CPA- Levels of Assurance

Audits, Reviews, and Compilations

The term “audit” is often used loosely. What is an audit, and what makes it different from other types of accounting reviews? Let’s look at the three types of accounting review of financial statements:  Audits, Reviews and Compilations.

What exactly is an audit?

An audit provides a reasonable level of assurance that the financial statements conform to Generally Accepted Accounting Principles and are free from material misstatement. Audits provide the highest level of assurance, but are not absolute guarantees against inadvertent error or deliberate misstatement.
However, a number of additional steps are taken to make an audit the highest
level of review:

The CPA is required to have an extensive knowledge of the
organization’s industry.

• Auditors perform search and verification procedures such
  as obtaining written confirmation of accounts receivable, examination of contracts and other supporting documentation and physical reviews such as observing year end inventory counts.
• Auditors also review internal control systems to identify
  potential risks to the company that are included in the final audit
  report.

What is a Review?

Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform to Generally Accepted Accounting Principles. The Review is distinct from the Audit in some ways:

The CPA is not required to have extensive knowledge of the
organization’s industry but must have a specific understanding of the type of business being reviewed.

• If information provided appears questionable the CPA will
  take additional steps in performing a review.
• A review does not require the CPA to analyze the internal
  controls of the business or provide risk assessment.

And what is a Compilation?

When a CPA prepares a compiled financial statement from data provided by the client, it is called a compilation. This means that the CPA does not express any form of assurance regarding the financial statements. The CPA also does not provide an analysis of internal controls or risk assessment. The following are still  required:

If the CPA becomes aware that information supplied is
inaccurate or misleading, she/he must request additional information.

• The CPA is required to issue a report whenever completing
  a compilation of financial statements for nonpublic entities in compliance with established guidelines.
• If the financial statements contain departures from Generally Accepted Accounting Principles, this must be disclosed by the CPA.

This example of recommended language to be used in a Compilation explains the limited scope of Compilations: “I (We) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.”

The type of review required will be determined by cost and need.  The SEC requires all public companies to be audited annually.  Larger private firms also benefit from annual audits.  But smaller organizations may require Reviews or Compilations depending on specific needs.