Every company needs to have up-to-date financial statements. They provide information about the company’s financial health and business activities, which can improve decisions made by management, investors and directors. Financial statements are also critical if you are looking for new investors or creditors.
There are three primary types of statements that can be prepared: audited, accountant reviewed and compilation engagement.
While these reports have some similarities, there are also some major differences. So, let’s take a look at what each of these reports are and what they should be used for.
Compilation Engagement
Prior to December 14, 2021, you may have been asked for Notice to Reader financial statements. This type of statement had few requirements, and accountants did not give assurances regarding the accuracy of the statements.
Due to changing standards and uses, Notice to Readers were replaced by compilation engagements. These engagements require the least amount of accountant involvement and are prepared using financial data provided by a company’s owner or management.
While these financial statements are not audited or reviewed, new rules will ensure that the financial information meets the needs of its users. This will be done by adding improved requirements regarding:
- the basis of accounting being used.
- notes describing the limitations of the statements.
- management responsibilities.
- how compilation engagements must be performed.
- what is included in a compilation engagement.
New rules also clarify when a compilation engagement is required and when it is voluntary.
While these financials do not receive as much inspection as reviewed or audited financials, they are better than financial statements produced by non certified bookkeepers or accounting software. The accountant must also use their professional judgment to determine whether the information provided by the client is reasonable.
Compilation engagements are prepared with specific purposes in mind. This may include preparing financials for an investor with specific information related to assets, liabilities, profitability, and growth potential. Additionally, lenders may require compilation engagements to determine creditworthiness or to assess credit applications, though most prefer reviews or audits, which we will talk about next.
Accountant Reviewed
Accountant reviewed financials are not looked at with more scrutiny than notice to readers but are not as detailed as audited financials. The goal is for the accountant to determine whether the financials are plausible and likely to be accurate. As such, the accountant reviewing the financials will not give an opinion on the accuracy of the information.
When reviewing your financials, your accountant will:
- Look at internal consistency.
- Analyze account balances, especially those known to have errors.
- Request explanations or details for anything they deem unusual or unreasonable.
Once complete, the accountant will sign off on the financials.
Most professional lenders or investors will, at the very least, require reviewed financials, especially if you are only seeking a small line of credit or loan. Reviews may also be requested for sales, mergers and acquisitions to help the buyer do their due diligence.
Audited
When completing an audit, your financial statements will be highly scrutinized for detail. The accountant who prepares audited financial statements will run them through several tests to ensure they are accurate and do not include any material errors. This will include reviewing back up documents for the amounts that make up the financial statements. They will also look at your internal controls to uncover any deficiencies that need to be reported back to management.
If there are material errors, the accountant will provide advice on how to make corrections to ensure the financials are in compliance. If there are material errors, the accountant will provide an audit opinion letter. In this letter, the auditor will state that the financials have been reviewed and will identify the audit method used. If there are no material errors, the auditor will state that the financials fairly and reasonably represent the company’s performance and position.
If you are a public company, you must complete an annual audit at year-end. Private companies will likely only need one if it is requested by a third party, such as a lender.
When it comes to deciding whether you need a notice to reader, reviewed or audited financial statements, it’s best to speak with the party requesting the statements and your accountant. This will ensure you are requesting the right type of statements while optimizing time and money.
If you need further help, please do get in touch with the team of chartered professional accountants here at Koroll & Company.
