Whether your company has been requested to have a financial statement prepared by an outside CPA firm or is doing so voluntarily, the process can be extremely complex depending on what level of financial statement is requested. Many executives of privately held companies are unaware that they have three choices when preparing financial statements: compilations, reviews and audits. The complexity of the engagement is drastically different between the three, with an audit being the most complex. Obviously the more complex the engagement is, the more the cost will be.
“If you’re having compiled financial statements prepared, the CPA is giving virtually no assurance that the statements are in accordance with generally accepted accounting principles (GAAP),” says Larry Kane, director of assurance services for Glenn M. Gelman & Associates CPAs. “If you’re having reviewed statements prepared, the CPA is providing limited assurance that the financials are in accordance with GAAP. If you’re having audited financial statements prepared, the CPA is assuring that the statements are in accordance with GAAP.”
Smart Business spoke with Kane about how to determine which choice is right for your business and how to make the entire process less painful.
What are the primary differences between the three statements that companies can have prepared?
Assuming that all three levels of the financial statements were prepared in accordance with GAAP, the statements would look basically the same. The only significant difference would be the report issued by the CPA.
A compilation engagement consists of the CPA presenting, in the form of a financial statement, information that is the representation of company management. There is no assurance given that the statements are in accordance with GAAP. In a review engagement the CPA will perform various analytical procedures and make inquiries of company management in order to provide limited assurance that no material modifications should be made to the statements in order for them to be in accordance with GAAP.
An audit engagement requires the CPA to go way beyond what is required in compilations and reviews. The CPA must have extensive knowledge of the company’s business and the relevant industry it is in. They also must obtain a thorough understanding of the company’s internal controls. In addition to gathering evidence and information about the company’s financial statements, the CPA is required to corroborate this information. The firm will corroborate the information via methods such as outside verification, observation and confirmation.
The choice of which level is right for your company is either your own comfort level or that of the requesting party.
