While it’s a “given” that accuracy in financial statements is important, ensuring such accuracy can be tricky. When enlisting the aid of a third party to help give your company that assurance, there are some general types of assurance engagements with which you should be familiar. The three main ones that can provide varying degrees of assurance include compilations, reviews, and audits of financial statements. The following is an overview of these services to assist in understanding the differences and help inform decisions for choosing the best fit.
First, an audit is a service provided by certified public accountants (CPAs) affording the highest level of assurance to the accuracy of a company’s financial statements. CPAs perform procedures to obtain a reasonable level of assurance that there are no material misstatements within a company’s financial records. At the end of an audit engagement, CPAs provide companies with an opinion as to whether a company’s financial statements are presented fairly, in all material respects.
An audit is best suited for a growing or mature company, particularly one looking for a large financing deal. Alternatively, a company’s creditor(s) may request an audit as part of the lending agreement. In certain industries, a regulator may require an audit. For instance, public companies filed with the Securities & Exchange Commission (SEC) must provide annual audited financial statements to the SEC and its investors. While an audit is the most expensive type of assurance engagement, it is considered a cost of doing business for companies seeking financing.
Next on the assurance scale are reviews of financial statements. A review performed by a CPA provides some assurance, but not as much as an audit. And due to that limited assurance, CPAs will conduct fewer tasks, such as inquiries of management and analytical procedures, to provide evidence that the financial statements require no material modifications.
A company looking to obtain an audit soon would be well-suited for a review in the meantime. Furthermore, even if a company is not required to obtain an audit, investors, creditors, or business owners often benefit from a clean CPA review report. Because the CPA performs fewer procedures, the cost of a review can be significantly lower than that of an audit.
The last engagement we’ll look at is a compilation of financial statements. A compilation does not provide any assurance that the numbers within the financial statements are accurate. The primary goal of a compilation is the collection of financial records into a financial statement format that is in accordance with generally accepted accounting principles. There are no analytical procedures or reviews of underlying data.
Even though a compilation does not provide any assurance, it can be helpful for young companies wanting to ensure financial statements are in good order. It also looks good to potential lenders for companies to have existing relationships with CPA firms. Depending on the size of the company, a CPA firm can perform a compilation for a reasonable price.
Whatever your company’s needs may be, one size does not fit all. It is important to understand your needs and the means for addressing them in approaching a third party to assist with your financial records.
PYA is a CPA firm with specialized industry experience and a commitment to understanding the application of complex accounting and auditing standards. We provide audits, reviews, and compilations of financial statements; internal control reviews and risk assessments; impairment testing of intangible assets; transaction accounting assistance; special reporting; outsourcing of internal audit functions; and forensic accounting and dispute resolution services, among others.
If you have questions about assurance engagements, or would like to request a speaker on this topic for your organization or event, contact one of our executives below, (800) 270-9629.