Difference between an Audit and a Review of Financial Statements

The companies act of South Africa, which publicly listed and private companies, close corporations and currently Non-Profit Corporations are registered under requires these organizations to prepare annual financial statements. Depending on the entity’s public interest score and the entity’s activity, The Act requires that the entity is either audited or reviewed.

Definition and Scope of an Audit

An audit of financial statements is a detailed evaluation of whether the financial statements are prepared in all material respects in accordance with elected standards used in the preparation of financial statements and whether the entity complied with all laws and regulations applicable. The general-purpose standards widely used in South Africa for the preparation of financial statements are either International Financial Reporting Standards (IFRS) and IFRS for SMEs. To use IFRS for SME the organization needs to meet certain criteria otherwise the organisation must use IFRS.

An audit of financial statements is performed by a Registered Auditor operating under a registered practice with the Independent Regulatory Board of Auditors (IRBA) in South Africa. Both the individual signing the financial statements and the firm need to be registered with the IRBA. An audit provides a reasonable assurance (not absolute assurance) which is the highest level of assurance that can be independently provided. The auditor issues an audit report, which becomes part of the financial statements. Audits are conducted in accordance with the Auditing Profession Act which requires the International Auditing standards to be used.

Definition and Scope of a Review

A review of financial statements is an evaluation, were the reviewer makes enquiries and performs analytical procedures to obtain sufficient evidence to reach a conclusion. The reviewer reaches a conclusion and does not issue an opinion, as to whether anything came to their attention during the review to suggest that the financial statements are not fairly prepared in accordance with the elected framework. The review provides a lower level of assurance referred to as limited assurance because the evaluation is not as detailed as an audit. It should be noted that assurance is given to the users of the financial statements, albeit a lower level of assurance.

A review of financial statements can be performed by any person who qualifies to become an accounting officer of a close corporation in terms of section 60 of the Close Corporations Act, however if a company has a public interest score of more than 100 the review must be performed by Registered Auditors registered with the IRBA or a Chartered Accountant qualified by the South African Institute of Chartered Accountants. Reviews should be performed based on International Standards on Review Engagements 2400.

Considerations for Choosing Between an Audit and a Review

The following are things to be considered when making the decision to either be reviewed or audited:

• The public interest score of the entity.
• Whether the memorandum has elected for the entity to be audited rather than reviewed.
• Whether the financial statements have been internally prepared or external prepared.
• The activities of the entity, for example, a personal liability entity which holds funds on behalf of others in excess of R5 million; and
• What the users of financial statements require, for example, NPCs and NPOs are often required by donors/grantors to provide audited financial statements, and so are most financial institutions if a company needs loans.

Benefits of an Audit for Small Businesses

Small businesses may still benefit from an audit rather than a review. Keep in mind that recent writings in The Accountant (2018) and by Roberge (2017) describe some of the primary benefits in the context of the cost versus benefit counter argument:

• Assists in the acquisition of money from investors and financial institutions. These parties will benefit from receiving audited financials since it will offer them greater confidence and comfort that investors will receive a return on their investments, as well as greater certainty that the loans will be returned.
• It reveals flaws and vulnerabilities in the company’s accounting system, such as instances when the system may not be accurately monitoring specific transactions.
• Recognizes instances of fraud, such as when firm workers or management are stealing goods or other assets from the company. In certain cases, an auditor may be able to discover disparities and aid the organization in putting in place measures that will prevent these issues from occurring in the future.
• Identify questionable accounting practices: It is difficult to spot these problems unless you have a comprehensive picture, which is only achievable through an audit.
• Improves tax planning: An external audit may aid you in ensuring that you are prepared for tax season and that you are taking advantage of all available tax write-offs and advantages. It is less stressful and easier to submit taxes when you keep meticulous records and plan ahead of time.

We urge businesses to make sure that:

• Their reviewer or auditor is qualified to perform the activity which they are appointed for. All registered auditors are listed in the IRBA’s website, entities should make sure to check that before appointment. Further, most professional accounting associations list all registered personnel in order to confirm if the appointed personnel are who they claim to be.
• What standards the review or audit is performed against?

Audits and Reviews are limited to the financial statements and may not offer all the answers that the management of the entity may want, for example, like whether fraud or corruption has been committed in the organization. There are other assignments that the management may request to be performed to get specific answers, for example:

• Internal Auditor’s give assurance over controls.
• Forensic Auditors give assurance over suspected fraud.
• Data Analysts analysis data for specific uses in decision making.
• IT Auditors review controls over information technology and maturity of technology adoption.
• Knowledge audits provide facts on the knowledge management system.
• Performance audits provide facts on the performance reports.

Entities can also request auditors and / or reviewers to perform specific procedures in order to determine the facts of transactions, systems or processes, compliance or governance and risk management activities. Let Bagaka sit with you to determine the appropriate engagement needed to meet your specific need.