Dealing with financial audits and reviews may not be the most exciting part of running a business, but each of these accounting engagements can bring considerable value to management. Whether you are a business owner or an external stakeholder, getting reliable, accurate and meaningful financial information is critical to your ability to protect your investment and maximize the value of your company. Many business owners view a third party audit or review as a necessary evil – something that banks and investors require that brings little value to your actual business operations. In fact, businesses that aren’t required to have an annual audit or review sometimes go years without having a qualified outside party take a critical look at their financials, procedures and policies. Whether or not an independent audit or review is a requirement for your business, any well-run business can benefit greatly from having a qualified CPA take an unbiased look at their financials and operations on a periodic basis. Getting the right service from the right advisor provides business owners and managers with peace of mind and confidence in their financial information, as well as the ability to extract valuable management information from trends, benchmarks and key performance indicators that can empower managerial decisions that lead to sustained organization performance.
Why are audits and reviews important?
Audits and reviews are important tools for any business. Audits and reviews can provide credibility to vested third parties that your financials are accurate as presented. Without these tools, it would be difficult for banks to lend money – working capital would dry up, capital investments would decrease, and economic growth spurred on by outside investments could slow to a crawl. Regardless of the success of a business, outside investors may be leery of making investments without some third party assurance as to the reliability of financial information. The level of assurance needed may depend upon the business or the size of the investment. Business financing and investment requires the confidence of investors in financial information. Financial audits and financial statement reviews can provide a vehicle to establish needed confidence.
Still, not all businesses are looking for external financing. Does it then make sense to forgo an annual financial statement audit or review and spend the money elsewhere? Not necessarily. While investors’ confidence is the most obvious reason for a third party assurance, there are many reasons why a business may benefit internally from an audit or review. Audits and reviews can provide an independent eye as to how you are conducting your business. A skilled CPA can use an assurance engagement to help businesses foresee future problems and avoid them, or to compare your procedures and methods to the best practices in the industry, leading to increased efficiency and more meaningful information for business owners. It’s important that banks are able to rely on your financial information. Business owners make decisions every day based on the best information that they have available. If the information is flawed, the decisions might be flawed as well.
Internal controls are another compelling reason for assurance services. An audit of internal controls over financial reporting can be a helpful project for business owners to assure that the appropriate checks and balances are in place within the organization and that the flow of information to the financial statements is complete and accurate. If controls are lax, an experienced auditor may pick up signs during a review of a business’ internal controls which could lead to improvements and the mitigation of risk.
What is the best assurance service for your business?
What level of assurance will provide the most benefit to your business depends largely on your situation and stakeholders’ needs. Some businesses will receive the maximum benefit from a full financial and managerial audit. Others would benefit from a review or compilation. How do you know which will provide the greatest value to your organization? The following is a quick summary of audits, reviews and compilations, and how each can be used to improve your business:
An audit is the highest level of financial statement assurance service. It is conducted in accordance with generally accepted auditing standards (GAAS). An audit satisfies external reporting requirements for leading institutions and regulatory agencies. An audit includes examining, on a test basis, evidence supporting the financial statements. An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
A review is the next level of assurance services. A review is conducted in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is a procedures driven engagement with limited assurance provided regarding the financial statements. It is substantially smaller in scope than an audit in accordance with GAAS. While a review provides less assurance to a third party regarding the accuracy of financial statements, it can be a very valuable tool for internal management.
A compilation is the lowest level of assurance services. A compilation is conducted in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA. A compilation is limited to presenting, in the form of financial statements, information which is the representation of management. Common financial statement methods of accounting used for compilations include accrual basis, cash basis and income tax basis. A compilation assumes the data provided by the business, but assures that the information provided is compiled accurately in the method that will be the most meaningful to the business.
If your business has not had an audit, review or compilation by a third party recently, we would love to speak with you. Wayne P. Naegele, CPA can help you determine what service will bring the most value to your business. Call Wayne P. Naegele, CPA today at 212-736-0055 or visit wn-cpa.com through the link below to find out how we can help your accounting reporting improve your business.