Need to Know
Q. Do I need an audit?
Often, we receive calls asking, “How much will it cost for an audit of my company?” This question inspires several of our own because we have found that when a person inquires about an “audit” it could really mean many different things. In accounting, an audit is something very specific but for others not in the industry, an “audit” request could be a financial statement in general or a review of controls verifying transactions were accurate. What we need to do is ask questions to determine what service is really needed.
A typical starting point would be to find out why they are asking for an audit. It could be for bank financing, requirement of by-laws, a vendor request, or they may describe some other situation altogether. If it is a result of bank financing or by-laws, we ask to see the documents to determine what exactly is required. If it is something else, we will continue to follow-up to see what exactly the needs are so we can provide them with the information they really want.
In order to help determine what type of engagement is required, below is a little synopsis about the different types of specific services.
Audited financial statements provide an opinion that the statements are presented fairly, in all material respects. In performing the audit, we must consider controls at the company, which means considering what policies and procedures are in place to help prevent errors or fraud. We do this by talking with the owners and employees, as well as reviewing various transactions. Our review of transactions, including the supporting documents (invoices, purchase orders, account detail) is to see processes are in place and that the transactions are being recorded and reported correctly. An audit does provide assurance. The auditor is giving an opinion, that the financials are free from material misstatements based on the information, or audit evidence, obtained. Audited financial statements are required to include disclosures pertaining to accounts, transactions, company procedures or commitments and contingencies.
Reviewed financial statements provide limited assurance there are no material modifications needed on the financial statements. In a review, we are still gathering some information about the company and how it operates but at a lower level than an audit. We must document expectations and perform analytics as well as perform inquiries of management. Some account detail or transaction detail may be reviewed but to a much lesser extent than an audit. A review provides a conclusion on the financial statements. Is affirms that we are not aware of any material modifications that should be made to the statements. Reviewed financial statements also are required to include disclosures pertaining to accounts, transactions, company procedures or commitments and contingencies.
Compiled financial statements provide no assurance on the financial statements. A compilation is even less involved than a Review. Similar to an audit and review, we start with the company's statements, but here we only look it over for reasonableness. For example, if you have a loan, it is recorded on the books and the principal and interest are recorded correctly or depreciation expense is being booked. There is no testing of transactions performed during a compilation. The compiled financial statements will be accompanied by an accountants’ report, but it specifically indicates that an audit or review was not performed, and we were not required to perform procedures to verify completeness and accuracy of information. Compiled financial statement may include disclosures required, as noted in Audits and Reviews, but may omit all disclosures which would be disclosed int the report.
Prepared financial statements provide no assurance and do not even require a report. They may include just the statements with a footer indicating no assurance is provided. Prepared statements may also include or omit disclosures, if omitted, it would be indicated in the footer.
Agreed Upon Procedures would not be a financial statement but a performance of specific procedures, determined by the Company. After performing the procedures, a report is issued noting the procedure, including details of the number of items selected and the findings. There is no opinion or conclusion expressed for this engagement. Procedures performed may include steps like examining checks for proper signatures or agreement to approved invoices.
As you can see from the descriptions, audits are much more involved than other forms of financial statements. Often, we have found a reviewed or compiled financial statement is sufficient to meet the needs of the Company. Due to the additional work involved in an audit they take more time and are more costly than a lower level of service, which may be all that is necessary.
Through our inquiries, we may uncover the Company does not need one of the above services but rather, a less formal consultation. The consultation, especially if for internal purposes only, can be similar to one of the above engagements but would allow for more flexibility in how the information is provided to the company. The steps performed under a consultation arrangement would still be reported to the company but would not have to be presented in accordance with our professional standards, as the other engagements would, allowing for flexibility.
If you need an audit, or believe you need an audit, let’s talk. We want to assist you in getting the right service and the most benefit for you and your company.