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20 C O A S T A L G R O W E R | FA L L ’ 1 1
FINANCE
The Differences Between Compiled, Reviewed and Audited Financial StatementsB Y M I K E N O L A N , C P A , H A Y A S H I & W A Y L A N D A C C O U N T I N G & C O N S U L T I N G , L L P
W I T H C O N T R I B U T I O N S F R O M S H E A H A M I L T O N , C P A
Many business owners and managers know
that certified public accountants (CPAs) can
perform an audit and issue an audit report on
an organization’s financial statements. However, many are
not aware that CPAs can also provide two other levels of
service for unaudited financial statements: compilations
and reviews. The level of service provided by a CPA
typically reflects the needs of the client, and what the
client’s lenders, investors or creditors may require. With
all of the changes in the lending and credit markets over
the last few years, due in part to the 2008 financial crisis
and recession that followed, banks and other creditors
are analyzing financial statements more than in years
past. Many companies are being required to provide their
financial information to lenders and creditors with a
higher level of assurance. A company that was previously
only required to provide internal financial statements or
tax returns to lenders, may now be required to provide
financial statements that have been compiled, reviewed
or audited by an independent CPA. Such increased
requirements may also be necessary when companies are
looking to obtain additional financing or investment. Given
these changes it is important to understand the differences
between compilation, review and audit.
COMPILATION
A compilation represents the most basic level of service
that a CPA can provide with respect to a client’s financial
statements. The CPA assists management by presenting
financial information in the form of financial statements
without expressing any assurance that there are no
material modifications that should be made. CPAs are
not required to verify the numbers included in the
financial statements. However, if the CPA is aware that
the information supplied by the client for the financial
statements is incorrect or misleading, the CPA must
obtain new or revised information from the client. The
standards for compilation engagements require that the
CPA be knowledgeable about the industry in which the
organization operates and understand the nature of the
organization’s business. Additionally, the CPA must read
the organization’s financial statements to ensure the
form is appropriate and that they are free of any obvious
material errors.
REVIEW
During a review engagement, in addition to the
requirements previously mentioned for a compilation,
the CPA makes inquiries of management and performs
analytical procedures on the balances in the financial
statements. The review procedures provide a reasonable
basis for obtaining limited assurance for the users of the
financial statements that the accountant is not aware of
any material modifications that should be made to the
financial statements.
AUDIT
Audit engagements provide the highest level of assurance
on the financial statements. In an audit, the CPA
performs all of the steps indicated above for compiled
and reviewed financial statements, plus must also
Many companies are being required to provide
their financial information to lenders and creditors
with a higher level of assurance. A company that
was previously only required to provide internal
financial statements or tax returns to lenders,
may now be required to provide financial
statements that have been compiled, reviewed
or audited by an independent CPA.
21C O A S T A L G R O W E R | F A L L ’ 1 1
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obtain an understanding of the company’s
internal control structure, evaluate its
effectiveness, and assess the risk of fraud.
The CPA must maintain an attitude of
professional skepticism throughout the
planning and completion of the audit
engagement. The CPA is also required to
substantiate the amounts and disclosures
included in the financial statements and
obtain various types of audit evidence
to reduce the risk that the financial
statements are materially misstated. The
audit evidence typically includes inquiries,
sending confirmations to third parties,
performing tests of accounting records,
physical inspection, and other procedures
deemed appropriate. At the conclusion of
the audit, the CPA provides an auditor’s
opinion that the financial statements present
fairly, in all material respects, the financial
position of the company and the results
of operations in conformity with generally
accepted accounting principles or another
comprehensive basis of accounting.
SUMMARY
There are multiple levels of service a CPA
can perform for an organization’s financial
statements. The costs associated with
these different engagements correlate with
the time it takes to perform the services.
Knowledge about these levels of service
will assist business owners and managers
in making more informed and cost-effective
decisions about the type of service their
organization may require. Understanding the
objectives and procedures a CPA is required
to perform, along with the reports that will
be issued and the assurance they provide,
helps shed light on the differences between
compilation, review, and audit engagements.
Consult with your CPA to determine, which
levels of service are appropriate for your
organization’s financial statements. CG
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