Historically, all companies – both public and private – needed to have their financial statements audited on an annual basis. The new Companies Act of 2008 has introduced significant changes for companies with regards to the requirement to be audited or reviewed.
This requirement, more specifically for unlisted companies, is mainly determined by the PI score (Public Interest) which is calculated by allocating points to certain key factors and figures of that company in order to determine whether or not the company has to be audited or independently reviewed. These key aspects include average number of employees, annual turnover, holders of beneficial interest and third party debt.
The general public, and more often, the users of financial statements, appear to lack a basic understanding of the main differences between an audit and a review engagement.
ISA 200 explains the purpose of an audit as to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. In the case of most general purpose frameworks, that opinion is on whether the financial statements are presented fairly, in all material respects, or give a true and fair view in accordance with the framework. An audit conducted in accordance with ISAs and relevant ethical requirements enables the auditor to form that opinion (reasonable assurance).
ISRE 2400 explains that the objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner’s attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework (negative assurance).
The abovementioned extracts can be tabled as follows to provide a high level overview of the differences between these two engagements:
|Comparison of review vs audit|
|Level of assurance obtained by the accountant/auditor||Limited assurance||High, but not absolute assurance|
|Objective||Limited assurance||High level of assurance|
|Assurance provided to user of financial statements||None. Negative assurance is provided to state that the accountant is not aware of any material modifications that should be made to the financial statements.||None. Positive assurance is provided and the auditor provides an opinion on whether or not the financial statements fairly present, in all material respects, the company’s financial position, results of operations and cash flows.|
|Types of audit procedures required:
· Obtain an understanding of the entity’s internal control and assess fraud risk
· Perform inquiry and analytical procedures
· Verification and substantiation procedures
|Difference in costs||Cost lower than audit||Involve much work and cost is substantially higher than a review.|
Even though the types of audit procedures for a review is less than that of an audit, the planning that procedures that goes into the review is exactly the same than the procedures that goes into the planning of an audit. The effect of this that a significant amount of work goes into the planning of both the review and the audit, but it is only the procedures that is different. It is therefore important to highlight that although at first glance the number of procedures performed for review purposes seems to be less than that of an audit, the costs for an independent review is not necessarily less than that of an audit.