Generally, there are three levels of services provided by Certified Public Accountants (CPAs) concerning the issuance of financial statements. These services are audits, compilations, and reviews. Each of these are governed by standards established by the American Institute of CPA's (AICPA) as follows:
Audits are governed by Statements on Auditing Standards issued by the Auditing Standards Board, the senior technical body of the AICPA.
Compilations and reviews are governed by Statements on Standards for Accounting and Review Services issued by the AICPA Accounting and Review Services Committee. The statements provide guidance concerning the standards, procedures, and reporting requirements for each level of service. In addition, the AICPA council under its Code of Professional Conduct specifically states that members performing these services shall comply with standards promulgated by bodies designated by Council. The remainder of this article will focus on the differences between these services and hopefully answer a variety of questions concerning each level of service.
The highest level of service is the audit of financial statements. The purpose of an audit of financial statements by a CPA is to express an opinion on the fairness with which they present fairly, in all material respects, financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (GAAP). The audit must be conducted in accordance with generally accepted auditing standards (GAAS). The certified public accountant expresses his opinion, or, if circumstances require, disclaims an opinion through the auditor's report. In either case, the CPA must state that the audit was conducted in accordance with GAAS and state whether, in the CPA'\ opinion, the financial statements are presented in conformity with GAAP. The auditors' report will identify any departures from GAAS and GAAP, if appropriate.
An audit of financial statements requires the CPA to do the following:
o Plan the audit.
o Obtain an understanding of the internal control structure and assess control risk.
o Obtain evidential matter to support amounts and disclosures in the financial statements.
o Apply analytical procedures.
o Assess accounting principles used and estimates made by management.
o Examine the information above so as to enable the CPA to form an opinion on the statements taken as a whole.
The next level of service is the review of financial statements. The purpose of a review of financial statements is for the CPA to be able to provide limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with GAAP. This limited assurance is expressed in the accountants' report. Any departures from GAAP would be identified in the accountants' report.
A review of financial statements differs significantly from an audit as follows:
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Does not provide a basis for expressing an opinion.
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Does not contemplate obtaining an understanding of the internal control structure or assessing control risk.
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Does not require tests of accounting records and responses to inquiries.
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Does not require obtaining corroborating evidential matter.
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Limited to inquiry and analytical procedures.
The compilation of financial statements.
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The CPA's report on compiled financial statements does not express any form of assurance and states that a compilation is limited to presenting information in the form of financial statements that is the representation of management. In addition, it is clearly stated that the compiled statements have not been audited or reviewed.
When does a company have an audit performed?
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Publicly-held companies.
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Certain other regulated companies.
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Loan agreements may require audits whether publicly-held or not.
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Privately-held companies with absentee owners may require audits.
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Some bonding companies may require audited financial statements.
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Not-for-profit entities generally have audits.
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Generally larger companies have audits.
When does a company have a review performed?
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Medium to large non- public entities.
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Not-for-profit entities are not required to have audits.
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Loan agreements which allow reviews rather than audits.
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Many bonding companies will accept reviews.
When does a company have a compilation?
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Small to medium non- public entities.
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Entities not required to have either an audit or a review.
What are the fee ranges for each level of service?
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Fees depend on the size of entity, industry, and level of preparedness by the company.
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Generally, audits would be the most expensive and compilations the least expensive.
The various questions and technical issues discussed are not meant to be all inclusive. When considering which level of service your company or organization requires, you should carefully review your situation and needs with your independent CPA and experienced legal counsel.
The reader should also review our article on Due Diligence.