As an organization grows and new opportunities emerge, management may find it necessary to expand and develop new business relationships. This can also be a catalyst to find new sources of financing such as a business loan or line of credit. It is common when starting a new business relationship that a supplier, creditor, or bank will request a financial statement compilation, review, or audit. If this is the first time an organization has received such a request, there can be confusion about the differences between these three types of financial statement reports. All three—compilation, review, audit—are forms of attest services which help an organization tell its story about its financial position and performance as explained through financial statements. To help clients, prospects and others, Selden Fox has provided a brief overview outlining the differences in these options.
Financial Statement Compilation
As the name suggests, a compilation is simply a presentation of an organization’s financial statements, notes and supporting schedules presented in a specific format. A compilation can be completed on financial statements without notes or cash flows as long as they are not misleading to the users of the financial statements. Once all pertinent information is collected, the objective of the accountant is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements. Finally, a report is issued which states that management is responsible for the financial statements and no opinion or assurance is given that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework. For a compilation report, the CPA does not need to be independent from the business but does need to disclose its lack of independence, if applicable, in the final compilation report.
Financial Statement Review
A review is when a CPA provides negative assurance (limited assurance) that the CPA is not aware of any material modifications that should be made to the accompany financial statements for them to be in accordance with the applicable accounting framework, most commonly the Generally Accepted Accounting Principles (GAAP). To conduct this work, a CPA will often request a copy of the organization’s trial balance, general ledger, and schedules to support balance sheet and income statement amounts. An analysis will be done over significant account balances, and an inquiry will be made of management regarding accounting procedures and practices, as well as explanations for variances from prior to current year figures. Unlike compilations, procedures are performed to ensure there is a reasonable basis for providing limited assurance that no material changes are necessary. The CPA must be independent from the entity and any of its affiliates to perform a review of financial statements.
Financial Statement Audit
An audit is the highest level of assurance that can be provided on an organization’s financial statements. Unlike reviews or compilations, audits are designed to provide sufficient, appropriate audit evidence to the CPA which would allow him/her to express an opinion on whether the financial statements are fairly stated, in all material respects, in accordance with the applicable accounting framework, most commonly GAAP. To conduct this work, a CPA will often request a copy of the organization’s trial balance, general ledger, and schedules to support material balance sheet and income statement amounts and the related disclosures. Next, procedures will be performed to test the integrity of this information. Common audit procedures include sending confirmations to third parties to verify bank and investment balances, sending confirmations to confirm accounts’ receivable balances, and observing inventory. To test significant areas, the CPA will obtain supporting documentation for significant balances and transactions, such as invoices, check copies, cash receipts, and agreements. The CPA will also obtain an understanding and evaluate internal controls over financial reporting. When completed, the audit report will be issued containing the audit opinion on the accompanying financial statements and the related footnotes. Additionally, although no opinion will be given specifically related to internal controls, an internal control letter may be issued if any internal control deficiencies were noted during the audit process. Similar to a review, a CPA must be independent to conduct an audit.
It is also important to know that a financial statement audit is not designed to detect fraud. A forensic investigation would be suited for this type of need, instead of a financial statement audit.
Contact Us
Many Chicago organizations will be required by suppliers, creditors, or financial institutions to submit audited, reviewed or compiled financial information as part of a loan or line of credit agreement. If your organization has been requested to undergo one of these engagements, it is important to work with an experienced provider familiar with the nuances of each one. If you have questions about the information outlined above or need assistance with another audit or assurance issue, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us. We look forward to speaking with you soon.
