A Simple Guide for Business Owners
As a business owner or manager, you may find yourself in need of professional assistance with your company’s financial statements. When seeking help from Certified Public Accountants (CPAs) like HNG, you may come across terms like compilation, review, and audit. But what do these terms actually mean, and how do they differ?
In simple terms, these are different levels of service CPAs provide when helping businesses prepare or assess their financial statements. Each has its own level of involvement, cost, and level of assurance that the financial statements are accurate. Let’s break down each one so you can better understand which is right for your company.
A compilation engagement is the simplest and most affordable option for businesses. In this service, HNG will help organize and format your financial statements to ensure they follow the proper accounting guidelines. Typically, these would be the Generally Accepted Accounting Principles (GAAP), though other methods like tax basis can be used for validation or assurance. This type of financial presentation is generally best for internal usage or, in some cases, to support bank requirements.
However, it’s important to note that a compilation does not offer any assurance about the accuracy or completeness of the financial statements. Essentially, the CPA is helping to prepare the financial statements, but they are not verifying the information. Therefore, if you need a straightforward financial statement with no in-depth analysis, a compilation may be the right choice. This option is ideal for businesses that just need to present their financial position without seeking validation or assurance.
A review engagement goes beyond a compilation by providing limited assurance that your financial statements are accurate. In a review, HNG will examine your financial records using analytical procedures, and ask management specific questions. This process is designed to identity areas that could lead to financial statement elements that require adjustment.
The analytics and inquiries performed in a review engagement still fall well short of the requirements required in an audit. However, the limited assurance obtained in a review does exceed that of a compilation.
Like a compilation, reviewed financial statements can be GAAP, tax basis or cash basis and also include disclosures in the form of footnotes to the financial statements. This type of financial presentation is generally best for internal and limited external cases such as bank requirements, regulatory agencies, etc.
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An audit is the most comprehensive and detailed type of engagement. In an audit, HNG will examine the supporting evidence behind the numbers in your financial statements, such as invoices, contracts, and other relevant documents. This includes testing a sample of transactions to verify their accuracy. The CPA will also evaluate your company’s internal controls, policies, and overall risk of errors or fraud.
While audits are the most rigorous and involve in-depth testing, they do not cover every single transaction. An audit provides the highest level of assurance, meaning it’s the most trusted and reliable option if your business needs its financial health confirmed or is required to provide audited financial statements to investors, lenders, or regulatory agencies.
The best option depends on your company’s specific needs:
Careful thought should be given in determining which level of financial statement service you select.
Level of assurance, cost, internal & external factors should all be considered. Do not hesitate to talk to your accounting firm who can also shed light on your particular situation.
If you’re unsure which service is right for your business or need more details, HNG encourages you to reach out for a conversation. Our team is ready to help guide you through the process, answer your questions, and tailor a solution for your unique situation. Don’t hesitate to contact us to learn more!
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