FAQs on CPA Audits

Both are performed by CPAs, but they differ in scope, level of assurance, procedures and cost.

• Assurance level. An audit gives the highest level of assurance (reasonable assurance) that the financial statements are free from material misstatement and fairly presented under a framework such as GAAP. A review gives limited assurance that the CPA isn't aware of any material changes needed.
• Scope of procedures. An audit is an in-depth examination of financial records, internal controls and supporting documents, including testing records and verifying information with third parties. A review focuses mainly on inquiries and analytical procedures to spot unusual items or trends.
• Cost and time. An audit is typically more expensive and time-consuming. A review is generally less costly and quicker.
• When to choose which. Audits are often required by investors, lenders and regulators. A review may be enough for smaller organizations or when a lower level of assurance is acceptable.

The choice depends on the organization's needs, the level of assurance stakeholders require, and cost and time.

A CPA audit is a comprehensive, independent examination of an organization's financial statements and records to make sure they are accurate, fair and follow established accounting standards.

• Purpose. To give stakeholders a high level of assurance that the financial statements are free from material misstatements, whether from error or fraud.
• Independence. The CPAs must be independent of the organization they audit.
• Scope. A detailed review of financial statements, supporting documents (invoices, bank statements, contracts, payroll records) and internal controls.
• Methodology. Testing transactions, confirming balances with third parties, and reviewing accounting policies and estimates.
• Four stages. Planning (understanding the organization and its risks), fieldwork (gathering and testing evidence), reporting (issuing an audit opinion) and follow-up (addressing weaknesses found).
• Standards. Audits follow Generally Accepted Auditing Standards (GAAS).
• Audit opinions. Unmodified (statements are presented fairly), qualified (a material issue that isn't pervasive), adverse (material and pervasive misstatement) or disclaimer (not enough evidence to form an opinion).
• Benefits. Besides assurance, audits can reveal weaknesses in internal controls and ways to improve financial management.

A CPA examines the financial statements to give limited assurance that they are plausible and don't need significant changes to follow the applicable reporting framework.

• Analytical procedures. Comparing current results with past periods, with similar organizations, and with what's expected, to find unusual items or trends.
• Inquiries. Asking management about accounting policies and practices, significant or unusual transactions, events after the reporting period, significant journal entries, and communications from regulators.
• Overall review. Checking that the statements are presented according to the framework, such as GAAP, including the principles used and significant estimates.

In short, a review checks whether the financial statements make sense, without the more extensive procedures of an audit.

A forensic audit is a specialized examination of financial records to uncover evidence of fraud or financial irregularities. It goes beyond a traditional audit, which mainly checks compliance with accounting standards.

• Purpose. To investigate suspected misconduct such as fraud, embezzlement or misuse of assets, and gather evidence for legal action or corrective measures.
• Scope. Triggered by specific allegations or suspicions, with a detailed look at statements, transactions, internal controls and other documents.
• Process. Usually done by CPAs with investigative training: planning, gathering evidence, documenting findings and, if needed, testifying in court.
• Outcomes. Identifying the nature and extent of any fraud, who was responsible, the financial loss, and improvements to prevent it happening again.

A forensic audit may be needed when there is suspected fraud or financial crime, a legal dispute that requires assessing assets or damages, concerns about how financial information is reported, or a request from tax authorities or legal professionals.