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Audit, compilation or review

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Which one is right for your company?

The financial statements of a company are used for a variety of reasons.

For external purposes, financial statements may be provided to bankers, bonding agents and sureties to assist in lending and bonding decisions. For internal purposes, statements may be used by management to assist in performance measurement and forecasting. Whatever the purpose, if a company is engaging an outside CPA to perform attest services, it needs to make sure it has a good understanding of the level of assurance they are receiving.

Three common attest services proved by an outside CPA are compilation, review and audit services, and each service provides different objectives to the user of the financial statements.

A compilation is considered the lowest level of attest services provided on financial statements. A compilation is intended only to be a preparation service that the accountant provides to a company. This attest service involves assisting management in compiling the financial information into a financial statement that management has assumed the responsibility for, ensuring that it is presented in accordance with the applicable accounting framework.

During the process of performing the compilation service, the accountant may offer suggestions as to the financial information that comprises the financial statements, but the fair presentation of financial statements are the sole responsibility of the company’s management. Compilation procedures do not require the accountant to understand the nature of transactions, nor test the reasonableness of account balances.

Accordingly, because no testing is performed, there is no assurance given by the accountant that there are no material modifications that should be made to the financial statements in order for them to be accordance with the applicable financial reporting framework.

A review can be considered the middle of the road in attest services. The overall objective of a review is to provide limited assurance that no material modifications should be made to management’s financial statements in order for them to be in accordance with the applicable financial reporting framework. The key phrase in a review engagement is “limited assurance,”  which is not the same as “reasonable assurance,” the objective of an audit.

Limited assurance is provided due to the limited testing that is performed on the accounting information used in the preparation of the financial statements. These limited procedures generally include analytical procedures performed on the financial information and inquiries of management. During a review engagement, the accountant is not required to apply testing procedures that require obtaining and examining audit evidence to support that transactions have been properly recorded in accordance with the applicable financial reporting framework.

An audit is the highest level of assurance that can be obtained. The objective of an audit is to provide reasonable assurance that the financial statements are free of material misstatement. The key phrase in an audit is “reasonable assurance.” While the assurance provided by the audit is not absolute, reasonable assurance is considered to be the highest level of assurance provided by an auditor. As part of an audit engagement, the auditor will apply procedures to obtain an understanding of the entity’s internal control, assess the fraud risk associated with the entity and test the accounting transactions through various procedures to determine that they are in accordance with the applicable financial reporting framework.

Even though a company engages an outside CPA to perform attest services on its financial statements, the users of those financial statements should not immediately assume the level of responsibility taken on by the accountant/auditor. Instead, the user should understand the level of services provided and use his or her own professional skepticism when placing reliance on those financial statements.

Please contact your trusted LGT advisor at (214) 871-7500 for more information or questions.