Understanding Compilation, 

Review and Audit

Reporting on Financial Performance

Almost every organization — whether it’s a privately held business, a publicly owned corporation, or a nonprofit organization — must prepare reports on its financial performance. Such reports help owners and managers make operating decisions, enable creditors to evaluate loan applications, and provide individuals with information to make investment decisions.  The accounting profession recognizes that different entities have different accounting needs. Acknowledging these differences, the profession has developed standards that enable CPAs to offer a range of financial statement services.

Diverse Accounting Services for Diverse Needs

A CPA may provide a client with three distinct services involving financial statements. Each is designed to meet a different need.

A compilation  is useful to small, privately held entities that need help in preparing their financial statements. 

 

A review, on the other hand, may be adequate for entities that must report their financial positions to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies.

An audit  is the third and most extensive service. An audit is appropriate for entities that must offer a higher level of assurance to outside parties. An unqualified opinion from a CPA after an audit provides reasonable assurance to outside parties that the entity's financial statements fairly present its financial position and results of operation in accordance with certain accounting principles.

What Services Do You Need?

Compilation - CPA prepares financial statements from information provided by management.
A compilation is useful when limited in-house capabilities for preparing financial statements exist. 

Review - CPA applies inquiry and analytical procedures to financial statements provided by management to determine if they are reasonable.  A review provides limited assurance that no material changes need to be made to the financial statements.

Audit  - CPA examines financial statements by conferring with outside parties, completing physical inspections and observations, and testing selected transactions by examining supporting documents. An audit provides the highest level of assurance that the financial statements fairly represent the entity's financial position and results of operation in accordance with generally accepted accounting principles.

Prepared by:
American Institute of Certified Public Accountants
Harborside Financial Center
201 Plaza Three, Jersey City, NJ 07311-3881

This information is for general purposes and is not intended as specific advice for any individual business. In addition, late-breaking tax developments may alter certain tax-planning strategies. Before acting on any advice, consult a CPA.