Last quarter, I discussed what an audit accomplishes and what it does not accomplish in my article titled “Do You Really Need An Audit?” In that article, I introduced the idea that an audit may not be right for every organization, especially if resources are tight, as audits can be costly. Below, I discuss a few alternative options that may fulfill your organization’s financial reporting needs.
Audit vs. Review
In short, an audit provides the highest level of assurance over the financial statements. An audit provides assurance that an organization’s financial statements are free of material misstatement and are fairly presented. A review, unlike an audit, provides limited assurance of an organization’s financial statements. The reason for the difference in the level of assurance that is provided is a result of the difference in testing between an audit and a review. During an audit, some procedures include confirming balances with outside parties, testing selected transactions by examining supporting documents, or completing physical inspections and observations. On the other hand, procedures under a review are scaled back quite a bit. During a review, inquiries and analytical procedures make up the basis for expressing limited assurance that no material misstatements exist on the financial statement.
So, you might be asking, “Why should I get a review if I’m only getting limited assurance over the accuracy of my financial statements?” The cost of an audit might be prohibitive for your organization, and a review would be an alternative that still provides a level of accountability and transparency. You would still have a certified public accountant (CPA) providing a level of assurance that the financial statements are free from material misstatements, and from your Board’s perspective, that might be enough for them to be able to exercise their fiduciary responsibilities for the organization.
Compilations and Internal Control Engagements
Another level of service offered by a CPA is a compilation. A compilation, unlike an audit or review, provides no assurance over the financial statements. Instead, the CPA takes financial data provided by the organization and puts it into financial statement form that complies with the basis of accounting that it is being presented on. There are no testing or analytical procedures that are performed during this engagement. A compilation may be a good option if you know that the internal controls within your organization are strong and you just need the data presented to you in financial statement form.
This leads us into another type of engagement that might be beneficial to you, which is an assessment of your internal controls. Perhaps you have sound financial reporting and just want to make sure that internal controls are operating as designed, or you want to couple an internal control assessment along with a compilation engagement, rather than putting all of your resources towards an audit.
So, what should I do?
As you can see, there is much to think about before jumping to the conclusion that an audit is the right level of service to seek. At Forge Financial and Management Consulting, we understand how important your resources are and want to make sure that every dollar you spend with us is helping you achieve the results that you desire, whether that help is by providing an audit for the highest level of assurance over your financial statements, or by providing a review, compilation, or an evaluation of your internal controls.
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