Tax Audits, Reviews, and Compilations
Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company. Your stockholders, creditors, or private investors have different levels of risk tolerance, so we provide three levels of assurance to meet your needs.
Audit – Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review—and objective examination—of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice. We review internal controls, test selected transactions, and verify information with third parties. Based on our findings, we issue a report which affirms if the financial statements are fairly stated and free of material misstatements.
You get the highest level of assurance because we go outside your company to obtain more information. Typically, we’ll have written communication with:
- Your customers, to check outstanding receivable balances,
- Your banks, to confirm cash or debt balances and terms,
- Your vendors, to verify outstanding payable balances,
- Your attorneys, for information on pending or threatened legal action.
We also perform physical inspections by observing your inventory counting methods and complete our own test counts. We document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. Our audit work papers include a detailed program to document the examinations and testing performed, as well as the client’s supporting work papers.
Review – Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures we apply to the financial statements and various inquiries about your company’s management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, we may need to perform additional procedures.
A review doesn’t require us to study and evaluate your company’s internal controls or verify data with third parties or physically inspect assets. Instead, a review report expresses limited assurance in the form of the statement “We are not aware of any material modifications” for the financial statements to be in conformity with the Generally Accepted Accounting Principles (GAAP). Reviewed financial statements must include all required footnotes and other disclosures.
Why might a business request a review engagement? It is a good middle ground, providing the advantages of a CPA’s technical expertise without the work and expense of an audit.
Compilation – Lowest Level of Assurance
In compiling financial statements for a client, we present information that is the “representation of management” and express no opinion or assurance on the statements. Compilations don’t require inquiries of management or analytical procedures. Instead, we rely on our knowledge of accounting principles and a general understanding of your business. Banks often require compilations from an independent CPA as part of their lending covenants.
Which Report Should You Use?
Each type of financial statement report may suit specific circumstances, depending on requirements from your client’s bank or other parties, as well as meet budgetary needs.