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Audits of Financial Statements and Review Engagements

Each of Simkover's chartered accountants (CA's) have had over 15 years of experience in working with small to medium size businesses with sales of $5 - $20 million. With so much experience on hand, we are able to bring to the table expertise in a wide variety of fields, which includes the auditing of financial statements and review engagements. Our CA's will perform audits to ascertain the validity and reliability of financial information and also provide an assessment of the business system's internal controls. If an audit is not required, Simkover's CA's can also do a review engagement. Its scope is less than that of an audit and does not require supporting evidence or an evaluation of internal control. Being prepared is essential when the smooth operation of your business is at stake.

Audit

Many companies will request an audit because a bank, shareholder, or other third party requires the audit report which includes the above opinion. As compared to Notice to Reader financial statements, there is a higher degree of reliability in the numbers contained within an audited financial statement. Small business owners will only rarely request audited financial statements unless one of the above parties has insisted on it, since they do not wish to pay the added fees for audited statements. One exception is when purchasing a business and relying on the target company's Notice to Reader financial statements to determine how the company has been doing financially and to make decisions about whether the company should be purchased and at what price. In such a case, the purchaser may wish to obtain audited financial statements even if they have not already been produced in that format, since such an important decision should not be based on financial information that is only at a low to medium level of reliability.

It is beyond the scope of this article to explain the process that a Chartered Accountant goes through when conducting an audit for the purpose of producing an audited financial statement. The process is very complex and varies considerably in each individual situation. However, a few examples of typical audit procedures are described below, for the purpose of indicating why audited financial statements should be more reliable than Notice to Reader statements:

  • Inventory is usually physically counted and priced with the participation of the auditor, as opposed to Notice to Reader inventory which is merely the accumulation of bookkeeping entries for purchases and sales of inventory during the fiscal year

  • In an audit, accounts receivables and payables are often confirmed on a sample basis with the customers or suppliers, and the books are adjusted accordingly when differences are discovered

  • Outstanding bank loan balances are confirmed with the financial institution, and the book balance is adjusted if necessary

  • Ratio analysis and the interrelationship of accounts is reviewed in order to test the credibility of the numbers contained within the financial statement. For example, if the company normally has a ratio of current assets to current liabilities of 1.5 to 1 but this time has a ratio of only half of this, it is cause for further investigation. If there is no logical explanation, there could be significant errors in the accounts.

  • An analysis of internal control is conducted, to determine the degree of reliance that can be placed on the company's data as a result of standard operating procedures the company has put in place to control the flow of information. When the internal controls are weak, additional audit procedures are conducted to compensate for this fact

  • An analysis of the possibilities of fraud within the organization is a standard audit procedure. This analysis is conducted through interviews with management and staff, in addition to the internal control review described above.

Review Engagement

A review engagement consists mainly of enquiry, analytical procedures and discussion, with the limited objective of assessing whether the financial information is plausible (worthy of belief).

The scope of a review is narrower than that used for an audit, and therefore the level of assurance provided is lower. Unlike an audit, a review does not require supporting evidence or an evaluation of internal control. A review engagement can be performed for the benefit of a bank, shareholder, or other third party when the high level of assurance provided by an audit is not required.

Contact Simkover and Associates today and prepare your business- before the crisis hits!

Audits of Financial Statements and Review Engagements - Simkover and Associates Chartered Accountants

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