A Publication of WTVP

With the tax season just around the corner, now is a good time for businesses to determine which type of financial service may be needed. When determining which type of financial reporting service your business may require from an accountant, you should first understand the three levels of service that can be performed— compilation, review or audit.

A compilation involves no testing. The accountant will only format information provided by a company into a financial statement format. If you chose to use a compilation, be aware that the accountant is not responsible to assess the accuracy of any of the information presented. However, in performing the compilation, the accountant may correct any glaring errors found and discuss them with the company.

A review is considered negative assurance. The accountant performs an inquiry and an analytical review but does not test or confirm supporting figures and disclosures related to the financial statements. The procedures for a review are significantly more complex than those performed in preparing a compilation; however, they are significantly less complex than the procedures performed for an audit. During a review, the accountant does not give an opinion and the financial statements are prepared to conform to generally accepted accounting principles. The accountant may state that he or she is not aware of any misstatements of figures based upon the limited procedures performed.

An audit is the highest level of service a CPA firm can perform on a financial statement. The accountant states that he or she believes the financial statement fairly represents the company’s financial position as of a specific date, and that the results of operations and cash flows for the preceding period conform to generally accepted accounting principles. The accountant is required to perform certain procedures, obtain third-party verification and inquire of specific parties related to the financial statements. The fee for an audit is significantly more than for a compilation or review.

Factors to Consider
When considering if an audit should be performed, there are a few questions to be answered: Who will be using the financial statements? What type of reliance will the user place on the financial statements? Does the business have debt agreements that require a certain level of service?

The answers to these questions should help in determining which service should be performed. Although an audit may not be required by an outside party, companies often will choose to proceed with an audit in response to fiduciary responsibilities.

For example, an organization is planning a fund drive and the donors want to know how the money was used. As a response to the fiduciary responsibilities for solicited contributions, organizations will submit audited financial statements to their donors. Another example is an owner who is considering selling or merging a business. Putting together unbiased financial information can reduce perceived risk and enhance value on the part of a prospective buyer. Either an audit or a review could be performed in this situation. While the higher level of service is more costly, the investment may pay off in the form of increased value and a higher selling price.

Understanding the various levels of service an accounting firm can perform will help you determine how to manage your financial statements. With a greater understanding of the three options available, good financial stewards can choose the most cost effective level of service. IBI