Financial statements are meant to identify, measure, and communicate information about an organization to interested parties. They can be prepared by your organization’s management, an outside vendor, or a CPA. Depending on the needs of your organization, you may be required to provide them to a creditor, regulatory agency, your owners and stockholders, or others that do business with you. Financial statements also come in handy if you’re selling a business.
When a CPA gets involved, it typically happens at one of four service levels: preparation, compilation, review, or audit. Each service level is unique, and each has its own merits. Think of the four levels—from a preparation to an audit—as a spectrum of the amount of assurance and service the CPA provides.
So, how do you know which service level is right for your organization? To help you better understand your options, here’s a quick look at each:
Preparation
A financial statement preparation is the lowest level of service on the spectrum. Typically, your accountant will take your numbers and put them in the form of a financial statement. A preparation does not provide any form of assurance; it’s most often used for monthly financial write-ups, and it may or may not include a written report. A preparation is the simplest way to produce a financial statement. You could give it to a third party if you wish.
Compilation
Like a preparation, a compilation does not provide any form of assurance. It does, however, include a report as well as the accountant’s name, giving it a higher degree of credibility than a preparation.
A compilation can be done in different presentations (e.g., a tax basis) and can omit certain disclosures and/or cash flow information, depending on your needs. In a compilation, your accountant will provide accounting and financial expertise to assist with the presentation of your financials but will not provide an opinion on the completeness or accuracy of them.
Review
A financial statement review provides limited assurance. The accountant must be independent, and the statements must include certain disclosures and cash flow information. To achieve this, your accountant will ask certain questions and perform reconciliations. The result is an analytical review of your organization’s financial statements that doesn’t go as deep as an audit; it’s more of a flyover.
You will also provide your accountant with written representations saying you’ve answered their questions, provided the necessary information, and taken ultimate responsibility for the financial statements. Your accountant will not provide an opinion. Instead, he or she will provide a report stating that “we’re not aware of any material modifications,” meaning no significant, unresolved issues were found during the review.
Audit
An audit is a full-blown examination of your financial statements that provides reasonable assurance and includes an audit report in the form of an opinion. It follows its own set of standards, known as Generally Accepted Auditing Standards (GAAS), whereas the other three levels of service follow Statements on Standards for Accounting and Review Services (SSARs).
An audit is a much deeper dive than a review. Your accountant will have to understand your organization’s internal controls, assess the risk of material misstatement due to error or fraud, and perform procedures to verify selected information. This often includes confirmation with third parties and the examination of source documents, as well as looking at reconciliations and performing analytical procedures. The goal is to receive an “unqualified audit opinion,” meaning the auditor completed the audit and has reasonable assurance that there are no material errors.
While a clean audit opinion is not a seal of approval, it’s the highest level of service a CPA can provide. A clean audit opinion lends a great deal of credibility to your financial statements.
We’re here to help.
Financial statements do more than provide third parties with information about your organization. They’re a valuable tool for monitoring your business. PWB can help you determine the level of service that best meets the needs of your organization and the users of its financial statements. Our accountants and auditors ask the right questions, so you can have peace of mind that your numbers add up. If you have questions about your financial statements, contact us today.
Contact your PWB advisor today.
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