I have heard clients express the need for an “audit” of their financial statements many times during my career, but do they really need an audit? So often, people innocently confuse an audit with other financial services. In many cases, a different level of service and scrutiny of a company’s financial statements will suffice and meet the needs of stakeholders.
Let’s take a look at some of the various levels of service, ranging from an audit to preparation of financial statements:
Audit: This is the expression of an opinion on the financial statements as to whether they fairly present the financial position of a company as of a given date (and usually an opinion on the results of operations and cash flows of the company), in accordance with an accounting framework. An audit also requires the accountant to assess various levels of risk, and to gain an understanding of a company’s system of internal controls. This is the highest level of assurance a certified public accountant (CPA) can provide, and because of the level of scrutiny to which the company’s systems and records are subjected, the most costly.
Review: A review of financial statements uses the concept of “limited assurance”. This means that the accountant issues a report stating that he or she is “not aware of any material modifications that should be made to the financial statements” in order for them to be in accordance with the selected accounting framework. This level of service is significantly less in scope than an audit, which requires the expression of an opinion. A review requires inquiry of a company’s management and analytical procedures, but does not require the accountant to gain an understanding of the company’s internal control. Therefore, a company can incur significantly less in accounting fees with a review.
Compilation: In its truest sense, a compilation is merely taking a company’s financial statements and reporting on them, without expressing any form of assurance or conclusion of any kind with respect to those financial statements. The accountant is required to scan the financial statements for any obvious significant errors or departures from the selected accounting framework. Because of the minimal procedures required, and the fact that the accountant is not expressing an opinion or any other form of assurance, a compilation is typically less costly than an audit or a review.
Preparation: In the last year, the American Institute of Certified Public Accountants (AICPA) issued new standards for accounting and review services that now allow a CPA to issue “plain paper” financial statements without reporting on those statements. A financial statement preparation engagement does require the accountant to place a disclaimer at the bottom of the financial statements, stating that “no assurance is provided”. Because there is not even a report issued, this level of service is clearly the least costly option of the four discussed.
So, which level of service do you need? Often, the answer depends on who the users of the financial statements are, and what they require. For instance, the loan agreement from a financial institution will typically spell out whether it requires an audit, review, compilation or something less. In other cases, certain stakeholders or regulatory bodies will dictate the level of service required.
There are some instances in which a specialized report is required (e.g., Agreed-Upon Procedures, Collateral Field Examination, etc.). What you need will again depend on what the stakeholders and third-party users require. It is best to confer with your advisors (attorneys, lenders, insurance advisors, and most importantly, your CPA) to determine the best course of action and level of financial reporting service for you.
Skoda Minotti offers the ideal level of financial services based on your company’s needs. Email Jim Suttie or call 440-449-6800 to learn more about how Skoda Minotti can help your company grow.