When most people think of verifying information in a company’s financial reports, they believe in auditing. At the same time, a full audit of a firm’s accounting records delivers the highest level of assurance, a financial audit. While providing only limited assurance is also sufficient for companies seeking an independent audit of their financial statements to comply with generally accepted accounting principles.
When reviewing financial auditing, business owners look for different options to reduce time and cost. But how do you determine which approach provides the correct guarantees and which one meets your specific needs?
Learn the difference between the three ways to analyze your company’s financial records and make more informed decisions.
What is the level of assurance?
When considering financial auditing vs reviewing, the most crucial distinction is the level of assurance in financial reporting and how different accounting services provide those levels. There are three essential assurance services: financial compilation, financial review, and financial audit.
However, the level of assurance is an assessment of the auditor’s confidence in the financial statements‘ reliability, timeliness, and relevance.
Financial Compliance: This type of sharing uses company-provided data to generate financial reports in GAAP format. Since the accounting firm uses unverified client-submitted data, no guarantees are provided—an integrated report in the form of consolidated financial statements.
Financial Review: Reviews are conducted through limited analytical procedures to identify and inquire about unusual items or trends. These links provide limited confirmation.
Financial Audit: Audits provide the highest possible level of assurance: Reasonable assurance. Compared to an audit, this higher level of assurance is provided by verifying financial information with third parties and reviewing internal control processes.
And absolute certainty, can it be obtained? Unfortunately, no. complete assurance requires the auditor to ensure that the financial audit is free from material misstatement or revision. Unfortunately, auditing has many inherent limitations that naturally prevent this level of assurance.
What is a financial review?
A certified public accountant (CPA) audit checks that a company’s financial statements conform to generally accepted accounting principles. This process provides limited assurance that the financial statements are free from material misstatement.
In contrast to an audit in which a firm performs specific audit techniques to test the system of internal controls, a financial audit does not include an examination of the firm’s internal control procedures. Apart from this level of service, external auditors cannot assess the company’s fraud risk. Assurance of the company’s internal controls is most important to lenders and boards of nonprofit organizations.
Another significant difference between financial and ongoing audits is that auditors do not independently verify any financial transactions through third-party confirmation.
What is a financial audit?
A financial audit is performed by a chartered accountant independent of the company, which examines the financial records that, when prepared, make up the company’s financial statements.
Auditors use a range of audit procedures, including physical inspection of original documents, third-party confirmation by external vendors, and knowledge of the internal control environment to create the body of audit evidence that forms the basis of the audit report. A comprehensive audit involves using standard procedures to test transaction-level information for compliance with accounting principles.
What is financial compliance?
Financial compiling is a primary obligation and does not guarantee the accuracy of your financial data. Your company’s financial information is compiled using information gathered from existing records without testing the underlying data. During preparation, accountants gain a general understanding of the business and its financial reporting policies and procedures. Auditors do not perform analytical procedures, evaluate a company’s internal controls, assess the risk of fraud, or test accounting records. However, accountants may require specific documents such as bank statements, loan payment schedules, and contracts to form margins properly in financial statements.
Due to the limited scope of preparation, the preparation of the report does not guarantee that the financial statements will be error-free or conform to the applicable reporting framework. Financial compliance reports can be issued even if the accountant is not independent. However, the construction report must reveal this fact.
Three types of audits you can have for business growth.
Although there are several other types of audits, the three basic types of financial audits are internal, external, and Internal Revenue Service (IRS) audits.
Internal audit:
Accountants perform internal audits to assess compliance with laws and processes, including internal controls. Advice to the independent internal audit ensures that the internal control process is operating effectively and will make recommendations for process improvement resulting in improved financial performance.
External audit:
Auditors outside the company carry out external audits. This audit provides the highest assurance that the financial statements are free from material misstatement. The output is an audit report presented to the business owner or board of directors outlining the audit findings.
IRS audits:
IRS Audits are performed by auditors working for the IRS to verify the accuracy of information used for tax reporting purposes. These audits do not result in changes to tax returns or result in changes to additional tax liabilities.
Final Thoughts
Suppose your business receives a request to audit or amend financial statements; discuss the request with us to determine the actual needs of lenders, investors, or other third parties. Striking the right balance can be difficult, but discussing it can ensure you choose the right level of security for your business and budget.
It is essential to determine the appropriate level of security that balances costs and benefits. While VVAS can provide many different consulting auditing services to their clients, it is essential to distinguish between financial and auditing services. When considering finance versus audit, there are several factors, including the need for either of these two levels of financial statement examination.