Most of us have no idea how accounting works or what role it plays within the bigger picture of the world of business. As it relates to attestation work, accounting is a very important part of the process.
In this article, we’ll explore exactly what accounting and attestation are, how they relate to each other, how attestation auditors use accounting in their work, and more.
Let’s Start With The Basics: What Is Accounting?
Accounting, at its most basic level, is the process of recording and tracking financial transactions. Every time a business makes a sale, pays an expense, or receives money from another source, it creates an accounting record for that transaction.
One of the most important things to remember about accounting is that it is based on double-entry bookkeeping. This means that there are two entries in the accounting records for every financial transaction: one to reflect the increase in assets or decrease in liabilities, and one to reflect the corresponding increase in revenue or decrease in expenses.
What Is Attestation?
Simply put, it is a statement from an accountant that states or confirms certain information about a company’s financial statements. This information can be related to the accuracy of the statements, the completeness of the statements, or their compliance with applicable accounting standards.
Attestation auditors use accounting information in two ways: first, to help them understand the organization’s overall financial condition, and second, to assess whether the organization’s financial statements are accurate and fairly represented. To do this assessment effectively, attestation auditors need to clearly understand how accounting works and its role in the financial reporting process.
There are three main types of attestation services: compilation, review, and audit. Each type of service has a different level of assurance. Regardless of which type of attestation service you need, be sure to choose reputable accounting services that have experience with your specific type of business. With their help, you can ensure that your financial statements are accurate and compliant with all applicable accounting standards.
A compilation is the least expensive and quickest type of attestation service. In a compilation, the certified public accountant (CPA) is not required to perform any procedures to test or verify the accuracy or completeness of the client’s financial information. The CPA simply compiles (or organizes) the client’s financial information into financial statements in accordance with generally accepted accounting principles (GAAP). Because there is no testing or verification performed in a compilation, this service provides the lowest level of assurance to users of the financial statements.
A review is more comprehensive than a compilation but less rigorous than an audit. In a review, the CPA performs procedures to test and verify the accuracy and completeness of the client’s financial information. However, the CPA does not express an opinion on whether the financial statements comply with GAAP. A review provides a reasonable level of assurance to users of the financial statements.
An audit is the most comprehensive type of attestation service. In an audit, the CPA tests and verifies the accuracy and completeness of the client’s financial information and its compliance with GAAP. The auditor issues an opinion on whether or not the financial statements are presented fairly, in all material respects, the financial position, results of operations, and the client’s cash flows. An audit provides the highest level of assurance to users of the financial statements.
Attestation VS Audit
You might wonder what the difference between attestation and an audit is… the short answer is that there’s no difference. Audits are a form of attestation.
Attestation is an evaluation and review of how truthful the data or information is compared to a stated purpose. An audit is a methodical examination of data to find flaws, risks, or compliance concerns that may not have been identified previously.
Compilation VS Audit
The main difference between a compilation and an audit is the level of assurance that the auditor provides. A compilation is limited to presenting, in the form of financial statements, information based on representations made by management without undertaking an examination or other review of those representations. On the other hand, an audit includes an examination of those representations and testing of related accounting records and systems.
In addition to the three types of attestation services, there are also four types of assertions that an auditor can make about financial statements:
Presentation and disclosure: The financial statements are presented fairly and accurately in accordance with GAAP.
Occurrence: Transactions have occurred and been recorded in the proper period.
Valuation and allocation: Assets, liabilities, and equity interests are valued properly, and allocations are reasonable.
Rights and obligations: Rights to assets have been obtained, and obligations for liabilities incurred as stated in the financial statements.
The type of assertion that an auditor makes depends on the type of attestation service being performed. For example, if an auditor is performing a compilation, they would only be able to make assertions about presentation and disclosure. If an auditor is performing an audit, they would be able to make all four types of assertions.
Assertions are the representations made by management in financial statements. The three types of assertions are existence, rights and obligations, and valuation or allocation.
Accounting Services management must have a proper basis for making these assertions, which relies on its understanding of the entity and its environment, including internal control. The auditor gathers evidence to address the risk that management’s assertions may be materially misstated.
The attestation standards are a set of professional standards that govern the conduct of attestation engagements. These standards are issued by the American Institute of Certified Public Accountants (AICPA). The goal of attestation standards is for them to provide direction, set limitations on a growing service line, establish a level of quality, and define the goals that should be met when doing attestation work.
There are different attestation standards for compilations, reviews, and audits. The most common attestation standard is the Statement on Standards for Attestation Engagements (SSAE) 16, issued by the American Institute of Certified Public Accountants (AICPA).
SSAE 16 is the most commonly used attestation standard. It provides guidance on how to perform a variety of attestation engagements, including financial statement audits, internal control over financial reporting audits, agreed-upon procedures engagements, and examinations of prospective financial information.
The following are some of the primary standards that must be met in all attestation engagements:
Compliance: The auditor must comply with the relevant attestation standards in order to issue an attest engagement report.
Acceptance: The auditor must accept the engagement in order to be able to issue an attest engagement report.
Quality Control: The auditor must have a system of quality control in place to ensure that the work is performed in accordance with the relevant standards.
Preconditions: Three preconditions must be met in order for the auditor to issue an attest engagement report:
- The entity must have a proper basis for its financial statements.
- Management must have made all required disclosures.
- The auditor must have access to all necessary information.
Engagement: The auditor must perform the engagement in order to be able to issue an attest engagement report.
Reporting: The auditor must issue a report on the results of the attestation engagement.
Attestation Report Longevity
The length of an attestation report is determined by the level of assurance that the auditor has been able to obtain. Generally, an attestation report shouldn’t be accepted after a year has passed unless there have been follow-up verifications to attest everything is still in order. A compilation review report, which provides a lower level of assurance than an audit, typically has a shorter life than an audit report.
The auditor gathers evidence through various procedures, including inspection, observation, inquiry, and testing of documents and records. Once the evidence is gathered, the auditor forms an opinion on whether the assertions are free of material misstatement. The auditor then writes a report that states their opinion.
There are three types of attestation reports: unqualified, qualified, and adverse.
An unqualified report is the best possible outcome for an audit. It means that the auditor found no material misstatements in the financial statements and that they are confident in management’s assertions.
A qualified report means that the auditor found some material misstatements in the financial statements. However, it does not mean that management’s assertions are necessarily wrong. The auditor may still be confident in management’s assertions even though there are some material misstatements.
An adverse report is the worst possible outcome for an audit. It means that the auditor found significant material misstatements in the financial statements and that they are not confident in management’s assertions.
Work With A Team Of Experts
At Nesso Accounting, we provide a wide range of accounting and financial services to businesses.
We work hard to provide the peace of mind knowing that your accounts are accurate and up to date at all times. Our experts, at the Nesso Group, can help you get your business where it needs to be. Don’t hesitate to reach out now to get started.