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How Much Assurance Do You Need?
– June 30, 2009
That's a pretty loaded question in this economy. Many small businesses must weigh the costs and benefits each year of a compilation, review, or audit and determine which one, if any, best fits their needs. The following paragraphs summarize the key aspects of each service as well as the levels of assurance provided by each.
Compilation
As the name implies, a compilation is a service that essentially "compiles" the information provided by the client into a standard financial statement format. In this type of service, a CPA is expected to read the financial statements and determine they are in an appropriate format and there are no obvious material errors. A company may request the financial statements to be issued with or without the accompanying notes required by generally accepted accounting standards.
No opinion is issued on the financial statements; therefore an accounting firm is not required to be independent to provide compilation services. Compilation services can be provided on an annual, quarterly, or even monthly basis depending on the needs of the client.
Review
Another assurance service offered to clients is a review of the financial statements. A review provides limited assurance, also known as negative assurance, of the financial statements. It is a great option for small businesses that cannot afford an audit but would still like an outside party to examine their financial statements.
An accounting firm will issue an opinion on the financial statements at the close of the engagement based upon the test work performed. In a review, a CPA typically performs an analytical review of the data along with inquiries of personnel to form their opinion. In order to perform a review, the CPA firm must be independent in fact and appearance with respect to the organization under review. Both a compilation and a review engagement are subject to the Statements on Standards for Accounting and Review Services (SSARS) issued by the AICPA.
Review services are typically performed on either an annual or quarterly basis depending on the needs of the client.
Audit
An audit is the most extensive of the three services offered and is typically provided on an annual basis. As with a review, a CPA must be independent in fact and appearance with respect to the organization to issue an opinion on the audit. An audit is performed to provide reasonable assurance that the financial statements are free from material errors, including those that arise from fraud.
During an audit, an accountant is expected to examine supporting evidence, on a test basis, that will allow them to be reasonably confident that the figures listed on the financial statements are materially complete and accurate. In addition, a CPA is also required to gain an understanding of the internal controls and assess the fraud risk of the company to determine the extent of testing needed to gain reasonable assurance. An audit does not provide absolute assurance as it would not be cost effective to test all transactions that occur during the year.
An audit is the highest level of assurance available and is subject to the regulations provided by Generally Accepted Auditing Standards (GAAS) and other official statements that explain and interpret these regulations.
Lauren Hannon
Audit Department
318.429.2055
lhannon@hmvcpa.com
Lauren Hannon is a member of the audit department at Heard, McElroy & Vestal. Lauren is a graduate of Louisiana Tech University in Ruston, LA where she received her Master of Accountancy (MPA).
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