AUDITS, REVIEWS AND COMPILATIONS Accounting Reports Can Fit a Range of Needs

Abstract: Anytime a CPA shows up at a company to handle an accounting assignment, many employees assume that the results carry an official seal of approval. But that’s really accurate. This article explains the types of accounting reports a CPA can glean from a company’s financial statement.

The auditors are here. Nearly anytime a CPA shows up at a company to handle an accounting assignment, many employees assume that the results carry an official seal of approval. But that’s not really accurate. A CPA’s involvement with a company’s financial statements can occur at one of three levels — audit, review, or compilation. And the degree of assurance , as well as procedural scope the CPA provides under each scenario, varies dramatically.

Regardless of the level of detail, the accountant ultimately issues a report, describing to what degree he or she assures the company that its financial statement conforms with generally accepted audit principles (GAAP). In theory, the financial statements, including all amounts and disclosures, are company management’s responsibility. But the reader should view the report as communicating what the CPA did — and did not do — to verify the financial data

Audits Provide Premium Assurance
Audits Provide Premium Assurance

An Audit provides the highest level of assurance that a company’s financial statements comply with GAAP. An unqualified audit opinion (that is, one without caveats) expresses reasonable assurance that the financial statements contain no material misstatements, and that they are presented fairly in accordance with GAAP. To reach this opinion, The CPA must examine the company’s accounting statements and documents supporting the amounts and disclosures. The accountant must also asses the company’s accounting systems and the internal controls it uses to report transactions.

During audit testing of account balances. The auditor goes outside the company for more information . Typically , he or she will have written communication with:
- The company’s customers, to check outstanding receivable balances
- Banks, to confirm cash or debt balances and terms
- Vendors, to verify outstanding payable balances
- Attorneys, for information on pending or threatened legal action.
Auditors perform physical inspections by observing the company’s inventory counting methods and performing test counts. They also document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. The CPA’s audit papers include a detailed work program to document the examinations and testing performed, as well as the client’s supporting work papers. The accountant needs to supervise and review all audit procedures to ensure they conform with generally accepted auditing standards (GAAS). When performing audits, CPA’s must understand the economy, the company’s business and it’s industry. To issue an audit report, he or she is required to be independent of the company in question.
Reviews Take the Middle Road

Reviews Take the Middle Road

Less extensive than an audit, but more involved than a compilation, a review engagement consist primarily of analytical procedures the CPA applies to the financial statements, and various inquiries he or she makes of company management. If the financial statements or supporting information appear inconsistent or otherwise questionable , an accountant may perform additional procedures.

A review doesn’t require the accountant to study and evaluate internal controls, 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 GAAP. Reviewed financial statements must include all required footnotes and other disclosures.

To perform a review, a CPA needs to possess a general knowledge of the accounting principles and practices of the company’s industry, as well as the understandng of its business. To issue review reports, the accountant must be independent.

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 Express No Opinion

Compilation Express No Opinion

In compiling financial statements for a client, the CPA represents 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 the CPA relies on his or her knowledge of the accounting principles and a general understanding of the client’s business.
The accountant can substantially omit all GAAP-required disclosures from compiled financial statements. However, he or she must disclose any departures from GAAP. To issue compiled financial statements, the CPA needn’t be independent, but he or she must disclose this fact.
To be sure, compilations have drawbacks. For instance, they don’t require verification, or inquiry unless something appears to be wrong. A compilation might, in fact, amount to little more than the CPA retyping the company’s financial statements and attaching his or her report. Third-party users relying on compilations should know the company well, because they’re depending on management’s ability to independently provide financial information (without checks or assurances from an outside CPA).