Levels of assurance
Some privately owned companies may not need audited financial statements – a less complicated and less costly compilation or review could fulfill your requirements. What are the differences between the three levels?
- A compilation engagement is typically appropriate for a small, private entity with no lenders or others who rely on financial statements. Compiled financial statements are usually for internal purposes and the information is provided by management. Footnotes are not required. The CPA offers no assurance and does not have to be independent.
- A review provides limited assurance from the CPA on the financial statements provided by management. Footnotes are required. Reviews could be appropriate for private companies who want some assurance that the financial statements are free from obvious errors, have minority or inactive shareholders, or have lenders or others who rely on financial information. The CPA must be independent of the client.
- An audit is a report that provides the highest level of assurance that financial statements prepared by management are fairly presented in all material respects in accordance with generally accepted accounting principles. Audits are often desired or required by any public or private entity such as businesses, not-for-profit organizations and governments. They can be required by lenders, insurers, by-laws, funding sources or regulatory bodies. In addition to using information supplied by management, the CPA conducts “search and verification” procedures such as observing inventory, confirming receivables, testing selected transactions, examining supporting documentation and gathering information from outside sources. While an audit provides a reasonable level of assurance that the financial statements are free of material misstatements or fraud, it does not provide a guarantee of absolute assurance. The CPA must be independent of the client.