Types of Financial Statements
We can prepare or assist in preparing your financial statements. Our professional standards require us to issue a report on those financial statements. The report can be a "Compilation", "Review" or an "Audit" report. All financial statements are the primary responsibility of the reporting entity, regardless of the level of service performed by the CPA.
Privately held companies most often decide on a compiled or reviewed report, but the decision can be influenced by many factors, such as the needs of the client, requirements of creditors or investors, and a multitude of other factors. Usually, the main requirements for audited financial statements for closely-held companies are credit agreements with third-party lenders.
We are experienced in performing audits, reviews, and compilations for privately held companies. Here are brief descriptions and comparisons to assist in your decision.
Compiled Financial Statements
The basic level of service a CPA can provide with respect to financial statements is a compilation. The CPA must comply with certain basic requirements of professional standards. These standards require the CPA to have a level of knowledge of the client's industry and to the accounting principles applicable to that industry. Prior to preparing the financial statements, the CPA may need to perform other services. These services can range from the summarizing the bookkeeping data to providing assistance with adjusting entries necessary to close the books for the proper reporting period. At any rate, the client and the CPA must have a clear understanding of the services to be provided to the client. The CPA is required to read the financial statements in order to determine the existence of any obvious departures from generally accepted accounting principles or a client’s other comprehensive basis of accounting. The accountant’s financial statement compilation report will state that a compilation was performed in accordance with AICPA professional standards, and that no assurance is expressed that the statements are in conformity with generally accepted accounting principles. Hence this being a basic level of service where a privately held entity has no requirement or need for a higher level of assurance to be expressed in a report by a CPA.
Reviewed Financial Statements
In addition to the basic requirements of professional standards required in the compilation procedures discussed in the previous section, review procedures require the CPA to perform inquiry and analytical procedures When review procedures are complete, the accountant’s financial statement review report will state that a review has been performed in accordance with AICPA professional standards, that a review is less in scope than an audit, and that the CPA did not become aware of any material modifications that should be made in order for the statements to be in conformity with generally accepted accounting principles, or a client’s other comprehensive basis of accounting. This is an expression of limited assurance. Reviewed financial statements are often prepared for third parties that do not require audited statements.
Audited Financial Statements
The highest level of assurance a CPA can provide with respect to financial statements is an audit. In addition to the requirements of professional standards required in the compilation and review procedures discussed in the previous two sections, the CPA must incorporate verification and substantiation procedures. These procedures may include confirmation of amounts outstanding with creditors or debtors, a physical inspection of inventory and other tangible assets, an inspection of the entity’s formal minutes, inspection and verification of contractual obligations, and other similar steps. Also, the CPA is required to document an understanding of the entity's system of internal control. When the audit procedures are complete, the accountant’s financial statement audit report will state that an audit was performed in accordance with generally accepted auditing standards, and expresses an opinion that the financial statements present fairly the entity's financial position and results of operations. This is an expression of positive assurance.
Audit vs. Review
The objective of an audit is to provide a reasonable basis for expressing an opinion regarding the financial statements taken as a whole. A review does not provide a basis for the expression of such an opinion because a review does not require the procedures ordinarily performed during an audit. In a review, the accountant may become aware of significant matters affecting the financial statements, but it does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit.