Michelle Fisher of Sobell Rhodes explains how a new assurance service can help audit exempt companies save money whilst ensuring that their accounts are reliable and accurate.

The assurance service is a new reporting option pioneered in the UK for audit exempt companies that can only be offered by chartered accountants. This groundbreaking new facility offers a welcome aid to businesses during the recession, as well as raising the profile of chartered accountants and the services they offer.

Detail
The assurance service is appropriate for directors and shareholders who want to make use of the audit exemption but would like some independent work to be done on the accounts for added credibility. The assurance report helps to give an additional degree of comfort over the accounts and confirms to all interested parties that the accounts give a true and fair view of company’s financial status and have been properly prepared.

As part of this service, the chartered accountant analyses and discusses the company’s results with the directors and shareholders in greater depth and compares the information in the accounts with other relevant information to ensure it is consistent and makes sense. Any necessary further work specific to the company is then carried out, but this is less detailed than the work involved in an audit and hence less expensive. The guidance in the ICAEW Technical Release AAFO3/06 [1] provides sample reports, engagement letters and letters of representation.

The assurance service is a voluntary product and is widely used in countries such as Canada and the USA, where they are known as review engagements. Prior to launching, the institute undertook market research, taking feed back from Companies House, HMRC, the British Bankers Association and other trade reference agencies. Other countries (particularly in Scandinavia) are watching our experience and the IAASB is also expressing interest.

Benefits
Back in 2004 when the audit exemption threshold had been raised from £1m to £5.6m, one of my clients found that his company no longer required an audit. “Surely you’ll carry out a mini-audit?”, he asked me. I explained that there was no facility for a ‘mini-audit’. At the time, a company not required to have its accounts audited could opt for a voluntary statutory audit or a compilation report. There was no interim level of reporting for companies that had previously been audited and relied on the credibility the audit offered, but at the same time wished to reduce red tape and the associated professional costs.

The introduction of the ICAEW’s interim technical release made my client’s company an obvious candidate for an assurance engagement.

The company’s turnover was approximately £2m and it had three shareholders, only one of whom was involved with the management of the company. My client (the financial director) was aided by two accounts staff. Being in a creative industry, the managing director was not interested in understanding the detail of the numbers, but did want an endorsement on the bigger picture.

As the two non-working shareholders and the bank would be scrutinising the company’s accounts, an assurance report gave sufficient comfort to the managing director that his accounts team had done an accurate job and that his management accounts (provided on a monthly basis throughout the year) were providing an accurate snapshot of his business’s performance.

Our client was highly satisfied with the assurance service, as it struck a balance between providing sufficient credibility to the accounts presented to the shareholders and being cost effective.

Many of our clients are now opting for an assurance engagement. These clients are typically made up of a mixture between those previously being audited and those not, but it is of particular interest to fast-growing companies or those with external shareholders.

All our new business proposals for SMEs include the offer of an assurance engagement and we find that this gives us a competitive edge over less proactive accounting firms who may not have told their clients about the service.

Michelle Fisher is a partner at Sobell Rhodes Chartered Accountants, as well as chair of the Small Entity Assurance Services Working Party of the ICAEW, who developed the assurance service.