Financial institutions, creditors, bonding companies and investors often need assurance that the financial statements accurately represent the true financial position of a company.
The users of your financial statements have different levels of risk tolerance. Small businesses are often asked to supply either compiled or reviewed financial statements.
Review - Limited Assurance
More involved than a compilation, a review engagement consists primarily of analytical procedures applied to the financial statements, and various inquiries made of your company's management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may need to be performed.
A review doesn't require study and evaluation of your company's internal controls or verification of data with third parties or the physical inspection of assets, such as you would encounter in an audit. Rather, a review report expresses limited assurance in the form of the statement: "I am 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.
Compilation - Lowest Level of Assurance
In compiling financial statements for a client, I present information that is the "representation of management" and expresses no opinion or assurance on the statements. Compilations don't require inquiries of management or analytical procedures. Instead, I rely on my 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.
