Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of the company. In addition, state and federal franchise laws require audited financial statements to be included in the UFOC.
A Certified Public Accountant (CPA) can provide different levels of assurance through audited, reviewed, or compiled financial statements. Audited financial statements offer the highest level of assurance while compiled financial statements offer the lowest level of assurance.
Audit - Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including verification of specific information as determined by the auditor or as established by general practice.
Our work includes a review of internal controls, testing of selected transactions, and communication with third parties. Based on our findings, we issue a report on whether the financial statements are fairly stated in accordance with generally accepted accounting principles (GAAP) and free of material misstatement.
You get the highest level of assurance because we go outside your company to obtain more information. Typically, we'll have written communication with:
- Your customers, to check outstanding receivable balances
- Your banks, to confirm cash or debt balances and terms
- Your vendors, to verify outstanding payable balances
- Your attorneys, for information on pending or threatened legal action
We also perform physical inspections by observing your inventory counting methods and perform 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.
Who is required to have audited financial statements?
All public companies are required to have an annual audit, but some nonpublic entities must undergo an annual audit as well. Franchisors are required to have audited financial statements of the most recent two years in their uniform franchise offering circular (UFOC). Moreover, some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank's assessment of the company's risk. Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order audits as checks of their management teams.
Which Report is Right for You?
Each type of financial statement report may suit specific circumstances, depending on requirements from your bank, other parties, as well as your budgetary needs.
Understanding each report's unique strengths and weaknesses can help you choose the most appropriate one.