What is the difference between an audit and a review?

While both an audit and a review examine a company’s financial records, the processes differ in depth, cost, and the level of assurance they provide. An audit is the most extensive type of examination and is often required by lenders, investors, and government agencies like the Securities and Exchange Commission (SEC). In an audit, an independent Certified Public Accountant (CPA) thoroughly examines the company’s financial records, analyzing transactions and supporting documents, verifying balances with financial institutions, and evaluating the company’s accounting procedures and internal controls. This provides the highest possible level of assurance that records are accurate and trustworthy.

 

A review, on the other hand, is a less intensive and therefore less costly procedure. In a review, the CPA largely relies on information supplied by management rather than independently investigating and confirming that information. Unlike audits, reviews don’t include evaluation of a company’s accounting procedures and internal controls. As a result, it provides a lower level of assurance than an audit.

 

What should you consider when deciding whether an audit is needed?

The most important factors in determining whether an audit or review is more appropriate include the purpose of the procedure, the size and complexity of the business, and whether a full audit will likely be needed in the near future.

 

What is the size and complexity of your company?

Large, highly complex businesses face higher levels of risk in their accounting practices than smaller, simpler entities. The larger the company and the more intricate its finances, the greater the potential for mistakes and abuse. As a result, these businesses may benefit from the heightened scrutiny of an audit, which is better able to detect error and fraud. If your business is expanding rapidly, an audit could help ensure your procedures stay on track as the company grows and correct any accounting issues before they balloon out of control.

 

Why is the information needed?

Often, lenders and other creditors require companies to undergo some sort of financial assessment as a condition of doing business with them. It’s worth investigating whether an audit is strictly required in these cases or if the requesting business would be satisfied with a review. If you find that the requesting business will accept a review, this could result in substantial savings for your company. In many cases, however, these external stakeholders may require an independent audit to mitigate their risk.

 

Additionally, some industries are subject to more stringent financial regulations than others. Companies that work in areas such as finance and healthcare, for example, as well as all publicly traded companies, must undergo regular financial audits. Be sure you understand the industry regulations that apply to your business, including whether audits are required.

 

What’s on the horizon for your company?

Sometimes, a company can benefit from an audit even if it’s not required by an outside party. If you are looking to sell your business or attract investors in the near future, then it could make sense to pay for a full audit even if it’s not required at this point. The reason for this is that, contrary to popular belief, a review cannot be easily expanded into a full audit. So, if you pay for a review this year and end up needing an audit next year, this could necessitate going back over the same financial statements again with a more critical eye. This could cost your company more in the end than undergoing the full audit this year.

 

What does your CPA say?

Before requesting an audit or review, discuss the reasons for the financial assessment and any plans that may require additional financial scrutiny with your CPA. They will be able to provide valuable insight on the procedure that would best benefit your company at present as well as support your goals for the future.

 

Choosing the Best Path Forward for Your Business

Audits and reviews provide different levels of assurance that financial records are accurate. While reviews can save businesses money and be appropriate in some instances, audits provide greater accuracy and involve deeper scrutiny. As a result, audits carry greater credibility with creditors and investors. When determining which path to take, consider the potential risks of missing errors or abuse, the requirements of your industry, and your plans for the near future.

 

Rosenberg Chesnov Advisors, LLC, a Stable Rock Company, assists startups and enterprises across industries to strengthen their financial health, support strategic decision-making, and fuel growth. Learn more about our firm, or subscribe to our newsletter to receive ongoing insights about business accounting, tax, and financial strategy.