Overview
Did you know that review engagements typically cost between 30% to 90% less than full audits while still providing valuable financial assurance?
Organizations in New Zealand face crucial decisions about external scrutiny levels needed for audits and financial compliance. Full audits provide complete assurance. Review engagements serve as a practical alternative that fits specific needs and budget constraints.
Reviews give users a high-level assessment of financial statements. They provide comfort that nothing has caught the reviewer’s attention that indicates the statements don’t present a true and fair view. These reviews focus on analytical procedures rather than detailed testing, unlike full audits.
In this piece, we’ll explore what auditors look for during financial review engagements in New Zealand. We’ll cover the key differences between reviews and audits of all types, and help determine which option best suits your organization’s needs and legal requirements.
Understanding the Scope of a Financial Review Engagement
Let me explain what auditors look for during review engagements and their place in financial assurance. We’ll start with their scope and purpose under New Zealand standards.
Definition of a Review Engagement under ISRE (NZ) 2400
International Standard on Review Engagements (New Zealand) 2400 sets up the framework for review engagements. This standard explains what assurance practitioners must do when they review historical financial statements. It also lists requirements for review reports’ form and content.
ISRE (NZ) 2400 shows that review engagements want to get limited assurance about financial statements being free from material misstatement. Assurance practitioners write a conclusion to improve users’ confidence in financial statements that follow an applicable reporting framework.
The main goal is simple: practitioners need to say if they found anything that makes them think the financial statements don’t follow the applicable financial reporting framework in all material aspects.
Remember that ISRE (NZ) 2400 works only when the assurance practitioner isn’t the entity’s auditor. A different standard (NZ SRE 2410) applies to reviews done by the entity’s current auditor.
Types of Audits and Where Reviews Fit In
Financial assurance services offer different levels of scrutiny:
- Compilations – These need minimal work and focus on correct formatting without giving assurance.
- Review Engagements – These give limited assurance through analytical procedures and questions, without extensive testing.
- Full Audits – These give reasonable assurance by completely examining internal controls and collecting extensive evidence.
Reviews play a specific role in this setup. They work best for:
- Organizations that need some independent assurance but want to avoid audit costs
- Small private companies whose stakeholders need limited assurance
- Entities with annual operating expenditure between specific thresholds
- Cases where interim reporting needs quick but basic assurance
Review Engagement Standards, relevant laws, and engagement terms guide the review’s scope. Note that scope limitations need careful thought before acceptance. Significant limitations might affect the practitioner’s ability to give required assurance.
Reviews fill a vital middle ground. They give more assurance than simple financial statement preparation but less than a complete audit’s extensive checks.
What Auditors Examine During a Review Engagement
Analytical procedures are the life-blood of financial review engagements in New Zealand. Reviews differ from full audits that need extensive testing. They rely on analytical reviews and asking questions to draw conclusions about financial statements.
Analytical Procedures: Ratio
Ratio analysis remains a vital technique in the reviewer’s toolkit. Auditors use ratio analysis to review financial data by comparing relationships between financial statement accounts over time. They also match ratios with industry standards to spot unusual items that need explanation.
Key ratios we get into typically include:
- Profitability ratios – Gross profit margin, net profit margin, and return on equity reviews help determine if a business generates adequate returns
- Liquidity ratios – Current ratio and quick ratio assessments show an entity’s ability to pay short-term financial obligations
- Efficiency ratios – Stock turnover, debtor days, and asset turnover calculations reveal how well the organization uses its resources
These analytical procedures do more than just crunch numbers. They serve multiple functions:
- They spot inconsistencies or variances from expected trends
- They provide supporting evidence for other procedures
- They work as additional procedures when material misstatements might exist
Auditors must really get into significant differences between expected values and recorded amounts. They need explanations for the full variation.
FAQs
Q1. What is the main difference between a review engagement and a full audit?
A review engagement provides limited assurance through analytical procedures and inquiries, while a full audit offers reasonable assurance through comprehensive examination and extensive testing of records.
Q2. What types of analytical procedures do auditors use during a review engagement?
Auditors primarily use ratio analysis, comparing financial statement accounts across different periods and with industry benchmarks. This includes examining profitability, liquidity, and efficiency ratios.
Q3. Are there situations where an organization might need a review even if not legally required?
Yes, an organization’s constitution or funding requirements may mandate regular audits or reviews regardless of size or legal thresholds.
About the Author: Jonathan Maharaj
