Audit and Assurance Services: What Does Your Business Need?
It's not uncommon for CPA firms to be approached by a business owner who says "I need an audit." However, they may need assurance services that are not at the level of an audit. So, how do you know what you actually need? In this article, we'll cover the difference between audit and assurance services so you understand what to ask for when you work with an accounting firm.
Audit vs. Assurance: What's the Difference?
One way you can think about the difference between the terms "audit" and "assurance" is similar to how you might think about squares and rectangles. While squares are a type of rectangle, not all rectangles are squares. Audits are a type of assurance service, but not all assurance services are audits.
Audits
Audits examine the accuracy and fairness of financial statements and provide the highest level of assurance. An auditor will systematically review accounting records, financial reporting processes, and internal controls and provide "reasonable assurance" that financial statements do not contain material misstatements. External auditors, such as certified public accountants (CPAs), are primarily the people who conduct audits.
Assurance Services
Assurance services can refer to a much wider range of subjects beyond financial information and extend beyond the realm of audits. This can include performance measurements, assessments of regulatory compliance, internal controls assurance, and more. Levels of assurance also vary depending on the type of engagement. In some cases, businesses may only need limited assurance in the form of a compilation or review.
Assurance services that don't include audits are less rigorous and detailed and can be performed by internal or external auditors, depending on the type of service needed.
Why Does an Organization Need Audit and Assurance Services?
There are many different reasons an organization may require audit and assurance services. In general, they are necessary to ensure compliance, improve operational efficiency, assist a business with achieving a new goal, or enhance credibility.
Greater Confidence in Financial Health and Stability
Bolstered confidence in a business can be important in a few different cases. If a business is seeking credit from a lender, audit and assurance services can help lenders extend credit with greater confidence, gaining a better understanding of the financial health and stability of the organization.
Similarly, investors can become more confident in the financial health of a business through audited financial statements. Other assurance services can work to make employees, customers, and suppliers feel confident about where the organization is going financially or operationally.
Compliance with Regulations
One of the most essential roles audit & assurance services play has to do with regulatory compliance. Organizations need to comply with tax laws, financial reporting standards, and industry-specific regulations. Assurance services can help businesses meet regulatory requirements and mitigate risks associated with compliance issues, such as legal actions, penalties, and fines.
Improved Internal Controls
Strong internal controls are important in preventing financial irregularities or fraud. Assurance services can assess internal controls and recommend improvements that reduce the risk of these issues.
Better Decision-Making
When organizations have more reliable data to work from, they can make more informed decisions. Accurate financial data can help businesses make decisions about investments, resource allocation, and next steps in growth.
Optimized Operations
What inefficiencies and operational bottlenecks are dragging down your business? Sometimes it's hard to see them, or it's just less complicated in the moment to carry on with "business as usual." Assurance services can help identify process improvements that improve productivity and save on long-term costs.
How Do Businesses Know Which Audit and Assurance Services They Need?
It can still be confusing to understand what type of audit or assurance service you need. Oftentimes, business leaders think of all assurance services as "audits," but there are differences between audit, review, and compilation services.
Audit
Publicly traded companies are required to have annual audits by law. Large private companies may also require audits to meet investor or lender requirements.
Government entities and nonprofit organizations also often require audits. Government entities need to meet audit requirements to ensure accountability and transparency. Nonprofit organizations have to confirm that they are using funds properly, and audits are often required to maintain their nonprofit status.
With these larger entities or industries more subject to specific regulations, audits are necessary because they provide the highest level of assurance. They will look at your controls, the impact potential risks can have on the business, and documentation that can evaluate assertions made in financial statements.
Review
When looking at audits, reviews, and compilations, reviews sit in the middle. They are often required of smaller private companies. For example, businesses may need a review when seeking a large loan amount.
Nonprofit organizations may choose to do a review over an audit, but this will depend on the particular organization and compliance requirements.
In a review, the accountant will form a reasonable basis to assert that a business does not need to materially modify their financial statements to meet Generally Accepted Accounting Principles (GAAP).
Compilation
Compilation offers the lowest level of assurance and is often used by small businesses for internal purposes. This could be for tax preparation or financial planning. With this service, no assurance is given. A CPA will compile information and present it as a financial statement. This can also be useful to startups to receive initial financing.
Other Types of Assurance Engagements
Businesses may be looking for specific types of assurance services, some of which may be included in the categories above but can be done independently as well. These include:
Internal Control Audits: How effective are a business' internal controls in preventing and detecting errors and fraud?
Compliance Audits: How well is the organization complying with regulatory standards dictated by their industry, geography, and the nature of their business?
Performance Audits: How effective are business operations?
Information Systems / Cybersecurity Audits: How reliable are the organization's information systems, and how strong is their cybersecurity posture? These can include evaluations against standards like NIST.
Sustainability Audits: What is an organization's environmental and social impact? This might be evaluated using ESG reporting standards, such as SASB.
Due Diligence: How healthy are the finances and operations of a business or investment?
What to Look for in a CPA Firm Offering Audit and Assurance Services
If you know you need some type of audit & assurances, but aren't sure where to look for help, consider looking for firms that have the following:
Experience
Think about experience both in terms of years working on assurance services and expertise in your specific industry. Assurance engagements run more smoothly when CPA firms have capabilities and experiences that are relevant to the problems you are likely to face and the requirements you need to meet.
Trust
You also want your firm to be reliable and trustworthy. Check reviews and ask for testimonials to learn about the track record of the CPAs you want to work with.
Communication
With larger accounting firms, it's easy for small to midsize businesses to feel like they're not getting the attention they need. You don't want to wait weeks for an answer to a critical question. Seek out an accounting firm that will be responsible and reachable when you need them.
Technology
Accounting is an industry notorious for paper. To receive more efficient services, you'll want to work with a firm that has digitally transformed their business. Find out what technologies different CPA firms use and how they work to make their processes more efficient. This can improve accessibility to your information and cut down on the time it takes to complete certain engagements.
Work With the Most Reachable Firm For Your Audit and Assurance Services
At OAK Advisors CPAs, we pride ourselves on simplifying the complex, helping our clients achieve their goals, and being reachable to our clients when they need us the most. If you're ready to learn more about our audit and assurance services, reach out to us and we will respond to you within a reasonable time frame. We can help you get your assurance process rolling.