All small businesses must address whether assistance from an accounting firm is necessary. As a small business begins to grow, it may need to have financial statements that have been prepared or looked at by a professional accountant. It is important to understand the various services offered, the differences between these services and whether they are suitable for your company.
An audit is a full review of all financial matters of the company. An independent auditor from an accounting firm checks the validity of data and possibility of material misstatements. The auditor performs numerous tests and checks to ensure the financial records are entered and maintained appropriately. In addition, the auditor ensures that internal controls are appropriately laying a foundation for accurate financial reporting. The end result is an overall opinion from the auditor regarding the financial statements.
Because of the extensiveness of work, an audit is more expensive than other options. An audit is required for public companies. Companies seeking external financing may find an audit is required. An audit is performed in accordance with a specific accounting framework. If your company is in a highly specialized industry, you may experience limit options regarding who can audit certain portions of your financial statements.
An accounting firm can also perform a review. A review also results in partial assurance from the accounting firm that there are no material misstatements within the financial statements. However, review engagements provide less assurance because less testing is performed. An accounting firm doesn’t do as many tests, doesn’t test as many transactions and doesn’t cover all areas considered when performing an audit. The accounting firm tests the reasonableness of the figures reported, reviews management’s responsibilities and performs analytical procedures to test the relationships between financial figures.
Because a review requires less work, it is less expensive. However, it also provides less assurance to external users of the validity of the information. Many financial institutions and external investors accept reviewed financial statement data. The key difference from an audit is that no accounting opinion is given.
The most basic option from an accounting firm is a financial statement compilation. This process involves building the financial reports and producing a final product that is presentable to external users. No assurance is given regarding the quality of the underlying numbers; the only undertaking is related to the development of the report itself. A compilation may or may not include note disclosures, an option that isn’t permissible under the other options listed above.
Compilations are the least expensive option. However, no assurance is given on the accuracy of financial data. Compiled financial statements generate reports that can be distributed, but financiers often require some level of assurance. A compilation is the most flexible service option, as an independent accounting firm is not required and there are different levels of compilation service available.