Audit Confirmations
May 12, 2015
If your company is audited by an independent CPA and you are involved in the audit process, you are likely familiar with audit confirmations. When confirmation procedures are performed, you might think to yourself, “why does my auditor have to confirm this information with a third party, don’t they trust me?” A lack of trust is not the case at all. An audit confirmation is a common test that is performed in the completion of most audits.
According to AU Section 330 from the Public Company Accounting Oversight Board, a confirmation “is the process of obtaining a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions.” It is important to note in this definition that the communication should be directly between the auditor and the third party, excluding the auditee. This ensures that the auditor receives the information as it was originally provided by the responding third party and that the information was not tampered with.
The responding third party could be a variety of people, including but not limited to a bank, a vendor or a customer, depending on the type of confirmation being completed. The most common types of confirmations are for cash accounts, debt, accounts receivable and accounts payable, though confirmations can be customized to confirm almost any financial statement assertion that is made.
Historically, confirmations have always been sent in the mail between auditors and third parties, but in 2007 auditing standards allowed the use of electronic confirmations. The predominate electronic confirmation service provider is Confirmation.com. Confirmation.com is used by a majority of the national and regional banks in the United States, including Huntington, PNC, Fifth Third, Key Bank and Wells Fargo, to name a few. There are several benefits to using electronic confirmations over paper confirmations. The main benefits are that electronic confirmations have higher response rates, have quicker turnaround times and are easier for the bank to complete.
When a confirmation is received by the auditor and it matches the information provided by the auditee, it provides the auditor a level of comfort that the information is correct. This level of comfort is required for the auditor to ultimately sign the report on the financial statements. If there are differences on the returned confirmation, the auditor will follow up with the auditee, and likely the third party, to reconcile the differences. If a confirmation is not returned from the third party, the auditor will have to perform alternative procedures to come to this same level of comfort. These alternative procedures will likely take significantly longer than the process of sending and receiving confirmations.
So when your auditor sends confirmations to third parties, it is not because they don’t trust you, it is just the most efficient audit procedure to test the information provided following the auditing standards generally accepted in the United States of America.
By: Mark Swayer, CPA
Categories: Audit & Accounting
Higher Level of Service: The Compilation, Review or Audit
Apr 28, 2015
Many companies are required to provide lenders or other outside parties financial statements prepared by independent certified public accountants. A higher level of service requires the CPA to spend more time preparing and completing the engagement and will in turn be more costly to the client. So what are the differences between the three levels or services: compilation, review or audit?
Compilation
- The most basic level of service that a CPA provides relative to a financial statement
- The CPA firm provides management assistance in presenting financial statements without providing any assurance that there are no material modifications that should be made to the financials
- The CPA must comply with the Standards for Accounting and Review Services (SSARSs) and should have an understanding of the industry in which the client operates, obtain knowledge from the client and read the financial statements to make sure they are free from obvious material errors
- The CPA does not perform any inquiries, analytical procedures, understands the client’s internal controls, assess fraud risk nor test accounting records
- The accountant’s report associated with the compiled financial statements does notexpress an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework
Review
- A review says the accountant is not aware of any material modifications that should be made to the financial statements
- A review consists of performing mostly inquiry and analytical procedures which will provide limited assurance that there are no material modifications that need to be made to the financial statements
- During a review, the CPA required an understanding of the client’s industry and knowledge of the client, but still is not responsible for understanding the client’s internal controls, fraud risk, or test accounting records
- The accountant’s report associated with the reviewed financial statements does not express an opinion, but does provide assurance that the financial statements are in accordance with the applicable financial reporting framework
Audit
- This is the highest level of service that a CPA provides relative to a financial statement
- An audit provides the user with the auditor’s opinion that the financial statements are presented in conformity with the applicable financial reporting framework
- During an audit, the CPA is required to obtain an understanding of the entity’s internal controls and assess fraud risk
- The CPA is required to obtain evidence to support the amounts and disclosures in the financial statements through inquiry, physical inspection, observation and third-party confirmations, examination of records and analytical procedures
- The auditor’s report provides an opinion that the financial statements are presented fairly and the financial position of the company and results of operations are in conformity with the applicable financial reporting framework
By: Kristin Metzger, CPA
Categories: Audit & Accounting
Financial Statement Relief is in Sight
Jul 29, 2014
It seems like each year, new accounting rules are issued that make financial statements more complicated and less relevant for privately-held companies, especially those that are small and medium-sized businesses. Most of the new accounting requirements have been intended more for larger publicly-traded companies. The good news is that there has been some recent relief for privately-held companies.
For those privately-held companies required to issue financial statements using generally accepted accounting principles (GAAP), the Financial Accounting Standards Board (FASB) issued in 2014 some amendments to accounting rules that should simplify the accounting requirements in regards to recording goodwill, interest rate swaps, and variable interest entities (such as leasing relationships that previously were required to be consolidated). These amendments become effective for annual periods beginning after December 15, 2014, with early application allowed.
For those privately-held companies whose financial statements users don’t require GAAP-based financial statements, the tax basis of accounting has always been a popular more simplified option. There is also a new non-GAAP basis of accounting available for small and medium-sized enterprises (SMEs) called the Financial Reporting Framework for SMEs. This basis of accounting is accrual-based and uses more simplified principles that don’t include deferred taxes, interest rate swaps, comprehensive income, variable interest entities, etc. that have complicated a lot of GAAP-based financial statements. This new framework basically is like an old version of GAAP before the more complicated rules came into being.
Let us know if you have any further questions. While the relief noted above doesn’t guarantee more simplified accounting for all privately-held companies, it’s definitely a step in the right direction.
By: Brent Ringenberg, CPA
Categories: Audit & Accounting