Assurance | Audit | Review | Compilation
Even a successful and growing business should not be alarmed when a third party, a banker, investor, creditor, or buyer, asks for audited financial statements. Often, they are requesting some assurance that the financial statements provided by your business are reasonably accurate and free of any major oversights or material errors.
Sometimes, it comes down to the difference between a compilation, which may be what you have been doing all along, and a review.
Difference Between a Compilation and Review
Compilation — Your outside accountants have assisted you in the presentation of financial statements according to certain rules and procedures. It is important to note that these accountants are not providing any assurance with a compilation.
Review — A review provides some assurance. It is the most common form of assurance of financial statement accuracy for small businesses. It is not an audit — it is much less extensive and provides limited assurance that your financial statements are basically in conformity with generally accepted accounting principles (GAAP).
A compilation may be useful for you; however, a third party like a bank may need an additional level of assurance. Therefore, you may need a review if you want a substantial loan.
A review takes it up a notch. It is considered the base level of CPA assurance services. In a review engagement, your CPA is required to understand your industry, including its accounting principles and practices. An accountant obtains knowledge about you and your business and accounting principles and practices. This identifies areas where material misstatements may arise.
In a review, a CPA performs analytical procedures and inquiries to obtain limited assurance about financial statements that are intended to provide a user with a level of comfort about their accuracy. It is substantially narrower in scope than an audit and it may be suitable for your purposes.
As explained by the American Institute of CPAs, compilations are “intended for use by lenders and other outside parties who may appreciate the business’s association with a CPA without requiring a level of assurance on the accuracy of financial statements.” A review, however, is “intended to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements.” It may be necessary when you are seeking extensive financing.
An audit is the highest level of assurance that a CPA performs and intended to provide comfort on the accuracy of financial statements. The CPA performs procedures in order to obtain reasonable assurance about whether the financial statements are free from material misstatement.
In an audit, a CPA is required to obtain an understanding of your business’ internal control and assess fraud risk. Also, a CPA is required to corroborate amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures, and other procedures.
When performing an audit, a CPA is required to determine whether independence has been impaired. Similar to a review, if independence has been impaired, a CPA cannot perform the audit engagement.
The CPA will issue a formal report that expresses an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance applicable financial reporting framework. In addition, a CPA is required to report any significant or material weaknesses in your system of internal control that are identified during the audit. By becoming aware of internal control weaknesses and discussing these with your CPA, you might be able to improve the way you do business.
As the highest level of assurance, an audit typically is appropriate and often required when seeking complex or high levels of financing and credit. An audit also is appropriate when seeking outside investors or preparing to sell or merge with another business.
Appropriate Service for Your Business
Our goal is to instill confidence in your financial statements, provide information for internal control and management opportunities, and identify potential risks. Whether your business is in need of simple financial projecting or more complex modeling, we carefully and thoughtfully provide the most useful information.
Our services include:
+ Agreed Upon Procedures + special reports
+ Forecasts + projections
+ Internal Audit Services and Consulting
+ SEC Audit Services (provided through affiliated firms)
+ GAAP or IFRS based financial statements
+ Personal financial statements
+ Forensic accounting
+ Regulatory compliance
+ Accounting consultation and assistance for private and non-profit organizations
If you need guidance, give us a call and we will be happy to discuss your business, particular situation, and appropriate service.