What are your financial statements telling the outside world?
You have a critical choice when it comes to your year-end financial statements. Should you simply have them compiled? Is it better to have them reviewed? Or, is a full-blown audit the way to go? The answer comes down to the level of assurance you need for creditors and investors and for yourself. Your financial statements tell a story about your business and a significant aspect of how that story is told comes down to the type of work your accountant does on your statements. There are three types of engagements denoted by a report attached to your financial statements: Notice to Reader, Review and Audit. The scope of the work that is performed and the level of assurance differs with each approach. Here’s what you should know.
A Notice to Reader is simple, straightforward and the least expensive. The objective is to compile unaudited financial information into financial statements or schedules. Also called a compilation report, this is a straight-up transcription of the information your management team provides. Your accounting firm is simply putting that information into the appropriate template. They are not verifying the accuracy of the information and so they are not expressing any third-party assurance to the reader. There is no opinion and typically, there are no notes to the statements – just the numbers as you have represented them. The responsibility for the accuracy of the numbers rests solely with management. A notice to reader report is typically done when you are filing a tax return and require financial statements but have no third-party reporting requirements.
Your financial institution typically requires a Review engagement if you have bank debt. The objective here is for your accounting firm to perform procedures on the financial statement line items to conclude if the numbers are plausible. The typical procedures involved are analyses of relationships between accounts and discussions with management. Based on these analyses and the explanations provided, your accountant determines whether or not the financial statements and notes to the financial statements make sense. Accountants completing a review engagement must be independent from the client and have the appropriate knowledge of the business in order to accept the engagement.
An Audit is the most thorough, and as a result, the audit report offers the greatest level of assurance to readers. It is the gold standard, and also the most expensive. All publicly listed companies are required by securities laws to provide annual audited financial statements. As well, some private enterprises may be required to provide audited financial statements by their banks, bonding companies, creditors, absentee owners or potential buyers of the business. For example, bank financing over a certain borrowing threshold usually requires an audit. If the business is a subsidiary of an international entity, an audit may be required. An absentee owner may want an audit to get an extra level of assurance because they are not working in the business from day to day and want to feel confident in what they are being told by their management team. They will gain that confidence because an independent professional public accountant – the auditor – will conclude on whether or not the financial statements are materially misstated. In order to provide an opinion on accuracy, the auditor must go back to the source documents to test material balance sheet items and sample and test transactions within the revenue/accounts receivable, purchases/payables and payroll cycles. An audit also involves procedures such as confirmation of bank, accounts receivable or accounts payable balances as well as attendance at the inventory count where applicable. If you are looking to sell your business, having a history of audited statements will make the due diligence process easier and give your potential buyer comfort that the numbers and explanatory notes are fairly stated. That said, an audit is typically not a one-off When you make the decision to undertake an audit, you should be prepared to commit to that level of assurance for a number of years.
Understanding the scope of each option and the message it sends to stakeholders and the outside world is critical. Discuss your needs and longer-term goals to ensure you are choosing the right type of engagement for your business.
Laura Couvrette is a partner in Fuller Landau’s audit and assurance practice. She has over 10 years of experience helping entrepreneurs and owner managers achieve their business goals. Laura can be reached at 416-645-6528 or by e-mail at
Business Advisor: October 2013
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