Audit, Review & Compilation: How Does it Matter

Businesses  provide their financial statements, along with a CPA’s report, to investors and lenders. This report provides various levels of assurance to the readers based on the type of report.

All these reports are not the same. A CPA provide all levels of services related to financial statement.

Audit, review and compilation are the three common types of financial statements. When and what type of report is required, businesses need to check with the readers to determine what is the actual requirement, so the right level of service can be chosen. Is this report required for finance, measuring performance of the business or use by the shareholders?

What is an audit?

The highest level of assurance provided by a CPA. The auditor checks if the financial statement are free from material misstatement, prepared accounting to the accounting framework. Audit report can boost the confidence of the reader as it provides the highest level of assurance.

Audit also identifies any control issues and makes recommendations. Some of the more important auditing procedures include:

1.  Learning and understanding the business.
2. Evaluation of the internal control system
3. Applying analytical procedures
4. Testing documentation supporting account balances
5. Inventory count
6. Confirming accounts receivable

Audit report will include auditor’s views on the financials of the business.

A qualified opinion due to a scope limitation alerts the reader that, except for the matter to which the qualification relates, the financial statements present fairly, in all material respects, the company’s financial position. If the scope limitation is severe enough, the auditors may disclaim an opinion on the overall financial statements.

When an auditor issues a qualified opinion, the auditor believes the financial statements are fairly stated in all material respects except for a material departure from GAAP. But the auditor has concluded not to express an adverse opinion.

However, if the auditor concludes that the departures from GAAP are so significant that the financial statements as a whole are not fairly stated, an adverse opinion must be issued. An adverse opinion will include language describing what the auditor believes is materially misstated in the financial statements, and the effects of the misstatements. If the effects are not reasonably determinable, the auditors will state that.

What is a review?

Review provides a cost-effective financial statement for companies who require higher accuracy and assurance, generally required by lenders for significant levels of financing or other stakeholders. We use analytical procedures, inquiry, and discussions with limited level of assurance. Review engagements provide a higher degree of accuracy than a compilation with your financial statements without the extensive analysis that comes with an audit.

What is a compilation?

No assurance is involved in compilation. This report is based on the financial statement of the business. The CPA does not express opinion due to the limited scope of compilation.

It involves:

1. Understanding business model, accounting principles used.
2. Formatted financial statement

A CPA associated to your business can provide a compilation.