Accounting 101: Levels of Assurance

Business woman analyzing financial documents

A financial expert’s analysis is only as reliable as the data it’s based on — and all financial statements aren’t created equal. The term “assurance” refers to how confident (or assured) you are that a company’s financial reports are reliable, timely and relevant.  

Our parent company Doeren Mayhew’s dedicated Accounting, Audit and Assurance Group highlight the three distinct levels of assurance that certified public accountants (CPAs) offer, in order of increasing level of rigor:

1. Compilations and Preparation Services

These engagements provide no assurance that financial statements are free from material misstatement and conform with Generally Accepted Accounting Principles (GAAP). With a compilation, an accountant puts financial information that management generates in-house into a GAAP financial statement format. Footnote disclosures and cash flow information are optional.

Alternatively, when financial statements will be used for internal purposes only, our team of accountants might prepare the company’s financial statements in conjunction with bookkeeping or transaction-processing services. This is no different from what an in-house controller or CFO would provide to management. Prepared financial statements may be shared with outside parties, but each page of the statements will include a notice that “no assurance is provided.” 

2. Reviews

These statements provide limited assurance that they’re free from material misstatement and conform with GAAP. Here, an accountant applies analytical procedures to identify unusual items or trends in the financial statements. They inquire about anomalies, as well as the company’s accounting policies and procedures.

Reviewed statements include footnote disclosures and a statement of cash flows. But the accountant isn’t required to evaluate internal controls, verify information with third parties or physically inspect assets.  

3. Audits

These statements offer a reasonable level of assurance — but not a guarantee — that the financial statements are free from material misstatement and conform with GAAP. The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP. 

Beyond taking the analytical and inquiry steps of a review, auditors evaluate internal control systems, tailor audit programs for potential risks of material misstatement and report on control weaknesses when they deliver the audit report. In addition, they may conduct third-party verifications, physical inspections, and detailed examinations of original source documents and computer records.  

Reliability Matters

Financial statements may be used to value a business or analyze profits. Too often, a company’s owners and counsel assume that a CPA’s work carries an independent auditor’s stamp of approval. But that can sometimes be a faulty assumption.  

Count on Beene Garter, A Doeren Mayhew Firm’s audit and assurance specialists to deliver sound accounting practices and assurance services to help you improve controls, create efficiencies and simplify management’s day-to-day financial decisions.

Want to learn more about our audit and assurance services?