Deciding Between An Audit Or Review?

As companies  grow and move along their business life cycle, a question frequently arises as to whether the company should have an audit or review performed. 

Let’s summarize the differences as well as the pro’s and con’s of both of these two types of assurance services provided by CLA and other CPA firms.

Audit

An audit provides the highest level of assurance, including an opinion being rendered on the financial statements.  Auditing standards require that the auditor gain an understanding of the business and internal controls, that the auditor tests transactions and performs substantiation procedures, and communicates findings identified during the audit.  In addition, auditing standards require that the auditor identify any material fraud that could be occurring in an organization. A report with the audit opinion along with the financial statements and footnotes is issued.  Of note, there are two types of auditing standards generally used: AICPA (used for private companies) and the more rigorous PCAOB for public companies (required in public filings, IPO, etc.).   

It should also be noted that a first-time audit will generally be more painful than succeeding audits as a first-time audit will require the auditor to audit both the opening and closing balance sheet.  This generally requires more time for the auditor and company, as well as more fees. 

Why Have An Audit Done

A company usually has an audit done because it is required by a bank/lender, by an investor, or by regulation or a government agency.  Those financial statement users request audited financial statements because it provides them assurance over the numbers contained therein.  It is typically required when seeking high levels of financing, outside investors or when selling a business (note: it is not always required when selling a business and many businesses have been sold without audited financial statements.  Make sure you understand the potential buyer’s needs, whether of quality of earnings report would be better than an audit, or if a review could be used, or even internally generated financial statements).  An audit reduces the information risk inherent in an interest rate provided by a lender; therefore, an audit should result in an improved interest rate if you otherwise did not have an audit.   A completed audit can help move a potential sale or exit of the business along, as opposed to working last minute to arrange an audit and then identifying adjustments during the audit that would be different from preliminary information provided to a prospective buyer.  In selling your business, you are at risk of losing time and momentum, or of identifying large GAAP concerns in diligence, without having an audit performed.  In general, you should consider where you plan to take your business and to understand current and future reporting requirements.  Also, once you achieve a certain business size, it is a good business practice to have an audit even if there is no requirement to have one done. 

Review

A review provides limited assurance and is much less in scope than an audit.  The objective is to ensure there are no material modifications necessary in the financial statements. In requiring less assurance, a review means fewer hours and, consequently, cost savings in relation to an audit as well as less time needed from the company side. A review requires a basic level of understanding for lenders and outside parties.  A review involves primarily analytical procedures and inquiries of management, but no tests of transactions.  The financial statements and footnotes are issued the same as in an audit; however, the accompanying report from the independent accountant notes the limited assurance provided in a review.

Why Have A Review Done

Typically, a review is appropriate as the business grows and seeks larger and more complex levels of financing and credit.  Many companies like to progress towards an audit and first have a review performed to highlight any glaring, material issues and establish a set of financial statements and related footnotes.  In being the cheaper option, many companies attempt to persuade their lenders or outside parties to allow for a review instead of an audit. 

Conclusion

In the end, the decision of whether an audit or review is better for you, depends on many factors including the needs of the party requesting the review or audit, or the objective you trying to achieve in providing financial statements.  CLA would be happy to discuss specific facts and circumstances to ensure you strike the right balance of what is really needed and still control costs.