COMPILATIONS, REVIEW & AUDIT
Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company.
Your stockholders, creditors, or private investors have different levels of risk tolerance, so we provide three levels of assurance to meet your needs.
There is a stark difference between an audit, a compilation and a review, although they can be seen under the same umbrella.
OUTLINE OF THE DIFFERENCES BETWEEN AN AUDIT, A COMPILATION, AND A REVIEW
- Assurance level: the financial statements presented by companies are mostly error-laden. This makes investors and stakeholders have less and less faith in the process. To secure their assurance level, an audit/compilation/review is required. The level of assurance is highest for audit and at much lower levels for the compilation procedure. The review is more trustworthy than the compilation but less detailed than the audit.
- Dependence on the management data: For the audit, the data presented has to be investigated for consistency and accuracy. In review, the data collecting process is observed and tested. However, for compilation, whatever the management provides is taken – hook, line, and sinker.
- Internal control: It is only during an audit that the internal controls are investigated. This procedure is missing in both compilation and review.
- Work done: Carrying out an audit requires a large amount of time. It sometimes takes days. A review can be completed in a few hours less than an audit but the compilation process is essentially ‘a walk in the park.’
- Budget: An audit is most expensive between the three, followed by a review and then the compilation tags along.
By compilation, accountants tend to make financial statements based on the data provided to them by the management. A review, on the other hand, is more probing than the above.
Auditors carry out reviews of financial statements by inquiring if the data provided by the management is actually accurate.
Accuracy, in any case, cannot be overlooked. That is why stakeholders, investors, and creditors invariably want to be fed with the correct financial statement in order to understand the exact financial situation of the organization.
Since stakeholders and investors are taking risks, it will make sense to let them know the level of risk they are into and if it is risk-worthy. To get them to back your company up, you must be able to provide them with a high level of assurance.
At SmartCPA, we provide investors and stakeholders with three levels of assurance as required by either the lenders and stakeholders or the company’s budget; Audit, review, and compilation.
Audit – Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.
Our work includes a review of internal controls, testing of selected transactions, and communication with third parties. Based on our findings, we issue a report on whether the financial statements are fairly stated and free of material misstatements.
SmartCPA can help you with internal control reviews, review of specific transactions as well as your relationship with third parties.
Our reports can be relied on as it reflects the true nature of your financial statements – whether they are properly recorded or contain the smallest speck of error.
We provide the highest level of assurance because we do not limit our auditing to your company alone. We seek information outside your company, reaching out to people like;
- Your lawyers – in case you have any pending case or if you have been threatened with a lawsuit.
- Your customers – in case there is any unpaid debts and
- Your bank – in case of any balances and terms.
Furthermore, we perform a physical inspection of your inventory-monitoring methods to ascertain their reliability. Our report entails all the details as well as work support documents.
An Audit allows you to…
- Satisfy stakeholders such as employees, customers, suppliers and pressure groups, as well as the investing community, as to the credibility of published information.
- Facilitate the payment of corporate tax, goods and services tax, and other taxes on-time and accurately, thereby avoiding interest, penalties, and investigations.
- Comply with banking covenants.
- Help deter and detect material fraud and error.
- Facilitate the purchase and sale of businesses.
Just like public organizations, some non-public companies are required to undergo annual auditing. Even non-profits and government agencies aren’t left out.
Some investors may want to know the risk of investing in some nonpublic agencies based on their bank assessment or finances. Companies no longer running may also be audited as a means of a check by the powers that be.
Here’s what you get…
You get the highest level of assurance because we go outside your company to obtain more information. Typically, we’ll have written communication with:
- Your customers, to check outstanding receivable balances,
- Your banks, to confirm cash or debt balances and terms,
- Your attorneys, for information on pending or threatened legal action.
We also perform physical inspections by observing your inventory counting methods and perform test counts. We document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. Our audit papers include a detailed work program to document the examinations and testing performed, as well as the client’s supporting work papers.
Audits Not Just for Public Entities
All public companies are required to have an annual audit, but some nonpublic entities must undergo an annual audit as well. These include local governments, not-for-profit agencies and other organizations receiving government grants.
Moreover, some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank’s assessment of the company’s risk. Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order audits as checks of their management teams.
Review – Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures we apply to the financial statements, and various inquiries we make of your company’s management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, we may need to perform additional procedures.
A review doesn’t require us to study and evaluate your company’s internal controls or verify data with third parties or physically inspect assets. Rather, 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). Reviewed financial statements must include all required footnotes and other disclosures.
Why might a business request a review engagement? It can be a good middle ground, providing the advantages of a CPA’s technical expertise without the work and expense of an audit.
Compilation – Lowest Level of Assurance
In compiling financial statements for a client, we present information that is the “representation of management” and expresses no opinion or assurance on the statements. Compilations don’t require inquiries of management or analytical procedures. Instead, we rely on our knowledge of accounting principles and a general understanding of your business.
Banks often require compilations from an independent CPA as part of their lending covenants.
Which Report Should You Use?
Each type of financial statement report may suit specific circumstances, depending on requirements from your client’s bank or other parties, as well as meet budgetary needs.
Understanding each report’s unique strengths and weaknesses can help you choose the most appropriate one.