Audit, Review or Compilation?
Choosing the Appropriate Attestation Engagement for Your Organization
Melinda Irish, Audit Senior Manager
CPAs can perform a variety of attestation services for clients. “Attestation services” are those services whereby the CPA “attests” to the fairness of the financial information presented and signs a report that summarizes the findings. In that respect it is different than a tax return which is issued without any such attest report. These services range from a basic compilation to a much more involved full scope audit. An informed understanding of each of the three varying levels of services an independent CPA can provide will allow you to determine which is appropriate for your specific needs.
The consideration of the level of services should first address the purpose of the services to be delivered. For instance, a lender may require an independent audit of a company’s financial statements in order to satisfy them that the financial statements are free from material misstatement. Conversely, management may request a qualified accountant to simply compile the company’s financial information in a format meeting generally accepted accounting principles (GAAP). In these cases, the level of services varies greatly depending on the purpose of the service request. In general, you should seek the reporting standard necessary to meet the needs of bankers, owners, investors and management.
Below we will compare the alternative levels of service available. For all the attest services, CPAs are subject to licensing and other requirements including passing the CPA exam, completing required education, experience and continued professional education. Additionally, members of the AICPA must follow the AICPA Professional Standards, which include the AICPA Code of Conduct and peer review requirements.
Auditing services are the highest level of independent CPA attest services offered. Audits must be performed by an independent CPA. A financial statement audit provides the users with an independent auditor opinion confirming whether the financial statements present fairly the entity’s financial statements and footnotes. In order to express an opinion, the auditor must perform several procedures required by generally accepted auditing standards (GAAS) to gain reasonable, but not absolute, assurance that the financial statements are free from material misstatement, whether caused by error or fraud. Some of these procedures include, but are not limited to, confirmation of bank and debt balances, confirmation of a sample of accounts receivable balances with customers, review and verification of bank reconciliations, searches for unrecorded outstanding checks and liabilities, review of compliance with debt covenants, verification of the existence of inventory and a review of its valuation, gaining an understanding of the internal control environment, reviewing board minutes and obtaining certain representations from management and the company’s attorney.
Based on the level of work performed and the reporting standards required an audit costs substantially more than a review or compilation.
A review must be performed in accordance with Statements on Standards for Accounting and Review Services (SSARSs). In a review, an accountant obtains limited assurance that material modifications to the financial statements are not required for them to be in conformity with GAAP. This assurance is accomplished by performing inquiries of management, analytical procedures and calculations of certain financial ratios. Reviews generally are requested by users of the financial statements who require a higher degree of service and assurance than a compilation but not to the extent of an audit.
The third type of attestation services a CPA may provide is a compilation. In a compilation, the CPA compiles the books and records of a client without any performance of substantive procedures, verification or confirmation of balances. Therefore, the CPA does not obtain any assurance that the financial statements would not require material modification in order to comply with GAAP. The presentation of the financial statements may also be altered to exclude the related footnotes at management’s discretion.
The final product of each alternative includes the issuance of financial statements, including a balance sheet, statement of operations, cash flows and footnotes. However, the auditor/accountant report greatly differs based on the services performed and the level of assurance provided. The reports explain the reliance the user can place on the financial statements based on the procedures performed.
An independent auditors’ report is issued for audit engagements which states that the financial statements present fairly, in all material respects, the financial position of the company and that the results of operations and its cash flows are in accordance with accounting principles generally accepted in the United States of America.
An independent accountants’ review report asserts that based on the accountants’ reviews, they are not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.
An independent accountant’s report for a compilation explains that the compilation is limited to presenting information in the form requested. The accountant does not express an opinion on any information in the accompanying statements.
Audits, reviews and compilations are three very different levels of attestation services available for financial statements, and the information provided above will help you understand the differences and determine which one is appropriate for your business.
Audits, reviews and compilations address the financial statements as a whole. Another less common type of attestation service is available for limited scope engagements, known as “agreed upon procedures.” That service will be discussed in a subsequent newsletter article.
If you have any questions, please contact Melinda Irish or your BNN contact at 1-800-244-7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.
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