Differences Between Financial Audits and Reviews
Numerous forms of financial statement accountability evaluations exist and, with some being so similar, it is vital to discern the difference between them when deciding which is appropriate for your business or nonprofit entity. Two evaluations, the financial audit and the financial statement review, are so similar in nature that it’s important to understand the differences. The primary differences between financial audits and reviews are the level of assurance, the reliance on company management, the work performed, and the need to understand internal controls.
Financial Audits Explained
A financial audit provides the highest level of assurance that a company’s financial statements are reported in accordance with generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS) and that they conform to those frameworks. During a financial audit, a Certified Public Accountant skilled in financial audits will perform audit tests of financial data, ensure financial statement account balances, and issue an opinion on the audited financial statements.
Financial Statement Review Explained
A financial statement review is a service to businesses and non-profits for which an accountant provides limited assurance that financial statements conform to (GAAP). The management team of the company performing the review will prepare and present the organization’s financial statements for a review, whereas for an audit the accountant will compile these statements.
Differences in Financial Audits and Financial Statement Reviews
The first major difference between obtaining a financial audit and having an independent CPA review financial statements is the cost. For some entities, a financial audit may be cost prohibitive, forcing them to opt for a financial review to assure board members and other stakeholders that the finances of the company have been reviewed. Reviews are typically performed on businesses whose lenders/creditors allow this approach, and thus they save money by avoiding the cost of a full audit.
Secondly, financial reviews are not required by any state or federal governing body. However, financial audits may be required in certain situations, such as when your nonprofit revenues exceed $500,000, you have received grant money in which the grant agreement states an audit should be performed, your company is applying for a bank loan, or your organization receives more than $500,000 in federal grants.
Lastly, the scope of examination of financial statements is far greater when discussing a financial audit. A financial audit will include amassing evidence that the company has procedures in place which govern how the business complies with regulatory agencies, as well as corroborating ending balances, testing transactions, and even interviewing personnel on company processes. Opposingly, reviews do not require the accountant to test internal controls, assess fraud risk, or to perform other audit procedures.
Is an Audit or Review Most Appropriate?
Deciding which form of financial statement assurance for your business or nonprofit is sometimes made for you by following IRS guidelines. Still other times, you must decide whether a financial statement or a financial audit is more appropriate for your organization. Neither a review nor an audit can provide 100% certainty that fraud or misrepresentation of financial statements hasn’t occurred. Many businesses, both for-profit and nonprofit take solace in knowing that their financial statements have been audited, even when not required by federal regulations. If your organization can benefit from establishing accountability and transparency, then a financial audit is the most appropriate form of accounting assurance.
The Baird Audit Group specializes and focuses solely on all things audit. Contact us today to find out more about our tailored auditing services, which include both reviews and full audits, and how we can provide your business with timely quality assurance. Contact us online HERE or by calling 706-855-9500.