Audits, reviews and compilations of financial statements are all considered “attest” services, which are services that can only be performed by a licensed CPA operating within a licensed CPA firm. Only an audit and review, however, provide a level of “assurance” as to the accuracy of financial statements. There are a wide range of circumstances that may lead to one of these attest services being appropriate for your organization, the most common of which are discussed below.
An audit is the highest level of assurance an independent CPA can provide, and as such, is the most involved. It results in the auditor issuing an opinion on the financial statements and includes inquiries of personnel, analytical procedures, obtaining a thorough understanding of internal processes and controls and inspecting source documents, among other verification and substantive procedures. These procedures are performed with the goal of obtaining enough evidence for the CPA to conclude as to whether the financial statements are “free from material errors” due to mistakes or fraud.
Reasons for an audit include:
- Seeking complex or high levels of financing and credit
- Compliance with debt covenant(s)
- Considering selling the business or merging
- Providing high-level of assurance to business owners and senior management
- Required by law (for example, organizations with federal funding over $750,000, certain state and local governments or employee benefit plans above the Department of Labor participant threshold)
Reviews provide “limited assurance” that there are no material modifications that should be made to the financial statements. It primarily involves performance of analytical procedures along with inquiries of management.
Reasons for review include:
- Seeking small-medium sized business loans or line of credit
- Compliance with debt covenant(s)
- Business owner seeking level of confidence in financial statements to aid in evaluating results and making key business decisions
Compilations are the least involved of the attest services and do not require analytical procedures or inquiries of the management team. Rather, the CPA will “compile” your accounting information and perform a cursory check on the financial statements to consider whether the statements appear appropriate in form and are free from obvious material misstatements. Compilations are the least costly and time consuming of the attest services in which the CPA will issue a formal report.
Reasons for compilations include:
- Seeking small business loans
- Compliance with debt covenants (is often required when business owners have personal loans)
- Owners or stakeholders who wish to associate financial statements a formal report from a CPA
There is a plethora of factors to consider when deciding if one of these engagements is appropriate. If you have any questions on attestation services or aren’t sure which service might be right for you, fill out our contact form and we would be happy to speak with you.
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