Compilations, Reviews and Audits2017-06-16T13:04:20+00:00

Compilations, Reviews and Audits

Levels of Financial Analysis

Compilations, Reviews and Audits

When it comes to accounting reports, one size does not fit all.

The statements representing the financial health of an organization have different purposes. The stakeholders evaluating the operations of the organization have varying levels of risk tolerance and therefore require different levels of review.

The accounting industry has therefore developed three different levels of evaluation based on the testing and analysis of the underlying transactions required by each.

These are Compilations, Reviews and Audits.

This is a comparison of the levels of evaluation and what each does and does not do.

Compilation

An Internal Tool

The lowest level of analysis takes place with a compilation. This action gathers the data from the organizations books and creates financial statements. It trusts the word of management that all transactions are accurate and complete without further analysis. It may have been created by software or a bookkeeper but has not been analyzed by a CPA. These statements are generally used internally to monitor and control the operations of the business, but are rarely accepted by lenders or investors, as there is no assurance that the information is an accurate representation of the operations financial health.

Despite how simple and promising the leading online tax prep software seems, it will never replace live person-to-person tax preparation and planning, accounting and a tax pro’s hands-on wisdom. Also, most online or boxed software entails extra filing fees. Why not give this fee to a tax pro in exchange for a larger return?

Review

Provides Limited Assurance

A review by a tax professional involves limited evaluation of financial position based on a minimal investigation into procedures, response to specific questions or concerns, and comparison to similar organizations. The a tax professional may recommend changes to procedures to make the books align better with Generally Accepted Accounting Principles. Since the scope of the review is not in great depth, the result is known as “limited assurance”, meaning the tax professional did not notice anything seriously wrong with the financial reports.

Audit

Broadest Scope of Analysis

The greatest level of investigation comes with a full audit. In this case, the tax professional provides a critical review of management, provides independent verification of financial data selected randomly, and offers the professional opinion of thetax professional that the financial statements provide an accurate picture of the operations and financial health of the organization. This type of analysis is considered the “highest level of assurance” of the reliability of the documents. An audit may recommend operational changes to enhance controls. With the increasing demand for accountability of non-profit organizations, financial backers often require this level of analysis when at one time they may have been satisfied by a review. Shareholders in profit making corporations will most certainly require this level of analysis to assure them that the published information is credible.

Which Is Best For You?

There are two determining factors to consider when arranging for CPA evaluation of an organization’s books:

  • Need and budgetary concerns. One level may lead to another at a later date. For example, a company at its onset may wish to consult with a CPA after the first few months of business to make certain that it is on the right track and has the proper levels of controls in place.
  • That initial compilation or review may lead to an audit when the company chooses to seek investors or lenders.

Public corporations are required to undergo an annual audit. Non-profits may need an audit to assure contributors that their donations are well managed.

Our professionals are happy to help you determine the level of assistance you need in a consultation. Please don’t hesitate to give us a call so that we can discuss your needs.

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