This article was written by Corey Wegman, CPA, Audit Manager.
As many companies begin to experience growth, one of the significant questions that begins to impact their need for new capital is whether that capital can be from new investors or shareholders, or by obtaining a loan from a financial institution. However, as part of this, many new significant questions begin to exist for the company, particularly surrounding the financial reporting requirements that both potential options can bring.
Many companies may even be subjected to requirements to engage in an audit, a review, or a compilation engagement with a CPA firm in order to secure these capital influxes. This article will explore the types of financial statement services that a CPA firm can provide to understand which service best meets different needs.
Audit Engagement
An audit is the highest level of an assurance engagement that a CPA can perform. As part of an audit, the CPA designs various tests and procedures of financial statement information to obtain “reasonable assurance” about the whether the financial statements are free from material misstatements.
Given the fact that the audit provides the highest level of assurance to a user of the financial statements, it also involves the most significant time commitment, both by the CPA and the company under audit. As part of an audit, the CPA is required to go through a significant risk assessment process, which includes obtaining an understanding of the auditee’s internal controls, understanding policies and procedures, considering company-specific and industry-specific trends and developments, and regulatory and accounting developments. Additionally, the CPA is required to perform detailed tests of transactions, which include items such as confirming amounts with customers or financial institutions, physically observing inventory, and the performance of analytical procedures surrounding the financial information. The CPA is also required to be independent of the company, in accordance with professional standards.
At the conclusion of an audit engagement, the CPA will issue a report on whether the financial statements are fairly presented, in accordance with management’s chosen financial reporting framework.
Audits tend to be necessary in cases where a company is taking on high levels of financing through a financial institution or adding external investors. Additionally, certain companies who are considering exit strategies, whether through a merger or a sale of the company, may find that an audit could result in significant time and cost savings in the event of a transaction.
Review Engagement
A review engagement, while less in scope than an audit, similarly provides a form of assurance for a user of the financial statements. In a review engagement, the CPA performs procedures that are designed to provide “limited assurance” on the financial statements.
A review engagement primarily involves the CPA performing analytical procedures over financial information and making inquiries of management to determine if there are any material modifications that are necessary for the financial statements to be materially correct, in the context of the chosen financial reporting framework. Since a review provides a lower level of assurance, certain parts of the procedures necessary in an audit, such as a detailed risk assessment process and obtainment of an understanding of a company’s internal controls, are not performed. Furthermore, the CPA will not perform procedures, such as direct confirmations of amounts with customers and financial institutions, which are hallmarks of an audit engagement. Despite being lesser in scope, a CPA is still required to be independent of the company, to provide review services to a company.
The CPA’s report in a review engagement provides a conclusion as to whether the CPA is aware of any material modifications necessary to the financial statements, in accordance with management’s chosen financial reporting framework.
Reviews tend to be a smart choice for companies that are still in the earlier growth stage and could be used as a steppingstone, prior to engaging a CPA firm in an audit engagement. At certain financing levels, financial institutions may also be willing to require a review of the financial statements, rather than an audit.
Compilation Engagement
A compilation engagement is the lowest in scope of the three options covered in this article. In a compilation engagement, the CPA does not provide any assurances with regards to the financial statements. As part of a compilation engagement, the CPA works with management to assist in preparing financial statements from the books and records provided by the company.
Since a compilation engagement does not provide any form of assurance on the financial statements, generally the amount of time necessary to the engagement is significantly less than an audit or a review. Additionally, the CPA is not required to be independent to perform a compilation engagement, however, there will be added wording to the compilation report issued by the CPA, indicating a lack of independence, if necessary. At the conclusion of the engagement, the CPA’s report indicates that no assurances are provided on the financial statements.
Compilation engagements tend to be best for companies that may not be seeking significant influxes of capital. Furthermore, if a business owner seeks to improve their company’s financial reporting practices, a compilation engagement can help to achieve this.
Engaging Trusted Advisors
Regardless of which type of engagement best suits a company’s needs, The Bonadio Group’s trusted advisors and accounting professionals can ensure that any of the above engagements are able to proceed in a professional manner.
If you need further guidance or have any questions on this topic, we’re here to help. Please do not hesitate to reach out to our experts to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
