Financial statements are prepared by management of a business and are normally acceptable for general purposes of management and the owners of the business. There are however other stakeholders, both internally and externally. This is where assistance is normally sought from an independent accountant, typically a licensed public accountant. The public accountant's role may be limited to just compiling numbers as provided by management and may be accompanied by a disclaimer called Notice to Reader. There is no assurance provided by the public accountant on the accuracy or reliability of those financial statements. There are two other types of communications accompanying the financial statements: one is called a Review Engagement Report which provides moderate assurance to the users of those financial statements; and the other form of communication is called Independent Auditor's Report which provides the highest level of assurance that can be provided by an independent accountant. What type of assurance is required is determined by the needs of each particular situation. A company's lenders, government regulatory agencies, taxation authorities, shareholders, directors, employees or other stakeholders may demand a level of assurance that fits into a review engagement or an audit.
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.
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. Auditors must be a CPA in USA or a Licensed Public Accountant authorized by a Province in Canada. Our firm holds a CPA license from California Board of Accountancy and a Public Accounting License from CPA Ontario.
The audit process encompasses a review of internal controls, testing of selected transactions, and confirmations from third parties. Modern audits are designed to assess risks of a material error or misstatements. Based on the level of risk assessed, the auditor prepares an audit response designed to address those risks. Based on the findings, the auditor issues a report on whether the financial statements are fairly stated and free of material misstatements.
Advantages of an audit:
An audit satisfies almost all the stakeholders including suppliers, employees, customers, investors, lenders and the world at large.
Determine more accurate amounts of corporate taxes, sales taxes and ensure timely payments to avoid interest, penalties, and tax audits.
Ensures compliance with lenders' covenants.
Prevent and detect misstatements, frauds, and errors.
Provide a reliable basis to all parties involved in the merger, acquisition, amalgamation, or purchase and sale of businesses.
You can expect to get the following from an audit:
The client gets the highest level of assurance because the modern audit doesn't just focus on numbers or on the finance function. Instead it covers an evaluation and conclusion on the entire business: its history, health, and, indirectly on its prospects in the near future. Generally, the auditor will communicate directly with a company's:
Major customers to independently verify the amounts recorded by the company is being receivable from them as well as, occasionally, the volume of business conducted with them,
Financial institutions to obtain direct confirmation of bank balances, loans, credit facilities and the related terms and conditions;
Major suppliers to verify outstanding payable balances, and
Lawyers for their opinions on the likely outcomes on ongoing or potential litigation, claims, or other disputes.
Private companies, too, can benefit from an audit:
Normally all public corporations have to have a statutory audit, but some private entities must also have an annual audit done. These might include local bodies, not-for-profit entities and other organizations receiving government grants.
Additionally, certain financial institutions require audits of private corporations depending upon on the nature and magnitude of both the amounts and the specific risks involved. and/or the bank's assessment of the company's risk. Further, where the owners do not have direct access to detailed information or are not willing to spend the time and resources and efforts involved in checking the financial statements themselves, an audit provides the best solution.
A review engagement provides a moderate level of assurance to the user of the financial statements.
In reviewing financial statements for a client, the public accountant bases his/her work primarily on inquiry, discussion and analysis with the overall of objective of ensuring that the information presented is plausible under the circumstances.
A review is not an audit and therefore all pages contained in a set of reviewed financial statements are clearly marked as un-audited.
In most cases related to small to medium size businesses, review engagements are required by regulatory agencies, financial institutions and other lenders.
Review engagements are cost effective compared to an audit.
Lowest Level of Assurance:
In case of compilation, the accountant essentially presents numbers provided by management without expressing his/her own professional opinion. In compilation engagements, an accountant does not make inquiries or nor does he/she carry out an analytical review. The accountant just puts his/her accounting and financial reporting knowledge based on a very limited understanding of the client's business.
Quite frequently the bankers and other lenders find financial statements compiled by an independent accountant, even though without any assurance, to be useful for their purposes.