Understanding the different levels of service an accountant can provide related to an organization’s financial statements is important when determining what your company may need. Owners may automatically assume that they need an audit but that is not necessarily true. There are three levels of assurance an accountant can provide and understanding those levels can help management make a more appropriate decision for their organization. The following is a review of the three levels of assurance services an accountant can provide.
Audit (Highest level of Service)
An audit is the highest level of service that can be provided by an accountant. It is an independent examination and evaluation that is conducted in accordance with generally accepted auditing standards using the organization’s books, accounts, and financial documents. The auditor will provide an opinion based on the information reviewed that indicates whether the financial statements have been presented fairly and accurately in accordance with the proper financial reporting framework. It is important to note that the auditor’s opinion and report will indicate that the audit was planned and performed to obtain reasonable assurance that the financial statements are free from material misstatements. An audit does not provide one hundred percent assurance that no material misstatements existed only a reasonable assurance.
In order to obtain reasonable assurance over the statements an auditor will gain an understanding of the organization and industry and will begin to request various documents from management. The auditor will take this information and will begin the audit which includes but not limited to: performing observations, evaluating and understanding internal controls, testing and tracing accounts, confirming balances, and performing inquiries of personnel. During the audit the auditor will use “auditor’s judgment” to expand or limit test work done in certain areas.
At the conclusion of the audit, the auditor’s will issue an opinion in the Auditor’s Report. The opinion will be either an unqualified, qualified, or adverse opinion. Within an unqualified or “clean” opinion, the auditor concludes that the financial statements are presented fairly in accordance with the proper financial framework. .A qualified opinion means that there is some aspect of the financial statements that are not presented fairly. Within the report for the qualified opinion the auditor will include a paragraph describing the aspect that are not fairly presented. An adverse opinion is a result of information that the auditor gained during their test work that resulted in them concluding that the financial statements are grossly misstated and not presented fairly. Within the report for the qualified and adverse opinions the auditor will include a paragraph describing the aspect that is either not fairly presented or that has caused the adverse opinion. In all auditors reports information will be included that explains both the auditor’s responsibility and management’s responsibility with regards to the financial statements. It is important to point out that under the auditor’s responsibility it clearly states that the audit was planned and performed to obtain reasonable assurance that the statements are free from a material misstatements. Under the management responsibility section it clearly states that management is responsible for the preparation and fair presentation of the financial statements.
An audit is the highest level of assurance a CPA can provide and it can help increase the comfortability that the users of the financial statements have that the information is reasonably stated. Some scenarios that might require an organization to obtain an audit are:
- Publically Traded Company
- Considering going public in the near future
- Receiving funding from the Federal or State Government
- Considering a business loan that requires an audit
- Considering purchasing or selling a business in the near future
Review (Moderate level of Service)
A review engagement is a moderate level of services an accountant can provide. A review is conducted to provide limited assurance regarding any material modifications that should be made to the financial statements for them to be in accordance with the proper financial framework. It is important to point out that the accountant’s opinion and report will indicate that procedures were performed to obtain limited assurance as a basis for reporting whether any material modifications should be made.
Review procedures are significantly less than an audit, and in order to obtain limited assurance the accountant will conduct inquiries, and will perform analytical procedures over but not limited to account balances, ratios, accounting practices and policies, knowledge of fraud, knowledge and responsibility of internal control. The inquiries and analytics preformed provide the basis for the limited assurance that the statements are not materially misstated. At the end of the review the accountant will issue a report indicating that based on limited assurance they are not aware of any material modifications that should be made to the financial statements.
A review is less than an audit and provides only limited assurance that no material modification need to be made. Some scenarios that might require an organization to obtain a review are:
- Considering a business loan that requires a review
- Some loans require ongoing financial requirements (such as reviews each year the loan is outstanding)
- Board requirement
- Management desire
Compilation (Lowest level of Service)
A compilation engagement is the lowest level of service an accountant can provide. A compilation is conducted to assist management in presenting its financial statements in accordance with a proper financial framework. It is important to point out that the accountant provides no assurance regarding material modification within a compilation.
A compilation consists of the accountant gaining an understanding of the entity and its environment and then obtain financial information from management and presenting it in the accepted format. The accountant will utilize the financial information, which is the representation of management without involving any activities to obtain any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. Ultimately with a compilation, management is taking full responsibility for the preparation and presentation of the financial statements. The accountants’ report will not express an opinion or provide any assurance about the accuracy of the financial statements they prepared.
Some scenarios that might require an organization to obtain a review are:
- To obtain a new business insurance policy
- Investors/ Lenders requesting financial statement report
- Board requirement
- Management desire
The three levels of assurance an accountant can provide for an organization’s financial statements are audit, review and compilation. An audit will provide the users with an opinion indicating whether or not the statements are fairly presented and is not aware of any material modifications. A review will provide the users with limited assurance that the accountants is not aware of any material modifications that should be made. A compilation will provide the users with no assurance regarding material modifications. An organization should take into account what exactly they are looking for with regards to the level assurances and find the proper balance between costs and services provided. Management should always discuss with their accountant to understand the level of services to verify it is the service they need.