20 C O A S T A L G R O W E R | FA L L ’ 1 1

FINANCE

The Differences Between Compiled, Reviewed and Audited Financial StatementsB Y M I K E N O L A N , C P A , H A Y A S H I & W A Y L A N D A C C O U N T I N G & C O N S U L T I N G , L L P

W I T H C O N T R I B U T I O N S F R O M S H E A H A M I L T O N , C P A

Many business owners and managers know

that certified public accountants (CPAs) can

perform an audit and issue an audit report on

an organization’s financial statements. However, many are

not aware that CPAs can also provide two other levels of

service for unaudited financial statements: compilations

and reviews. The level of service provided by a CPA

typically reflects the needs of the client, and what the

client’s lenders, investors or creditors may require. With

all of the changes in the lending and credit markets over

the last few years, due in part to the 2008 financial crisis

and recession that followed, banks and other creditors

are analyzing financial statements more than in years

past. Many companies are being required to provide their

financial information to lenders and creditors with a

higher level of assurance. A company that was previously

only required to provide internal financial statements or

tax returns to lenders, may now be required to provide

financial statements that have been compiled, reviewed

or audited by an independent CPA. Such increased

requirements may also be necessary when companies are

looking to obtain additional financing or investment. Given

these changes it is important to understand the differences

between compilation, review and audit.

COMPILATION

A compilation represents the most basic level of service

that a CPA can provide with respect to a client’s financial

statements. The CPA assists management by presenting

financial information in the form of financial statements

without expressing any assurance that there are no

material modifications that should be made. CPAs are

not required to verify the numbers included in the

financial statements. However, if the CPA is aware that

the information supplied by the client for the financial

statements is incorrect or misleading, the CPA must

obtain new or revised information from the client. The

standards for compilation engagements require that the

CPA be knowledgeable about the industry in which the

organization operates and understand the nature of the

organization’s business. Additionally, the CPA must read

the organization’s financial statements to ensure the

form is appropriate and that they are free of any obvious

material errors.

REVIEW

During a review engagement, in addition to the

requirements previously mentioned for a compilation,

the CPA makes inquiries of management and performs

analytical procedures on the balances in the financial

statements. The review procedures provide a reasonable

basis for obtaining limited assurance for the users of the

financial statements that the accountant is not aware of

any material modifications that should be made to the

financial statements.

AUDIT

Audit engagements provide the highest level of assurance

on the financial statements. In an audit, the CPA

performs all of the steps indicated above for compiled

and reviewed financial statements, plus must also

Many companies are being required to provide

their financial information to lenders and creditors

with a higher level of assurance. A company that

was previously only required to provide internal

financial statements or tax returns to lenders,

may now be required to provide financial

statements that have been compiled, reviewed

or audited by an independent CPA.

21C O A S T A L G R O W E R | F A L L ’ 1 1

Since 1939, three

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family have been providing

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community. From farmland

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we stand by our reputation

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piinirealty.com

obtain an understanding of the company’s

internal control structure, evaluate its

effectiveness, and assess the risk of fraud.

The CPA must maintain an attitude of

professional skepticism throughout the

planning and completion of the audit

engagement. The CPA is also required to

substantiate the amounts and disclosures

included in the financial statements and

obtain various types of audit evidence

to reduce the risk that the financial

statements are materially misstated. The

audit evidence typically includes inquiries,

sending confirmations to third parties,

performing tests of accounting records,

physical inspection, and other procedures

deemed appropriate. At the conclusion of

the audit, the CPA provides an auditor’s

opinion that the financial statements present

fairly, in all material respects, the financial

position of the company and the results

of operations in conformity with generally

accepted accounting principles or another

comprehensive basis of accounting.

SUMMARY

There are multiple levels of service a CPA

can perform for an organization’s financial

statements. The costs associated with

these different engagements correlate with

the time it takes to perform the services.

Knowledge about these levels of service

will assist business owners and managers

in making more informed and cost-effective

decisions about the type of service their

organization may require. Understanding the

objectives and procedures a CPA is required

to perform, along with the reports that will

be issued and the assurance they provide,

helps shed light on the differences between

compilation, review, and audit engagements.

Consult with your CPA to determine, which

levels of service are appropriate for your

organization’s financial statements. CG