Financial Statements - Levels of Assurance

 Many small/medium-sized companies either need or need formal financial statements prepared at the year's conclusion.  These may be for a 3rd party such as a lender or just for internal usage.  Not many financial audited statements are created equal, however.

 

As a company owner, you have three choices.   Each creates different reports that follow the financial statements, although the financials themselves should be quite similar.  Many small business owners are unaware of the options, so I thought I'd outline them.

 

Compilation Engagement

 

That is the most typical, the cheapest, and typically all that's needed for many companies. 

Beneath this participation, the financial statement preparer will only take the info offered by a client and build it into regular financial statements.  Unless there is apparent or wrong information, the financial statements will signify what the customer has supplied. 

In reality, the preparer throughout the NTR report isn't providing any certainty that these statements' contents are accurate.

The financial statements should, nevertheless, be shown in a consistent and readable way.

 

There'll be minimal notes on the financial statements, and they need less detail than from different kinds of engagements. 

 

A good instance of the quantity of verification that's achieved in a compilation agreement is.

The owner of a retail outlet will state that they had $100,000 of stock available at the year's close.  The financial statement prepared beneath a compilation arrangement will accept that worth as correct and not misleading.

 

Review Engagement

 

 In cases like this, the accountant needs to do more analysis, disclosure, and query. 

 

A few of the financial notes can include funding asset information, long-term debt info, and related party transactions, amongst others.  There'll also be disclosures regarding significant accounting policies set up. 

 

Utilizing the stock example, the preparer of this review engagement would not just take the operator's word for this.  He might have a peek at prior years' stock levels and compare. 

He might inquire how every unit's worth was derived and perhaps even confirm the price per unit into the current market; to be sure it is reasonable.

 

Audit Engagement

 

Audited financial statements need the most comprehensive work to estimate the validity of the data supplied.    In conclusion, the auditor provides 'reasonable assurance' that there are absolutely no material misstatements in the financial statements. 

Therefore they must execute many different tests to be sure that the data is recording correctly.  The manner of ‘material misstatement' is described in this example because the consumer of those statements' decisions won't be affected by any mistakes within the words. 

Much like a review engagement, the audited statements will comprise several disclosures and notes, highlighting whatever the users might have to understand when analyzing the reports.

 

In the instance of our stock worth, an auditor, in all probability, would be available at the close of the year to validate the counts were correctly performed.

 

Which degree should I select?

 

Typically the lending arrangement is the deciding factor concerning which way you move.  If the lender says you need to evaluate statements to acquire the loan, you'll be getting your invoices reviewed.

 Another situation that may need more than only a compilation is if there are more unrelated owners, and they would like to ensure things are up and up.  Perhaps a buyer may demand the vendor have an inspection or audit completed to provide greater confidence. 

As I mentioned before, the typical compilation is the most frequent choice on the market, and unless your 3rd party is asking something different, the compendium is generally the preferred choice.