Know the Level of Assurance Lenders or Funders Need

You need financial statements from a CPA firm, perhaps because a lender requires them before increasing your credit limit. If your organization is a nonprofit, you may be required to produce financial statements for grantmaking sources or major donors.

It sounds like a simple request, but there are differing degrees of service a CPA firm can provide, each of which provides a different level of “assurance,” if any.

Before we get into the various types of financial statements, a word about assurance. Assurance refers to the level of certainty that the CPA firm can provide as to the fairness of your financial statements. When third party organizations such as lenders and funding sources request your financial statements to be prepared by a CPA firm, they are asking for a level of certainty that your financials are fairly and accurately stated. They may simply want to see the numbers prepared in a specific format, which offers no assurance, or they may want an independent opinion as to the fairness – assurance – of your financial statement.

Because each level of service requires varying levels of work from a CPA firm, they come with different fees. If you are obtaining a financial statement to satisfy a third party such as a lender, be sure you know what level of assurance, if any, they require before calling your CPA.

Following are the financial statement services CPA firms provide and the varying levels of assurance the come with each approach.

  • Preparations – These offer no assurance. CPAs use client-provided data to prepare financial statements in accordance with your basis of accounting. No report is included with the financial statements. These are used within your entity only. If the financial statements need to be sent to an outside party, a compilation may be a better fit for you.
  • Compilations – These, too, offer no assurance. Financial statements are prepared as they are for a preparation. An independent accountant’s compilation report, however, will accompany the financial statements. There is no testing, no inquiries with management, and no opinion given on the fairness of the financial statements. These are useful when you need to provide financial statements to lenders or other outside parties.
  • Agreed-Upon Procedures (AUPs) – No assurance is provided with AUPs either. Agreed-Upon Procedures are typically useful when a regulatory agency or other third party wants to know if regulations, contractual obligations or other specific requirements are being followed. The procedures performed do not have to relate to financial statements. The responsible parties (could be just you or it could be you and another third party) come to an agreement on a set of procedures that are tailored to your specific requirements, and we perform those procedures. A report is created for you that details the procedures performed and the results.
  • Reviews – These offer limited assurance on the financial statements. We limit our procedures to inquiries with your management and analytical procedures on the financial information provided. There is no testing of internal control, no physical inspections and no examination of source documents. Reviews are more in-depth than compilations, but do not provide as much assurance as audits. In addition, reviews may be sent to third parties that have requested them.
  • Audits – An audit offers a high level of assurance that the financial statements are fairly stated. Your audit procedures will involve significant examinations of source documents, testing of internal controls, inquiry and observation of management and other employees, analytical procedures and other procedures. Audit reports also may be sent to third parties that have requested them.

Determining which service you may need can be complicated, but we’re here to help.  Contact our Audit and Attestation team to learn more.