Compilations, Reviews, and Audits – Oh My! Which one is Right for your Business?

There are several reasons financial statements are extremely important for your business; they come into play when attempting to get a loan, or assessing the financial health of your company. It is important these reports be generated accurately, understandably, and timely for them to be useful.

Preparing financial statements in-house is an option for your business, but it will cause your focus to shift from growing the business; which is why many small business owners are trusting their accountants to prepare statements for them. By doing this business owners can ensure their financial statements will meet their bank’s requirements among others as their accountants will prepare statements in accordance with an appropriate accounting framework for their business.

There are several financial reports that accountants can generate for their clients – let’s break down the most commonly used and required.

Basic Financial Statement Preparation

When deciding to allow your CPA to prepare your financial statements, you can determine the frequency you will be provided with these reports; typically monthly, quarterly, or annually are the most common timeframes. It is also important to decide which reporting framework will be most beneficial to your business. By outsourcing your basic financial statement preparation, you are essentially getting high-quality CFO reports on your business’ health without having to pay for their steep salary.

Compilations make the role of CPA involvement more clear to outside parties, it is the cover page before actual financial statements. Due to CPA involvement the requirements for preforming this work are more detailed. One requirement is that the CPA must read through the financial statements to ensure there are no obvious material misstatements. Another stipulation of compilations is if a CPA is not separate from ownership, management or other circumstances, they must disclose the impairment to independence. A compilation may be sufficient for a small business owner looking to secure a personal loan, but most of the time a more credible report will be required for a business loan.

Review is a financial service where a CPA performs analytical procedures, inquiries, and other tasks obtaining “limited assurance” on financial statements. This is intended to provide a level of comfort in relation to the accuracy of the statements with review being the base level of CPA assurance services. CPAs are also required to be independent, and if they are not, the CPA cannot perform the review engagement.

In addition to being independent, the CPA is required to understand the industry in which you operate, along with the accounting principles and practices associated with the industry. CPAs are also required to obtain knowledge about you, your business and the accounting practices you use internally; when doing this you will need to submit documents to your accountant including your trial balance, bank reconciliation, accrual schedule and more. Following initial work done in the review a CPA will issue a report concluding whether they are aware of any material modifications that should be made to financial statements to bring them in accordance with the chosen reporting framework.

This is the highest level of assurance that a CPA can perform, it is designed to provide the highest level of comfort in the accuracy of financial statements. A CPA will ensure that financial statements are free from material misstatement by obtaining “reasonable assurance” which is defined as a high but not absolute level of assurance.

During an audit, your CPA must obtain an understanding of the business’s internal controls and assess fraud risk. On top of this, your CPA is required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, analytical procedures, and other processes. Again similarly to review a CPA must be able to deem themselves independent and if they are not they cannot perform the audit work.

After a CPA has completed the beginning work related to the audit a CPA will issue a formal report. Within this report, they will express an opinion on whether the financial statements are presented fairly. Additionally, CPAs will disclose any significant or material weaknesses in the business’ system of internal control. This disclosure will likely make owners aware of problem areas allowing them to improve the way operational efficiency of the business.