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. CPAs can provide four levels of financial statement services. You can find an overview in the AICPAs Guide to Financial Statement Services.
At Wall & Company, we can provide services related to Review, Compilation and Preparation engagements. We often have clients ask us if we can perform audits or "audit" their books. Oftentimes this results in a conversation with the client about their needs and intentions. Audits can be very costly and for most clients the level of assurance provided by an audit is either not necessary or simply not cost effective.
What is assurance you ask?
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 between a compilation and an audit, providing the advantages of a CPA's technical expertise without the work and expense of an audit.
Compilation - No 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.
Preparation - No Assurance
In preparing financial statements for a client, the intended use of the information is for business owners to manage their business. This is similar to what an in-house controller or CFO would provide.
Like compilations, preparations don't require inquires of management or analytical procedures. Unlike compilations, preparation engagements do not require a formal CPA report - and none will be issued.
Which Report Should You Use?
Each type of financial statement report may suit specific circumstances, depending on requirements from your 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 contact us if you have questions about which type of report is right for you.