Financial Statement Reports
The most frequently prepared reports by CPAs are audits, reviews and compilations. Here are descriptions and differences of each. Puja Shastri, CPA, from our audit staff assisted in the preparation of this blog.
Audits
An audit of financial statements (which is sometimes referred to by the general public as a certified report) is the highest level of financial statement attest reporting and only independent CPAs can perform this service. The purpose of an audit is to provide reasonable assurance that the financial statements are free of material misstatement.
An audit includes examining on a test basis documentation supporting the amounts and the notes in the financial statements; assessing the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation. During the audit, the CPA obtains third party evidence; performs analytical and ratio analysis; and makes inquiries of management to determine if the information contained in the financial statements is free from material misstatement
The procedures are performed using Generally Accepted Auditing Standards (GAAS) and the report states whether the financial statements have been prepared under Generally Accepted Accounting Principles (GAAP) or another accounting framework.
Auditors are responsible to assess the risk of material misstatement, whether due to fraud or error and management has a duty to design policies and procedures to help prevent fraud and to perform periodic internal reviews to ensure that transactions are recorded properly by their staff.
Users place the highest reliance on audited statements.
Reviews
Review reports provide limited assurance that the financial statements are free of material misstatements.
A review consists of principally inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit performed in accordance with GAAS.
During a review, the CPA will perform some analytical procedures and ratio analysis and ask questions of management about items contained in the financial statements that appear to be different than expected and to determine whether they became aware of any material modifications that should be made to the financial statements in order for them to be in conformity with the appropriate accounting reporting framework. Review reports will contain a complete set of notes to financial statements, as do audited reports. The auditor must be independent.
Compilations
Compilation reports provide no assurance that the financial statements are free of material misstatements. A compilation consists of presenting in the form of financial statements information that was submitted by management. During a compilation, the CPA will “read” the financial statements to determine if they appear to be free from obvious material misstatement. Financial statements which have been compiled may or may not have to include notes to financial statements. If notes to financial statements are not included, that fact should be specified in the compilation report. The person or firm issuing the compilation does not have to be independent but if they aren’t, their lack of independence must be stated in the report.
Other financial statement and reporting and attestation services
Besides the traditional services described above, CPAs also may be asked to prepare prospective and forecasted statements, organizational budgets, personal financial statements, or other reports such as for construction bonds, letters of credit, third party guarantees and SEC and FINRA regulation compliance and forensic audits and special engagements designed to uncover or inhibit fraud.
Additional information
The basic financial statement services have been briefly described. If you would like additional information, consult with your accountant or you are welcome to call Ed (732 964-9329) or Puja (732 828-1614).
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