Regardless of the size of your company, having good financial reporting is essential for both internal and external stakeholders. To enhance the accuracy and validity of financial statements, an assurance engagement provides additional level of credibility to users for their decision making. An assurance engagement is performed by an objective third-party that is not connected to the business to provide stakeholders such as investors or lenders with a higher degree of certainty that the financial statements are in compliance with Generally Accepted Accounting Principles (GAAP) and there are no material misstatements that may adversely affect the users of the financial statements.
What is an Assurance Engagement?
Assurance, from a financial statement perspective, means that an objective third party has performed work related to the financial statements to provide a level of validation that the content and disclosures in the financial statements are not materially misstated and in accordance with GAAP. The work performed would include a variety of tasks such as:
- Obtaining backup to validate balances
- Analytical analysis for financial statement balances and relationships
- Third party confirmation of balances
- Reviewing and assessing the process of how the financial information was compiled
- The application of accounting policies used by the company.
The results from the work performed would be assessed to determine whether the financial information contains any material misstatements or departures from Generally Accepted Accounting Principles (GAAP). This would also include an analysis of the presentation in the financial statements to ensure it meets the requirements under GAAP. The results of the analysis would be reported in an attached report to the financial statements. The report would indicate that the financial statements are prepared in accordance with GAAP, or it would outline any qualifications related to the financial information or presentation.
What types of financial statements have assurance related to them?
There are three types of financial statement reports that are issued: Compilation, Review & Audit. Only the Review and Audit Engagements are assurance engagements where the financial statement report indicates whether the financial statements are in accordance with GAAP.
Compilation Engagements do not have any assurance related to them, which is specifically stated on the report. In addition, compilation engagements are not necessarily in accordance with GAAP rules for accounting policies or disclosure.
Why would an assurance financial statement engagement be necessary?
- There is a third-party requirement to have either a review or audit engagement performed. This is typical where there are loans in place and the bank requires a level of assurance on the financial statements so they can monitor the company and assess company performance.
- The company is looking to raise additional financing or capital in the future. Having assurance level financial statements would provide potential lenders or investors’ confidence that the financial statements are not materially misstated and are in compliance with GAAP.
- The shareholders are looking to sell the company and want to provide a higher-level financial statement to prospective purchasers so they can properly assess the company.
- The shareholder is not active in the business and wants to verify that the financial statement information is not materially misstated.
- An assurance engagement also provides insights that may help identify any potential issues with financial reporting or potentially identify internal control issue that should be addressed before they present problems.
An assurance engagement is a great way to provide users of your financial statements with an additional level of creditability to rely on your financial statements for decision making. In addition, they ensure that the statements are in accordance with GAAP which provides a standard framework for reporting which allows for more accurate comparison of results amongst companies.
For more information on the types of assurance engagements, please visit our Audit and Review Services Page.