31 March 2020
Anyone who has been audited or who carries out audits know that there has been significant creep in requirements and subsequently costs over the least decade or so. This has made the other alternative – the Review Engagement – an alternative worth considering.
What is a Review Engagement?
It is a high-level assessment of financial statements by an independent professional providing comfort to the users of financial statements that nothing has come to the reviewer’s attention that indicates that the financial statements do not give a true and fair view/are not fairly presented. Appropriate enquiry or analytical tests are devised to give “limited assurance” that these are not materially misstated as opposed to “reasonable assurance” (in the case of Audit).
This is by definition a lower degree of assurance than required by the Audit standards. There are a raft of Audit standards, but essentially only one Review standard (ISRE (NZ) 2400). Like an Audit, preparation of financial statements remains the responsibility of the entity, risks are identified and materiality is considered, and the reviewer must understand the entity and its environment. But beyond that there is significant divergence.
Leave the tool box at home
Based on all these standards the auditor uses a whole box of tools. Compared to this the assurance practitioner carrying out a Review is like a plumber that just shows up with a wrench and hammer. This is the major difference between Review and Audit. The Review uses just two main tools: analytical review and enquiry. Analytical review is all about looking for relationships – this year to prior, budget to actual, financial to non-financial data (service performance for instance), KPI’s, relationship between different elements in the financial statements and so on. Enquiry is quite prescriptive, but must extend further if warranted.
The reviewer’s report says that “…nothing has come to our attention…” This negative assurance doesn’t mean that the reviewer can be deliberately ignorant, but that as a suitably qualified and experienced person they are walking through the financial statements looking for things that may not “add up” (analytical review) and making suitable enquiries where necessary.
Unlike an auditor, review practitioners are not required to test details unless their enquiry and analytical review turns up something they just can’t ignore. They are a bit like a “sniffer dog” in this sense. Their understanding of the entity tells them what sort of bad smells they should be looking for. Their risk assessment tells them where they should be sniffing. Their materiality assessment tells them what level of sensitivity to sniff to.
Then they start sniffing. If it smells okay it is okay and they can move on. Nothing has come to their attention. If they find a smell they make further enquiries and satisfy themselves that all is well. And if all is not well they may extend their work or modify their conclusion (as opposed to an opinion in an Audit).
Who can use this option?
Registered charities with expenses of under $1million may opt for a Review rather than an Audit. Unregistered charities and associations, clubs etc may opt for a Review as can privately owned local companies. However many entities are required to be audited in terms of their trust deed, by their constitutions or because of some legal or funder requirement so please check!
So are they really a cheaper option?
If done according to the standard, and if the job is straightforward – yes. If the auditor remembers to leave the toolbox at home and just use their two tools, their work will provide a satisfying level of assurance well beyond a compilation engagement that should be of great comfort to members, shareholders, funders and other key stakeholders. And if the practitioner can avoid digging up every old bone in the garden and just stick to the plan they will fulfil the requirements of the Review standard and do a good, economical job.
How can we help?
Review Engagements are an increasingly popular option for assurance professionals. Audit Assistant provides specific templates for different kinds of Review Engagements so that this work is carried out in a compliant and cost effective manner. Contact us for more details of what we provide.