Audits, Reviews, and Compilations, Oh My!
Terms like these might make your head spin at first. However, the difference between an audit, a review, and a compilation may be simpler than you think. Understanding which you need only requires knowing the status of your company.
When you run a company or share responsibility for its financial health, you need a clear view of its fiscal status. The gravity increases when a business sees significant growth. Your growth stage determines whether you require an audit, a review, or a compilation.
A simple preparation of financial statements may work well for those at the beginning stages of the journey, at least for a while. It is when business owners desire larger steps and seek bigger impacts that more refined methods of financial organization and reporting become necessary.
Which Report Should Your CPA Prepare?
Expanding enterprises often fuel their growth through loans or investors. Those lending entities require assurance, a verification of any claims of financial strength or integrity. Banks want to know you can pay back your loans. Investors want assurance that the status is what you claim. All three types of reports we discuss here provide that information.
Compilations codify your finances, which is to say, they break them down into a prearranged format. Once applied to that format, your financial status is more readily understood. In other words, you are no longer using a “personal system of accounting.” A CPA, usually not connected to your business, will prepare the compilation. If the CPA, or preparer, is not independent, the report needs to declare such. The report organizes financial data and preparation does not usually include a check against related data. That means that, among the three types of reports, compilations offer the lowest level of assurance.
Reviews organize the fiscal side of a business as well, but with the purpose of providing a level of assurance to outside parties. CPAs prepare them when companies desire to borrow money or need to create reports for entities such as partners that do not take part in management or banks that provide smaller loans. A CPA creates a more in-depth report that includes recommendations. The CPA must be independent in order to create the review. A PDF prepared by AICPA (Association of International Certified Professional Accountants) states that a review is “intended to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements.”
An audit offers the highest level of assurance. It comes into play when lenders, partners, or investors require a clear picture of a company’s finances in order to make informed decisions. A business will enlist a CPA to prepare an audit when their growth requires the financial power of others. A post by NJCPA.com (New Jersey Society of Certified Public Accountants) explains that only a sample of the overall data receives review, thus making absolute accuracy unobtainable With larger amounts of money at stake, an audit still provides the greatest level of assurance to those parties. The preparer does so by verifying the accuracy of the data through comparison and other analytical means. It is the most complex of the three reports, requires the most time, and is the most trusted.
Which CPA Service Do You Need?
Understanding the difference between an audit, review, and compilation is as simple as understanding your company’s needs. At what stage of growth do you find your business? Are you seeking a professional level of organization that a compilation might provide, or are you ready to surge forward with a bid for investors? You probably already know the answer. If we can help, please give us a call.