What Are Attestation Services and How Do They Work?
Explore how attestation services provide assurance through various engagements, ensuring accuracy and reliability in financial reporting.
Attestation services play a critical role in ensuring the credibility and reliability of financial information. Provided by CPAs or accounting firms, these services are essential for businesses seeking to establish trust with stakeholders such as investors, regulators, and customers. By offering an independent assessment, attestation services verify that financial statements and other data adhere to established standards.
Types of Engagements
Attestation services include various types of engagements, each tailored to meet specific needs and objectives. These engagements provide different levels of assurance to intended users. The three primary types are examination, review, and agreed-upon procedures, each serving a distinct purpose within financial reporting and compliance.
Examination
An examination engagement provides the highest level of assurance. CPAs conduct a thorough evaluation of a subject matter, such as financial statements or compliance with regulations, in accordance with established criteria. This process involves extensive testing and verification, culminating in an opinion on whether the subject matter is presented fairly in all material respects. Guided by standards like the Statements on Standards for Attestation Engagements (SSAE), examinations are often sought by stakeholders requiring significant confidence in the accuracy and reliability of information, such as investors or regulatory bodies.
Review
A review engagement offers a moderate level of assurance and serves as an alternative to a full examination when less rigorous scrutiny is sufficient. CPAs perform analytical procedures and inquiries to determine whether material modifications are necessary for the information to conform to the applicable framework. These procedures are more limited than those in an examination, focusing on identifying plausible relationships and discrepancies rather than conducting extensive testing. Reviews are commonly applied to interim financial statements or situations where companies need to demonstrate credibility without incurring the costs of a full audit. The resulting report assures stakeholders that no material modifications are required, providing a limited level of assurance.
Agreed-Upon Procedures
Agreed-upon procedures engagements are distinct in that they do not provide an opinion or assurance but instead deliver findings based on specific procedures agreed upon by the client and the CPA. These engagements are customizable, allowing clients to address particular areas of concern, such as verifying inventory quantities or assessing the accuracy of transactions. The CPA performs the defined procedures and reports factual findings, leaving interpretation and decision-making to the client. This type of engagement is especially useful in scenarios like due diligence, fraud investigations, or compliance checks where targeted verification is needed.
Required Documentation
Documentation is a fundamental component of attestation services, ensuring the validity and reliability of the engagement process. It serves as evidence of the procedures performed and as a safeguard for both the CPA and the client. The nature and extent of documentation vary depending on the type of engagement but remain indispensable throughout.
In an examination engagement, documentation includes detailed work papers, correspondence with management, and evidence supporting the CPA’s opinion. These records demonstrate compliance with applicable standards and provide a trail for future reviews or audits. For a review engagement, documentation focuses on the analytical procedures and inquiries conducted, such as summaries of discussions with management, financial ratio analyses, and comparisons of current data with prior periods or industry benchmarks. This captures the rationale behind the CPA’s conclusions.
In agreed-upon procedures engagements, documentation is tailored to the specific procedures performed. This might include checklists, data extracts, or third-party confirmations, all of which validate the findings reported to the client.
Engagement Outcomes
The outcomes of attestation engagements vary based on the type of service provided, but all contribute to enhancing financial transparency and stakeholder confidence. An examination engagement results in a detailed report offering a high level of assurance, often influencing investor decisions and ensuring regulatory compliance. This report, governed by SSAE standards, confirms the organization’s adherence to financial reporting standards, easing interactions with regulatory bodies like the Securities and Exchange Commission (SEC).
A review engagement, while offering moderate assurance, supports interim financial integrity. Its report assures stakeholders of the absence of material misstatements, which can be critical during periods of financial volatility or as preparation for future audits. This assurance can help companies secure better terms from creditors or investors by demonstrating financial reliability without the exhaustive scrutiny of a full examination.
Agreed-upon procedures engagements produce a report of factual findings. While this does not provide assurance, it delivers targeted insights crucial for internal decision-making. The specificity of these findings allows organizations to address particular concerns, such as compliance with the Sarbanes-Oxley Act or verifying financial transactions, without requiring a comprehensive audit. This outcome is particularly valuable during mergers and acquisitions, where precise financial verifications are essential.