Assurance Concepts Explained

1. Audit of Financial Statements

An audit of financial statements involves an independent auditor examining a company's financial records to express an opinion on their fairness and compliance with accounting standards. The auditor assesses the accuracy, completeness, and reliability of the financial statements.

Example: A manufacturing company engages an auditor to review its annual financial statements. The auditor checks the accuracy of inventory records, verifies bank balances, and ensures that all transactions are properly recorded, providing a report on the overall fairness of the financial statements.

2. Review of Financial Statements

A review of financial statements involves a less extensive examination compared to an audit. The reviewer performs analytical procedures and inquiries to obtain limited assurance that there are no material modifications needed for the financial statements to be in accordance with accounting standards.

Example: A small business owner requests a review of their quarterly financial statements. The reviewer compares current financial data with historical trends, asks management about significant changes, and provides a report indicating that no material modifications are apparent.

3. Compilation of Financial Statements

Compilation of financial statements involves preparing financial statements based on information provided by the client. The preparer does not express any assurance on the statements but ensures they are presented in accordance with the applicable financial reporting framework.

Example: A consultant compiles financial statements for a startup based on the financial data provided by the startup's management. The consultant organizes the data into a standard financial statement format but does not verify the accuracy of the information, as no assurance is provided.

4. Agreed-Upon Procedures

Agreed-Upon Procedures (AUP) involve performing specific procedures on financial information as agreed upon by the auditor and the client. The auditor reports on the findings of these procedures without expressing an opinion or assurance on the financial statements as a whole.

Example: A non-profit organization contracts an auditor to perform AUP on its grant disbursement records. The auditor checks that all grants were disbursed according to the approved budget and that proper documentation is in place, providing a report detailing the findings without expressing an overall opinion on the financial statements.