Financial statement audit or review

How can dealers make the right choice?

Our team explains the differences between financial statement audits and reviews, so you can make the best choice for your dealership.

Owners of privately held dealerships know the importance of having both accurate financial results and sufficient internal controls to safeguard assets and mitigate the risk of fraud. Dealers also must understand the differences between financial statement audits and financial statement reviews.

Both services, which are performed by independent CPAs, provide banks and outside investors a level of assurance about financial statements, but important differences exist between the two types of assurance engagements. Dealers who understand these differences can make the decisions that best fulfill their objectives.

What is a financial statement audit?

The objective of an audit is to obtain reasonable assurance about whether a dealership’s financial statements are free from material misstatement. An audit involves performing procedures to obtain evidence about the amounts and disclosures in the financial statements.

The procedures selected during a financial statement audit

The proper procedures for the audit depend on the auditor’s judgment but must include assessing the risks of material misstatement of the financial statements, whether due to fraud or error. When assessing these risks, an auditor considers the internal controls relevant to the entity’s preparation and fair presentation of the financial statements. This analysis will help the auditor design audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls.

An audit also includes evaluating the appropriateness of the accounting policies used, the reasonableness of significant accounting estimates made by management, and the overall presentation of the financial statements.

What dealers should understand about the objective of an audit

Only reasonable assurance that the financial statements are free from material misstatement is being expressed. Dealers should understand that an audit is focused on material financial statement issues. For example, an audit likely would not identify a controller not filing IRS Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business,” as a significant risk or consider a used-car manager receiving kickbacks from an independent car dealer down the street with whom he is making great deals on used cars to be a fraud risk.

An audit involves obtaining audit evidence about amounts and disclosures in the financial statements. Auditors are required to perform procedures related to financial statement presentation and disclosure. Financial statement users should read and understand the financial statements, including disclosures.

Auditors consider internal controls relevant to preparation and fair presentation of the financial statements, but this is not done for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. Dealers should understand that the audit opinion addresses the financial statements and related disclosures – not a company’s internal controls. An unqualified audit opinion on the financial statements does not provide any assurance that a dealership’s internal controls are designed appropriately or operating effectively.

An audit includes evaluating the appropriateness of accounting policies and the reasonableness of accounting estimates as well as the overall presentation of the financial statements. Financial reporting includes selecting accounting policies and developing estimates. Auditors are required to evaluate management’s accounting policies, including consistency of application, and test significant estimates.

How does a financial statement review differ from an audit?

A CPA’s objective in a review engagement is to perform procedures to obtain limited assurance that no material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

A review often is defined by how it differs from an audit. For example:

The scope of a review is substantially less than the scope of an audit.
A review does not include:

Obtaining an understanding of an entity’s internal controls
Assessing fraud risk
Testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents (such as canceled checks or bank images)
Conducting other procedures ordinarily performed in an audit

A review includes primarily making inquiries of management and applying analytical procedures to financial data.

Agreed-upon procedures

Another available service is an agreed-upon procedures engagement, which involves performing specific procedures that are agreed upon by the engaging party, which acknowledges that the procedures are appropriate for the intended purpose. An agreed-upon procedures engagement is not an audit, examination, or review and does not have the objective of providing an opinion or conclusion on the subject matter.

Agreed-upon procedures can be designed and performed to address specific items identified by the dealer. For example, they can be designed to assist dealers in evaluating compliance with policies, procedures, and controls in areas such as bank reconciliations, cash disbursements, cash receipts, payroll, journal entries, Form 8300 reporting, and a wide variety of others.

An agreed-upon procedures engagement can be performed on a stand-alone basis or in addition to an audit or review. Furthermore, an agreed-upon procedures engagement can be performed at any time during the year, and areas considered for agreed-upon procedures can be changed or rotated at the dealer’s discretion.

Considerations for deciding on a financial statement audit or review

Limited assurance versus reasonable assurance. Many privately held dealers want to make sure their financial results are stated accurately. If a dealer requires “limited assurance that there are no material modifications that should be made to the financial statements” (as expressed in a review report) rather than “reasonable assurance that the financial statements are free from material misstatement” (as expressed in an audit opinion), the dealer could decide to select a review.
Internal controls. The auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements when designing audit procedures. When gaining an understanding of internal controls in order to design audit procedures, the auditor might become aware of deficiencies in the design or operation of internal controls. The auditor is required to communicate material weaknesses and significant deficiencies in internal controls to those charged with governance. The information communicated as a result of this process is valuable to a dealer in assessing risks. Internal controls are not considered as part of a review.
Audit needs. When dealerships are privately owned, the owner is likely to be actively involved in the dealership on a day-to-day basis (although this situation is starting to change as private equity firms and family funds begin to invest more in dealership groups). Due to this involvement, the need for an audit, which provides the highest level of assurance on financial statements, is normally less than it would be if outside investors were involved in ownership. Such types of outside owners typically want the highest level of assurance that CPAs can offer, so dealers might choose to accede to outside investors’ requests for audits.
Future sale. Dealers planning a future transaction might want to consider whether an audit or review would be valuable to or expected by a potential buyer.
Goal setting. Before committing to an audit, a review, or agreed-upon procedures, dealers should develop a list of their goals and compare those with the objectives of an audit or of a review with or without agreed-upon procedures. For many dealers, a review engagement supplemented with agreed-upon procedures might be a more efficient and effective way to satisfy their goals. In other instances, an audit could be the better solution. Agreed-upon procedures also could be used to address certain matters not covered in a financial statement audit.

Whether choosing a financial statement audit or a review, dealers should consider working with a CPA firm that has industry experience, credibility, and a reputation in the marketplace that lenders, investors, and buyers recognize and value.
Adapted from "Financial Statement Audit or Review: Which Is Better for You?" previously published by Crowe.

Get the experience your dealership needs

It’s vital to work with a team that understands your industry. Our team serves more than 1,100 dealership clients, including some of the most successful dealerships in the U.S.

Discover our services

Related insights