position, results of operations and cash flows.
The accountant is required to obtain an understanding of the entity’s internal control and assess fraud risk	No	Yes
The accountant is required to perform inquiry and analytical procedures	Yes	Yes
The accountant is required to perform verification and substantiation procedures	No	Yes
Situations requiring different levels of service	Often prepared for privately held companies because of requirements of outside third parties (such as banks) that are looking for comfort that the financial statements are not materially misstated	Often prepared for companies because outside third parties (such as banks) require an auditor’s opinion on the financial statements
Differences in costs for each level of service	More costly than a compilation but substantially lower in cost than an audit.	Involves the most work and the cost is substantially higher than a review or compilation

Sources:
CPA: America Counts on CPAs®