WHICH IS BEST FOR YOUR BUSINESS
Many small business owners are not familiar with the various level of assurance offered by a certified public accounting firm and the differences between each. They mistakenly combine all assurance services (audit, compilation and review) under the term audit. The truth is that, depending on the situation, an audit is not always required. There are three levels of assurance a company may need – audit, compilation or review. These three services offer different level of assurance including time, cost and reporting. In most cases, a company’s situation will determine which assurance service is most appropriate (bank loans, vendor applications or internal planning). To help our clients, prospects and others understand the difference between audits, reviews and compilations, JLK Rosenberger has provided key details about each below.
An audit provides the highest level of assurance and is often prepared for companies because outside third parties (such as banks, creditors, potential purchasers and outside investors) require an auditor’s opinion on the financial statements. To render an opinion requires in-depth testing and evidence gathering (e.g., inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures, etc.) as well as analysis of the financial statements. In order to assess the risk of material misstatement in the financial statements, develop the appropriate tests and provide the necessary assurance, an accounting firm must gain a sufficient understanding of the audited company’s internal controls.
The end goal of an audit is to provide reasonable, but not absolute, assurance (based on the CPA firm’s opinion) that the financial statements comply with generally accepted accounting principles and are free of material misstatement by error, fraudulent financial reporting or misappropriation of assets.
In some cases, a company may require assurance that doesn’t reach the extent of a full audit. A review of the company’s financial statements is meant to provide limited assurance that there are no material modifications that should be made to the financial statements in order for them to conform to generally accepted accounting principles. A review is performed primarily through inquiry of management and applying a range of analytical procedures to the financial data provided by the client. This type of engagement still requires an understanding of the client’s industry and assessment of risk for material misstatements in the financial documents.
However, in these cases, the accounting firm conducting the review does not need to gain an understanding of the company’s internal controls. In addition, a review does not assess fraud risk, test the accounting records or involve the in-depth procedures of an audit.
Compilations, unlike audits and reviews, provide no opinion on the financial statements and are the most basic level of service that a CPA can provide with respect to financial statements. In a compilation engagement, the CPA takes information provided by management and presents it in financial statement form without providing an opinion or any assurance that there are no material modifications that should be made to the financial statements. While there is no formal inquiry, analytical procedures, assessment of fraud risk or other testing, the accountant should still have an understanding of the client’s industry and should read the financial statements before issuing the compilation report to ensure the statements are free from obvious errors.
Sooner or later as a company grows it will become necessary to have audit, review or compilation performed. Whether it’s for internal planning, obtaining a loan from a bank or many others reasons these assurance services are important. If you have questions about audits, review or compilations, JLK Rosenberger can help. For additional information please call us at 818-334-8623, or click here to contact us. We look forward to speaking with you soon.