Audit, reviews and compilation services
The main purpose of audits, reviews and compilation services are to provide assurance to investors, stockholders, and creditors that your company’s financial statements are presented properly and accurately as possible.
Most small business owners understand that CPAs can perform audit services and issue an audit report on a company’s financial statements. However, some may not be aware that there are alternatives to the audit engagement. CPAs can provide two other levels of service for unaudited financial statements. These two types of engagements are compilations and reviews.
Everyone has a different level of tolerance for risk. We will help your company with figure out which is best for you.
Compilation – Lowest Level of Assurance
The compilation is the lowest level of service that a CPA can provide for a client’s financial statements. A compilation engagement requires less time than a review or audit engagement because fewer procedures are required. This is good for a small business who just wants to make sure their books are in order and wants to get a loan. Banks might ask this of the small business.
The compilation standards require the CPA to possess a sufficient knowledge about the accounting principles and practices of the client’s industry. They should also have a general understanding about the nature of the client’s business. The CPA is required to read the compiled financial statements and consider whether they are in appropriate form and free from obvious material errors.
Because of the limited scope of compilation procedures, DHD Financial Services will provide a standard compilation report that disclaims any degree of assurance on the financial statement.
Review – Limited Assurance
A review engagement requires all of the procedures that are necessary for a compilation engagement, plus other procedures that enable the CPA to provide limited assurance on the financial statements. These additional requirements are inquiries of client management and analytical procedures. These inquiries should be made towards people who have responsibility for accounting. Professional judgment is used to determine the extent of inquiries that are needed. We will tailor the inquiries for your industry. The types of inquiries that will be made, at a minimum, relate to: the accounting practices and principles used by the organization; the procedures for recording and accumulating financial information; and the actions taken at meetings of the organization’s stockholders or board of directors.
Analytical procedures include:
- comparison of current-period financial statements with statements of prior periods or with current-period budgets or forecasts;
- study of the financial statements to identify items or relationships between items that do not conform to expectations based on earlier reports or other information; and
- review adjustments made to the financial statements of prior periods
Because of the inquiry and analytical procedures, accountants are able to express limited assurance on client financial statements that have been reviewed compared to the disclaimer of any assurance on client financial statements that have been compiled.
A review report expresses limited assurance in the form of the statement: “We are not aware of any material modifications” for the financial statements to be in conformity with the Generally Accepted Accounting Principles (GAAP). A reviewed financial statement must include all required footnotes and other disclosures.
Audit – Highest Level of Assurance
An audit provides the highest level of assurance. Audits can be considered a type of assurance service. However, audits are only designed to test the validity of the financial statements. Under an assurance engagement, accountants can provide a variety of services ranging from information systems security reviews to customer satisfaction surveys. In addition, the auditor is specifically required to obtain reasonable assurance that the financial statements are not materially misstated due to fraud.
Some of the more important auditing procedures are:
- Consideration and evaluation of the internal control system of the company, which may include testing the effectiveness of the system;
- Tests of the underlying documentation to support account balances;
- Observation of the physical inventory counts (if any); and
- Outside confirmation of account receivable balances.
From the audit findings, a report will be issued on whether the financial statements are fairly stated and free of material misstatements.
Which Report Should Your Company Pick?
Depending on your company size and industry, you may not need a full audit. We will help you choose which will be best for your company.