Mallory Vincent, CPA •
With the possibilities of compiled, reviewed, and audited financial statements, it can be difficult to determine the level of CPA audit and assurance services that are the best fit for your Organization and your role in the process. External financial statements could be mandatory due to a state, bank, and/or funding source requirement. For example, the state of New Hampshire sets audit requirements for Non-Profit Organizations (NPOs) – the audit threshold for NH Charitable Organizations (effective August 6, 2022) is gross annual revenues of $2 million or higher. Just over the border in Massachusetts, NPOs with gross revenues of $500,000 or more are required to have an audit. Additional requirements may be applicable depending on the type of industry in which your Organization operates, its location, and its specific activities.
With the possibilities of compiled, reviewed, and audited financial statements, it can be difficult to determine the level of CPA audit and assurance services that are the best fit for your Organization and your role in the process. External financial statements could be mandatory due to a state, bank, and/or funding source requirement. For example, the state of New Hampshire sets audit requirements for Non-Profit Organizations (NPOs) – the audit threshold for NH Charitable Organizations (effective August 6, 2022) is gross annual revenues of $2 million or higher. Just over the border in Massachusetts, NPOs with gross revenues of $500,000 or more are required to have an audit. Additional requirements may be applicable depending on the type of industry in which your Organization operates, its location, and its specific activities.
In the absence of regulatory and statutory requirements, directors and management have options for audit and assurance services. For example, if your Organization is in the growth stage and looking to get records up to date and/or to strengthen corporate governance, it may benefit from the preparation of compiled or reviewed financial statements. Let’s say your Organization will be applying for or expecting to receive large grants, then it may benefit to invest in consultation services, which will help with the implementation of internal controls now to prepare your Organization for a future audit requirement. Whether or not financial statements are required, it is important to understand your role in the process and the differences between compiled, reviewed, and audited financial statements, which are outlined below.
What is your role in the financial statement process? Management is always responsible for the preparation and fair presentation of financial statements. This responsibility is applicable for any type of financial statement (compilation, review, and/or audit). Management’s responsibilities also include creation and maintenance of the internal control environment over the financial statement process. In other words, management creates systems and processes to enter financial information into accounting software (for example, QuickBooks), and at the end of the year, the internal financial statements (profit and loss and balance sheet) are presented to us as accurate and complete. If we, as the auditor or accountant, take responsibility for these financial statements or internal control processes, our independence (required for a review or audit) would be jeopardized which could affect our ability to provide financial statement services.
What is our role in the financial statement process as your CPA? We work with financial information provided by management, and through the performance of certain procedures, provide assurance on the financial statements. The level of assurance (compilation vs. review vs. audit opinion) we are engaged to provide dictates the extent of the procedures we are required to perform, which we will explain below.
What are compiled financial statements? Compiled financial statements involves obtaining management’s financial statements and formatting these into general-purpose financial statements, such as balance sheets and income statements. Independence is not required for this type of engagement. Compiled financial statements do not require any specific testing or analytical procedures, and no conclusion or opinion is expressed.
What are reviewed financial statements? We obtain internal financial reports from management and perform procedures to ensure there are no material corrections needed. In a review engagement, we perform inquiry and analytical procedures. Analytical procedures involve comparisons of account balances from the prior year(s) to the current year or comparison of ratios to industry averages. After we complete these procedures, we offer our conclusion on whether or not we are aware of any material modifications in the financial statements. It is important to note that a review requires independence and is less involved than an audit. In other words, any third party looking at financial statements would not rely as heavily on numbers presented in a review as they would an audit.
What are audited financial statements? An audit provides an opinion that is stronger than the conclusion expressed in a review. It is the auditor’s objective to provide positive assurance that there are no material misstatements in the audited financial statements. Similar to a review, an audit requires independence, inquiry, and analytical procedures but is even more involved. For instance, an audit also requires an auditor to assess entity level and operational risk by gaining an understanding of the industry, environment, and internal control processes of an entity to develop a plan for the extent of audit procedures performed. As a result, an audit typically requires additional procedures, such as a detailed test of transactions, to mitigate the risk of a material misstatement.
Should I rely on audited financial statements to focus on fraud? Audits are not designed to uncover fraud - that is not the purpose of an audit and should not be a factor in determining whether to conduct an audit. According to Association of Certified Fraud Examiner’s Report to the Nations, auditors rarely find fraud; internal audit detects fraud 15% of the time, while external audit merely 4% of the time.
Our accountants at Mason + Rich are ready to help you with navigating your audit and assurance needs! Feel free to call us at 603-224-2000.
What is your role in the financial statement process? Management is always responsible for the preparation and fair presentation of financial statements. This responsibility is applicable for any type of financial statement (compilation, review, and/or audit). Management’s responsibilities also include creation and maintenance of the internal control environment over the financial statement process. In other words, management creates systems and processes to enter financial information into accounting software (for example, QuickBooks), and at the end of the year, the internal financial statements (profit and loss and balance sheet) are presented to us as accurate and complete. If we, as the auditor or accountant, take responsibility for these financial statements or internal control processes, our independence (required for a review or audit) would be jeopardized which could affect our ability to provide financial statement services.
What is our role in the financial statement process as your CPA? We work with financial information provided by management, and through the performance of certain procedures, provide assurance on the financial statements. The level of assurance (compilation vs. review vs. audit opinion) we are engaged to provide dictates the extent of the procedures we are required to perform, which we will explain below.
What are compiled financial statements? Compiled financial statements involves obtaining management’s financial statements and formatting these into general-purpose financial statements, such as balance sheets and income statements. Independence is not required for this type of engagement. Compiled financial statements do not require any specific testing or analytical procedures, and no conclusion or opinion is expressed.
What are reviewed financial statements? We obtain internal financial reports from management and perform procedures to ensure there are no material corrections needed. In a review engagement, we perform inquiry and analytical procedures. Analytical procedures involve comparisons of account balances from the prior year(s) to the current year or comparison of ratios to industry averages. After we complete these procedures, we offer our conclusion on whether or not we are aware of any material modifications in the financial statements. It is important to note that a review requires independence and is less involved than an audit. In other words, any third party looking at financial statements would not rely as heavily on numbers presented in a review as they would an audit.
What are audited financial statements? An audit provides an opinion that is stronger than the conclusion expressed in a review. It is the auditor’s objective to provide positive assurance that there are no material misstatements in the audited financial statements. Similar to a review, an audit requires independence, inquiry, and analytical procedures but is even more involved. For instance, an audit also requires an auditor to assess entity level and operational risk by gaining an understanding of the industry, environment, and internal control processes of an entity to develop a plan for the extent of audit procedures performed. As a result, an audit typically requires additional procedures, such as a detailed test of transactions, to mitigate the risk of a material misstatement.
Should I rely on audited financial statements to focus on fraud? Audits are not designed to uncover fraud - that is not the purpose of an audit and should not be a factor in determining whether to conduct an audit. According to Association of Certified Fraud Examiner’s Report to the Nations, auditors rarely find fraud; internal audit detects fraud 15% of the time, while external audit merely 4% of the time.
Our accountants at Mason + Rich are ready to help you with navigating your audit and assurance needs! Feel free to call us at 603-224-2000.
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