GUIDE TO FINANCIAL STATEMENT SERVICES: COMPILATION

GUIDE TO FINANCIAL

STATEMENT SERVICES:

COMPILATION, REVIEW

AND AUDIT

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FINANCIAL STATEMENT SERVICES YOUR CPA CAN PROVIDE 3

BASIC FINANCIAL STATEMENT PREPARATION 3

COMPILATION 4

REVIEW 6

AUDIT 7

SERVICE COMPARISON 8

TABLE OF CONTENTS

You’ve worked hard to get your business off the ground. Business is good—

so good that you’re ready to trade up from your leased space and build your

own building. You’ve met with the bank and they’ve given you preliminary

approval on a loan package. But the bank representative says she needs to

see your ﬁnancial statements before she can ﬁnalize your loan.

You know that timely, accurate and understandable ﬁnancial statements are

necessary to gauge how well your business has performed and to assess the

strength of its ﬁnancial position. You know that they are the foundation upon

which you make important business decisions.

You can prepare your ﬁnancial statements in house, but if you’re like many

small business owners, you may prefer to have an outside professional

to prepare your ﬁnancial statements in accordance with an accounting

framework that is appropriate for your business.

Oftentimes, the certiﬁed public accountant (CPA) who performs your general

accounting and/or bookkeeping and prepares your annual tax return can also

prepare your ﬁnancial statements and, in addition, perform the appropriate

service in order to meet your bank’s requirements. Keep in mind that not

all accountants are CPAs. In most states, only a licensed CPA can perform

certain services.

BASIC FINANCIAL STATEMENT

PREPARATION

FINANCIAL STATEMENT SERVICES

YOUR CPA CAN PROVIDE

Intended for business owner’s use to manage the business (similar to

what an in-house controller or CFO would provide for management in

a larger company)

May fulﬁll some lenders’ documentation requirements for small loans

No formal report issued on the ﬁnancial statements

If you decide to have a CPA prepare your ﬁnancial statements, he can do so in any frequency that is most useful for

you. Typically, this service is performed in conjunction with bookkeeping or transaction processing services and can

be monthly, quarterly or annually. The ﬁnancial statements are prepared in accordance with an acceptable ﬁnancial

reporting framework. If you’re not sure which reporting framework to use, your CPA can explain the pros and cons

of each and the best ﬁt for your business.

The ﬁnancial statement preparation service is primarily intended for your own use to have current information on the

ﬁnancial standing of your business and to make decisions accordingly. In essence this service is no different from

what an in-house controller or CFO would provide to management in a larger company.

You can share your ﬁnancial statements with outside parties but on each page, your CPA will include a notice that

“no assurance is provided” on the ﬁnancial statements.

Because your CPA will prepare your ﬁnancial statements directly from the records you provide, the CPA will

not verify the accuracy or completeness of the information and is not required to issue a formal report on the

ﬁnancial statements.

COMPILATION

Intended for use by lenders and other outside parties who may appreciate the

business’s association with a CPA without requiring a level of assurance on

the accuracy of ﬁnancial statements

Typically appropriate when initial or lower amounts of ﬁnancing or credit are

sought or signiﬁcant collateral is in place

CPA issues compilation report

Compilation of ﬁnancial statements is a service where the role of the CPA is more apparent to outside parties, and as

such, the requirements for performing this service are more explicit. For example, if the CPA is not independent from

ownership, management and other circumstances in their relationship to you and your business, she is required to

disclose the impairment to her independence in her compilation report. The compilation report is the ﬁrst page before

the actual ﬁnancial statements and is written by the CPA on her ﬁrm’s letterhead.

The CPA is also required to read the ﬁnancial statements in light of the ﬁnancial reporting framework being used

and consider whether the ﬁnancial statements appear appropriate in form and are free from obvious material

misstatements.

A CPA can obtain a level of “assurance”

about whether the ﬁnancial statements are

in accordance with the ﬁnancial reporting

framework. The CPA obtains assurance

by obtaining evidence. There are different

levels of assurance that a CPA can obtain

that can range from no assurance at all, to

the highest level of assurance, which is an

audit. The level of assurance required by

lenders is typically based on the size of the

loan, the collateral and their determination

of the overall risk.

Other situations that often require a level of CPA assurance include performance bonding and

leasing. Certain trade creditors, outside investors or family owners that are not actively involved in

the business may also request or require a level of assurance on your ﬁnancial statements. If your

requirements are unclear, in many cases, your CPA can speak with your lender and others about the

level of service that will satisfy their requirements.

UNDERSTANDING ASSURANCE

ASSURANCE

Compilation

Financial Statement

Preparation

Bookkeeping,

Accounting & Tax

Audit

Review

However, the CPA does not obtain any assurance for a compilation because she is not required to verify the accuracy

or completeness of the information provided or otherwise gather evidence for the purposes of expressing an audit

opinion or a review conclusion.

The compilation report states that the CPA did not audit or review the ﬁnancial statements and accordingly does not

express an opinion, a conclusion or provide any assurance on them.

A compilation is typically appropriate when initial or lower amounts of ﬁnancing or credit are sought or there is

signiﬁcant collateral in place. Though no assurance is provided, outside parties may appreciate your association with

a CPA, which is readily apparent in the formal compilation report.

A misstatement is a difference between a reported ﬁnancial statement item

and that which is required for the item to be reported in accordance with the

applicable ﬁnancial reporting framework. A misstatement may result from

fraud or error. A material misstatement is one where the severity or nature

of the difference (i.e., misstatement) would cause a user to form an incorrect

conclusion about a ﬁnancial statement.

UNDERSTANDING A MISSTATEMENT AND MATERIAL MISSTATEMENT

REVIEW

The review service is one in which the CPA performs analytical procedures, inquiries and other procedures to

obtain “limited assurance” on the ﬁnancial statements and is intended to provide a user with a level of comfort on

their accuracy. The review is the base level of CPA assurance services.

Similar to a compilation, the CPA is required to determine whether he is truly independent. If he determines that he

is not independent, the CPA cannot perform the review engagement.

In a review engagement, your CPA is required to understand the industry in which you operate — including the

accounting principles and practices generally used in the industry. Your CPA is also required to obtain knowledge

about you — including your business and the accounting principles and practices that you use — sufﬁcient to identify

areas in the ﬁnancial statements where it is more likely that material misstatements may arise.

A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding

of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation,

outside conﬁrmation or the examination of source documents or other procedures ordinarily performed in an audit.

In a review engagement, the CPA will issue a formal report that includes a conclusion as to whether, based on the

review, he is aware of any material modiﬁcations that should be made to the ﬁnancial statements in order for them to

be in accordance with the applicable ﬁnancial reporting framework.

A review typically is appropriate as a business grows and is seeking larger and more complex levels of ﬁnancing and

credit. It is also useful when you, as the business owner, are seeking greater conﬁdence in your ﬁnancial statements

for the purpose of evaluating results and making key business decisions.

Intended to provide lenders and other outside parties with a basic level of

assurance on the accuracy of ﬁnancial statements

Typically appropriate as a business grows and is seeking larger and more

complex levels of ﬁnancing and credit

CPA issues review report

AUDIT

The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on

the accuracy of the ﬁnancial statements. The CPA performs procedures in order to obtain “reasonable assurance”

(deﬁned as a high but not absolute level of assurance) about whether the ﬁnancial statements are free from material

misstatement.

In an audit, your CPA is required to obtain an understanding of your business’s internal control and assess fraud

risk. Your CPA is also required to corroborate the amounts and disclosures included in your ﬁnancial statements by

obtaining audit evidence through inquiry, physical inspection, observation, third-party conﬁrmations, examination,

analytical procedures and other procedures.

When performing an audit engagement, the CPA is required to determine whether her independence has been

impaired. Similar to a review, if her independence has been impaired, the CPA cannot perform the audit engagement.

The CPA will issue a formal report that expresses an opinion on whether the ﬁnancial statements are presented

fairly, in all material aspects, in accordance with the applicable ﬁnancial reporting framework. In addition, the CPA is

required to report to you any signiﬁcant or material weaknesses in your system of internal control that are identiﬁed

during the audit. By becoming aware of internal control weaknesses and discussing these with your CPA, you might

be able to improve the way you do business.

As the highest level of assurance, an audit typically is appropriate and often required when you’re seeking complex

or high levels of ﬁnancing and credit. An audit also is appropriate if you’re seeking outside investors or preparing to

sell or merge with another business.

Consult the following chart for a comparison of ﬁnancial statement preparation, compilation, review and audit services.

Intended to provide creditors, investors and other outside parties with

a high level of comfort on the accuracy of ﬁnancial statements

CPA issues a formal report that expresses an opinion on whether the

ﬁnancial statements are presented fairly, in all material aspects, in

accordance with the applicable ﬁnancial reporting framework

Typically appropriate and often required when seeking high levels

of ﬁnancing or outside investors, or when selling a business

SERVICE COMPARISON

FINANCIAL

STATEMENT

PREPARATION

COMPIL ATION REVIEW AUDIT

Level of

assurance that the

ﬁnancial statements

are not materially

misstated

CPA does not obtain

or provide any

assurance that there

are no material

modiﬁcations that

should be made to

the ﬁnancial

statements.

CPA does not obtain

or provide any

assurance that there

are no material

modiﬁcations that

should be made to

the ﬁnancial

statements.

CPA obtains limited

assurance that there

are no material

modiﬁcations that

should be made

to the ﬁnancial

statements.

The CPA obtains

reasonable (deﬁned

as high, but not

absolute) assurance

about whether the

ﬁnancial statements are

free of material

misstatement.

Objective To prepare ﬁnancial

statements

pursuant to a

speciﬁed ﬁnancial

reporting framework.

To apply accounting

and ﬁnancial

reporting expertise

to assist management

in the presentation of

ﬁnancial statements.

To obtain limited

assurance as a

basis for reporting

whether the CPA is

aware of any material

modiﬁcations that

should be made

to the ﬁnancial

statements for them

to be in accordance

with the applicable

ﬁnancial reporting

framework,

primarily through

the performance of

inquiry and analytical

procedures.

To obtain reasonable

assurance about whether

the ﬁnancial statements

as a whole are free of

material misstatement

thereby enabling the CPA

to express an opinion

on whether the ﬁnancial

statements are presented

fairly, in all material

respects, in accordance

with an applicable

ﬁnancial reporting

framework and to

report on the ﬁnancial

statements in accordance

with the auditor’s

ﬁndings.

The CPA is required

to be independent

No No — but if the CPA

is not independent,

the CPA is required

to indicate lack of

independence in the

CPA’s compilation

report.

 

FINANCIAL

STATEMENT

PREPARATION

COMPIL ATION REVIEW AUDIT

The CPA is

required to obtain

an understanding of

the entity’s internal

control and assess

fraud risk



The CPA is required

to perform inquiry

and analytical

procedures

 

The CPA is required

to perform

veriﬁcation and

substantiation

procedures



The CPA issues a

formal report on the

ﬁnancial statements

  

Situations requiring

different levels of

service

Intended for the

business owner’s

own use to have the

current information

needed to know the

ﬁnancial standing

of the business

and to make

business decisions

accordingly. Similar

to what an in-house

controller or CFO

would provide for

management in a

larger company. The

ﬁnancial statements

may be shared with

third parties.

Typically appropriate

when initial or lower

amounts of ﬁnancing

or credit are sought

or there is signiﬁcant

collateral in place.

Outside parties

may appreciate

the business’s

association with a

CPA, which is readily

apparent in the formal

compilation report.

Typically appropriate

as a business grows

and is seeking larger

and more complex

levels of ﬁnancing

and credit. It is also

useful when business

owners themselves

are seeking greater

conﬁdence in their

ﬁnancial statements

to evaluate results

and make key

business decisions.

An audit is typically

appropriate and often

required when seeking

complex or high levels

of ﬁnancing and credit.

Also appropriate

when seeking outside

investors, seeking to

sell the business or

considering a merger.

Differences in cost for

each level of service

Varies based on the

ﬁnancial records

provided.

Least time consuming

of the services in

which the CPA issues

a formal report.

More time consuming

than a compilation

but substantially less

than an audit.

Involves the most work

and, therefore, the most

CPA time.

To make your business #CPAPOWERED,

call today and let’s get started.

Your information goes here.

#CPAPOWERED