Overview
Making a choice between an audit vs review engagement for your New Zealand organization requires clear understanding of legal requirements. Your registered charity must work with a qualified auditor for either a review or audit if its total operating expenditure exceeds $550,000 for each of the previous two years. The requirements get stricter – a full audit becomes mandatory if your expenditure goes beyond $1.1 million.
Canadian requirements may differ, but the core differences between review engagement vs audit vs compilation stay the same. Audit services give reasonable assurance – this means auditors confirm the information is materially correct, though not with absolute certainty. Reviews, on the other hand, provide limited assurance. The auditor just states they haven’t found any material modifications needed. Many New Zealand community organizations find audit costs to be their biggest financial challenge. This explains why reviews are now more popular. We’ll help you make the right choice for your organization’s financial reporting needs, whether you need to check the auditors register or are just exploring your options.
Audit vs Review Engagement: Key Definitions and Differences
The difference between audit and review engagements helps organizations make better decisions about their financial reporting.
Definition of an Audit Engagement
An audit engagement provides a detailed look at financial records, transactions, and internal controls. Auditors test extensively by checking supporting documents, reconciling accounts, and verifying data with external parties. The process aims to give stakeholders complete confidence that financial statements accurately represent an organization’s financial position.
Definition of a Review Engagement
A review engagement looks at financial statements through analytical procedures and questions. Reviews are different from audits because they don’t require extensive testing or external confirmations. CPAs analyze financial data’s plausibility and ask questions about accounting practices and bookkeeping systems.
Review Engagement vs Audit vs Compilation: Scope and Purpose
These three services have substantially different scopes:
- Compilations require minimal work and focus on correct formatting and numbers without providing assurance.
- Reviews take longer because they include general investigation of practices.
- Audits require the most time since they need thorough examination of internal controls and evidence collection.
Assurance Levels: Reasonable vs Limited
Reasonable assurance (audit) gives positive assurance – auditors confirm that financial statements have no material misstatement. Limited assurance (review) provides negative assurance – auditors haven’t found anything that suggests the financial statements aren’t presented fairly.
Reporting Language: Positive vs Negative Assurance
The reporting language shows a basic difference between audit and review engagements. This affects how users interpret their confidence level in financial statements.
Positive assurance in audit reports uses clear, direct language. It states that financial statements are “presented fairly in all material respects” and “in conformity with accounting principles generally accepted in the United States”. The strong wording reflects the thorough procedures auditors perform.
Review engagements work differently – they provide negative assurance. They don’t state what’s correct but point out what isn’t wrong. The standard wording typically mentions that “nothing has come to the reviewer’s attention to suggest the financial statements are materially misstated”. This reflects the limited scope of their procedures.
The difference matters a lot. Positive assurance means accountants have evidence proving accuracy. Negative assurance just shows they didn’t find anything wrong during their limited review.
Users of financial statements should understand these subtle differences. An unqualified audit opinion gives substantially more confidence than a review’s negative assurance statement. Both have value though, depending on what stakeholders need, what regulations require, and how much risk they can accept.
The accountant must explain clearly why they can’t issue an unqualified review report and what this means for the financial information.
Legal and Regulatory Requirements in New Zealand
New Zealand organizations must follow specific rules about audits and reviews based on their structure and size.
Statutory Thresholds: $550,000 and $1.1 Million Rules
The regulatory framework in New Zealand sets clear financial scrutiny requirements. Charities need a review or audit by a qualified auditor if their total operating costs are more than NZD 938,085.65 for two accounting periods in a row. This is a big deal as it means that if spending goes beyond NZD 1.88 million, they must have an audit. These amounts used to be NZD 852,805.13 and NZD 1.71 million.
source: Charities Services | Audit and review requirements
Charities Act 2005 vs Incorporated Societies Act
The Charities Act 2005 sets these spending limits for assurance requirements. The Incorporated Societies Act 2022 takes a different approach. Non-charitable societies need audits only if they spend more than NZD 5.12 million in two consecutive periods. Charitable societies must still follow the Charities Act rules.
At the Time Your Constitution Requires an Audit or Review
Many organizations commit to yearly audits through their constitution or trust deed without realizing it. These rules apply whatever the statutory thresholds say. On top of that, funding rules might demand audits. Organizations that get more than NZD 170,561.03 yearly from the Ministry of Social Development must provide audited statements.
source: Charities Services | Audit and review requirements
Who Qualifies as an Auditor in NZ (Auditors Register)
Qualified auditors for statutory audits must meet sections 35-36 requirements of the Financial Reporting Act 2013. Financial Markets Conduct audits need licensed auditors under the Auditor Regulation Act 2011. You can find qualified auditors through Chartered Accountants Australia New Zealand or CPA Australia.
Procedures and Documentation Involved
The way audit and review engagements differ in their procedures affects how much assurance stakeholders receive.
Audit Procedures: Testing, Inspection, and Verification
Audit procedures need a complete examination through multiple techniques. Auditors check records and documents, which give different levels of reliability based on their source. The foundations of audit evidence collection include physical examination of assets, process observation, external confirmation, recalculation, and control activity reperformance. These procedures let auditors test internal controls and transaction details.
Review Procedures: Inquiry and Analytical Review
We used inquiry and analytical review as the main review procedures. Reviews don’t need detailed testing or source document verification like audits do. The accountant uses analytical procedures such as trend analysis, ratio analysis, and matches results against industry standards. These basic procedures help accountants give negative assurance that they haven’t found anything suggesting material misstatements.
What Gets Audited or Reviewed: Financial and Non-Financial Info
Organizations that meet legal thresholds need to get these items checked in both audit and review:
- Financial information: income, expenses, assets and liabilities
- Non-financial information: entity information and statement of service performance
Auditors look at non-financial measures like facility conditions, customer feedback, and operational metrics to check financial statement reliability.
Preparing for an Audit or Review: Key Documents Checklist
A good preparation makes both types of engagements smoother. Organizations should:
- Check financial statements for accuracy and completeness
- Keep supporting documentation organized (receipts, invoices, contracts)
- Settle all accounts and financial records
- Write down key judgments and areas needing estimation
Talk to your auditor early about what the engagement covers to avoid confusion.
Cost, Time, and Practical Considerations
Money often determines whether New Zealand organizations choose audit or review engagements.
Cost Comparison: Audit vs Review Engagement
Organizations worried about finances can save money with reviews. A review engagement usually costs about half of what you’d pay for a full audit. The actual review fees range from 30% to 90% of audit fees, based on how complex the organization is. These savings come from:
- Less detailed examination
- Fewer tests to run
- Reduced paperwork
- Shorter timeframes
Time Commitment and Resource Allocation
Money isn’t the only factor – time matters too. Audits just need many more hours from both the accounting firm and your staff. Your board members and employees spend less time on reviews. This means teams can stay focused on their actual work.
Impact on Small vs Large Organizations
The size and complexity of your organization play a vital role in this decision. Small entities with simple financial structures find reviews meet their needs perfectly. Medium-sized charities with annual revenue between NZD 852,805.13 and NZD 5.12 million can pick either option legally. Larger organizations usually go for audits because their stakeholders expect it.
When Funders or Banks Require an Audit
The cost savings might not matter if outside requirements control your choice. Big grant makers and government programs usually ask for audited financial statements before they give money. Some funders accept reviewed statements, especially for smaller grants or first-time applicants. You should get into your funding agreements carefully before you pick an assurance approach.
Comparison Table
| Aspect | Audit Engagement | Review Engagement |
|---|---|---|
| Assurance Level | Reasonable assurance (high but not absolute) | Limited assurance |
| Type of Assurance | Positive assurance – states what is correct | Negative assurance – states what wasn’t found wrong |
| Procedures | – Complete examination of records – Extensive testing – External confirmations – Transaction testing – Internal control examination |
– Analytical procedures – General asking – Limited examination – No extensive testing – No external confirmations |
| NZ Legal Requirement | Mandatory for charities with expenditure over $1.1 million | Required for charities with expenditure over $550,000 (can choose between audit or review) |
| Cost | Higher cost (base reference) | Approximately 30-90% of audit cost |
| Time Commitment | Much time investment required | Less time-intensive |
| Scope of Examination | – Detailed testing – Verification of source documents – Internal controls review – Complete evidence collection |
– Simple analytical review – Limited testing – No detailed verification – General investigation of practices |
| Documentation Requirements | Extensive documentation needed | Less documentation required |
Conclusion
Your New Zealand organization’s choice between an audit and review engagement ended up depending on several key factors. Legal requirements clearly spell out what many entities must do, especially when you have registered charities that need to follow statutory guidelines based on their spending. All the same, there’s more to this decision than just following the law.
The main difference is in assurance levels. Audits give reasonable assurance through complete examination. Review engagements provide limited assurance through analytical procedures. This shows up in how reports are written – audits positively confirm that statements are correct, while reviews just say nothing contradictory was found.
Money and time are big factors in making this choice. Review engagements usually cost between 30-90% of an audit’s price and just need by a lot less time from both your team and the accounting firm. This can make a huge difference for smaller organizations with tight budgets.
On top of that, it’s essential to think about your organization’s constitution, funding requirements, and what stakeholders expect. Many funding bodies and grants specifically ask for audited statements, which might override any cost concerns if you’re looking for financial support.
The choice between audit and review engagement comes down to balancing legal requirements, assurance needs, available resources, and what stakeholders want. Audits provide better assurance through thorough testing and verification. Reviews are a practical option to get simple financial statement credibility without high costs. Your final choice should fit both your compliance needs and strategic goals as a New Zealand organization.
FAQs
Q1. What are the key differences between an audit and a review engagement?
An audit provides reasonable assurance through comprehensive examination, extensive testing, and verification of financial information. A review engagement offers limited assurance based on analytical procedures and inquiries, without detailed testing or verification of source documents.
Q2. How do the costs compare between an audit and a review engagement?
Review engagements typically cost less than audits, ranging from 30% to 90% of an audit fee. The cost difference is due to the reduced scope, fewer testing procedures, and shorter engagement period of a review compared to an audit.
Q3. When is an organization legally required to have an audit in New Zealand?
In New Zealand, registered charities with total operating expenditure exceeding $1.1 million for each of the previous two accounting periods are legally required to have a full audit. Additionally, some organizations may be required to have an audit due to their constitution or funding agreements.
About the Author: Jonathan Maharaj
