Many companies or organizations that borrow from a bank, are looking to raise capital, looking to potentially sell the entity, or meet certain Federal or state specifications, are required to have some kind of independent or outside assurance of their financial statements by a certified public accountant. This assurance usually comes in the form of an audit, review or compilation. What is the difference between the three? The difference between them is the level of assurance each type of service provides.
An audit provides the highest level of assurance and also takes the most time for both the auditors and company management to perform and complete. An audit provides reasonable assurance that the financial statements are free from material misstatement and are in accordance with Generally Accepted Accounting Principles (GAAP), which is accrual based accounting. In order for the auditor to provide an opinion, they will perform their work on a test basis on various financial aspects that includes direct confirmation of information with creditors and customers, gaining an understanding of the entity’s internal controls surrounding the financial statements, and examination of source documents that support the transactions recorded in the financial statements. What is tested is based on levels of materiality and risk perceived by the auditor.
A review is substantially less in scope than an audit. The CPA will not render an opinion like they would if it were an audit. A review consists principally of applying analytic procedures and making inquiries of persons responsible for financial and accounting matters. The review provides only limited assurance that the CPA is not aware of any material modifications that should be made to the financial statements in order for them to be in conformity with Generally Accepted Accounting Principles (GAAP). The CPA is not required to gain an understanding of internal controls. The CPA will compare trends from year to year or relationships within the financials and come up with expectations for the current year and inquire about any differences from those expectations of company management.
A compilation is the lowest level of service and provides no assurance on the financial statements. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements. This is the only level of financial statement services in which the CPA is not required to be independent.