GYF’s A&A Services Group performs a full range of financial statement services including audits, reviews and compilations. Each of these services provides a level of “assurance” about whether the financial statements are in accordance with the financial reporting framework. The level of services required by an entity depends upon a number of circumstances. This article highlights the differences between audits and reviews, and provides examples of when each may be required.
Review
The objective of a review engagement is to provide limited assurance that no material modifications are necessary for the financial statements conform with the applicable accounting principles.
Unlike an audit, a review does not involve verification procedures or detailed testing (e.g., examining invoices or payment support). Instead, the reviewer performs analytical procedures and makes inquiries of management. If inquiries suggest uncertainty or the possibility of material misstatement, the reviewer may request additional information such as subledger detail or schedules supporting financial statement disclosures.
At the conclusion of a review, the reviewer issues a report noting any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
Common circumstances in which an entity may be required or requested to obtain a review include (but are not limited to):
- Debt requirements established by a bank (based on instrument size or risk)
- Requests from investors or shareholders
- Requests from a governing board or committee
- State-level nonprofit reporting requirements
Audit
The objective of an audit is to provide reasonable (but not absolute) assurance that the financial statements are free from material misstatement, whether due to fraud or error.
During an audit, the auditor performs substantive procedures and detailed testing of transactions, which include assessing balance sheet areas, identifying risks of material misstatement, and tailoring procedures to address those risks. For example, when testing accounts payable, the auditor may review payments made subsequent to year-end along with invoice and payment documentation to test for completeness of liabilities related to the fiscal year under audit. Entities subject to an audit must provide supporting schedules and subledgers for balance sheet and income statement accounts, as well as documentation for required disclosures, as applicable.
In addition, the auditor evaluates the entity’s internal controls to determine whether significant deficiencies or material weaknesses exist that could lead to material misstatements. These procedures may include reviewing management-prepared memoranda or other internal control documentation.
At the conclusion of the audit, the auditor issues an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The auditor is also required to communicate any identified significant deficiencies or material weaknesses in internal control to management and those charged with governance.
Common circumstances in which an entity may be required or requested to obtain an audit include (but are not limited to):
- Public company reporting requirements (SEC)
- State-level nonprofit reporting requirements
- Nonprofits receiving significant federal funding (greater than $750,000, or $1 million for fiscal years beginning on or after October 1, 2024)
- Debt covenant requirements
- Requests from a governing board or committee
- Mergers and acquisitions
Final Thoughts
Whether an entity requires a review or an audit depends on its circumstances, regulatory requirements, and stakeholder needs. In either case, the service provider must remain independent to comply with professional standards, ensure the integrity of the engagement, and provide the appropriate level of assurance. (see related post on independence). Please contact GYF at 412-338-9300 to discuss the assurance services required by your entity.
