Review or audit? Help your clients understand the difference.

The option to conduct a review instead of an audit, even if allowed under relevant legislation, depends on the entity’s constitution.

Many of your clients may not be aware that the entity they manage may not require an audit.

It isn’t that surprising when you consider that review and other assurance engagements are a relatively new concept when compared to that of an audit.

Clients may not understand the difference between an audit and a review, or realise that a review may be more appropriate and cost effective for their organisation.

The option to conduct a review instead of an audit, even if allowed under relevant legislation, depends on the entity’s constitution.  Does relevant legislation or regulation allow for a review or does it require an audit?  Has management reviewed the constitution to determine whether it needs changing to allow for a review? 

One of the benefits of a review is that less evidence is needed for a review to satisfy the requirements of the standards, which equates to less time and, in turn, a reduction in fees. 

Why aren’t there more reviews?

Based on potential cost savings, one would expect that clients would usually elect for a review instead of an audit, if permitted by their constitution and applicable legislation. Yet despite the opportunities for a review in place of an audit, often an audit is still requested by management regardless of the choice available to them. 

Statistics are not readily available on the proportion of audits compared to reviews but anecdotally regulators report a poor uptake of review engagements. 

According to the Australian Charities and Not-for-profits Commission (ACNC), few charities below the permitted threshold seek reviews. In fact, when the ACNC examined a limited sample of medium-sized charities’ financial reports, it found that about 90 per cent still obtain an audit.

The next time you are meeting with a client who may benefit from a review instead of an audit, it’s a great opportunity to add value by educating your client about the options available to them.  

In the short term, it may mean a reduction in fees. The power of positive advice, however, may hold you in good stead for future engagements or referrals from that client.

Entities that may benefit from a review include:

  • Companies limited by guarantee with revenue of at least $250,000 up to $1 million.
  • Medium-sized charities with income of at least $250,000 up to $1 million.
  • Tier 2 incorporated associations in Victoria with revenue between $250,000 and $1 million.
  • Public ancillary funds with revenue and assets less than $1 million.
When a review is chosen as the only routine assurance engagement conducted for the year it has different implications for the practitioner than interim reviews conducted on the six-month financials of disclosing entities prepared in addition to the annual audited financial report. 

In an interim review, the practitioner effectively tops up the evidence obtained in the last annual audit and can take the opportunity to do some interim testing for the year-end audit. As such, additional work at this stage does not go to waste if it is in excess of that needed for the review, as the evidence can be used to support the audit opinion at year-end. 

When the review is the only assurance engagement for the year, then sufficient appropriate evidence to provide only limited assurance needs to be obtained. As a review conclusion is based on a lower level of assurance than an audit, the evidence should be less extensive than for an audit of that client. 

When a review must stand on its own, one generally wants to do just the right amount of work – not too much, which is unnecessarily costly and not too little, as that is risky.

This may be deterring practitioners from recommending them, but is something scaring clients off reviews? 

There are a number of possible explanations, one being lack of confidence in reviews. 

Clients may only have ever had experience with an audit, especially if an audit is required in their constitution, and the implications of changing those rules are not well understood. 

Consequently, those clients will be more familiar with audits – or have at least heard of them – and therefore it is understandable that they could have greater confidence an audit will deliver what they want. 

Professional Development: Claire Grayston FCPA will speak at CPA Congress 2018 on the topic of "Audit changes - what you and your auditor need to know". Learn more.

Ambiguity holding back review uptake

Indeed, clients may not be clear on what a review actually is and if the truth be told, neither are some practitioners. 

The standards on review engagements issued by the Auditing and Assurance Standards Board (AUASB), which conform to international standards, do not clearly define a review or the extent of evidence needed. 

They state that in a review engagement the practitioner obtains limited assurance, which is a “meaningful level of assurance”, which in turn reduces engagement risk to “an acceptable level in the circumstances of the engagement”. 

What is an acceptable level of risk? The answer in the standards is “that risk is greater than for a reasonable assurance engagement”. Confused? So are clients and many other practitioners. 

On top of all this, there is the fact that reviews are not always markedly less expensive than audits. 

As the level of assurance is not well defined, there is no really clear and consistent understanding of how much evidence is necessary. Some practitioners do substantially more work than others. 

Reviews primarily involve enquiry and analytical procedures. However, if a practitioner suspects an error (material misstatement) they must satisfy themselves either that there is not likely to be an error, or confirm there is one. 

Obviously this requires a lot more work and can significantly impact the final cost. As a result, practitioners do not always encourage clients to switch to a review if there is concern about managing expectations in the event final fees come close to that of a previous audit.

What are the solutions?

Given legislation allows reviews for certain small to medium-size entities, it would seem to make sense for them to economise and obtain a review. Clearly, the impediments to greater take-up need to be addressed. 

This could be achieved by a clearer framework for review engagements, more precise articulation of what constitutes reviews, and better guidance on how procedures can be constrained so that fees do not blow out. There is no question that encouragement of a consistent approach to reviews, providing a level of assurance understood and trusted by all clients entitled to them, is what is needed in Australia. 

Over time, it is likely that benchmarks and common practice will become better established which, in turn, should provide a sounder basis for the wider use of reviews. In the meantime, it is worth making your clients aware if they are entitled to a review and assist them in determining if a review would meet their needs.

Claire Grayston is Policy Adviser – Audit & Assurance at CPA Australia.

Read next: Are you distrusting enough to be a great auditor?

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