CPA's are required by law and regulation to very specifically define the extent to which they are associated with any financial information that a firm may have participated in developing. Essentially the data and form being reported is the client's and and the degree of assurance on the fairness of the data and its form and the extent to which it complies with generally accepted or other accounting principles is the CPA's. The CPA typically expresses its assurance in one of three levels; audit, review or compilation.
In compiling financial statements for a client, information that is the "representation of management" is presented and the CPA report expresses no opinion or assurance on the statements. Compilations don't require extensive inquiries of management or analytical procedures. Essentially the CPA takes data which you represent to be accurate and puts it in the form of financial statements. Compilations can be prepared without including the notes and disclosures ordinarily included with financial statements. They may also be prepared on a basis other than generally accepted accounting principles such as the basis on which your tax return is prepared.
Review-The middle level-"limited assurance"
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures applied to financial statements, and various inquiries made of a company's management team. If the financial statements or supporting information appear inconsistent with management's responses or the results of analysis additional procedures may be required.
A review doesn't require a study and evaluation of your company's internal controls, a verification of data with third parties or physical inspection of assets as an audit would. Rather, a review report expresses limited assurance in the form of the statement: "We are 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
Audit - Highest Level of Assurance
An audit provides the highest level of financial statement assurance and is typically required by a third party such as a governmental body or financial institution. Audits are expensive and in our market are generally required only for a few of the areas largest organizations. There is a very limited market for audits locally and the skill set employed in auditing is decidedly different than the more proactive and constructive services we choose to offer. Should you need audit services, we would be glad to liaise for you with firms which choose to practice in this specialty area and we can be a very cost effective bridge with your audit firm.
Which Level Should You Use?
The users (banks, etc.) of your organization's financial statements generally will seek as much assurance as you are willing and able to provide (pay for). On the other hand if you have no compelling need for CPA Firm assurance on your financials and your financial house is "in order" buying more assurance than you might otherwise need is an expense with no benefit. So in a strictly economic sense the level of assurance you will generally seek is the lowest level which your statement users will accept. Of course the higher the level of assurance attained the greater the likelihood the CPA will identify material problems in the financial affairs of your organization, if they exist. That is to say there can be significant benefits realized by increasing the level of assurance above the minimum your users seek. In addition, if you expect to attempt to sell your business or a segment of it the existence of multiple year financial statements with some form of assurance issued on them will be beneficial. We would be glad to discuss these alternatives with you.