A financial review, aka a financial statement review, is the process of analysing a company’s financial statements. Its purpose is generally to assess whether the financial statements conform to all relevant accounting standards and, if not, to determine which modifications a company should make.
In contrast, an audit is another type of external assurance. It involves a thorough and detailed examination of a company’s financial statements, measuring their accuracy and more. By assessing the strength of a company’s internal financial controls, auditors can also help ensure that assets are protected and that companies have recorded financial transactions accurately.
Both financial reviews and audits can be useful in identifying major financial issues and trends while instilling confidence in shareholders and investors.
A few key factors distinguish financial reviews and audits despite their similarities in perceived function.
An audit is a more complex process and takes far more time than a financial review. Case in point – to obtain audit evidence, auditors will perform one or more of the following procedures:
In contrast, a financial review doesn’t require any of those procedures. Nor does it involve the same in-depth examination as an audit, making it faster to complete.
Unsurprisingly, accounting firms will charge more for audits than financial reviews. One accounting firm confirmed they charge ten times more for an audit than a financial review because it takes ten times longer.
Audits often require fieldwork, contributing to their higher cost. Fieldwork may involve:
1. Observing physical inventory counts
Auditors may visit warehouses to verify the accuracy of a company's reported stock levels, ensuring they match what's physically present.
2. Tracing documentation
Auditors may track paper trails for deliveries – like invoices and receipts – to confirm the company received the goods and that its financial records accurately reflect their value.
Smaller, private businesses – not mandated by law to undergo a full audit – can benefit from a financial review. It offers a cost-effective way to boost shareholder or buyer confidence in their financial statements.
3. Frequency of Preparation
A financial audit typically occurs annually, while a financial review can take place routinely. In some jurisdictions, public companies must issue and file less-detailed financial statements with local authorities a few times a year. Some companies issue financial review statements once in the middle of the calendar year, while others do this at the end of every quarter. The frequency depends on regulatory requirements, the company’s risk tolerance, size and complexity.
4. Level of Assurance
Financial reviews and audits provide different levels of assurance. An audit provides an independent professional opinion that a company’s financial statements are free from material misstatements. Therefore, an audit’s function is to present the company's financial status and performance objectively and fairly, making the assurance from an audit reasonable.
Irina Staneva – who worked for PwC as an auditor – summarised the importance of audits: ‘Audited financial statements give confidence to their users that the information presented is accurate. In addition to shareholders, other typical users of audited financial statements can include:
In contrast, a financial review provides limited assurance that no material modifications have been made to the financial statements. Limited assurance confirms the absence of material misstatements via a limited scope of procedures. Whereas, reasonable assurance conveys a high level of confidence (yet not absolute certainty) that there are no material misstatements in financial statements.
Company X is a private firm based in the UK that only meets one of the three criteria mandating an audit — it has an annual turnover of more than £10.2 million (but fewer than 50 employees and less than £5.1 million in assets). The shareholders have not requested an audit, so management decided to save time and costs ahead of the shareholder meeting by commissioning an external financial review from an accounting firm.
The review confirmed that Company X's financial statements are fairly presented and comply with UK Generally Accepted Accounting Principles (UK GAAP). These findings ultimately provided comfort to management and the board.
Later in the year, Company X decides to guide their business decision-making by voluntarily commissioning an external audit. The audit shows that the company's finances are stronger than initially thought, specifically identifying under-depreciated assets and a conservative inventory valuation. Company X’s financial stability and transparency highlight its potential to take strategic opportunities – namely, expanding into a different global market.
By deploying audits and financial reviews, Company X was able to identify opportunities for long-term growth while building investor confidence in management’s ability to make sound financial decisions.
Unlike financial reviews, when audits go wrong, serious consequences can occur. For example, the social housing contractor high-flyer Connaught went bust in 2010. Allegations of misconduct were levelled against its auditor, PwC. These claims were later substantiated when it transpired that the audit was substandard, with investments being capitalised as ‘assets’ on the balance sheet – which wasn’t detected during the audit. New working structures, IT investments and unpaid invoices eventually drove the company to nine figures in debt, seemingly without warning.
A recent example of when an audit went awry is when PwC and EY were fined in May 2024 for London Capital & Finance’s (LCF) 2019 crash. The crash erased the investments of nearly 12,000 customers. The cause of the audit’s failure was far more intangible, as the Financial Reporting Council (FRC) accused the auditors of failing to deliver ‘sufficient professional scepticism’. PwC and EY failed to understand LCF’s internal controls and financial structures, resulting in regulatory breaches and customers losing £237 million.
Yet, there are no infamous stories of financial reviews going wrong, reflecting the increased liability of audits in comparison.
Audits involve a long, detailed analysis of financial statements. Often a statutory requirement, audits dive into the ‘what’ and ‘why’ surrounding the data presented within financial statements. In contrast, financial reviews provide a less significant degree of assurance and a somewhat superficial review of financial trends. Whether a company requires a financial review or an audit depends on the size and financial position of the company, as well as the purpose of the assessment.
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