Certified public accountants (CPAs) offer a wide range of services that attest to, verify, or validate certain assertions or financial claims. The best known and most comprehensive of these services is an audit, but there are several other levels of attestation services, including compilations, reviews, and agreed-upon procedures. Sometimes, these other services fit a business’s needs better than an audit, and can thereby save time and resources.
To render discussions with a CPA more productive, this article describes each of the various attestation services. It’s important to note that only independent, licensed CPAs can perform any of the attestation services.
What Are Attestation Services?
Attestation services, also known as attest services, refer to the array of procedures in which a CPA evaluates or reviews specific information provided by a client. There are two broad types of attestation service: those that include assurance, and those that don’t. “Assurance” is when a CPA includes a certification about the accuracy and validity of the service’s subject. Reviews and audits are two attestation services that extend assurance to outside parties, such as lenders, regulators, and investors. This assurance is often provided for financial data, but it can be applied to other areas, as well, such as a business’s controls or compliance with contracts and regulations.
Attestation services that do not include assurance, such as compilations and agreed-upon procedures, serve their own specific purposes but do not require the CPA to express a conclusion.
All attestation services, with or without assurance, are performed by CPAs in accordance with various standards issued by the American Institute of Certified Public Accountants (AICPA). These standards ensure that these services are carried out consistently, while also providing a level of quality control. Only audits need to comply with Generally Accepted Auditing Standards (GAAS), which are the most comprehensive standards.
When a client hires a CPA for an attestation service, they formalize the agreement with a letter of engagement. This letter details the scope of work and terms for the collaboration and must be updated if any changes occur. At the end of the engagement, the CPA issues a report – the contents of which vary, based on the specific attestation service provided.
Attest Services That Provide Assurance
Businesses can use attest services with assurance to provide more trustworthy information to stakeholders – investors, creditors, suppliers, regulatory bodies, etc. This confidence and reliability come from the CPA’s opinion at the end of the engagement. Two attest services that provide assurance are audits and reviews.
Audits
A financial statement audit is a professional assessment of whether a company’s financial statements are free from “material misstatement” (errors, omissions, or misrepresentations substantial enough to impact the decisions of someone relying on those statements). It provides the highest level of assurance of all attestation services because it includes rigorous testing of accounting data and the company’s internal control environment. The CPA issues an opinion at the end of an audit, the best of which is an “unqualified” or “clean” opinion, which signifies stakeholders can reliably depend on the financial statements to make informed decisions.
Annual audits are required for public companies, whereas private companies can often choose to undergo an audit only when they are needed, such as for lenders or investors, or when selling a business. While audits sit at the top of the attestation food chain, they can be costly and take up a lot of a business’s time. For example, during an audit, the client is tasked with preparing the statements and footnotes for the auditors to review, documenting accounting policies and procedures, providing evidence needed for the auditor’s testing, and, of course, answering any questions that arise.
Reviews
During a review engagement, a CPA performs a high-level evaluation of financial data. The best outcome of a review is that the CPA provides limited assurance that there are no apparent material modifications that should be made to the financial statements in order for them to satisfy generally accepted accounting principles (GAAP). Reviews can be a cost-effective and less intrusive alternative when a full-blown audit is not required.
Reviews can be generally intended for lenders and other outside parties whenever limited assurance of the completeness and accuracy of the financial statements will suffice. Reviews can also be performed for nonfinancial data, such as social and governance strategies. In such cases, the review may be called an “examination” instead.
Attest Services That Do Not Provide Assurance
Sometimes a business can simply need assistance and may not need or want the additional rigor that comes with attestation services that provide assurance. Two very common attest services that can bring credibility to a business’s information, without assurance, are compilations and agreed-upon procedures.
Compilations
In a compilation, a CPA assists a client by preparing or finalizing the client’s financial statements. Small businesses often turn to compilations when they want to supplement their accounting staff and demonstrate that the company used a CPA in the preparation of its financial statements.
Preparation involves the CPA using the company’s accounting data to create the financial statements, whereas finalizing involves reading the financial statements prepared by the client and ensuring that they’re organized and presented properly. Compilations do not provide assurance, and CPAs do not express an opinion on the compiled financial statements because they are not permitted to certify their own work.
Agreed-Upon Procedures
This type of engagement is the most varied and can be customized to suit many different purposes. In an agreed-upon procedures engagement, a CPA performs specific actions on specific information, financial or nonfinancial. At completion, the CPA reports the findings without providing an opinion or conclusion, meaning that no assurance is provided.
Agreed-upon procedures may be a useful attestation service for demonstrating due diligence when buying an asset, reviewing internal control processes, complying with royalty agreements, verifying inventory counts, or addressing other particular concerns a business may have. Because agreed-upon procedures are narrow in scope, the CPA’s final report will list the specific procedures performed and the results.
When You May Need Attestation Services
Many business activities may warrant attestation services. Selecting the right service can save time and effort. It can be common for companies to believe they are in need of an audit without realizing other alternatives exist. Industry professionals, like CPAs, can highlight other, less rigorous alternatives that can still meet the company’s financial reporting objectives. Consider the following situations where attestation services may come in handy:
- Taking out a bank loan. This is probably the most common situation in which a small business may need some type of attestation service. But before you schedule an audit, consider whether a review might be performed instead.
- Making equity investments. Most times, investors may want to see some kind of financial information before agreeing to a new investment. The requirements can run the gamut, from a compilation of financial statements for angel investors to a review with limited assurance for a new partner in an established business or, yes, even to an audit to secure a large venture capital infusion.
- Contracting with the government. When a company applies for a federal government contract, the contracting officer should make a determination about whether the selected firm is a “responsible contractor” prior to awarding a contract. Specifics can depend on the area of government, but having adequate financial resources – or the ability to obtain them – can often be a requirement. To determine this, the contractor may need to provide a compilation of financial statements, if not an audit.
- Selling your company. If you’re selling the assets of the company – hardware, software, customer list, etc. – there is probably no need for a financial audit, as the potential buyer can assess these items during its due diligence (usually with an agreed-upon procedures engagement). However, if you are selling the legal entity, the buyer might require a financial audit, especially of the balance sheet and any net operating losses.
The Bottom Line
There are several different attestation services that a small business can retain depending on its needs. Some services, like reviews and audits, can provide a level of assurance that can verify transparency and help stakeholders confidently make informed decisions. Other attestation services, like compilations and agreed-upon procedures, can satisfy specific purposes when assurance is not required. Engaging the right service can help a business save time and resources, yet fulfill their evaluation needs.
A version of this article was originally published on April 06, 2017.
Photo: Getty Images
