Difference between Audit and Review

Audit Vs Review

Business entrepreneurs look for different options to save their time and money when it comes to financial statements. Both the methods: Audit and Review, is used for the same. But the problem that usually arises is how to choose which one is better? Let's discuss the solution to this problem.

Audit

A very deep examination of the financial records for the company, which determines the current financial position at the given time, is calledan audit.

• It is a more critical process that requires a detailed review of financial transactions and records to conclude.
• The auditor's role is to interview a bunch of employees to survey the same.
• However, it provides the highest level of assurance and credibility.
• The CPA firm which performs the Audit is required to have an appropriate look at the internal controls of the company and any risk of fraud.

Importance of Audit

An audit is crucial to any business organization as it provides credibility to the financial statements and is appropriate in calculating the accounts. It also helps to improve systematic controls.

When is an Audit required?

An auditor should make an audit under the following conditions:

• The company's annual turnover is equal to or more than 10.2 million pounds.
• The company's assets value is more than 5.1 million pounds.
• The employees are more than 50.

Companies that require Audit:

• A public company
• Authorized insurance company
• Banking organization
• A company whose share is traded in a European state

Elements required to make an Audit:

1. Income statement
2. Balance sheet
3. Cash flow statement

Types of Audit

The three types of audits are as follows:

1. Internal audits:These types of audits are generally performed by the organization's employees and are stayed inside the company's premises.They are only prepared for the use of management.

They are used to improve the decision-making process and improve the financial statements before the externals review them.

• External audits:Performed by external organizations and third parties. Unlike internal audits, external provides an unbiased opinion. The major difference between the two is that external Audit is independent of anyone's decision. The organizations that use these audits are KPMG, Ernst & Young (EY), Deloitte, etc.
• Government audits:These are performed to determine whether the financial statements have been prepared accurately, not to misinterpret a company's taxable income.

Review

• It is a service under which the accountant holds limited assurance that there are absolutely no changes required in its financial statements. (Such as GAAP OR IFRS).
• Expense – Audit> Review> Compilation
• This method is used by those businesses whose lenders and creditors have no problem saving the money of an audit.
• It is the responsibility of the management to prepare and present the financial statements, and the accountant should have enough knowledge of both industry and entity.

Procedures

In a reviewed financial statement, the accountant's job is to ensure that no changes are required in the final review of financial statements. The procedures are mainly focused on the mere risks of misstatement. The types of procedures include:

• Ratio analysis
• Financial transactions
• Accounting period
• Journal entries made
• Complex situations

Steps:

There are a few steps under reviewing-

1. Cash
2. Receivables
3. Inventory/capital
4. Investments
5. Assets
6. Long-term liabilities
7. Revenue and expenses
8. Equity
9. Accrued expenses

Note: If the accountant thinks that the financial statements are inappropriate, they should perform additional procedures to obtain the required result. And if still there is nothing that the accountant can do, the accountant should report to the management or withdraw from the same.

Difference-

Let’s take a look at the difference to see which method is better:

BASIS	AUDIT	REVIEW
Reliance on management	The account balance is provided by the management and the auditor will then proceed with their testing.	It also begins with the management providing the account balance however only a tiny amount from that information is tested.
Level of assurance	Higher	Lower
Work performed	An audit is taxing and consists of a long list of procedures.	Review is less taxing.
Time taken	A lot of time	Very less
Understanding of the internal control	Internal control is a must.	It doesn’t involve testing internal control.
Price	The cost of hiring an auditor is relatively high, and less affordable for small scale, or startup companies.	The cost of review is cheape, hence affordable.
Report provided	Free of material misstatement, i.e. only positive opinions.	A conclusion is always provided but in a negative form.

To sum it up, an audit is a more to the point method to study financial statements containing every detail. Whereas a review only considers those steps that establish limited assurance.