Timely, accurate and understandable financial statements are necessary to gauge how well your business has performed and to assess the strength of its financial position. Financial statements are the foundation upon which you make important business decisions. Oftentimes, the Certified Public Accountant (CPA) who performs your general accounting and prepares your annual tax return can also prepare your financial statements. Keep in mind that not all accountants are CPAs. In most states, only a licensed CPA can perform certain services.
Compilation (No Assurance Provided)
SSARS No.19 (AR Section 60.05) defines a compilation as follows,
A compilation is a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any 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. Although a compilation is not an assurance engagement, it is an attest engagement.
The objective of a Compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements. The CPA does not obtain any assurance for a compilation engagement because he/she is not required to verify the accuracy or completeness of the information provided or otherwise gather evidence for the purposes of expressing an audit opinion or a review conclusion.
The CPA is also required to read the financial statement in light of the financial reporting framework being used and consider whether the financial statement appear appropriate in form and are free from obvious material misstatements.
A Compilation is typically appropriate when initial or lower amounts of financing or credit are sought or there is significant collateral in place. Outside parties may appreciate the business’s association with a CPA, which is readily apparent in the formal compilation report.
Review Engagement (Limited Assurance)
Concerning a Review engagement, SSARS No. 19 (AR Section 60.07) states,
A review is a service, the objective of which is to obtain 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. In a review engagement, the accountant should accumulate review evidence to obtain a limited level of assurance. A review engagement is an assurance engagement as well as an attest engagement.
A Review engagement is intended to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements. Typically, appropriate as a business grows and is seeking larger and more complex levels of financing and credit.
In a Review engagement the CPA performs inquiries and analytical procedures and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy.
The CPA is required to understand the industry in which you operate – including the accounting principles and practices generally used in the industry. The CPA is also required to obtain knowledge about you – including your business and the accounting principles and practices that you use – sufficient to identify areas in the financial statements where it is more likely that material misstatements may arise.
A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation, outside confirmation or the examination of source documents or other procedures ordinarily performed in an audit.
In a review engagement, the CPA will issue a formal report that includes a conclusion as to whether, based on the review, he is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
A review typically is appropriate as a business grows and is seeking larger and more complex levels of financing and credit. It is also useful when you, as the business owner, are seeking greater confidence in your financial statements for the purpose of evaluating results and making key business decisions.