Accounting is the language of business, and financial statements are how companies talk to investors, lenders and other outside parties. Regardless of the size of your organization or entity, accurate, understandable financial statements matter. It results in leadership teams needing to answer important questions like, “What is financial auditing?” and “How does calling in qualified auditors benefit my business?”
A key way to ensure the accuracy of your main financial statements is through a financial audit. But that’s just one of many types of audits that can benefit your business. All audits provide important and deeper insight into an organization.
What is an audit?
An audit is defined as “a formal examination of an organization’s financial situation.” Part of understanding “What is an audit?” is that there are several types of audits, including:
All audits provide important and deeper insight into an organization, but they all have slightly different purposes.
Typically, the term audit refers to a financial statement audit. 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.
Understanding what is the purpose of a financial audit empowers key decision-makers to achieve compliance at work, and establishing a reliable auditing policy and set of standards.
When is an audit required?
Now you know, “What is an audit?” when do you need one? Financial audits are sometimes required by third parties such as lenders, bonding companies or regulatory agencies ,in accordance with federal and state laws. However, there are other benefits of a financial statement audit, including:
What Is a Review?
What is an audit of financial statements? A financial audit is the highest level of assurance service offered by a public accounting firm. But there are other levels of assurance services provided as well, depending on your needs as an organization.
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. Just like with an audit, the accountant must be independent to perform a review. However, a review does not include:
A review may be necessary for a growing business that requires new financing. It may also be useful to business owners seeking greater confidence in financial reporting to evaluate results or make decisions.
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.
What is Financial Statement Preparation?
Preparation of financial statements is a service intended primarily for management or owner 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.”
How do you choose what type of audit you need?
The first thing to consider when determining if you need an audit is to answer “why.” Each type of audit, as well as any type of assurance or bookkeeping services, serve a specific purpose, such as to comply with regulations or initiating wholesale change.
Want to learn more?
Here are a few resources to help you understand the role audits play in your organization:
When in doubt, just ask.