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. CPA Firms may be called upon to provide three levels of assurance to meet requirements of investors, lenders or others. These levels are discussed below.
The top two levels of service (audit and review) are generally requested when a third party, a bank for example, requires the higher level of assurance as a condition for a loan. Or, an absentee owner may require an audit to keep his managers "honest". If not required, because these services are more costly, small business clients often request a level of service less in scope and cost than audit or review.
Compilation services (financial statements issued with no opinion or assurance) or other services designed to assist the client in getting his books in order without producing a financial statement are most often requested by small business owners.
For this reason, Fisher CPA, PC, like many firms, does not perform audit or review level work. Instead, we focus on what we perceive to be the greater need and demand, that is the development of companies through the building of a proper foundation for growth and success. This includes the design and implementation of a dependable accounting system, internal controls, management systems, strategic planning and tax management. When our clients do have a need for Audit or Review services, we assist in the selection of the audit or review firm and work with that firm in order to keep our clients' costs down.
For your understanding of each of the levels of service discussed above, we have included a discussion of each. Please let us know if we can answer any questions that you may have regarding these or any other matters.
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.
This work includes a review of internal controls, testing of selected transactions, and communication with third parties. Based on the auditors' findings, 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 employees, customers, suppliers and pressure groups, as well as the investing community, as to the credibility of published information.
- Facilitate the payment of corporate tax, goods and services tax, and other taxes on-time and accurately, thereby avoiding interest, penalties, and investigations.
- Comply with banking covenants.
- Help deter and detect material fraud and error.
- Facilitate the purchase and sale of businesses.
Here's what you get...
You get the highest level of assurance because the auditors go outside your company to obtain more information. Typically, they will have written communication with:
- Your customers, to check outstanding receivable balances,
- Your banks, to confirm cash or debt balances and terms,
- Your vendors, to verify outstanding payable balances, and
- Your attorneys, for information on pending or threatened legal action.
Auditors also perform physical inspections by observing your inventory counting methods and perform test counts. They document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll.
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.
Review - Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures to apply to the financial statements, and various inquiries made of your company's management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may be performed.
A review doesn't require the reviewing firm to study and evaluate your company's internal controls or verify 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.
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.
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.
SSARS 8 Engagements
SSARS 8 engagements are useful when the client does not have a need for financial statements or any expectation that the financials will be presented to third parties for their reliance on them. The CPA firm assists with adjustment, correction and reconcilation of the clients books but does not issue financial statements. The engagement letter between the CPA and client expressly states that no financials will be issued. All reports that are made available are for managment purposes only.
