When you run a business or a non-profit, eventually you may need audit or assurance services. Typically, this happens when a lender, an insurance company, a bonding company, or an investor wants to know more about your business, and in particular, they want verification of your financial records.
If someone has requested audited financial records or other types of assurances, you may be wondering what’s the difference between assurance vs audit services. To help you understand these concepts, this post provides an overview of assurance services and audits. Then, it outlines the differences between the two. To get help right now, contact us at DHJJ today. We’d love to explain these services to you and help you determine what’s right for your organization.
What Is Assurance?
Assurance provides an independent look at a company’s accounting records or processes. Generally, organizations require assurance services when they need to provide independently verified financial records to external stakeholders. For instance, lenders, investors, bond issuers, and others may require an organization to obtain assurance services. These services lend credibility to the company’s financial records.
An audit is the most rigorous type of assurance service, but it is not the only option. Assurance services also include statement compilations and reviews. Compilations, reviews, and audits all require a CPA from outside your organization to review your financial records. Bringing in an independent third party from outside your organization assures others that your financial records are correct. However, the level of assurance varies with each of these services.
Compilations provide very little if any assurance. With a compilation, a CPA simply compiles your financial records into statements such as profit and loss reports, balance sheets, and cash flow statements. A review provides more assurance, as the CPA analyzes your accounting procedures and managerial processes. An audit, however, provides the highest level of scrutiny.
The intricacy and timing of each of these services align with their level of assurance. Statement compilations are quick and straightforward. Reviews are slightly more involved. Audits are extensive and time-consuming. That said, the timing varies significantly depending on the size of your business and the complexity of your accounting processes.
What Is an Audit?
An audit is an independent review of your accounting statements. There are other types of audits such as operational audits and compliance audits. For instance, businesses that have government contracts often have to be compliant with various cybersecurity requirements, and they need to have a third party audit their processes to verify their compliance.
This post, however, focuses on one of the most common types of audits — the financial accounting audit. Public companies are required to undergo an annual audit every year. In contrast, private companies aren’t statutorily required to go through audits, but they may need audited records for investors, lenders, and others who want assurance that the financial records are correct
During an audit, the auditor looks at the company’s accounting records to ensure they meet generally accepted accounting principles (GAAP). The auditor also looks at the organization’s assets to ensure they match what appears on the balance sheet. They also audit accounting practices and internal controls to assess the risk of fraud or accounting errors.
In other words, an audit is a deep look into an organization’s finances and its financial processes. At the end of the audit, the auditor issues a statement outlining the audit process and explaining if there are any issues with the organization’s accounting records or processes.
Differences Between Assurance and Audit
When assessing the differences in assurance vs audit services, the main distinction is that an audit is a type of assurance service. Compared to compilations and reviews, an audit is the most detailed assurance service, and it provides the highest level of assurance. However, you can also break down these concepts in a slightly different way.
The audit is the process of systematically evaluating the accounting records and processes. Then, assurance refers to the assessment of the company’s financial records. To put it another way, an audit examines the accounting records, and when the auditor issues the audit report, they provide assurance that the records are correct. If the auditor has any concerns about the accounting records, they will outline their concerns in the audit report.
Assurance services use the information obtained during the audit to assess the quality of the information. The audit report provides assurance that the company’s financial records clearly represent reality, funds are not being misused, and there is no fraud occurring.
For example, during an audit, an auditor will look at the revenue and expenses noted in your financial records. Then, they will match these numbers to the sources of the information, such as sales records for revenue and purchase orders and invoices for expenses. Then, the auditor will assess the processes you use to report this information, and they will look for any risks of errors in your processes. They will also examine your internal controls to assess the risk of fraud in your organization. Finally, they will leverage all of this information when they create the audit report.
Another key difference is that an audit can happen internally. Businesses can audit their own financial records and processes. Generally, however, this only occurs for internal purposes. When investors and lenders request audited statements, they’re referring to statements audited externally, also known as a third-party audit.
In contrast, assurance services must always come from a third party. An organization cannot complete assurance services internally These services are inherently independent
The scope of these services also varies. As indicated above, an audit is very deep and detailed. Assurance services can also refer to compilations and reviews which are much more limited in scope.
Business Audit and Assurance with DHJJ
At DHJJ, we provide business audit and assurance services including compilations, reviews, and audits. We also provide a full range of tax and business advisory services. Our services can help you and others feel confident about your financial records, but assurance services aren’t just designed to reassure outsiders. When we provide assurance services, we can also help you identify any business accounting issues and make changes to your processes as needed.
Your finances drive the success of your business, but you don’t have to deal with them on your own. We can provide you with the support and services you need for a successful business. To learn more, contact us at DHJJ today.