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An audit is the highest level of assurance that CPA’s can provide on an entity’s financial statements. In an audit we will gather evidence to provide assurance that the financial statements follow generally accepted accounting principles, or some other appropriate basis of accounting. The audit involves obtaining an understanding of an entity’s internal control, inspecting documents, observing assets, making inquiries within and outside the company, and other procedures.
There are various reasons for engaging a CPA to perform an audit. While all public companies are required to have an audit, many non-public companies will have an audit to satisfy bank loan covenants or franchise agreements. Non-profit entities often have an audit to comply with government or grantor agency requirements.
A review is substantially less extensive than an audit, but more involved than a compilation. A review provides limited assurance on the financial statements, and consists primarily of analytical procedures and various inquiries of company’s management. A review doesn’t require an evaluation of internal controls or verification from third parties.
The reasons for a review are similar to that of an audit. It will provide limited assurance from a CPA without the additional work and expense of an audit.
When we compile financial statements for a client there is no opinion provided on the statements. The financial statements remain the representation of management. We take information that is provided to us and combine that information with our knowledge of accounting principles to compile the statements.
While no assurance is given on a compilation, lending institutions often request compiled financial statements from a CPA as part of their lending covenants.
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