Which of the following services provide the lowest level of assurance on a financial statement?

Audits are seen by many as the “gold standard” in financial reporting. But this level of assurance isn’t necessary for every business. In some cases, management may prefer to downgrade to a less expensive service. When a borrower wants to downgrade its financial statements, it’s important for lenders to understand the key differences between reviews, compilations and preparations, including how these services have changed under the American Institute of Certified Public Accountants’ (AICPA’s) recent Statement on Standards for Accounting and Review Services (SSARS) 21.

What does assurance for financial reporting look like?

The term “assurance” refers to how much confidence stakeholders have that a company’s financial statements will be reliable, informative and in conformity with U.S. Generally Accepted Accounting Principles (GAAP) or another financial reporting framework. Higher levels of assurance require more in-depth procedures performed by the CPA when evaluating a company’s financial statements.

Audits provide reasonable assurance that the statements are free from material misstatement and conform to GAAP. Other services provide lower levels of assurance.

Reviews

Borrowers who can get by with a slightly lower level of assurance than an audit may issue reviewed financial statements. Reviews provide limited assurance that the statements are free from material misstatement and conform to GAAP. They start with internal financial data. Then, the accountant applies analytical procedures to identify unusual items or trends in the financial statements. He or she will also inquire about any anomalies and evaluate the company’s accounting policies and procedures.

Reviewed statements require footnote disclosures and a statement of cash flows. But, unlike in an audit, the accountant isn’t required to evaluate internal controls, verify information with a third party or physically inspect assets.

SSARS 21 calls for review reports to contain emphasis-of-matter (and other matter) paragraphs when CPAs encounter significant disclosed (or undisclosed) matters that are relevant to stakeholders.

Compilations

Next, compiled financial statements provide no assurance that they’re free from material misstatement or that they don’t require material changes to conform to GAAP. The CPA simply puts management’s data into a financial statement format that conforms to GAAP (or another framework). Footnote disclosures and cash flow information are optional in compiled financial statements.

SSARS 21 changes the length of compilation reports. Instead of the previous standard three-paragraph statement, compilation reports are now only one paragraph long, unless the company follows a special-purpose framework (such as income tax basis or cash basis). In those cases, an extra paragraph is needed.

Preparations

For years, accountants have been performing financial statement “preparations” as a type of nonattest service. Now there’s official guidance under SSARS 21 for accountants to follow. Prepared financial statements are often used by owners who formerly relied on management-use-only financial statements, which have been eliminated under SSARS 21.

Preparations provide no assurance and usually omit most of the disclosures required under the financial reporting framework. In fact, the requirements for preparation and compilation engagements are very similar. The main difference between the two services is the report: Prepared statements don’t require the CPA to include a report; instead they simply contain a disclaimer on every page that no level of assurance has been provided.

No guarantees

No service offering provides an absolute guarantee that a borrower’s financial statements are free from material misstatement and conform to GAAP. Clever fraudsters sometimes get away with creative accounting shenanigans — and errors may go undetected.

Some borrowers need more oversight than others. Deciding on which level of assurance is acceptable requires lenders and borrowers to discuss these options with the company’s accountant.

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Stockholders, creditors, and private investors require assurance that the financial statements accurately represent the true financial position of a company and their tolerance of risk may be different. PKF Mueller’s Audit and Assurance professionals provide three levels of assurance to meet your needs.

PKF Mueller also performs physical inspections by observing your inventory counting methods and test counts. We document and test each operating cycle including sales and cash receipts, expenses and cash disbursements, and payroll. Our audit papers include a detailed work program to document the examinations and testing performed, as well as the client’s supporting work papers.

Which Report Should You Use?

Each type of financial statement report may suit specific circumstances, depending on requirements from your client’s bank or other parties, as well as meet budgetary needs. Understanding each report’s unique strengths and weaknesses can help a firm choose the best and most appropriate report.

After PKF Mueller performs any of the procedures outlined below, your company will be furnished with a management letter or report from our firm that details our findings and recommendations. These services are more fully explained as follows.

Agreed-UponProcedures

Performing agreed-upon procedures is a process of applying specific procedures to an area of a financial statement or within a specific accounting cycle. When agreed-upon procedures are requested, a member of our team will meet with you to determine what specific goals you are trying to accomplish and the procedures that will help achieve those goals. They are then performed to provide management with an opinion regarding the fairness of information presented.

Analytical Procedures / Ratio Analysis

Analytical procedures and ratio analysis is a financial analysis of the company, which discloses trends concerning the company’s financial stability, ability to meet its current obligations and operations. The services are based upon comparisons with prior years as well as with similar companies within your industry. The information provided in an analytical procedures and ratio analysis will assist management in focusing on financial strengths and weaknesses, as well as provide another way to interpret current financial information.

FinancialProjections

Comprehensive financial projections are usually necessary when seeking financing to expand, develop or purchase a new product line, obtain a new building, or for major equipment additions. PKF Mueller will work with your key personnel to develop a financial projection that will be reasonable based upon the underlying facts and assumptions, and that will answer the questions a bank or a potential investor may have.

What are the levels of assurance?

What provides the highest level of assurance?

On what level of assurance are financial statements prepared?

What are the three 3 most commonly sought assurance services?