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Compilations, Reviews & Audits

Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company.

Your stockholders, creditors, or private investors have different levels of risk tolerance, so CPAs provide three levels of assurance to meet your needs.

Compilation - Lowest Level of Assurance

In compiling financial statements for a client, information is presented that is the "representation of management" and a compilation report expresses no opinion or assurance on the statements.  Compilations do not require inquiries of management or analytical procedures.  Instead, CPAs rely on our knowledge of accounting principles and a general understanding of your business.

Many individuals and smaller companies desire their financial statements to be prepared on a basis of accounting other than Generally Accepted Accounting Principles (“GAAP”), for example the cash basis of accounting or the tax basis of accounting; and generally this is coupled with omitting the statement of cash flows and/or all required disclosures and footnotes.  This is most often the case when the company’s management intends to use these financial statements for internal analysis and not distribute them outside their company.  Compiled financial statements are usually the most economical way to meet management’s needs in this situation.

Banks often require compilations from an independent CPA as part of their lending covenants.

Review - Limited Assurance

Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures CPAs apply to the financial statements, and various inquiries made of your company's management team.  If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may need to be performed.

A review doesn't require us to study and evaluate your company's internal controls or verify data with third parties or physically inspect assets.  Rather, a review report expresses limited assurance in the form of the statement: "We are not aware of any material modifications" for the financial statements to be in conformity with the Generally Accepted Accounting Principles (“GAAP”).  Reviewed financial statements must include all required footnotes and other disclosures.

Why might a business request a review engagement?  It can be a good middle ground, providing the advantages of a CPA's technical expertise without the work and expense of an audit.

Audit - Highest Level of Assurance

A financial audit provides the highest level of assurance.  It is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.

Financial audit work includes a review of internal controls, testing of selected transactions, and communication with third parties.  Based on the findings, an audit report is issued on whether the financial statements are fairly stated and free of material misstatements.

A Financial Audit allows a Client to...

  • Satisfy stakeholders such as employees, customers, suppliers, owners and pressure groups, as well as the investment community, as to the credibility of published information.
  • Comply with lending covenants.
  • Help deter and detect material fraud and error.
  • Facilitate the purchase and sale of businesses.

Here's what a client gets...

The client gets the highest level of assurance because financial auditors go outside the company to obtain more information.  Typically, there will be written communication with:

  • Its customers, to check outstanding receivable balances,
  • Its banks and lenders, to confirm cash or debt balances and terms,
  • Its vendors, to verify outstanding payable balances, and
  • Its attorneys, for information on pending or threatened legal action.

An audit also requires physical inspections by observing the company’s inventory counting methods and performing test counts. It requires documenting and testing each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll.  Many financial audits include evaluating and testing the client’s computer systems to determine the reliability of the reports they produce.  Audit work papers include a detailed work program to document the examinations and testing performed, as well as the client's supporting work papers.

Audits are not just for Public Entities

All public companies are required to have an annual financial audit, but some nonpublic entities must undergo an annual financial audit as well.  These include local governments, not-for-profit agencies and other organizations receiving government grants.

Moreover, some financial institutions require financial audits of nonpublic companies based on the financing amount and/or the bank's assessment of the company's risk.  Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order financial audits as checks of their management teams.

Our firm has made the decision to NOT perform financial audits.  However, we do perform audit support services for companies requiring a financial audit.  These services assist a company in preparing for the examination.  We can assist clients in their documenting, testing and evaluating their internal controls.  We can assist clients in preparing client’s supporting work papers and drafting their financial statements and footnote disclosures.  Many audit clients find using a smaller firm to assist them is more economical than having the same work performed by their audit firm and frees their finance / accounting team to continue dealing with their daily functions.

Which Report Should You Use?

Each type of financial statement report may suit specific circumstances, depending on requirements from your management, bank / lender or other parties, as well as meet your budgetary needs.

Understanding each report's unique strengths and weaknesses can help you choose the most appropriate one. Please call if you have questions about which type of report is right for you or complete the form below for a free consultation.

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Welcome to Mike Donelson CPA, PC CPA firm licensed in Texas.

We offer a broad range of services for business owners, executives, and independent professionals. We are affordable, experienced, and friendly.
Please call us today at (281) 537-8202. We'll be happy to offer you a free initial consultation. Thanks for visiting!

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