Financial Statements Explained: Compilation, Review, and Audit

At many points in operating a business it will be necessary to compile various financial statements. For large purchases and loans, lenders require proof of financial viability to process the transactions. Providing them with accurate, thorough reports increases the chance of financing requests being approved, helping your business to thrive and grow.

To choose the right level of scrutiny for your financial reports, you’ll need to get help from an auditor or a certified public accountant (CPA). There are three levels of financial reporting for your business: a brief compilation report, a basic review, or the most thorough, an audit


The Basics: Compilation

The simplest financial statement is a compilation. Your CPA will perform a basic check of your financial statements and prove to potential lenders that you have an association with a professional CPA. As this does not involve a deep analysis of the statements, a compilation doesn’t require extensive records to be submitted by the business. A completed compilation is the cover page submitted by the CPA, outlining the financial records that you compile for a potential lender.


More Thorough: Review

To secure a line of credit or small business loan, a lender may request a review by a CPA. A review provides limited assurance on the business’ financial statements. Essentially, the CPA (auditor) performing the review vouches that your provided financial statements are free from any material misstatements and determine if they meet generally accepted accounting principles.

While more thorough than a compilation, and review is not as extensive as an audit, therefore, it is generally employed in instances where a lender does not have a lot at stake.

The accounting professional performing the review will review and provide assurances as to the following accounting practices and principles used by the business:

· Procedures for recording and accumulating financial information.

· Written representations from management regarding the accuracy of all information given to the CPA.

· Receipt of all relevant information by the CPA.

· Management’s responsibility for internal control.

· Management’s responsibility to prevent and detect fraud.

· Knowledge of fraud.

· Information related to any significant subsequent events.

· Analytical procedures regarding comparisons.


Most Detailed: Audit

An audit is the most thorough of the accounting reports and requires a much deeper and detailed exploration of a business’ financial reports and practices. A detailed audit may be required for larger credit, equity, and financial transactions. Additionally, publicly traded companies are required to have their financial statements audited and reported to the SEC on a quarterly and annual basis.

In an audit, an expert CPA is required to obtain concrete evidence through inquiry with appropriate personnel, physical inspection, verification, and thorough testing procedures. A CPA or auditor also will examine supporting or source documents, send third-party confirmations to confirm the balances and legal matters, and perform analytical and other procedures. A completed audit ensures your financial statements are free from material error or fraud.

Depending on a company’s individual requirements, compilations, reviews, and audits may be a necessary part of conducting business. It is important that the CPA providing these services can not only recommend the appropriate level of inquiry into financial reports but has the expertise and reputation to perform the required inquiry. Please contact us for your financial reporting and accounting needs.