Financial Statement Audit & Assurance
Financial Statement Audit & assurance is the process of analyzing, verifying the records available in the company’s accounting record is as per accounting standard and principle (for example, U.S. GAAP), and it also confirms that accounting record is accurate or not. The main aim of assurance is to check the accuracy of financial reports, and make sure there is no misrepresentation, no misuse of funds, no fraud, and no fraudulent activities done in a company.
Based on the level of assurance, there are Audit, Review, and Compilation. The level of assurance that the financial statements of a client are fairly presented is at its highest for an audit and at its lowest (none at all) for a compilation, with a review somewhere in between. Higher assurance level requires more procedures to be performed, and a significant number of hours to complete.
Assurance Service Level
Audit
The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements. The CPA performs procedures in order to obtain “reasonable assurance”(defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement. In an audit engagement, the auditor must corroborate the ending balances in the client's accounts and disclosures. This calls for the examination of source documents, third party confirmations, physical inspections, tests of internal controls, and other procedures as needed.
Review
Review offers a lower level of assurance than Audit. The review service is one in which the CPA performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy. The review is the base level of CPA assurance services. In a review engagement, the CPA will issue a formal report that includes a conclusion as to whether, based on the review, he is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
Compilation
Compilation is a service where the role of the CPA is more apparent to outside parties, and as such, the requirements for performing this service are more explicit. For example, if the CPA is not independent from ownership, management and other circumstances in their relationship to you and your business, she is required to disclose the impairment to her independence in her compilation report. The compilation report states that the CPA did not audit or review the financial statements and accordingly does not express an opinion, a conclusion or provide any assurance on them.
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What Do I Need, Audit Or Review?
Audit
There are no federal requirements for an independent audit unless the NFP receives $750,000 or more in federal funds in a single year. Twenty-six states have laws requiring charitable NFPs to conduct an independent audit under certain circumstances. For example, in the state of New Jersey, a nonprofit organization must file an Audit Report if its revenue exceeds $500,000.
Review & Compilations
There are no state or federal laws requiring reviewed financial statements. As with an audit, there may be grantors or lenders that require that the organization provide an annual reviewed financial statement as part of the grant or loan agreement. A review will provide that grantor or lender some comfort in knowing that an accountant independent of the organization has reviewed the financial information that the organization is providing.
An audit may be cost prohibitive for an organization, so a reviewed financial statement is an alternative that still provides a level of accountability and transparency. Although a review is less in scope than an audit, a CPA outside of the organization is still providing some level of assurance that the financial statement are free of material misstatements. A review will help the board exercise its fiduciary responsibility for the organization. When the organization engages a certified public accountant to review its financial statements, it can also receive the benefit of an external expert providing recommendations for improvement of any internal control deficiencies it may identify.
Stages Of An Audit
Financial Audit Separate Into Three Stages
First: Risk assessment and planning
This is the beginning stage, the auditor spends time to learn your business and business environment. This helps your auditor gain an understanding about the way your business operates. The information helps the auditor assess potential risks that can adversely affect your audited financial statements.
Second: Internal Control Testing
Auditor uses risk assessment questionnaires to test your internal controls, for example:
- How well you safeguard your business assets
- Proper authorizations are in place
- Clear segregation of employee duties
Assessing your internal control can determine your company’s degree of effectiveness and control. Positive results mean the audit can go faster. If the errors or misstatements are found, auditor has to dig deeper to find the problem areas.
Substantive Audit Procedures
The last stage includes a lot of procedures and financial statement reviews:
- Cash review
- Accounts receivable
- Inventory
- Fixed assets
- Accounts payable
- Debt
- Revenue
- Expenses