Banks and other interested parties are increasingly requesting financial statements prepared in accordance with generally accepted accounting principles (or other applicable financial reporting framework) that have either been compiled, reviewed or audited by an independent Certified Public Accountant. There are varying degrees of service and reliability provided by a compilation, review or audit engagement so it is important to understand the differences.
A compilation engagement involves presenting information, consisting of management’s representations in the form of financial statements, without expressing assurance on them. Accountants are not required to make inquiries or perform other procedures to corroborate or review the information supplied by management. However, quite often the accountant will make inquiries of management regarding certain items that may be present within the company that may not be identifiable in the financial statements, as well as to comply with certain professional standards for a compilation engagement. This is especially true if the compiled financial statements include relevant disclosures. Financial statements prepared in accordance with generally accepted accounting principles include relevant disclosures; however compiled financial statements can omit the disclosures if so elected by the users of the financial statements.
The objective of a review engagement is to express limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework used by the entity. In a review engagement, the accountant accumulates review evidence to obtain a limited level of assurance. This is done by
• Obtaining an understanding of the client and the client’s industry
• Applying analytical procedures to the financial statements
• Making inquiries of management and, when applicable, other company personnel
Furthermore, the accountant is required to read the financial statements to consider whether they appear to be in compliance with the applicable financial reporting framework. Contrary to compiled financial statements, reviewed financial statements should generally include all relevant disclosures.
In an audit engagement, the auditor expresses an opinion about whether the financial statements are fairly presented in conformity with the applicable financial reporting framework that is used by the entity. The auditor plans and performs the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. In order to properly plan and perform the audit, the auditor will obtain a sufficient understanding of the client and the control environment to assess the risks of material misstatement of the financial statements. Furthermore, in addition to the analytical type procedures performed in a review engagement, the auditor performs certain detailed transaction testing and may consider testing certain internal controls.
As the auditor is expressing an opinion about whether the financial statements are fairly presented in conformity with the applicable financial reporting framework, compared to providing limited assurance as in a review engagement, an audit engagement is more in-depth and thus brings a higher cost.
If you have any questions regarding compiled, reviewed or audited financial statements, please do not hesitate to contact one of Henry & Horne’s professionals.
Jonathan Poppel, CPA