FINANCIAL STATEMENTS, COMPILATION, REVIEW OR AUDIT – WHICH ONE DO YOU NEED?

Personal Finance Series
September 18, 2017
Fraud and Forensics
November 16, 2017

FINANCIAL STATEMENTS, COMPILATION, REVIEW OR AUDIT – WHICH ONE DO YOU NEED?

By Oluchi Taylor

Organizations are often required to provide their financial statements to lenders, investors, regulatory agencies, or other third parties. Different levels of service can be provided related to an organization’s financial statements. What level of service does your organization need? You should work with your external auditor to determine what your needs are. For example, financial statements may be required in order to assess compliance with debt covenants, to satisfy regulatory requirements, for shareholder use, or to satisfy the requirements in an organization’s bylaws. The four general levels of financial statement services include financial statement preparation, compilation, review and audit.

The objective of financial statement preparation is to prepare financial statements pursuant to a specified financial reporting framework. Financial statement preparation is a nonattest service and provides no assurance. The CPA does not gather evidence to express an opinion, form a conclusion, or otherwise report on the financial statements. Financial statements produced from a preparation engagement are intended for management to have current information on the financial standing of the organization and to make decisions accordingly. A CPA is not required to be independent of the organization in order to perform this type of service.

The objective of a compilation is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements, without providing any assurance on those financial statements. CPAs are not required to make inquiries or perform other procedures to corroborate the accuracy or completeness of the information supplied by management. However, a CPA has an obligation to obtain additional or revised information if they become aware that information supplied by the client is inaccurate, incomplete, or misleading. Compilations are the least time consuming of the services in which the CPA issues a formal report. If the CPA is not independent, he or she is required to disclose the impairment of independence in the compilation report.

The objective of a review is to obtain limited assurance as a basis for reporting whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. A review is narrower in scope than an audit. A review is useful when management is seeking greater confidence in financial statements for the purpose of evaluating results and making key organization decisions. A CPA must be independent to perform a review engagement.

The objective of an audit is to express an opinion about whether the financial statements are fairly presented in accordance with the applicable reporting framework that is used by the organization. The auditor will issue a formal report that expresses an opinion. The auditor must obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by fraud or error. An audit provides the highest level of assurance, and therefore is more time consuming than the aforementioned services. The auditor is required to obtain an understanding of the organization’s internal control and assess fraud risk. In addition, the auditor is required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.
Similar to a review, if the CPA’s independence has been impaired, the CPA cannot perform the audit engagement. The CPA is required to report any significant deficiencies or material weaknesses in internal control that are identified during the audit.

Different organizations need accounting services for different reasons. Therefore, it is best to discuss which service is best for your organization with your CPA early on. This will help ensure the engagement is completed timely and efficiently. In addition, this will help save money by ensuring that you do not pay for a service you do not need.

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