What is the difference between an Audit and an Independent Review?
Audit: An audit is the examination of the financial report of an organisation - as presented in the annual report - by someone independent of that organisation. The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes. The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organisation at a given date, for example: Are details of what is owned and what the organisation owes properly recorded in the balance sheet? Are profits or losses properly assessed? When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work. With some exceptions, all organisations subject to the Corporations Act must have an audit each year. Other organisations may require or request an audit depending on their structure and ownership or for a special purpose. Independent Review: On 1 April, 2011 Companies Act 2008 (“Act”) will replace both the Companies Act 1973 and Corporate Laws Amendment Act 2006. The Act introduces the concept of an “Independent Review” as an alternative form of external independent assurance of financial statements. Private companies in South Africa will be able to replace the annual audit with an Independent Review. The work effort in an independent review engagement is limited to inquiry, analytical procedures and discussions related to the information that the client supplies. Consequently, an independent review does not require the gathering of supporting or independent evidence or an assessment of internal control as would be required in an audit. Management's responses to inquiries are acceptable as long as they appear plausible in the circumstances. The word plausible is often defined in terms such as the information being credible, appearing worthy of belief, or seemingly or apparently valid, likely or acceptable. The level of assurance provided by an Independent Review is lower than an audit, so less work is required and less cost is incurred. However, less work obviously increases the risk of material misstatement, including undetected fraud, management bias, mistakes, omissions and incorrect disclosures. This risk factor is communicated to users of the financial statements through a negative assurance report as compared to the positive opinion provided in an audit. The objective of a review of financial statements is to enable a practitioner to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the practitioner's attention that causes the practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework (negative assurance).
**Audit Engagements** The objective on an audit engagement is to enable independent professional public accountants to render an opinion on the fairness of the client’s financial statements. Audited financial statements are the accepted means which many business corporations report to shareholders, to bankers, to creditors and to government. Federal and provincial legislation in Canada generally requires a limited company (corporations) to prepare annual financial statements for audit by qualified independent auditors. The financial statements subject to audit are the responsibility of the company’s management. The auditors’ responsibility is to express an opinion on those financial statements. The auditors must plan the audit to obtain reasonable assurance that the financial statements are free of material misstatement. Through the study and evaluation of the company’s system of internal control, and by inspection of documents, observation of assets, making enquires within and outside the company, and by other generally accepted auditing procedures, the auditors will gather evidence necessary to determine whether the financial statements present a fair picture of the company’s financial position and its activity during the period being audited. **Review Engagements** The objective of a review engagement is to prepare and review financial statements to ascertain whether they are plausible, that is, worthy of belief. If, after reviewing the financial statements the accountants are satisfied that the financial statements are not misleading, the accountants’ standard report will preface the financial statements. Where an audit is not required or the shareholders have waived the appointment of an auditor, financial statements may be prepared on a review basis. Reviews provide limited assurance that the financial information confirms to generally accepted accounting principles. In performing a review the accountants would must be independent from the clients and have sufficient knowledge of the industry which the business operates. They would acquire sufficient knowledge of the client’s business to make intelligent enquiry and assessment of the information obtained, with the limited objective of determining the plausibility of the information reported on. The review should entail enquiries, analytical procedures and discussion with responsible client officials. This degree of assurance is less than that resulting from an audit and is expressed as either: The negative assurance that nothing has come to the accountants' attention that would indicate the financial information is not presented in accordance with generally accepted accounting principles, or A reservation together with appropriate disclosure and explanation of the reservation.