What provides the highest assurance that a CPA can offer?

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.

DGN offers four different levels of financial statement services. Because users of financial statements hold different levels of risk tolerance, clients may be unsure which type of service is needed. Following is a basic guide to help answer this question.

Audits

An audit provides the highest level of assurance on an organization’s financial statements.  The CPA performs procedures in order to obtain “reasonable assurance” (defined as high but not absolute) about whether the financial statements are free from material misstatement. The CPA is required to obtain an understanding of the entity’s internal controls and assess fraud risk. The amounts and disclosures in the financial statements are corroborated through inquiry, physical inspection, observation, confirmations, examination and analytical procedures.

Reviews

A review provides limited assurance on an organization’s financial statements. A review is intended to provide a user with a level of comfort on the financial statement’s accuracy. A review is substantially narrower in scope than an audit. The CPA must understand the industry in which the organization operates and obtain knowledge about the business and accounting principles used. Procedures performed include analytical procedures and inquiries.

Compilations

A compilation provides no assurance on an organization’s financial statements. There is no testing or analytical procedures performed during a compilation.  The CPA must read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and free from obvious material misstatements.

Preparations

A preparation also provides no assurance on an organization’s financial statements. This service is primarily intended for management’s own use to have current information on the financial standing of their business and to make decisions accordingly. Management can share the financial statements with outside parties, however, the CPA will not verify the accuracy or completeness of the information and is not required to issue a formal report on the financial statements. 

DGN participates in the AICPA Peer Review Program. The goal of the practice monitoring, and the program itself, is to promote and enhance quality in the accounting and auditing services provided by the CPA firms subject to these standards. This goal serves the public interest and strengthens the accounting and audit quality.  To read DGN’s peer review report click here.

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