When it comes to financial statements, many businesses and organizations are unsure if a preparation, compilation, review, or audit engagement best fits their needs. A CPA can perform any of these services and can let you know which one works best for your expected use of the financial statements.
CPAs can be engaged to prepare financial statements, even when an organization does not need or desire a compilation, review, or audit. Preparation can consist of a single financial statement – such as an income statement or a statement of cash flows – or a complete set of financial statements, with or without disclosures. Compilations and reviews are financial statements that are generally needed by management, owners, financial institutions, or other creditors. Audited financial statements are required for all public companies. Certain regulatory bodies, governmental entities, or others may require some nonpublic companies, nonprofits, and pension plans to have an audit of their financial statements.
The CPA’s objective when engaged to prepare financial statements is to base these statements on the financial reporting framework that has been adopted by management.
When a CPA is engaged to prepare financial statements – but not engaged to perform a compilation, review, or audit – those financial statements will be based on management’s records, documents, explanations, and other information. The CPA will include a clear statement on each page of the financial statements indicating that no assurance is provided or will issue a disclaimer that the financial statements have not been audited or reviewed, and that no CPA expresses an opinion or a conclusion, nor provides any assurance on them.
A preparation of financial statements may be performed to assist management with its day-to-day duties and responsibilities; to support information for the organization’s tax return; or to be presented alongside an organization’s financial plan. It can be a single financial statement or a complete set of financial statements. The CPA does not have to be independent when performing a preparation service, and the financial statements can be with or without disclosures.
With a compilation engagement, the CPA will apply accounting and financial reporting expertise to assist management in the presentation of financial statements and to report, without undertaking to obtain or provide any assurance, that there are no material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.
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.
When performing a review of financial statements, the CPA will obtain limited assurance as to whether any material modifications should be made to the financial statements to be in accordance with the applicable financial reporting framework. 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.
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. Please call if you have questions about which type of report is right for you.