The Companies Act 2008 brought at least two alternatives to the traditional audit: Firstly, some smaller companies have no requirement at all, leaving shareholders with the ability to choose their own level of assurance, if any. For others, the concept of an “independent review” of the financial statements has been introduced.

Actually, the concept of a review engagement is not a new one at all. Interim financial statements have been reviewed for years and, internationally, many companies have used the review mechanism as an alternative to an audit where independent assurance is required but at a lower level (and cost, hopefully) than an audit.

Reviews and audits are similar in many respects, for example the independence of the professional, the concept of materiality, etc. The difference lies in the procedures performed by the independent auditor or reviewer.  Where an auditor is required to obtain sufficient appropriate evidence that the financial statements are fairly presented, the reviewer only performs limited enquiry and review procedures to conclude as to whether or not anything has come to his / her attention that the financial statements are NOT fairly presented.  Where an audit always involves some detailed testing a review may not include any detailed testing at all.

The difference will be clearer if you look carefully at the “opinion” paragraph in your audit / review report again: The auditor concludes that “the financial statements present fairly …” (reasonable assurance) whereas the reviewer would use the rather confusing phrase “nothing has come to my attention that has caused me to believe that the financial statements are not fairly presented” (limited assurance).

Have these changes introduced realistic alternatives to businesses? Three years after the implementation of the new Companies Act, our own experience is that reviews are far less popular than initially expected with the majority of companies opting for a voluntary audit if they have a choice.

The biggest reason for this reluctance to change appears to be the perception that a review offers much less assurance than an audit, at a cost saving that doesn’t quite justify the lower level of assurance. Our own (very unscientific!) research suggests that the perceived assurance gained from a review is about 50% of an audit, at a cost of about 80% of that of an audit.  On the face of it, and assuming that these figures are reliable, the numbers don’t seem to make sense and it is understandable that companies rather pay for the “flagship” audit product.

Another reason may be that the users of financial statements – owners, directors, banks, etc – are less familiar with the new term and therefore prefer to stay with what they know and trust.

But perhaps it is time to think outside the normal three levels of assurance (no assurance, limited assurance and reasonable assurance) and consider combing them to better meet the assurance needs of the specific business.  For example,

  • By performing a review as defined, and then adding some more in-depth investigation into particular areas of concern, for example receivables – the so-called “audit light” concept.  The cost saving is not likely to be significant but the benefit will be material because it would allow the independent professional to focus on what is really important to the users.  (This option has already been provided for in legislation in some countries, e.g. Denmark.)
  • If your company is exempt from any audit or review requirement, why not ask us to look at specific areas only and give you higher assurance – for example if you want to make sure that all your sales have been recorded accurately, that the tax liability is correctly calculated, etc?

By thinking innovatively and opening our minds to the possibilities of working together to provide reliable and useful financial reports the flexibility introduced by the new Act can provide businesses with many benefits.  Speak to your engagement partner about the options.

Henk Heymans
Audit Partner, Johannesburg