Businesses are often required to have a financial statement audit, review or compilation completed at the request of their bank, creditors, vendors, or other organizations.
Generally speaking, any of these are requested for the purpose of receiving additional information about the financial condition of a business. The main difference between the three services is the level of work performed by the CPA or audit firm. The key issue is the level of assurance the firm is giving that the company’s financial statements are free from material misstatements. Or in other words, free from issues or errors that will impact the validity of the financial information presented. To help clients, prospects, and others understand the difference between these, Hanson & Co. has provided a brief summary of each below:
A compilation is the most basic of the three services requiring the CPA or audit firm to take the company’s existing financial information and “compile” or present it in standard financial statement form. This means that the information is prepared in accordance with Statements on Standards for Accounting and Review Services (SSARS). While there are several rules that must be followed when presenting information in this format, it is important to understand that the CPA firm is not required to render an opinion on whether or not it is free from misstatement. As a result, the amount of work needed to complete a compilation is less than for an audit or review.
At compilation conclusion, the CPA firm will issue a report that affirms the following:
- The compilation was performed according to SSARS.
- The CPA has not provided any audit or review services.
- The firm does not express an opinion on the condition of the financial statement or offer any level of assurance as part of the report.
A review is the basic level of assurance that a CPA firm offers on the condition of a company’s financial statement. Unlike a compilation, a review requires the CPA to perform analytical procedures and inquiries to receive a limited level of assurance on the accuracy of the financial information. This includes performing some analysis on financial data and making relevant inquiries of management when appropriate. In a review, your CPA is required to have an understanding of the accounting practices commonly used in your industry and be familiar with areas where financial errors commonly occur. Since the CPA firm is required to provide limited assurance about the company’s financials, a review generally takes longer to complete than a compilation. As a result, the amount of time needed to complete a review is greater than a compilation.
At review conclusion, the CPA firm will issue a report that affirms the following:
- The review was performed according to SSARS.
- Management is responsible for the fair presentation of financial statements and for designing, implementing and maintaining necessary internal control procedures.
- CPA firm is not aware of any material modifications needing to be made to ensure conformity with the standard financial reporting framework.
An audit is the advanced level of assurance that a CPA firm offers on the condition of a company’s financial statements. Unlike reviews or compilations, an audit of financial statements needs to be prepared in accordance with Generally Accepted Accounting Standards (GAAS) used in the United States. The CPA firm is required to validate the amounts listed and disclosures in the financial statements through a variety of procedures. These include inquiry, inventory observations (where applicable), on-site inspections, confirmation with outside vendors and other parties, and examinations. Since the CPA firm is required to provide a high level of assurance about the condition of the financial statements, an audit takes longer than a review or compilation. As a result, the amount of time needed to complete an audit is the greatest, and as a result, so are the fees for the service.
At audit conclusion, the CPA firm will issue a report that affirms the following:
- The audit was performed in accordance with GAAS
- Provide an opinion that the financial statements fairly present the financial position of the company in all material respects.
- If appropriate, the CPA firm may issue a disclaimer or adverse opinion. These are rarely issued, but when they appear, it means there are significant issues with some of the presented information.
There are significant differences in the level of assurance received between these three services. The differences can be confusing so it is essential to consult with a qualified provider to guide you through the process. If your company has been requested to conduct one of these services, Hanson & Co. wants to help! For additional information contact us at (303) 388-1010 or click here to contact us. We look forward to speaking with you soon.