Choosing an assurance engagement is like choosing what to eat from a menu: depending on how hungry you are, you might want something lighter or you may want a 16-ounce steak. Accounting firms provide assurance options to businesses through reviews and audits. Each engagement provides different value to the business through varying levels of assurance over the financials. In addition to your assurance appetite, both you and the CPA must be aware of independence requirements for each of these jobs. As always, it is important to contact a CPA to determine the appropriate level of assurance needed based on your specific business need. Additionally, a business may engage an accounting firm to perform a compilation which is considered a non-assurance attest service.
A review differs from a compilation in two ways. First, in a review, the CPA provides a basic level of assurance (less assurance than an audit, but more than a compilation) that the financial statements are complete, accurate, and in accordance with the applicable accounting framework. Second, the CPA must be independent from the business in order to perform engagement review.
A review is typically appropriate as a business grows and is seeking larger and more complex levels of financing and credit. It is also useful when the business owners is seeking a greater level of confidence in their financial statements for the purpose of evaluating results or making important business decisions.
An audit is the highest level of assurance over the financial statements a CPA can provide. The CPA will perform various procedures to obtain a reasonable assurance that the financial statements are free from material misstatements due to either fraud or error. An audit is not designed to detect and catch fraud, and as such, if you are looking to an audit for that service, it would be best to have a forensic audit performed instead of a financial statement audit. Similar to a review, a CPA must be independent to conduct an audit.
In contrast to a review, a CPA must gain an understanding of the business’ internal controls over financial reporting, and at the end of the audit, the CPA is required to report any significant deficiencies and material weaknesses to the business so that deficiencies can be adjusted, and improvements can be made as they relate to internal controls although no opinion is given specifically as it relates to internal controls. At Selden Fox, a value added service when we conduct audits is assisting the business or organization in the identification and development of new control procedures to close any open doors that allowed an error to happen. It is always better to preemptively catch a small error before it grows into large problem.
An audit is typically needed for businesses looking for large or complex funding or credit or if you are preparing to sell or merge with another business. Other than these one-time occurrences, an annual audit is helpful to determine if the financial statements are complete and accurate, and that the internal controls over financial reporting are operating effectively.
In a compilation engagement, the CPA compiles the financial statements and its supporting schedules from the information provided by you, the business owner. The CPA has no requirement to verify the provided information. Therefore, no assurance is expressed over the financial statements in a compilation.
For a compilation, independence from the business is not required. If the CPA is not independent, he or she must disclose as such in the compilation report so that anyone who uses the information is made fully aware of the lack of independence.
A compilation is typically appropriate when initial or lower amounts of financing or credit are sought or there is significant collateral in place for the agreement. Though no assurance is provided, outside parties may appreciate your association with a CPA, which is readily apparent in the formal compilation report.
At Selden Fox, we have dedicated team to ensure that your assurance appetite is satisfied with an audit or a review depending on your desired assurance needs, or maybe even a compilation. Overall, these engagements are designed to allow you to sleep better at night and to showcase your business in a light that will allow others to be confident in its performance.