Financial Statements: Which Level of Assurance is Right for Your Business?

Financial statements are integral to assessing a company’s financial position and are routinely relied upon by business owners, banks, bonding companies and other shareholders regarding investing, financing or other business considerations. There are varying levels of assurance provided by a certified public accountant (CPA):

• Compiled Financial Statements;
• Reviewed Financial Statements; and
• Audited Financial Statements.

It is important for business owners to work with their accountants to determine which level of service is best for their company’s needs. In doing so, be sure to consider all available information, including debt agreements, to confirm that the financial statements will meet the needs of the business and related users.

Compiled Financial Statements

Compiled financial statements are appropriate when businesses are seeking lower levels of financing, including a line of credit, with financial institutions. Unlike review or audit engagements, the accountant offers no assurance on the financial statements and does not have to be independent of the client. However, in an instance where the accountant is not independent, this information must be included in the compiled report. In preparing the compiled financial statements, the accountant is required to read the statements for obvious material errors, providing users with the confidence that the financial statements are in the appropriate form.

Reviewed Financial Statements

Reviewed financial statements are issued by an independent accountant who provides limited assurance that no material modifications are needed for the statements to conform with the applicable financial reporting framework. To obtain limited assurance, the CPA is required to perform inquiry and analytical procedures, rather than testing transactions (i.e. substantive procedures). It’s important for users to note that the reviewed report explicitly states that a review is substantially less in scope than an audit and that no opinion is expressed on the statement. Reviewed financial statements are appropriate for companies that have grown and are seeking larger levels of debt financing.

Audited Financial Statements

Audited financial statements are often required for more complex or significant financing arrangements. They are also typically sought after when a business is contemplating a merger or acquisition, or are seeking to be pre-qualified for specific work. Consistent with reviewed financial statements, the accountant is required to be independent and perform inquiry and analytical procedures. However, auditors must also understand the Company’s internal control environment and assess the risk of material misstatement across the various transaction cycles and financial statements as a whole. Audits also require the accountant to perform substantive procedures, such as inspection, observation, confirmation, etc., in order to obtain reasonable assurance and express an opinion as to whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

Independence

In addition to selecting the level of assurance that is best for your company, it is also necessary to know if your service provider has independence to ensure the credibility, neutrality, and reliability of the financial statements. Independence is paramount when selecting a service provider.

For financial statement purposes, independence means that the individual or firm preparing, reviewing, or auditing the financial statements has no relationships or interests that could impair objectivity or create a conflict of interest.

We understand selecting an independent assurance team and understanding which financial statement assurance report to choose can be challenging. The assurance team at Wouch Maloney CPAs & Business Advisors is available to speak with you to help you make a decision that works best for you. Should you have questions on this or other matters affecting you or your business, please call 215.675.8364 or email us to speak with a member of our team today.

DISCLAIMER: All communications by Wouch, Maloney & Co., LLP intend to provide general information, as of the date of the communication, and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. Please be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.