Compilations, Reviews and Audits – Which is Right for Your Organization/Company/Association?
What is the difference between the following types of CPA certified financial statements? At Schutte & Hilgendorf, we perform all levels of accounting, tax and auditing services. The three main types of financial statements we issue are:
A compilation involves merely putting the financial information received from an Organization in an acceptable format (i.e. financial statements, footnotes and supplementary schedules) to satisfy professional standards governed by the American Institute of CPA’s (AICPA). The information is considered the representation of management (i.e. Board of Directors). NO assurance is given as to whether the statements are in conformity with generally accepted accounting principles. In fact, no assurance is given that the numbers are even right!
Compilations that include footnotes are called “full disclosure” compilations. Footnotes are detailed explanations of accounting policies and material balances contained in the financial statements. They are meant to help the reader better understand the statements. Limited compilations do not have any footnotes.
A review takes the compilation to the next level. Instead of just slapping the numbers into a prescribed format, the CPA considers trends in the market and industry, calculates and compares relevant ratios, and questions management about balances, fluctuations, accounting practices and financial performance. A review is performed to determine whether the financial statements are plausible in the circumstances. Upon completion, a report is issued stating 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. This is known as the expression of “limited assurance”.
Audited financial statements are the product of a CPA’s highest level of assurance services. In an audit, the CPA performs all of the steps indicated above regarding compiled or reviewed statements, but also performs verification and substantiation procedures that may include (but definitely is not limited to):
- Validating receivables/payables through direct correspondence with creditors/debtors,
- Substantiating spending obligations through inspection of minutes, contracts and invoices.
- Verifying accuracy of recording through examination of cancelled checks and invoices
- Substantiate proper rights of ownership through inspection of title records and invoices
An audit also involves an evaluation of an Association’s internal controls—the “checks and balances” in place to prevent and detect errors and fraud. When the audit is complete, the CPA’s standard audit report states that an audit was performed in accordance with generally accepted auditing standards, and expresses an opinion that the financial statements present fairly the Association’s financial position and results of operations. This is the expression of “positive assurance”.
So the level of service you decide on should first be based on the amount of assurance you want to have that your financial statements are free from material error. Take note that you don’t have to choose the same level of service year after year (unless of course required by your bylaws or other governing documents). This may help to balance the need for that warm, fuzzy feeling in your financial statements with your desire to keep the budget down. The value of a review over a compilation far outweighs the difference in cost. Remember that a compilation gives NO assurance that the books are accurate, whereas a review gives at least limited assurance. Some boards decide to have an audit every year just to get the highest level of “warm, fuzzy”.
For exact pricing or to help you decide what your next engagement will be, contact us directly. All mutually agreed upon procedures and pricing are summarized thoroughly in an engagement letter before beginning any engagement.