December 16, 2011

Audit, review and compilation documentAudit, Review & Compilation: How CPA reports differ

Many companies provide their financial statements, along with a CPA'due south written report, to lenders, investors, suppliers and customers. Informed readers of the written report volition gain varied levels of comfort based on the type of fiscal statement provided.

Not all reports are the same. A CPA can provide unlike levels of service related to a visitor'due south financial statements.

The three general levels of financial statement service are audit, review and compilation. When do you need an audit? Businesses should work with their external auditors to determine what their existent needs are then they tin can decide the right level of service. Is the need for the financial statement a debt covenant requirement? Shareholder use? Regulatory requirement? Operation measurement? Or perhaps compensation calculation?

With a clear understanding of what is needed, the right decision tin can be made appropriately without wasting resource.

What is an audit?

An inspect is the highest level of fiscal statement service a CPA tin can provide. The purpose of having an audit is to provide financial argument users with an stance by the auditoron whether the financial statements are prepared in accordance with the proper financial reporting framework. An audit enhances the degree of conviction that intended users, such as lenders or investors, can identify in the financial statements.

The auditor obtains reasonable assurance almost whether the fiscal statements equally a whole are gratis from material misstatement, and whether the misstatements are from mistake or fraud.

To obtain reasonable assurance, items are observed, tested, confirmed, compared or traced based on the accountant'due south judgment of their materiality and adventure. After gathering appropriate prove through this process, the accountant issues an stance about whether the financial statements are free from material misstatement.

As an additional benefit, the auditor may get aware of some deficiencies in internal command or weaknesses in the organisation's systems and offer suggestions for comeback. Some of the more important auditing procedures include:

✎ Inquiring of management and others to gain an understanding of the organization itself, including operations, financial reporting and known fraud or error

✎ Evaluating and understanding the internal control system

✎ Performing analytical procedures as expected or unexpected variances in business relationship balances or classes of transactions appear

✎ Testing documentation supporting account balances or classes of transactions

✎ Observing the concrete inventory count

✎ Confirming accounts receivable and other accounts with a third party

Ideally, auditors volition provide an unqualified, or "make clean," opinion on the company's financial statements. An unqualified opinion volition comprise language such as "the financial statements nowadays fairly in all material respects" and "in conformity with bookkeeping principles generally accepted (GAAP) in the United States.

If an accountant is unable to return an unqualified opinion, a qualified opinion may be issued. Some reasons opinions may be qualified include scope limitations and departures from GAAP.

A qualified stance due to a scope limitation alerts the reader that, except for the matter to which the qualification relates, the financial statements present adequately, in all fabric respects, the visitor's fiscal position. If the telescopic limitation is astringent plenty, the auditors may disclaim an opinion on the overall financial statements.

When an auditor issues a qualified opinion, the accountant believes the financial statements are fairly stated in all material respects except for a cloth departure from GAAP. Just the accountant has ended non to express an adverse opinion.

However, if the auditor concludes that the departures from GAAP are so significant that the fiscal statements as a whole are non fairly stated, an agin opinion must exist issued. An adverse opinion will include linguistic communication describing what the auditor believes is materially misstated in the financial statements, and the effects of the misstatements. If the effects are not reasonably determinable, the auditors volition state that.

What is a review?

A review engagement is conducted to provide express assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the financial reporting framework.

A review differs significantly from an audit. Review engagements provide less assurance to the reader of the financial statements because the CPA does non perform many audit procedures. The broad review procedures required to exist performed past the CPA are:

✎ Inquiries every bit to the bookkeeping practices and principles used by the business concern

✎ Procedures for recording and accumulating financial information

✎ Actions taken at owners' or directors' meetings

✎ Written representations from direction regarding the accuracy of all data given to the CPA

✎ Receipt of all relevant information past the CPA

✎ Management'south responsibility for internal control

✎ Direction's responsibleness to preclude and observe fraud

✎ Knowledge of fraud

✎ Information related to any significant subsequent events

✎ Analytical procedures regarding comparisons

✎ Expectations developed by the CPA of recorded amounts

✎ Ratios from recorded amounts

✎ Plausible relationships of recorded amounts

These analytical procedures provide better agreement of primal relationships amidst sure numbers. This understanding gives more balls about the reasonableness of the financial condition presented in the financial statements.

Based on the inquiries and analytical procedures, the CPA is able to express only limited balls that there are no textile modifications that should be made to the financial statements for them to be in conformity with the applicable fiscal reporting framework. Because a review engagement is substantially less intensive in scope than an audit, the CPA cannot express an opinion on the fairness of the financial statements taken as a whole.

What is a compilation?

In a compilation date, the objective is to help management in presenting financial information in the form of financial statements without undertaking to provide any assurance that at that place are no material modifications that should be made to the fiscal statements so they volition conform to the acceptable fiscal reporting framework. Considering of the fifty-fifty more than limited scope of compilation procedures, the CPA's report will not express an stance or provide whatever assurance regarding the fiscal statements.

A compilation involves (ane) gaining a full general understanding of your business concern, accounting principles used and fiscal reporting system and (2) presenting financial information in the accepted format of proper financial statements. The CPA expresses no balls about the accurateness of the financial statements presented. The written report fastened to the financial argument emphasizes that the service is a compilation.

While independence is required at the other levels of service, the CPA does not have to be independent of your organization to perform a compilation. The written report must land that the accountant is not independent.

Further options lie within the compilation level of service. The compilation report may be a total disclosure report with complete footnote explanations of certain amounts and policies contained in the financial statements. Or, these otherwise required disclosures may be omitted. Omission of this information is not permissible nether the other levels of service.

Information technology is important to find the proper remainder between the cost of the CPA'south services and the level of assurance the users of the fiscal statements crave.

This article was originally posted on December 16, 2011 and the data may no longer be current. For questions, please contact GRF CPAs & Advisors at marketing@grfcpa.com.