Small businesses usually either prepare their own financial statements internally (owner or bookkeeper) or use an accounting or bookkeeping service. As discussed in the types of financial statement examinations provided by CPA's some even have a CPA prepare them.
Auditited Financial Statements
When does a business need one?
Public companies are required to provide audited financial statements to their shareholders and file them with the Security and Exchange Commission. A small business may require an audit or one of the other types of CPA provided examination of their financials if:
- Applying for a bank loan
- Applying for credit with a major suupplier
- Looking for additional investors (owners)
- Selling a business
What is a Financial Statement Audit?
A financial statement audit is the examination of an entity's financial statements and accompanying disclosures by an independent auditor. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The auditor's report must accompany the financial statements when they are issued to the intended recipients.
The purpose of a financial statement audit is to add credibility to the reported financial position and performance of a business.
Types of Financial Statement Examinations Performed By CPA's
An audit is the most expensive of all the types of examination of financial statements. The least expensive is a compilation, followed by a review. Due to its cost, many companies attempt to downgrade to a review or compilation, though this is only an option if it is acceptable to the report recipients. Publicly held entities must have their quarterly financial statements reviewed, in addition to the annual audit.
Financial Statement Preparation
While not an examination some businenesses do use the services of a CPA to prepare their financial statements. This financial statement preparation service is primarily intended for your own use to have current information on the financial standing of your business and to use to make decisions. Your CPA will prepare your financial statements directly from the records you provide, the CPA will not verify the accuracy or completeness of the information and is not required to issue a formal report on the financial statements.
Basically, this service is no different from preparing your own statements or using a bookkeeping service.
Intended for use by lenders and other outside parties who may appreciate the business’s relationship with a CPA without requiring a level of assurance on the accuracy of financial statements. A compilation is typically appropriate when initial or lower amounts of financing or credit are sought or there is significant collateral in place. Though no assurance is provided, outside parties may appreciate your association with a CPA, which is readily apparent in the formal compilation report.
The review service is one in which the CPA performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with some level of comfort as to their accuracy and reliability. The CPA will issue a formal report that includes a conclusion as to whether, based on the review, he is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework. A review typically is appropriate as a business grows and is seeking larger and more complex levels of financing and credit. It is also useful when you, as the business owner, are seeking greater confidence in your financial statements for the purpose of evaluating results and making key business decisions.
The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements. The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement. Intended to provide creditors, investors and other outside parties with a high level of comfort on the accuracy of financial statements CPA issues a formal report that expresses an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework. Typically appropriate and often required when seeking high levels of financing or outside investors, or when selling a business.
They say a picture's worth a thousand words - so here's your picture.
|Type of Preparation||Level of assurance that the financial statements are reliable and not materially misstated|
Financial Statement Preparation
|Prepared internally by owner , bookkeeper, accountant, or bookkeeping service does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.|
|Financial Statement Preparation||Prepared by CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.|
|Compilation||Prepared by CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.|
|Review||CPA obtains limited assurance that there are no material modifications that should be made to the financial statements.|
|Audit||The CPA obtains reasonable (defined as high, but not absolute) assurance about whether the financial statements are free of material misstatement|
The chart is made as an analogy of a traffic light and represents the degree of assurance provided by the dirfferent types of Financial Statements:
- Red Shaded Rows-Stop-No Assurance
- Yellow Shaded Rows-Caution-Limited Assurance
- Green Shaded Rows-Go-Reasonable Assurance
While all businesses need to prepare financial statements, most small businesses can not afford the luxury of Audited Financial Statements.