Audits vs. Reviews of Financial Statements
by Tracey Yan, SCSBC Director of Finance ◊
How are financial statement audits and reviews different? And why is it important?
Your school has likely just completed its financial statements for the 2020/21 fiscal year and you may be wondering about the significance of the report the external accountants have attached to those statements. What does the audit report mean and how much can you rely on it? And what if you have a “review engagement” report instead? Let’s breakdown the contents of these reports to give you a better understanding of what they mean and how they differ.
The Auditors’ Report
All auditors in Canada are required to conduct their work in accordance with Canadian generally accepted auditing standards. Those standards are set out in the report and include understanding the school’s accounting policies and internal controls, obtaining sufficient evidence to support the figures in the financial statements, and evaluating that all the relevant information is disclosed fairly.
The auditors’ report also lays out the responsibility of management and the board. Management (the school’s administration) is responsible for the preparation and fair presentation of the financial statements, for establishing the necessary internal controls, and for assessing the ability of the school to continue operating (i.e., that the school is a “going concern” and is not in danger of closing or being forced to liquidate its assets). The board is responsible for overseeing the school’s financial reporting process.
Audits provide an opinion on whether the statements provide a fair presentation of the school’s finances for the year “in all material respects.” Materiality depends on the size of the school and indicates that any errors or omissions would likely not be significant enough to affect a decision made by someone based on the financial statements. Audits do not guarantee that the accounting records are perfect, but that they are materially correct.
Sometimes the audit report will include a qualified opinion. This means that the auditors have an exception to one particular aspect of the financial statements. For charities, it is very common for auditors to qualify their reports because they cannot verify the completeness of donations revenue. This is because there is no contract or invoice to serve as evidence of a donation, which often comes in the form of unsolicited cash or cheques. Boards should not be overly concerned about this qualification, as it should not affect any agreements with the bank or other vendors.
Any other report qualification does require immediate board attention. If your auditors’ report indicates uncertainty about the school’s ability to continue as a “going concern,” it can influence lending agreements, the ability to attract donation revenue, and the attractiveness of the school to new families and employees. Serious efforts should be made by school management and the board to address the issues raised by the auditors in order to remove the qualification in future years.
The Review Engagement Report
Depending on society bylaws, lender requirements, budget constraints, and board preference, schools may decide to have a review engagement instead of an audit. The external accountants are still required to perform their work in accordance with Canadian generally accepted standards for review engagements. However, review engagements are limited assurance engagements and do not provide the same opinion as an audit. Whereas an audit provides positive assurance that the statements are fairly presented in all material respects, the review engagement provides negative assurance that nothing has come to the accountants’ attention that makes them believe the statements are not fairly presented in all material respects. Think of it as the difference between “everything looks right” (audit) and “nothing looks wrong” (review). It’s a subtle variation but important to distinguish. This is why review engagements do not involve as much work and are typically less expensive than audits. Choosing a review engagement, where allowed by the school’s lender, can save some fees while still providing a good level of assurance to the board and the society members.
Whether your school chooses to have an audit or a review, it is a good idea for management and the board to revisit this decision periodically with both your auditors and your lenders, especially when key staff or operations have changed, the school has changed in size, or expansion plans are being considered. It is also important to remember that no audit or review is designed to detect fraud, which is by nature often cleverly disguised. Every organization still needs to have robust systems of internal controls, proper accounting policies and procedures, and adequate oversight by administration, the finance committee, and the board to protect itself from financial mismanagement.