Lenders, suppliers, and others routinely request financial statements to assess a company’s or an individual’s financial health. It’s important to understand the various services available to determine what type of financial statement service best suits your needs.
There are three general levels of financial statements on which a CPA can prepare a report:
- Audited Financial Statements (most costly)
- Reviewed Financial Statements
- Compiled Financial Statements (least expensive)
Other types of special services, referred to as agreed-upon procedures, are also available.
What are the differences?
In an audited financial statement report, the CPA gives an opinion as to whether financial statements, taken as a whole, are fairly presented. This opinion is given after extensive tests of the accounting records are made. The tests include confirmation with outside parties, analytical procedures, inquiry of client personnel and a detailed study of the accounting records. The purpose of analytical procedures is to identify account balances or relationships that appear unusual so that additional inquiries can be made to determine the reason for the unexpected patterns. The financial statements are adjusted if necessary based these inquiries.
Consideration and evaluation of the company’s internal control system, assessing control risk, and observation of the physical inventory counts are important audit procedures designed to provide sufficient audit evidence necessary to express an opinion on the audited financial statements. In addition, the auditor is specifically required to obtain reasonable assurance that the financial statements are not materially misstated due to fraud. In a review or compilation engagement, the accountant is not required to document any assessment of fraud risk; however, the standards do require the accountant to inform management of any material errors, fraud, or illegal acts that come to his or her attention during the course of the engagement.
In a reviewed financial statement report, the CPA expresses limited assurance that there are no major adjustments that should be made to the statements in order for them to be in conformity with accepted standards. In order for the CPA to express this limited assurance, he or she must be satisfied as to the reasonableness of the statements through inquiry and analytical procedures.
In a compiled financial statement report, the CPA expresses no assurance on the correctness of the financial statements. The CPA only presents, in the form of financial statements, information that is the representation of the management of the business entity. To do this, he obtains the information from management and assembles it. A compilation engagement requires less time than a review or audit engagement because fewer procedures are required.
Which service do you need?
Common reasons for obtaining the more costly audited financial statements include the company’s stock being publicly traded, requirements of outside parties (such as banks, bonding companies, creditors, absentee owners or a potential purchaser) and maintenance of more accurate historical records. Reviews and compilations are provided for the same reasons that are usually allowed when the potential risk to outside parties is relatively low.
What about agreed-upon procedures services?
In addition to the three general levels of financial statements service your CPA can provide, there are other types of special services that are hybrids of the three general services. In a separate service known as agreed-upon procedures, the client and the user agree with the CPA on the specific procedures that will be employed. The results of those procedures are summarized in a report rather than a full set of financial statements being supplied. This service may satisfy a creditor wishing to obtain assurance that the inventory and accounts receivable are accurately stated but not requiring assurance regarding the remainder of the company’s financial information. This solution may result in a more cost effective approach when a full set of financial statements is not required by the lender.
Each type of financial service should be considered before selecting the one which will provide the necessary information and assurance to both owners and outside parties at the most reasonable cost.
For more information contact Sonya Coates.