Compilations, Reviews, Audits
Many small businesses eventually need audit services including financial statements for either a potential income source, investor, or in order to receive a loan. There are many levels of services that are provided by a CPA in helping with those financial statements, such as compilations, reviews, or audits. The reason for needing the financial statements will determine what level of audit services you need in regards to those financial statements. As a CPA, I can help walk through the required items and make recommendation of which would be most cost effective for your company. Below are the varying levels of services for financial statements and a brief description of each. Read more about the difference from the AICPA.
Compilation Service is the lowest level of service a CPA can provide for a client’s financial statements. A compilation is taking your financial information and putting it in the format of a set of financial statements. A compilation does not entail testing of the actual detail or confirming of account balances with outside providers. As a CPA I will question balances that appear out of the norm for your specific business or industry.
According to the standards an accountant is to have adequate knowledge the accounting principles or practices that affect your business or industry. They are also required to read the compiled statements and consider if they are appropriate in form and free from obvious material errors. However the scope of the procedures does not allow an accountant to verify the balances and therefore there is disclaimer of assurance on the financial statements expressed in a letter attached to the financial statements.
A review of financial statements is a bit more detailed than a compilation. In a review the standards require an accountant to perform inquiries of management and analytical procedures on the information. These procedures include comparing the current period financial statements to the prior period and to the budget; identifying items or relationships between items that do not conform to expectations. This is done through comparison as well as in some cases reviewing the underlying reconciliations for items that are unexpected and discussing with management any items that appear out of the norm for that business and industry. With the inquiry and analytical procedures it allows the accountant to express a limited assurance on the financial statements.
This is the highest level of assurance an accountant can give on a set of financial statements. In an audit the accountant is not only required to have an understanding of accounting principles that affect your business and industry, but also are required to have an understanding of how your specific business operates in order to plan the audit. The audit is then planned and accounts are confirmed with outside sources or a test of transactions is completed to obtain a reasonable assurance that the balances on the financial statements are materially correct. Analytical procedures are used during an audit to help determine the areas of the financial statements that could be a concern for error or fraud as well as during review to help assure there were no new areas of concern come to light during the process of the audit.