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As businesses are formed and as they grow, one question often asked by owners and chief financial officers is whether their companies would benefit from an audit. As you might have guessed, the answer depends on a number of factors specific to each company. Below is helpful information about audits to keep in mind as you decide whether or not an audit is right for your business.
Although audits, reviews, and compilations all involve a report on financial statements, an audit provides a higher level of assurance compared to a review or a compilation. Here’s what each consists of:
The most basic of the three, a compilation is when the accountant assists management in presenting financial information in the form of financial statements without providing any assurance that there are no material modifications needed to the financial statements.
In a review engagement, the accountant performs analytical, inquiry, and other procedures to obtain limited assurance that no material modifications should be made to the financial statements.
An auditor obtains reasonable assurance about whether the financial statements are free of material misstatements. In order to obtain this assurance, auditors are required to gain an understanding of an entity’s internal controls and fraud risk. During the audit, tests of balances and transactions through third-party confirmations, physical inspections, observations, and other procedures are performed. Due to its greater scope, an audit is higher in cost, but the benefit is that it is more thorough and provides a higher assurance of accuracy.
There are many reasons why a business may benefit from an audit. Here are a few examples:
As auditors gain an understanding of internal controls, they are required to communicate any weaknesses they identify to the company board and management. These auditor communications can be a valuable resource in helping management and ownership take action to establish or strengthen procedures that safeguard assets, reduce the risk of fraud, and improve the financial reporting process. As a result, the company will have more effective and efficient financial reporting and accounting processes, which may lead to even more operational efficiencies.
At Cray Kaiser, we recognize that every business has unique needs and considerations when it comes to audits. If you have questions about whether an audit may be right for your business, contact us today.