Guide to Evaluating the Appropriate Assurance Services for Your Borrowers
Do you struggle with verifying the information that your customers present to you? Do your customers complain about the cost of their annual audit which is only required due to their debt agreement with you? While an audit provides assurance that the financial statements as a whole are not materially misstated, there may be other options that are more cost effective and that provide more assurance around the specific balances that are of the greatest concern to you. Below, we have discussed three common forms of assurance engagements. They are 1) requiring an audit of your customer's financial statements on an annual basis; 2) requiring a review of your customer’s financial statements on an annual or quarterly basis; and 3) requiring agreed-upon-procedures that are specifically designed to give you comfort around certain financial statement line items. Below, we discuss each of these in more detail and at the end of the article provide a table to compare the pros and cons of each type of engagement.
Financial Statement Audit
In a financial statement audit, we apply testing to all significant accounts on a test basis in order to express an independent opinion on whether the financial statements are fairly stated and appropriate disclosures are made. The procedures applied to each account depend on the level of risk associated with each account balance. Some examples of procedures performed during an audit include testing of underlying transactions back to source documents (i.e. invoices or agreements), confirmation of balances with third parties (i.e. cash, accounts receivable, debt, etc), predictive analytics to evaluate the reasonableness of balances compared to our expectations, and evaluating the reasonableness of significant estimates and the assumptions used in their calculation. Audits are performed on an annual basis and the procedures are designed such to allow the auditor to express an opinion stating that the financial statements are fairly presented in conformity with U.S. generally accepted accounting principles (GAAP).
Financial Statement Review
A review is not as extensive as an audit as the procedures are more inquiry driven and analytical in nature. It does not include testing of underlying transactions or independent confirmation of balances discussed above. It enables us to express limited assurance that the financial statements are fairly stated and that no material modifications are required. One typical review procedure is to develop an expectation about balances and determine its reasonableness relative to the prior period based on our knowledge of the business. Reviews are typically performed on an annual or quarterly basis.
Agreed Upon Procedures
In an agreed upon procedures engagement, we do not audit or provide assurance on the financial statements as a whole, but rather perform specific procedures that we will assist you in designing and report the findings that result from applying those procedures. For example, you may be concerned with only the Company's accounts receivable and inventory. We can design procedures where we would confirm or examine subsequent receipts for a stated percentage of accounts receivable and where we count and price test a stated percentage of inventory. These procedures can be performed as often as you believe is necessary.
The table below compares the three procedures:
| Audit | Review | Agreed Upon Procedures |
| PROS OF EACH PROCEDURE: | ||
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| CONS OF EACH PROCEDURE: | ||
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We have prepared this as a reference guide for you to use when evaluating your needs for monitoring your customers' financial positions. Like any guide, it is an overview of available choices. As you know, the devil is often in the details so we will be happy to assist you with it whether or not your customer is a client of ours because of the value we place on our relationship with you. When we can help, please contact one of our partners or Lindsey Baker at 501–374-2910.
