The term “audit” gets used liberally when businesses need to provide financial statements to outside parties, but an audit may not actually be what many businesses need to meet their financial reporting requirements. In fact, there are many types of financial statement services that may offer a more cost-effective and appropriate examination of a company’s finances. Rather than assuming that your organization “needs an audit,” consider these different financial statement options and pick one that provides exactly what your organization needs to remain compliant.
What do these services provide?
Simply, these CPA services offer different levels of assurance, from no assurance to the highest level of assurance. In the case of a lender, assurance is required to make sure they are giving loans to individuals and companies who can pay them back. The larger a loan, the more assurance a lender is likely to require.
“Assurance gives organizations confidence about a company’s financials.”
Audits provide the most assurance to users of financial statements because they provide a higher comfort level on the accuracy of the financial statements. The other services are not as expensive as audits because they do not require the same amount of work by the CPA.
What are the other options?
There are basically three levels of financial statements for companies, and audits are the most intensive and expensive choice that a company can select. Therefore, you should ensure it’s the best choice for your situation.
Compilation and review may be smarter choices for a company that isn’t forced to do an audit in order to comply with specific financial requirements.
So, what is compilation?
A compilation is used when a lender or another outside party understands the organization’s association with a CPA. This option is generally employed for a relatively low level of financing, or in situations where significant collateral is available that limits the risk to creditors. It does not provide assurance on the accuracy of the financial statements.
Under a compilation, a CPA reads the financial statements provided by management and considers their appropriateness in form and if they are free from material misstatement. Then, the CPA drafts a compilation report to accompany the financial statements issued to lenders or other outside parties requesting the organization’s financials.
The compilation report indicates that the CPA did not review the financial statements or audit them, and also provides no level of assurance on them.
How about a review?
Reviews are more intensive than a compilation, but aren’t as extensive as an audit.
In a review, the CPA will perform analytics, inquiries, and other procedures to obtain “limited assurance” on the financial statements. It is also necessary for the CPA to understand the client’s industry and accounting practices to be able to identify potential material misstatements in the financials.
“In a review, the CPA issues a conclusion.”
After the CPA completes a review, they will issue a formal report that concludes whether any material modifications should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. This service may be beneficial as a business grows and requires higher levels of financing or prefers a greater confidence in the financial statements for decision making purposes.
When do I need an audit?
An audit is the highest level of assurance offered by CPAs, but it does not provide absolute assurance to lenders or other outside parties. Instead, it offers the most assurance possible that an organization’s financial statements are accurate.
When a CPA conducts an audit or review, they are required to maintain independence from the organization being audited or reviewed. In addition to corroborating the amounts and disclosures in the financial statements, the CPA is also required to obtain an understanding of the organization’s internal controls and assess fraud risk.
The CPA will issue a formal report expressing an audit opinion on the accuracy of the financial statements. In addition, a CPA will report any identified significant or material weaknesses in an organization’s internal controls. Business owners can benefit from an audit, because this element helps them identify ways to improve their organization’s practices.
Every financial service can help a business during a particular stage of its development. To determine which financial statement service is right for your organization, contact a member of the LaPorte Audit and Assurance Services department.