External stakeholders use your financial statements to inform their decisions involving your business. Financial reviews and audits both provide assurance that it’s safe for them to do so, but to different degrees.
Many companies default to the higher level of assurance, but that can result in a significant waste of time and capital. This guide will help you choose between financial review vs audit services more wisely. We’ll also discuss audit-readiness and how to prepare for both types of engagements.
What Is Assurance in Accounting?
Assurance is a type of service in which a Certified Public Accountant (CPA) firm evaluates your financial statements for accuracy and compliance with applicable reporting standards, like Generally Accepted Accounting Principles (GAAP).
This lends your accounting records a certain level of credibility. As a result, assurance engagements typically become necessary when external stakeholders want confirmation that they can use your financial documentation for their due diligence.
For example, a lender or investor may request reviewed financial statements before committing their funds to your business. Similarly, the Public Company Accounting Oversight Board (PCAOB) requires that public companies publish audited financial statements to protect investors.
What Is a Financial Review vs an Audit?
Financial reviews and audits are the two main types of assurance engagements. They involve different degrees of investigation into your financial statements, providing external stakeholders with varying levels of confidence.
Both financial reviews and audits result in the issuance of a written report. However, a review report merely states that the accountant is unaware of any material modifications you should make to your financial statements.
Meanwhile, an audit report expresses a formal opinion on whether your financial statements and disclosures are fairly presented in all material aspects according to accounting standards.
Potential opinions include unqualified agreement, qualified agreement and adverse disagreement. Auditors can also issue a disclaimer of opinion when they have insufficient evidence to determine one way or another.
What Is a Financial Review?
A financial review provides “limited assurance” that your financial statements are free from material misstatement and compliant with accounting standards. In simple terms, that means your accountant hasn’t found any significant issues that need correction.
Review engagements primarily involve the application of analytical procedures to your financial statements. For example, a CPA might compare line items across current and previous periods to identify unusual fluctuations.
When the reviewing accountant discovers anomalies, they ask your company’s management for an explanation and consider its merits. However, they generally don’t perform testing or examination beyond that level.
What Is a Financial Audit?
A financial audit is much more intensive than a review. It provides “reasonable assurance” that your financial statements are free of material misstatement and presented fairly according to accounting standards.
This is the highest level of assurance, though not a guarantee.
To provide greater assurance, audits involve rigorous investigation. In addition to analytical procedures and management inquiries, this includes procedures like:
- Confirmation of account balances with third parties
- In-person inspection and counting of physical assets
- Substantive testing and verification of transactions
- Assessment of internal control systems and fraud risk
For example, if your business has a meaningful inventory, auditors must visit your storage facilities. They’ll observe your inventory count process and perform various tests to double-check your accuracy.
Financial Review vs. Audit: Which Do You Need?
In many cases, whether you need a financial review or an audit depends on external requirements. Lenders, investors, boards and regulators typically specify the level of assurance they expect, dictating whether you opt for one or the other.
That said, if a stakeholder requests an audit when you were hoping a review would be sufficient, it can be worth discussing the issue. For example, they may have defaulted to an audit out of habit rather than actual necessity.
If you convince them to accept a review, it will likely be much less expensive. Review costs are often around half of audit fees. Of course, actual costs vary significantly between providers and depend on your company’s size and complexity.
Beyond cost savings, reviews tend to be less disruptive to your finance teams, as audits require more preparation and ongoing cooperation. For example, reviews often last a few days to several weeks, while audits typically take around three months to complete.
Generally, financial reviews are more appropriate for smaller companies with lower-stakes reporting needs. For example, many banks accept reviewed financial statements for traditional term loans, especially when default risk is low. However, audits become more likely as your business grows in size and complexity. For example, venture capital investors often start asking for audited financial statements once startups reach their Series B or Series C funding round.
Financial Audit vs Review
| Financial Audit | Financial Review | |
| Typical Clients | Larger, more complex businesses | Smaller, more straightforward businesses |
| Assurance Level | Reasonable assurance | Limited assurance |
| Procedures | Substantive testing, third-party verification, internal control evaluation | Analytical procedures, management inquiries |
| Outcome | Comprehensive report including formal opinion | Limited report with no formal opinion |
| Typical Fees | Significant but dependent on business size and provider | Roughly half of equivalent audit fees |
| Timelines | Several weeks to several months | Several days to several weeks |
Audit Readiness: How to Prepare for Assurance
It’s best to prepare for assurance engagements well before you need them. Waiting until a prospective business associate requests reviewed or audited financials can send you scrambling at the last minute, which is rarely efficient.
Start with the fundamentals. Maintain separate business bank accounts, create a well-organized chart of accounts, and set up automated bookkeeping software. Implement a monthly or quarterly close and perform consistent account reconciliations.
In addition, make sure to perform annual reconciliations between your company’s financial statements and tax returns. Discrepancies between the two can trigger inquiries and cause delays during audits and reviews.
Prioritizing documentation is another good habit to build early. Beyond organizing evidence like contracts and invoices, this should include creating clear records of accounting policies and internal controls.
Once the eventual audit or review approaches, check in with your finance staff. Make sure they have the knowledge to answer technical requests in support of the assurance project—and the capacity to do so without disrupting daily operations.
The Role of Finance Leadership
Strong finance leadership is the key to navigating audits and reviews successfully. Businesses often need someone with the expertise and experience to manage high-level responsibilities like:
- Confirming that accounting fundamentals are set up correctly
- Establishing documentation workflows and ensuring consistency
- Predicting when your business may need assurance services
- Recognizing when a financial review vs audit is appropriate
- Leading interactions with CPA firms and assurance providers
However, the cost of a full-time finance executive is a significant investment for any company. Many small and medium-sized businesses (SMBs) struggle to justify the costs, especially startups and other rapidly growing companies.
In these cases, fractional audit and assurance leadership can be an effective alternative, providing expert finance leadership on a flexible basis. This makes it easy to get increased support when you need it most, then dial back in slower periods to keep costs down.
Navigate Assurance Engagements With Paro
Financial reviews and audits are accounting services meant to assure external stakeholders that they can rely on your financial statements. Financial reviews provide limited assurance, while audits provide the highest level of assurance.
However, audits can often cost twice as much as reviews and are significantly more labor intensive. As a result, you should generally only choose an audit over a review to satisfy stakeholders or regulations.
If you expect to need assurance services, fractional audit experts and CPAs can be an invaluable source of support. Paro can match you with experts who can expand your team’s capacity for audits or financial reviews, or even provide strategic finance leadership when you need it most.
