An Explanation of Audits, Assurance and Attestation
Over the last 5 years or so, there have been major changes to the accounting standards that must be implemented by businesses. If that’s not enough, many companies are struggling in the new COVID world, forcing them to look to banks or the government for financial assistance. In this environment, we’ve been asked to do a lot more Assurance work for our clients than usual. What we’ve discovered is that many of our clients didn’t realize the value of Assurance services until we mentioned that these services could help grow or sell their business. By understanding and using Assurance services, companies are better able to manage their operational risks and stay in compliance with regulations. They are also in a better position to increase their profits, get financing from investors or position the company for a sale.
I’m Not So Sure About Assurance
First things first. What is Assurance? Simply put, Assurance services enhance the degree of decision-maker confidence in financial information. It can also help companies improve their financial reporting and business operations. Accountants typically offer a suite of Assurance services which provide different levels of assurance. These include audits, reviews, and attestation services. Assurance services may be required for bank loans, mergers and acquisitions, plus due diligence and certain transactions. Here we will break down the different type of assurance services: Audits, Reviews and Attestation.
The Dreaded Audit
First we’ll tackle auditing. Many people hear this word and think of the IRS auditing your taxes. In this instance, audits are performed on financial statements and are proactive vs. reactive. Auditing involves performing tests and procedures on the financial statements to obtain reasonable assurance that it is not materially misstated. In other words, the audit is a deep look into the company’s financial statements and financial reporting system that provides the highest level of assurance from an independent auditor that your financial statements are reliable. Besides providing a stamp of approval to banks and investors, an audit provides a wealth of knowledge about the inner workings of the financial reporting system and business operations that provide a tremendous amount of value to the Company’s management and governance. As a company owner or CFO, you know that accurate and reliable financial information is critical for a successful business, so you want to ensure that your financial reporting system is efficient and effective.
Among the different assurance services, audits provide the highest level of assurance. Some of the benefits your business can obtain from an audit include more accurate financial statements and financial reports, improved internal controls, quicker procurement of loans and investor capital, and a smoother process when selling your business due to audited financial records and improved internal controls. An audit can also provide peace of mind that your company is free of fraud. Audits are usually performed once a year.
An audit provides a clear picture of the financial condition of your company. This can help your business run at optimum efficiency. If you’re thinking of getting a loan, attracting investors or selling the company, you have added transparency and value to your company.
A great example of this is reflected in the work we provided a local equipment rental company when they were looking to expand. They realized that they would need financial statement audits to help attract capital. Last year they sold a large interest in the company to a private equity company. Because they had been doing regular audits with a CPA, their books where in pristine condition, making the sales process quicker and smoother.
When an Audit is Not the Answer
Sometimes, a Company may not need the highest level of assurance provided by an audit. Another option may be a review of the financial statements. A review is an assurance service that doesn’t go as deep as an audit and therefore requires less work. In a review, the accountant provides limited assurance on the financial statements primarily by performing analytical procedures and inquiries. Reviews are generally less costly than an audit and may be sufficient for a smaller business with less complex structures.
We started providing reviews for a major cosmetics company 15 years ago when they were much smaller. As they grew into an international business, our reviews gave us the insight to help them develop their internal controls and reporting procedures, along with improving their internal reporting and tax structure, allowing them to expand strategically and safely.
Mind the GAAP
Many small businesses do not have the expertise to prepare financial statements in accordance with generally accepted accounting principles. In these cases, the CPA firm performing the audit or review can also assist in the preparation of the financial statements. If the financial statement users do not require any level of assurance on the financial statements, then the CPA firm can perform a compilation of the financial statements which is simply taking the business bookkeeping information and preparing financial statements in accordance with generally accepted accounting principles or the selected basis of accounting.
Can You Attest to That?
Next, let’s tackle attestation. An attestation is an examination, review, or agreed-upon procedures engagement related to a subject matter or an assertion.
A major difference between audits, reviews and attestation is that the audits and reviews generally provide assurance on the financial statements as a whole, whereas attestations provide assurance on a specific matter or assertion. For example, a company may need an examination of their cash disbursements because they suspect fraud, or a lender may require a review of a company’s inventory because the company uses it for collateral. The attestation will provide assurance from an independent CPA firm on the specific matter or assertion.
You’ve Convinced Me. When Should I Do It?
Certain assurance services such as attestation services can be done at any time. Audit and reviews of annual financial statements are generally performed after the closing of the company’s books for the year. However, best practice is to retain a CPA firm prior to the end of the fiscal year, especially for an audit which requires a significant amount of work. If December 31 is your fiscal year end, then fall is a good time for business owners to interview accounting firms. By lining up the accounting firm now, you can start the planning process and complete the audit earlier.
Hopefully that clears up some of the mystery surrounding assurance services, along with the value of performing these services. If you have any questions or need assistance, contact us.