Written by: Bryan Boynton
Clients inquiring about assurance or audit services, often assume that their organization requires a financial statement audit. This assumption is made without fully understanding all the available assurance services that a CPA can provide. A CPA may compile, review or audit an organization’s financial statements.
The level of service is often determined by the client’s needs and what their creditors, investors, funding sources or government agencies require. The higher the level of service required, the more time the CPA needs to complete the engagement and therefore the more costly the engagement. Complied statements will usually be sufficient for management use, owners who are not active in management probably prefer reviewed statements and banks and other creditors usually want an audit.
Compiled financial statements represent the most basic level of service a CPA may provide with respect to financial statements. In a compilation engagement, the CPA assists 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.
The CPA issues a reporting stating the compilation was performed in accordance with Statements on Standards for Accounting and Review Services; and that the CPA has not audited or reviewed the financial statements and accordingly does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework.
Reviewed financial statements provide the user with comfort that, based on the CPA’s review, the CPA is not aware of any material modifications that should be made to the financial statements for the statements to be in conformity with the applicable financial reporting framework. In a review, the CPA designs and performs analytical procedures, inquires and other procedures, as appropriate, based on the accountant’s understanding of the industry, knowledge of the client, and awareness of the risk that he or she may knowingly fail to modify the accountant’s review report on financial statements that are materially misstated. A review does not contemplate obtaining an understanding of the organization’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit.
The CPA issues a report stating the review was performed in accordance with Statements on Standard for Accounting and Review Services; that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework and for designing, implementing and maintain internal control relevant to the preparation and fair presentation of the financial statements; that review includes primarily applying analytical procedures to management’s financial data and making inquiries of management; that a review is substantially less in scope than an audit that the CPA is not aware of any material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework.
Audited financial statements provide the user with the CPA’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.
In an audit, the CPA is required by auditing standards generally accepted in the United States of America (GAAS) to obtain an understanding of the organization’s internal control and assess fraud risk. The CPA is required to corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.
The CPA issues a report that states the audit was conducted in accordance with GAAS, the financial statements are the responsibility of management, provides an opinion that the financial statements present fairly in all material respects the financial position of the company and the results of operations that are in conformity with the applicable financial reporting framework (or issues a qualified opinion if the financial statements are not in conformity with the applicable financial reporting framework. The CPA may also issue a disclaimer of opinion, if appropriate).
Another type of engagement that clients often find useful and less costly is an agreed upon procedures engagement. An agreed upon procedures engagement is generally an engagement that involves applying procedures that have been agreed upon by specified parties (for example the client and a government agency). A report that details the procedures performed, and states the CPA’s findings. Such an engagement is useful for an organization that has no need for financial statement assurance, but would like a CPA to evaluate certain matters significant to the organization.