The difference between an Independent Review and an Audit
In terms of the Companies Act no 71 of 2008, companies are required to obtain an audit or independent review of their financial statements.
The assessment of which companies and close corporations have to get an independent review or audit of their financial statement is not discussed in this article, but rather the difference between an independent review and an audit.
An Independent Review provides limited assurance, whereas an audit provides reasonable assurance that the financial statements are represented fairly and free from material misstatements.
The difference in assurance obtained from an independent review versus an audit is due to the scope of work performed.
During the performance of an independent review, the reviewer primarily performs inquiry and analytical procedures (evaluating financial information through trend, ratio or reasonableness of data in relation to other financial and non-financial data) to obtain sufficient appropriate evidence in line with an independent review.
After performance of an independent review a conclusion is provided by the reviewer on the financial statements issued to stakeholders. The sentence will read something like the following:
Nothing has come to our attention that has caused us to believe that the financial statements are not fairly presented in terms of …
During the performance of an audit the auditors will decide on either a combined approach or a substantive approach to follow. This assessment is done per class of transactions. A combined approach will include substantive testing (this includes analytical procedures as well as test of detail) and test of controls. A substantive approach only includes analytical procedures and test of detail. The approach chosen will be based on the auditor’s risk assessment of the account or class of transactions.
This could include sample selections from source documentation for inspection and agreeing those to verifiable financial information or documents.
After performance of an audit, an opinion is provided by the auditor on the financial statements issued to stakeholders. The sentence will read something like the following:
We are satisfied that the financial statements are fairly presented in terms of …
It is clear from the above differences noted between an audit and an independent review that an audit provides far more assurance than an independent review.
As far less detailed verification and detailed testing is performed in an independent review than in an audit, more professional judgement is required to come to an appropriate conclusion. Only staff with appropriate and sufficient experience would therefore be allocated to review engagements. The net result is that costs to conduct a review often do not decrease in the same ratio as the decrease in assurance provided.
It is the duty of all company directors to assure that they comply with the Companies Act requirements as well as make prudent decisions in the interests of the company. You are invited to discuss your options with any of our partners or staff members who will gladly assist you in making the best informed decision.
Supervisor: Quality Assurance, Johannesburg