SR Client Question: Do I need an audit? Or a compilation? Or a review?
To Audit or not to Audit…..
Just the word “audit” can cause business owners to shudder (or yawn). Use the words “compilation” or “review” and eyes glaze over. But knowing the difference between these important terms, and which kind your specific situation requires, can save your business thousands in accounting fees.
A company’s financial statements are a good snap shot of its financial condition but the need to have financial statements compiled, reviewed or audited is often misunderstood. The terms audit, review and compilation seem to get thrown together with financial statements as if they all have the same meaning–they do not.
Financial statements are used for various purposes such as to: obtain loans or comply with existing loan requirements, seek new investors, comply with government regulations, comply with board or operating agreement requirements, franchise regulations or management oversight, to name a few.
There are many reasons a business needs financial statements but the question becomes what level of “assurance”, if any, is required: An audit is a level of service where a CPA provides an opinion that financial statements are presented fairly in accordance with generally accepted accounting principles (GAAP), a review provides limited assurance as to GAAP and a compilation provides no assurance as to GAAP.
When speaking with a CPA, discuss your actual needs and the benefits of the level of service you will receive to make sure you are asking for and getting the level of service, if any, you really need. Don’t ask for an audit, which generally comes with higher fees, when a compilation or review will meet your needs. Check the written requirements of your loan, operating agreements or other documents on which you are basing your need for financial statements to make sure you ask for the services you really require. Remember to also consider near term future needs such as sourcing venture capital or loans which may require audited financial statements.
Meet with your CPA and discuss the uses of your financial statements to determine what level of assurance (audits and reviews) or non assurance (compilations) service you need for your financial statements.
Keep in mind the terms audit, review, and compilation are different terms indicating differing levels of service. As a business owner/manager/decision maker, be informed of the differences and whether you actually need an audit. Engage us for the services you actually need and which will be the most useful for your business.