What are audits and reviews?
Audits and reviews are engagements intended to provide an enhanced degree of confidence in a set of financial statements within a certain accounting framework. An accounting framework is a set of rules or standards used to prepare financial statements. The framework determines how the balances and transactions in the financial statements are measured and presented, and what information needs to be disclosed in the notes to the financial statements. Depending on the type of entity (public, private, not-for-profit), different frameworks may be used to prepare the financial statements.
An audit or review engagement consist of a set of procedures to gain a degree of confidence that the financial statements were prepared in accordance with the framework (in all material respects). The area where they differ are the degree of assurance that is provided, and the procedures performed under each engagement.
Reasonable vs. limited assurance
Audits are designed to obtain reasonable assurance. Reasonable assurance is a high (but not absolute) level of assurance that the financial statements are materially in accordance with the stated framework.
Reviews are designed to obtain limited assurance. While the definition is a little vague, limited assurance is defined as being a meaningful level, but less than reasonable assurance.
What extra work is done in an audit?
A review consists of procedures primarily including inquiry and analytical procedures. This includes asking questions of people within or outside the organization and evaluating financial information through the lens of plausible relationships to determine if anything causes the reviewer to believe the statements aren’t presented according to accounting framework.
An audit is a more rigorous engagement that includes obtaining an understanding of a client’s business and industry, identifying and assessing overall and specific risks of material misstatement, and obtaining sufficient audit evidence using procedures such as inquiry, analytical procedures, confirmation, recalculation, sampling, inspection, and observation.
When is an audit or a review necessary?
The Business Corporations Act of Alberta requires all companies to appoint an auditor every year. Although, if the company is not a public company, the shareholders may waive the requirement to have an audit. If a corporation has significant financing, the bank may require an audit or a review as part of the financing agreement. Audits and reviews are usually required under the by-laws of most not-for-profit organizations.