Compilations, Reviews, and Audits
How to Get the Best Financial Information for the Least Cost
Organizations must usually prepare reports on their financial performance whether privately or publicly held. Both nonprofit and for-profit managers make operating decisions, provide creditors with loan information, and supply investors with decision making data utilizing financial statements. The type of report may be specified by third parties, but the accounting profession recognized that company needs vary and created different levels of service—compilations, reviews, and audits.
Compiled Statements
Compiled statements are management's information put in the form of financial statements. The CPA is obligated to read them and consider whether they are appropriate in form and free from obvious material errors; however, no assurance is expressed as to the accuracy of the information in those statements. Footnote disclosures required by generally accepted accounting principles may be omitted as long as the accountant's report indicates such in a separate paragraph. This paragraph lets the reader know that if the financial statements contained this information, it might affect the user's conclusions. Due to the CPA's limited involvement, this is the least expensive level of service.
Reviewed Statements
Reviewed statements require more involvement by the accountant than is required for compilations, but less than is required for audited financial statements. Limited assurance is provided that material changes to the financial statements are not necessary. The CPA must remain independent of the client during a review, and all appropriate disclosures must be included in the reviewed statements. Inquiries are made and analytical procedures are applied to conclude whether or not the financial statements "make sense." At the conclusion of the engagement, a letter of representation is obtained from management.
Audited Statements
Audited statements contain an accountant's report that provides the highest level of assurance that the financial statements are presented fairly in conformity with generally accepted accounting principles. As in a review, the CPA must be independent of the client, and the financial statements must contain all required disclosures. In an audit, the CPA searches and verifies. This includes confirming balances with banks and creditors, observing inventory, and testing selected transactions by examining supporting documents. A letter is sent to the company's attorneys to verify any threatened or impending litigation. As in a review, a letter of representation is obtained from management. The primary purpose of an audit is not to detect irregularities or fraud, but rather to provide a reasonable level of assurance that the financial statements are free of material errors or fraud.
The CPA Profession
As licensed practitioners, we are required to complete forty hours a year of continuing education, and each firm performing the aforementioned attest function must undergo mandatory peer review once every three years. Hence the CPA profession is primarily self-regulated. The results of the latest peer review of Heinemann & Associates PLLC can be obtained here.
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