The last year has likely put a strain on your business. Financially, strategically, and more, controllers across the US have looked for ways to cut down on costs to keep the business afloat. One way that companies may look to save a few dollars is by opting for a financial review instead of an audit.
While audits are important ways to maximize assurance, some companies may find it easier and equally effective to conduct a financial review. Though something that provides limited assurance, financial reviews can deliver easier audit seasons and may be adequate for compliance. So what does a financial review do and could it be an option for your company? We explore below.
Understanding Levels of Assurance
Before deciding if you should opt to complete a financial review instead of an audit, you first need to understand the levels of assurance. According to FloQast, there are three levels of assurance:
- Compilation: This type of engagement uses the company-provided data to create financial reports in GAAP format. Because the accounting firm is using client-provided, unverified data, there is no assurance provided. The compilation report is in the form of the compiled financial statements.
- Review: Reviews are performed with limited analytical procedures in order to identify and inquire about unusual items or trends. These engagements provide limited assurance.
- Audit: Audits provide the highest level of assurance possible: Reasonable assurance. As compared to a review, this higher level of assurance is provided by verifying the financial information with third parties and through a review of internal control processes.
Financial Review vs. Audit
Understanding whether one works better for you requires you to first understand what each hopes to accomplish.
Financial Review
A review engagement performed by a Certified Public Accountant (CPA) examines the company’s financial statements for compliance with GAAP. This process provides limited assurance that the financials are free from material misstatement.
Audit
A financial audit is performed by a CPA independent of the company, charged with inspecting the financial records that when compiled, form the company’s financial statements.
Requiring different levels of context, an audit looks at a variety of additional things, including physical inspection of source documents, third party confirmation from outside vendors, and gaining an understanding of the internal control environment in order to create the body of audit evidence forming the basis for the audit report.
Which One is Best for You?
As you can see, an audit not only does all of the things accomplished by a financial review, it digs a lot deeper. While a financial review exists to ensure people are doing their job, an audit can provide a much clearer picture of the organization’s financial health.
Which one is right for you? It depends. Pre-IPO companies will need to gain a deeper understanding of numbers, while a small business could benefit from the affordability of a financial review. It all comes down to your risk tolerance. Does your business opt for one over the other? We’d love to know more. Join the discussion in the Controllers Council message board, an exclusive place for controllers council members to discuss tactics and initiatives.
Additional Audit Resources
How Auditors Are Staying Focused in the Wake of COVID
Evolving Audit Evidence Standard: SAS No. 142
Audit in a Connected Business: How Will the Use of Big Data Change Audits?
