When it comes to ensuring the integrity of financial reporting, two primary types of assurance engagements are available: Audits and Reviews. Both play a vital role in enhancing the credibility of financial information, but they differ significantly in scope, depth, and the level of assurance provided. Understanding these differences is essential for directors, stakeholders, and users of financial reports—particularly when making decisions around investment, lending, or contractual arrangements.
Assurance engagements can differ in size and scope depending on varying factors, which are discussed later in this article; however, they can generally be categorised into two key types:
Reasonable Assurance (Audit)
This is the highest level of assurance, it involves:
- A detailed risk assessment of material misstatements
- Extensive testing of transactions and balances
- Evaluation of internal controls and accounting estimates
- Consideration of fraud risks and legal compliance
While audits provide a robust level of confidence, they do not eliminate all risk—absolute assurance is not possible due to sampling limitations.
Limited Assurance (Review)
This engagement provides negative assurance, meaning the auditor is not aware of any material misstatements. It typically involves:
- Analytical procedures
- Inquiries of management and governance personnel
Key Differences in Procedures
Audit Engagements Include:
- In-depth understanding of the entity and its systems
- Assessment of financial reporting frameworks
- Evaluation of IT systems and internal controls
- Testing of transactions and balances
- Review of going concern assumptions
- Compliance checks with Australian Accounting Standards
Review Engagements Include:
- Basic understanding of the entity and its environment
- Inquiries into significant changes in financial data
- Analytical procedures to identify trends and anomalies
Can You Elect to Undertake a Review Instead of an Audit?
Whether a review is an option depends on several factors:
- Constitutional or legal requirements: If your governing document mandates an audit, a review is not permitted
- Not-for-profits registered with the ACNC: May opt for a review if annual revenue is under $3 million
- Other not-for-profits: Refer to relevant state or territory legislation
- For-profit entities registered with ASIC: Must meet large proprietary company thresholds for audit. Reviews are not a substitute, although listed entities require a review of half-year financial reports
- External requirements: Bank covenants, investor agreements, grant conditions, or plans for public listing may necessitate an audit or review
Cost and Time Considerations
Audits are more resource-intensive due to the depth of procedures involved. Reviews, being less detailed, are generally more cost-effective and quicker to complete. However, the choice should be based on assurance needs—not just cost.
Selecting between an audit and a review should be guided by your entity’s legal obligations, stakeholder expectations, and the level of assurance required. At Accru Melbourne, we recommend discussing your options with your board and advisors to ensure the engagement type aligns with your financial reporting needs and provides value to users of your financial statements
