A financial expert ’ s analysis is only as reliable as the data it ’ s based on — and all financial statements aren ’ t created equal . The term “ assurance ” refers to how confident ( or assured ) you are that a company ’ s financial reports are reliable , timely and relevant . Here are three distinct levels of assurance that CPAs offer , in order of increasing level of rigor :
COMPILATIONS AND PREPARATION SERVICES These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles ( GAAP ). With a compilation , the CPA puts financial information that management generates in-house into a GAAP financial statement format . Footnote disclosures and cash flow information are optional .
Alternatively , when financial statements will be used for internal purposes only , a CPA might prepare them in conjunction with bookkeeping or transactionprocessing services . This is no different from what an in-house controller or CFO would provide to management . Prepared financial statements may be shared with outside parties , but each page of the statements will include a notice that “ no assurance is provided .”
REVIEWS These statements provide limited assurance that they ’ re free from material misstatement and conform with GAAP . Here , the accountant applies analytical procedures to identify unusual items or trends in the financial statements . He or she inquires about anomalies , as well as the company ’ s accounting policies and procedures .
AUDITS These statements offer a reasonable level of assurance — but not a guarantee — that the financial statements are free from material misstatement and conform with GAAP . The Securities and Exchange Commission requires public companies to have an annual audit . Larger private companies also may opt for this service to satisfy outside lenders and investors . Audited financial statements are the only type of report to include an expressed opinion about whether the financial statements are fairly presented and conform with GAAP .
Beyond taking the analytical and inquiry steps of a review , auditors evaluate internal control systems , tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report . In addition , they may conduct third-party verifications , physical inspections , and detailed examinations of original source documents and computer records .
RELIABILITY MATTERS Financial statements may be used to value a business or estimate lost profits . Too often , a company ’ s owners and counsel assume a CPA ’ s work always carries an independent audit ’ s stamp of approval . But that can sometimes be a faulty assumption . ■
Reviewed statements include footnote disclosures and a statement of cash flows . But the accountant isn ’ t required to evaluate internal controls , verify information with third parties or physically inspect assets .
Issue 2 | 2022 VIEWpoint 13