Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company.
Your stockholders, creditors, or private investors have different levels of risk tolerance, to this end the accounting world has devised three levels of assurance to meet your needs.
Audit - Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.
An audit includes a review of internal controls, testing of selected transactions, and communication with third parties. Based on the auditor's findings, an audit report on whether the financial statements are fairly stated and free of material misstatements.
An Audit allows you to...
Here's what an audit will provide...
You get the highest level of assurance because the auditor will go outside your company to obtain more information. Typically, there will be written communication with:
Physical inspections by observing your inventory counting methods and performing test counts. The auditor will document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. The audit papers include a detailed work program to document the examinations and testing performed, as well as the client's supporting work papers.
Audits Not Just for Public Entities
All public companies are required to have an annual audit, but some nonpublic entities must undergo an annual audit as well. These include local governments, not-for-profit agencies and other organizations receiving government grants.
Moreover, some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank's assessment of the company's risk. Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order audits as checks of their management teams.
Our audit services are limited to preparing the necessary work papers and other "foot work" necessary for an auditor to issue a report on whether the financial statements are fairly stated and free of material misstatements. We work extensively with the auditor to facilitate the audit. This arrangement can save a significant amount of audit fees.
We work with several local accounting firms who specialize in perorming audits of financial statements and we will assist you in engaging their services.
Review - Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures the accountants apply to the financial statements, and various inquiries are made of your company's management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may be required.
A review doesn't require a study and evaluation of your company's internal controls or verification of data with third parties or physically inspect assets. Rather, a review report expresses limited assurance in the form of the statement: "We are not aware of any material modifications" for the financial statements to be in conformity with the Generally Accepted Accounting Principles (GAAP). Reviewed financial statements must include all required footnotes and other disclosures.
Why might a business request a review engagement? It can be a good middle ground, providing the advantages of a CPA's technical expertise without the work and expense of an audit.
Our review services are limited to preparing the necessary work papers and other "foot work" necessary for an auditor/reviewer to issue a report and express limited assurance in the form of the statement as noted above.
We work with several local accounting firms who specialize in perorming reviews of financial statements and we will assist you in engaging their services.
Compilation - Lowest Level of Assurance
In compiling financial statements for a client, we present information that is the "representation of management" and expresses no opinion or assurance on the statements. Compilations don't require inquiries of management or analytical procedures. Instead, we rely on our knowledge of accounting principles and a general understanding of your business.
Reporting on compiled financial statements can be extremely less expensive than either and audit or a review and compiled financial statements can omit some or all of the required disclosures normally included with financial statements. Including disclosure (which normally involves footnotes to the financial statements) consumes a significant amount of time to compile.
Banks often require compilations from an independent CPA as part of their lending covenants.
Which Report Should You Use?
Each type of financial statement report may suit specific circumstances, depending on requirements from your client's bank or other parties, as well as meet budgetary needs.
Understanding each report's unique strengths and weaknesses can help you choose the most appropriate one. Please call if you have questions about which type of report is right for you.