The word ‘audit’ can generate distress for the calmest of people.
Hearing the word ‘audit’ elicits visions of in-depth inspections and painstaking review of receipts and details. It conjures up images of bright lights, intimidating and mean interrogators and the fear of ending up in jail.
Before your imagination gets the best of you, ‘audit’ can sometimes be used as a general term to indicate that a party needs a level of assurance of your financial statements. This is not an IRS audit. That is a completely different ‘audit.’ Learn more here.
In Generally Accepted Accounting Principles (GAAP), ‘audit’ is a technical term. It is the highest level of assurance to verify and substantiate financials completed by certified public accountants.
When you are told you need an ‘audit’, do not assume you need this level of assurance. We regularly help our clients — businesses, not-for-profits, and individuals — get clarification of exactly what the requesting party needs. We are happy to speak directly to the requesting party, e.g., a bank, who needs the assurance level to secure a loan.
So, do you need an audit or will another level of assurance suffice?
When we speak to the requesting party, our focus is on understanding their needs so we can prepare the level of assurance needed while minimizing your time, stress and cost incurred. Audits can take months and be time consuming and expensive, so it is our commitment to you to satisfy the need with the lowest level of assurance that is acceptable. Sometimes you cannot avoid performing an audit as part of your efforts to grow your business, including securing specific licenses in the state.
A compilation is the lowest level of assurance where most of our time is spent preparing the financial statements. A compilation, with or without footnotes, informs a third party that you have a CPA and that your financial statements are presented in accordance with accounting standards. Preparation takes the least amount of time and does not include any substantive testing.
A review is the second level of assurance that can be provided. This level of assurance also excludes any substantive testing, while completing a ‘reasonable’ review of the financial statements which takes more time for CPAs to complete.
This is the highest level of assurance and in the accounting world, is the technical term for the work that generally spans multiple months of effort. An audit is an in-depth effort to verify and substantiate financials and is used to obtain reasonable assurance that the financial statements taken as a whole are free of material misstatement whether due to fraud or error.
The audit process includes planning, correspondence where the client is organizing financials, field work which includes testing, preparation of the statements, client review, quality review and issuing the statements for the client to submit to the requesting party.
There are various requirements in Massachusetts for which assurance level is required. To secure financing, the requirement can vary based on the size of the loan as one example. To secure various licenses in the Commonwealth of Massachusetts, an audit may be required.
In Massachusetts, the state requires not-for-profits to file a Form 990 and the MA Form PC. Revenue level determines if the not-for-profit requires an audit or a review.
If you are told you need an audit, do not assume the worst. The language is confusing, generalized and intimidating. As our client, contact us to discuss your situation, and we will help you navigate through the required level of assurance. Once we know exactly what is needed, we will prepare the necessary work, whether a compilation, review, or audit, so you can then submit to complete the process.