Banking & Finance

What level of assurance do you require?

February 27, 2018
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Assurance. What is it? How does it apply to your business? What are the different levels of assurance?

The simple explanation of assurance is confidence. Confidence in the accuracy of the financial statements of the company is often a requirement of lenders, shareholders and others who rely on the financial statements to make important decisions. There are different levels of assurance that may be required. A Certified Public Accountant can provide various levels of assurance by performing a preparation, compilation, review, or audit engagement.

There are two types of financial statements that may be prepared without assurance to meet the requirements of lenders and other users of the financial statements. One of those options is a basic financial statement preparation. This may be done by the controller of a company or a CPA. With a financial statement preparation, the CPA does not verify the information provided by the client.

The other engagement service that does not include assurance is a compilation. This is generally required when lower amounts of financing are requested and the involvement of a CPA is preferred with the preparation of the financial statements. With their involvement, the financial statements should be free of obvious material misstatements. In addition, a compilation report is included before the financial statements.

Reviews and audits are services that include levels of assurance. With a review, there is a basic level of assurance provided. A review is generally requested when higher levels of financing are needed for the business to expand. A CPA is required to have an understanding of the business and perform analytical procedures to increase confidence in the accuracy of the financial statements. A review report is completed with the financial statements that states whether the CPA is aware of any material modifications that should be made.

An audit is the highest level of assurance, but never absolute assurance. This service usually is required when looking to sell a business or high levels of financing is needed. The CPA is required to perform additional tasks in adding to those already performed in a review. Third-party confirmations, physical inspections, understanding internal controls and assessing fraud risk are some of the additional requirements of an audit. After performing the audit, the CPA will express an opinion on the presentation of the financial statements in a formal report.

It is always important to keep accurate accounting records, but also be aware of the required level of assurance required by the users of the financial statements. Work with your lender and CPA to make sure the appropriate confidence level in your company’s financial statements is met.