Everyone Knows About Audits, But What About Reviews and Compilations?

Business shareholders, private investors and creditors often want assurance that your company’s financial information is correct and appropriately stated. You can accomplish this by using a CPA firm to prepare your financial statements. Financial statements evaluate your business’s performance and show its ability to pay down debt. Most people think to have this done an audit needs to be performed, but that is not necessarily the case. An audit can be costly and you might not see the benefit of having one if it’s not required. So how can you give your financial statements credibility without the expense of an audit?

Reviews and compilations can be great alternatives – as long as the individual using the financial statements can accept a lower level of assurance. A review or compilation can also beneficial if you have a smaller company and want a credible, outside CPA to prepare financial statements that you can rely on to make important business decisions.

Financial Statement Reviews

With a review, your CPA makes inquiries of management and performs analytical procedures. The analytical procedures should identify account balances or relationships that appear unusual. The CPA will make additional inquiries to determine the cause of the unexpected fluctuations in accounts compared to prior years or industry standards. Based on these inquiries and responses from management, any necessary adjustments to the financial statements may be made. Because of the inquiries of management and analytical procedures performed, your CPA can to express limited assurance on the client financial statement. While a review doesn’t provide the same degree of assurance as an audit, some financial statement users may find it an acceptable alternative.

Financial Statement Compilations

With a compilation, the CPA only assists in preparing the financial statements, but is not required to verify the information. The compilation standards only require that the CPA possess an adequate level of knowledge about the accounting principles and practices of the industry in which the company operates in and that he or she has a general understanding about the nature of the company’s business. The CPA is also required to read the compiled financial statements and consider whether they are in appropriate form and free from obvious material errors. Since a compilation has no testing procedures performed or inquiries of management or analytical procedures performed, the CPA gives no assurance as to whether the financial statements meet any of the professional standards.

In the end, the deciding factor for which assurance service to use will be determined by whom (business owners, shareholders, financial institutions, regulatory agencies, etc…) will be using the financial statement to assess the state of the business and what level of assurance they are comfortable with.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 3/27/2013.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.