Did You Really Say, “We Need an Audit?”

By Kimberley Morisette

I commonly receive phone calls where people say, “We need an audit.” But the definition of the word “audit” is used loosely, and many people don’t understand the implication of the word. Often, you aren’t really looking for an audit, but for a different level of service.

To the lay person, an audit means someone performs a review of the statements, which is quite different than what a formal audit actually means. To educate the reader on the various implications of accounting definitions, let me explain some widely used terms in the attestation (verification) world; Audit, Review, Compilation, Agreed-Upon Procedures.

An audit is the highest level of assurance an owner or board can receive that the financial statements are not materially misstated. Materiality is “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.” In connection with the number side of an entity, we also perform a risk assessment and review the internal control structure – both at an owner/board level and at what happens with daily transactions. (However, a standard audit does not opine on the internal controls of the entity.)

If a board was looking for assurance that the financials were not materially misstated and were looking for recommendations on strengthening internal controls, an audit would meet these needs. Audits are pricy, especially for small organizations with budget constraints, as auditors have to not only test the actual numbers, but also review the control and risk aspect of the entity.

A review is a step lower than an audit. It provides limited assurance as to the accuracy of the financials. A review consists principally of inquiries of organization personnel and analytical procedures applied to the financial data.  Reviews normally do not provide recommendations or review of internal controls.

Compilations are the lowest service in the attest tier. In a compilation, the accountant basically takes the accounting records and creates a financial statement.

Agreed-upon procedure engagements vary with the nature and extent of the procedures performed and is based on agreed procedures with a report stating the findings. An example of an agreed-upon procedures engagement would be to review a set of internal control procedures and report on suggested improvements to the controls.

So, before using the term “audit,” you might want to be sure what services you actually desire. Or better yet contact me and my team can help make sure you are getting the service you need.

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Kimberley R. Morisette, CPA, Partner
Kimberley joined Huth Thompson in 1998, becoming manager in 2001 and partner in 2010, after working as an internal auditor in Maryland for a large not-for-profit organization. She received an Associate of Science degree in Business Administration from Ulster Community College in 1995 and a Bachelor of Science degree in Accounting from the State University of New York in 1997. Her years of experience provide expansive knowledge in auditing, accounting, reporting, and operational issues affecting not-for-profit organizations. In 2005, she was honored with the Indiana CPA Society “Five Under 35 Emerging Leaders in the CPA Profession” Award. She currently serves as the treasurer for the Lafayette Symphony Foundation, Inc. Kimberley can be reached via email or by phone at (765) 428-5000