“What is an audit?” If you polled passersby on the street, I’d bet many of their responses would be akin to “I don’t know what it is, but I know it’s bad”. And that, frankly, is a gross misconception. Audits, generally speaking, are a good thing. They are meant to provide individuals who lack a strong financial background with a means of investing or donating money with confidence. Assurance, people, that’s the name of the game. And when it comes to offering assurance on financial statements, there are three types of engagements: audits, reviews, and compilations.
Audits provide the highest level of assurance available with regard to financial statement presentation. In an audit, a CPA will perform tests of an organization’s financial records to determine that the amounts presented in the financial statements are free of material misstatement. The auditor will also inquire with management and third parties in an effort to validate the fairness of the financial statements. Now, there are two main points to keep in mind. The first is that auditors are providing ASsurance, not INsurance. They are not guaranteeing that the statements are 100% accurate; instead the goal is to gather evidence that indicates the statements fairly reflect the organization’s financial position. The second important thing to remember is the word “material”. An auditor’s primary concern is in regard to misstatements or omissions of fact that would influence a financial statement user’s decision. Infinitesimal errors generally will not sway a user’s decisions.
Next on the assurance hierarchy are reviews. A CPA conducting a review provides limited assurance to financial statement users. It is also referred to as negative assurance because the CPA “is not aware of any material modifications” that should be made to the financial statements. Much of the auditor’s work in conducting a review involves client inquiry and comparing financial information analytically against certain benchmarks, such as past performance. A CPA need not contact outside parties or perform substantive testing of the company’s financial records. Unlike an audit, a review does not express an opinion on the fairness of an organization’s financial information. A properly worded review report will clearly state that the CPA is not expressing an opinion on the financial information.
Compilations do not provide any assurance to financial statement users. This type of engagement merely involves a CPA assisting a client in presenting financial information in a method that is in accordance with a prescribed reporting framework, such as generally accepted accounting principles. A CPA engaged in a compilation has no responsibility to verify the client’s financial information unless some piece of information is obviously questionable. An appropriate compilation report will clearly state that the CPA is neither providing any assurance nor expressing an opinion on the financial statements.
So does all this mean that an audit is better than a review or compilation? Not necessarily. The appropriate engagement is determined by each client’s unique situation. Involving a CPA in the preparation of your financial information can help lend credibility to your statements and satisfy the requests of benefactors and investors. If you’re looking for a CPA to help determine what engagement is right for you, feel free to contact Spire Group to help with the process.