Audit, Review, or Notice to Reader (NTR): What Level of Assurance Do I Need?
Year-end financial statements provide a ‘snapshot’ of your business’ finances. However, the level of detail required, and the associated level of assurance, varies considerably based upon the type of engagement. To determine what engagement is appropriate for your business, it is important to understand the difference between the varying levels of assurance, and the specific purpose of each.
There are three levels of assurance that Toronto accountants provide on financial statements, which result in three different reports. The differences are outlined below:
Notice to Reader: Minimal Assurance for Minimal Expense
The Notice to Reader (NTR) is the most basic engagement and provides no assurance on the accuracy of your financial statements. Your company’s financial information is compiled using information gathered from existing records with no testing performed on the underlying data.
An NTR engagement is a good choice for owner-managers who are involved in their business and do not have external stakeholders or material financing arrangements.
Review: Limited Assurance Through Discussion and Analysis
A Review engagement requires an accountant to perform limited procedures in order to conclude that there is no reason to be believe that the financial statements are not fairly stated. A review is considered an ‘assurance engagement’ in accordance with generally accepted standards for review engagements.
When completing a review engagement, your accountant performs limited procedures, such as discussion with various members of management and analysis of the financial information, to support the conclusion that there is no reason to believe the financial statements are not fairly stated.
Depending on the size of your credit facility, a review engagement will often provide a sufficient level of assurance to satisfy a lender, while giving you insights into the financial information of your company.
Audit: Maximum Scrutiny for Maximum Assurance
An audit provides the highest level of assurance. Unlike notice to reader or review engagements, an audit requires examination of source documentation on a sample basis (like invoices, bank statements and cheques) to confirm the accuracy, occurrence, and validity of the financial information to enable the auditor to conclude that the financial statements are not materially misstated.
During an audit, financial reporting practices and controls are also assessed and tested which can identify control weaknesses and highlight business risks.
For private companies, an audit is typically required by lenders when the credit facility exceeds a certain threshold but can also be required upon the request of an absentee shareholder.
Should I Settle for the Bare Minimum?
As an owner of a private company, you are deeply involved in your operations and have a handle on the finance function of your business. If financial statements are required by a third-party institution, they will most likely specify the level of assurance that they require. And while the minimum requirement is often acceptable, there are several benefits to seeking a higher level of assurance:
- An audit or review provides a snapshot of your business’ risks, highlighting ways that you can improve your record keeping and identifying vulnerabilities for fraud.
- When preparing a business for sale, an audit can provide potential buyers with peace of mind that your business is what it appears, that it’s ready for sale, and provide justification for its price.