- September 16, 2020
- Posted by: Jamie Nardello
- Category: Blog
What level of assurance does your business need? It’s a question that’s been on the minds of the leaders of private companies during COVID-19. The result? A range of different responses. Some businesses have elected to trim their financial reporting costs by downgrading to a lower level of assurance. While this saves money, it may compromise reporting quality.
Others have concluded that their companies face higher risks right now because of remote working and COVID-related financial instability and therefore upgraded their assurance level. This increases reliability but comes at a higher cost.
There’s no one right answer in these situations. Each company must weigh the size, structure, and general risks of its business along with the needs of creditors and investors. An additional concern is the shifts in the Generally Accepted Accounting Principles (GAAP) and US federal tax law; the burden of new practices on internal accounting staff makes guidance from external professionals a valuable tool.
Levels of Assurance
When we talk about assurance in the accounting industry, we’re talking about the level of confidence your business has in the accuracy, timeliness, and relevance of financial reports. There are three applicable levels to consider.
With a compilation, a CPA gathers financial information from in-house data and puts it into a GAAP financial statement form. Footnote disclosures and cash flow information can be included, but are often omitted. Compliances offer no assurance that reports are free of material misstatement or that they meet GAAP.
The next step up is reviews. Reviews offer limited assurance that statements don’t contain material misstatements and that they conform to GAAP. Through reviews, CPAs use analytic procedures to pinpoint unusual items or trends in financial statements.
Here, the accountant applies analytical processes to identify unusual or unexpected details or trends in the financial statements. They will then look into these items and reconcile them with the company’s financial practices, policies, and procedures.
Unlike a compilation, a reviewed statement should always include disclosure footnotes and cash flow statements. However, the CPA isn’t mandated to assess internal controls, verify findings and information with third parties, or inspect assets.
The highest level of assurance available is the audit. Audits aren’t guarantees, but they provide a reasonable level of assurance that financial statements don’t include material misstatements and that they comply with GAAP.
Under the Securities and Exchange Commission, all public companies have to undergo an annual audit. Private companies, especially larger ones, may choose to do so to assure investors, creditors, and other stakeholders. Among the three levels of assurance, an audited financial statement is the only level of reporting that offers an opinion on whether or not the statement is fairly presented and conforms with GAAP.
Audits go beyond the analysis and inquiry of a review by conducting “search and verification” procedures. Moreover, they evaluate internal controls, customize the audit to address potential risks of material misstatement, and report on any identified weaknesses in controls.
Evaluate your needs
Every business has different needs when it comes to assuring their financial statements. Many companies require higher levels of confidence in their statements, but many don’t. If you need help choosing the right assurance level for your company, contact Smolin Lupin today to talk with one of our accountants.