Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company.
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 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 with an audit…
You get the highest level of assurance because an audit involves going outside your company to obtain more information. Typically, there is 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.
An audit may also involve performing physical inspections by observing your inventory counting methods and perform test counts. The auditor documents and tests 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.
Review – Limited Assurance
A review doesn’t require us 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.
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 or complete the form below for a free consultation.
MARK ARONOFF, CPA, P.C.
122-39 Mowbray Drive
Kew Gardens, NY 11415
Phone: (718) 775-5868