Stakeholders, creditors, grantors and the public often require assurance that your financial statements accurately represent your true financial position.
Stakeholders may have different levels of risk tolerances, so in response there are three levels of assurance services.
Audit – Highest Level of Assurance
An audit provides the highest level of assurance. The scope of an audit engagement is to express an opinion on the fair presentation of the financial statements of the Organization in accordance with generally accepted accounting principles or some other applicable framework. An audit is a independent and objective examination of the financial statements which includes the verification of specific information as determined by the auditor or as established by rules or contract covenants.
Audit work includes a review of internal controls and testing of selected transactions. Based on the test results, a report is issued on whether the financial statements are fairly stated and free of material misstatements.
An Audit allows you to…
- Satisfy stakeholders such as creditors, grantors, investors and the public, as well as the general investing community, as to the credibility of reported information.
- Comply with banking covenants.
- Help deter and detect material fraud and error.
- Facilitate the purchase and/or sale of businesses.
Here’s what you get with an audit…
The highest level of assurance because we plan and perform audit procedures on material and significant account balances and revenue and expense accounts to ensure they are recorded in accordance with Generally Accepted Accounting Principles. While an audit provides the highest level of assurance, that assurance is still only reasonable assurance as we perform tests on a sample basis. In addition we communicate with outside parties to obtain more information. Typically, we’ll have written communication with your:
- Customers, to check outstanding receivable balances,
- Banks, to confirm cash or debt balances and terms,
- Vendors, to verify outstanding payable balances, and
- Attorneys, for information on pending or threatened legal action.
Should you have inventory, there will be physical inspections by observing your inventory counting methods and we’ll perform test counts. We document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. Our audit papers include a detailed work program to document the examinations and tests performed, as well as our support work papers.
Review – Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures applied to the financial statements along with inquiries with the organization’s management team. If during these we identify inconsistencies, we may perform additional procedures.
A review doesn’t require us to test and opine on your company’s internal controls or verify data with third parties. A review report expresses limited assurance in the form of a statement in the review report as: “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 disclosures.
Why might a business request a review engagement? It can be a good middle ground, providing an independent CPA’s technical expertise without the work and expense of an audit.
Compilation – Lowest Level of Assurance
Compiled financial statements are presented as information that is the “representation of management” where we do not express an opinion or provide assurance on the statements. Compilations do not require us to inquire of management or perform analytical procedures. Instead, we rely on our knowledge of accounting principles and a general understanding of your business.
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 bank or other parties.
Understanding each report’s unique strengths and weaknesses can help you choose the most appropriate one, and save you money. Please call (603-273-6303) if you have questions about which type of report is right for you or send an email for a free consultation.