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Your company’s financial statements provide critical financial information about the company’s financial performance.
If you operate in the commercial sector, investors and suppliers will want to use the information from your financial statements to evaluate your company’s viability before they invest more funds or provide additional supplies.
If your company is a nonprofit or governmental agency, citizens and donors will request information to evaluate your entities’ use of public funds and grants.
As an independent third party, your CPAs will provide the assurance to these stakeholders about the reliability of your financial statements. Since different situations call for different levels of assurance your CPA can provide three types of financial statement services, each with varying levels of assurance:
- Financial statement audits
- Financial statement reviews
- Financial statement compilations
The difference in the levels of assurance:
- The audit provides the highest levels of assurance. In an audit, your CPA obtains sufficient information to express reasonable assurance on the fairness of presentation of your financial statements. The auditor will pull source documents, send confirmations on cash and debt balances, walk through your internal controls, etc.
- During a review engagement, your CPA will collect and evaluate less evidence than during an audit. Therefore, the level of assurance is lower. In a review engagement, your CPA will offer you limited assurance about the reliability of your financial statements. This means your CPA is not aware of any material modifications that should be made to your company’s financial statements. In a review, your CPA will take more of an analytical approach to the numbers.
- As part of a compilation engagement, your CPA will prepare your financial statements. Any evidence your CPA obtains as a result, will be incidental. The CPA is purely pulling the information from your trial balance and is properly formatting it into a financial statement.
The different levels of assurance should not be confused with different levels of competency required to provide these services. Although compilations and reviews are significantly different in scope from an audit, the level of expertise required to perform compilation and review engagements is equally important.