What Is an Audit and How Does It Compare to Other Assurance Services?

February 2016 | Article

Accounting is the language of business, and financial statements are how companies talk to investors, lenders and other outside parties. From family-owned businesses to large corporations, financial reporting is necessary to communicate results to internal and external stakeholders. Accurate, understandable financial reporting is important, and so is having an accountant who can provide the services you need, from basic financial statement preparation to a financial statement audit.

What Is an Audit?
An audit is the highest level of assurance service offered by a public accounting firm. The purpose of an audit is to provide assurance (comfort) on the accuracy of an organization’s financial statements. In order to perform a financial statement audit, the auditor must be independent from the organization. The auditor examines evidence, on a test basis, to obtain “reasonable assurance” about whether the amounts and disclosures in the organization’s financial statements are free from material misstatement.

Audits are sometimes required by third parties such as lenders, bonding companies or regulatory agencies. However, there are other benefits of a financial statement audit, including:

  • Providing owners or the board of directors with a higher level of financial reporting
  • Establishing a record of audited financial results for the potential sale of the company
  • Seeking outside investors

What Is a Review?
A review of financial statements includes performing inquiry and analytical procedures in order to express limited assurance that there are no material modifications that should be made to the financial statements. Similar to an audit, the accountant must be independent to perform a review. However, a review does not include obtaining an understanding of the company’s internal controls, assessing fraud risk, examining audit evidence, or testing accounting records through inspection, observation or outside confirmation.

A review may be necessary for a growing business requiring new financing. It may also be useful to business owners seeking greater confidence in financial reporting to evaluate results or make decisions.

Understanding Assurance
Reprinted with permission from the American Institute of Certified Public Accountants

What Is a Compilation?
A compilation includes presenting, in the form of financial statements, information that represents management without expressing any assurance on the financial statements. An accountant is not required to be independent to prepare compiled financial statements, however if the accountant is not independent, that fact must be disclosed in the compilation report. A compilation involves reading the financial statements to consider whether they appear appropriate in form and are free from obvious material misstatements. While a compilation is not an assurance service, compiled financial statements may meet the reporting requirements of some third parties. A compiled financial statement may also help owners and management evaluate financial results.

Basic Financial Statement Preparation
Preparation of financial statements is a service intended primarily for management’s or owner’s use in managing a business. This service is comparable to what an internal controller might provide to management, and does not include the issuance of a formal report on the financial statements. This service may be performed along with bookkeeping or transaction processing on a monthly, quarterly or annual basis. Financial statements are prepared in accordance with an acceptable financial reporting framework, and on each page the accountant includes a notice that “no assurance is provided” on the financial statements.

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