Year-end financial statements provide a ‘snapshot’ of your business’ finances. However, the level of detail required, and the associated level of reporting, varies considerably based upon the type of engagement. To determine what engagement is appropriate for your business, it is important to understand the difference between the varying levels of reporting, and the specific purpose of each.
There are three methods that accountants use to analyze your financial statements, which result in three different reports. The differences are outlined below:
Compilation: a summary providing no assurance
The compilation is the most basic engagement and provides no assurance on the accuracy of your financial statements. Your company’s financial information is compiled using information gathered from existing records with no testing performed on the underlying data.
A compilation engagement is a good choice for owner-managers who need assistance in presenting their company’s financial information in the form of financial statements.
Review: limited assurance through discussion and analysis
A review engagement requires your accountant to perform limited procedures, such as discussion with members of management and an analysis of the financial information, in order to conclude that the financial statements as a whole are free from material misstatements. A review is considered an ‘assurance engagement’ in accordance with generally accepted standards for review engagements.
Depending on the size of your credit facility, a review engagement will often provide a sufficient level of assurance to satisfy a lender, while giving you insights into the financial information of your company.
Audit: maximum scrutiny for maximum assurance
An audit provides the highest level of assurance. Unlike compilation or review engagements, an audit requires examination of source documentation on a sample basis (like invoices, bank statements, and cheques) to confirm the existence, completeness, accuracy, and validity of the financial information. This allows the auditor to conclude that the financial statements as a whole are free from material misstatement.
During an audit, financial reporting practices and controls are also assessed and tested, which can identify control weaknesses and highlight business risks.
For private companies, an audit is typically required by lenders when the credit facility exceeds a certain threshold but can also be required upon the request of an absentee shareholder.
Should I settle for the bare minimum?
As an owner of a private company, you are deeply involved in your operations and have a handle on the finance function of your business. If financial statements are required by a third-party institution, they will most likely specify the level of assurance that they require. And while the minimum requirement is often acceptable, there are several benefits to seeking a higher level of assurance:
- An audit or review provides a snapshot of your business’ risks, highlighting ways that you can improve your record-keeping and identifying vulnerabilities for fraud.
- When preparing a business for sale, an audit can provide potential buyers with peace of mind that your business is what it appears, that it’s ready for sale, and provide justification for its price.
If you have any questions or need further information, please feel free to reach out to our Audit and Accounting team.
