How can a company determine whether an audit or a review is a better fit for it?
If you’re a public company, registered with the SEC, you are required to have an annual audit completed. Private companies — which usually have outside investors — may require an audit to provide assurance that their financial statements are correct and management is utilizing their capital investment properly.
A bank may also drive the need for an audit, because the terms of a loan agreement may dictate an audit. However, if a bank is comfortable with a company, it may forgo that audit and only require a review.
Nonprofits also frequently require audits, because donors want to be sure their donations are being used as they had been designated and intended.
Outside of those requirements, however, it is management’s or the board’s decision to determine whether it wants to have a review or an audit performed. If a company has very experienced staff members, has reliable financial information and management is comfortable with the information it is receiving, a review is probably the better option. But if a business has very complicated systems with complicated accounting issues or it has outside investors, an audit would be the better option.
To save money, some companies may alternate which process they choose, for example, doing a review each year but opting for an audit every third year.
What do audits and reviews of a company’s management entail?
The process can be disruptive to a company. A review can generally take about 100 hours, but an audit can be twice that or significantly more.
In a review, the accountants will perform analytical procedures and then sit down with the client to discuss. Management will have to take time out of their busy days to talk to the accountants, which prevents them from doing their regular duties.
In an audit, the auditors could be at a company for weeks. The auditors are constantly asking questions and asking for supporting documentation, and that can be disruptive to the company.
What should a company look for when choosing an accounting firm to perform a review or an audit?
A company should look at the accounting firm’s industry expertise, depth of resources and reputation. In addition, the company should obtain the accounting firm’s Peer Review report. A peer review is a review of the accountant’s work by another accounting firm regarding the quality of the accounting firm’s work. The peer reviewer issues a report on the results of their procedures.
Deborah Sabo is a director at SS&G. Reach her at (440) 248-8787 or [email protected].
