When it comes to your business’s financial statements, it’s important to understand that there are three different types — Notice to Reader, Review and Audit. Each one provides an overview of the financial status of your company but with different levels of financial assurance from your accountant.
If you’re doing anything with your business that requires a third-party involvement, such as applying for a loan, you likely require a set of financials that have been signed by someone with a measure of independence. The level of accounting assurance your business needs depends on what the third party requires. The more assurance required, the more work involved by your accountant, the higher your accounting bill.
The three types of financial statements
Notice to Reader
In this case, your accountant essentially takes the numbers you provide and generates a standardized financial statement, such as a balance sheet or income statement. The numbers are not reviewed for accuracy or to ensure that they are a true reflection of your business’s activity. Instead, your accountant simply trusts that the numbers provided are correct.
A Notice to Reader is the most inexpensive way to have a financial statement prepared.
A Review is halfway between and Audit and a Notice to Reader and its name says it all. To prepare a Review, your accountant reviews all of the numbers provided before preparing a financial statement. They are looking for internal consistency, analyzing specific account balances and asking for explanations or further details if anything seems unusual or unreasonable. Reviews must follow Generally Accepted Accounting Principles (GAAP) and once completed, must be signed by a public accountant. A Review instead of a Notice to Reader is usually necessary if your business is applying for a loan above a certain threshold.
Think of a Review as a ‘light Audit.’
The most stringent of the three types of financial statements, an Audit is an extremely detailed process in which every single number is scrutinized and verified. An Audit also tests your financial reporting routines and practices. It also must follow GAAP and once completed, is assured by a public accountant who confirms that all of the numbers are fair and reasonable.
Because of this demanding process, Audits are highly trusted documents. Public companies are required to conduct annual Audits at year-end. Private companies typically only need to conduct an Audit if it’s requested by a lender.
Don’t just assume which level of financial statement your company needs. First ask yourself who will be using your statements, then talk to your accountant to figure out which financial statement is the best, and most cost-effective, solution.
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