Assurance can be provided by an independent Chartered Professional Accountant (CPA) who is able to form an opinion and conclude that a business’ financial statements are presented fairly. Assurance is required by business owners who want confidence in the financial state of their business. Business owners may also require financial statements for their investors, shareholders, banks, creditors, or potential buyers. The most famous assurance scandal was Enron, when in 2001 it was discovered that its reported financial condition was fraudulent.
This article looks at these financial statement engagements:
Each of these engagements provide different levels of assurance. As the level of assurance varies, so does the amount of work involved as well as the associated cost. The appropriate financial statement engagement for your business depends on a number of factors like business size, ownership structure, business life cycle and financing arrangements.
Let’s dig a little deeper into the 3 options.
Level of Assurance Provided: None
A notice to reader (NTR), also known as a compilation, is a basic engagement. The distinguishing factor of an NTR is that it provides no assurance. Essentially, accountants will take information provided by the client in order to compile unaudited financial statements. In addition, financial statements with a notice to reader do not have to be prepared in accordance with generally accepted accounting principles and generally do not include the information disclosed in notes to the financial statements. As a result, the financial statements prepared in an NTR are usually not appropriate for banks and other creditors, who often require a higher level of assurance. Despite the fact that no professional opinion is offered in an NTR, the involvement of a professional accounting firm does lend increased credibility to the information being presented.
An NTR may be right for your business if you require financial statements for tax purposes or internal use; however, business owners benefit from more assurance because assurance offers protection from fraud and misinformation Since an NTR does not involve any assurance work, it is often the lowest cost engagement.
Level of Assurance: Low
A review engagement focuses on whether the information presented in financial statements is “plausible”. A review does not give an opinion on the financial statements (only an audit does), rather it expresses that nothing has come to the attention of the accountants that would require a significant adjustment to the information provided. Accountants achieve this by utilizing a mix of analysis of financial data, as well as discussion with business owners and managers. Unlike an NTR, but like an audit, financial statements in a review engagement must be prepared in accordance with generally accepted accounting principals including all required disclosures.
Since a review provides a low level of assurance, there is no assessment of the risk of fraud or the effectiveness of internal controls and procedures. The cost of a review is often less than that of an audit. Depending on the situation, banks and other parties requiring financial statements may deem review level assurance to be acceptable for their needs.
Level of Assurance: High
The purpose of an audit is to “enhance the degree of confidence” in financial statements. Having your financial statements audited means that an independent chartered professional accounting firm has provided their opinion on your company’s financial statements. This opinion determines whether there is reasonable assurance that the statements are free from material misstatement and presented fairly under the applicable accounting frameworks. Audit engagements also assess the risk of fraud as well as the effectiveness of your business’s internal controls and procedures.
Since audits provide the highest level of assurance, a higher cost is associated. Due to this higher level of assurance, banks, creditors, shareholders, investors and potential buyers will often require audited financial statements so that they are confident about the information being provided to them.
Which engagement is right for your business? Contact us for a free consultation OR click here for the Assurance Selector Quiz: our easy multiple choice questionnaire to find out which level of assurance your financial statements require.