The term ‘audit’ has a specific meaning in accounting terms. An audit of financial statements is an examination designed to provide the highest, but not absolute, level of assurance resulting in the publication of an independent opinion on whether or not those financial statements are relevant, accurate, complete, and fairly presented and that the information is free from material misstatement per Generally Accepted Accounting Principles (GAAP) or other accounting basis.
The purpose of an audit is to form a view on whether the information presented in the financial report, taken as a whole, reflects the financial position of the organization at a given date.
Financial audit involves, but not limited to, following procedures:
- Planning and risk assessment
- Internal control testing
- Substantive procedures
- Finalization including reporting
This audit service is not only provided to public companies but also to private companies, especially when they were requested to provide audited financial statements from financing facilities, vendors, government agencies. It is sometimes provided to facilitate the sale of business.
The objective of an engagement review is to provide the reviewer with a reasonable basis for expressing limited assurance on compiled financial statements. Therefore, a review is substantially less in scope than an audit. Reviewed Statements require that the CPA perform inquiry and analytical procedures in addition to the procedures required for compilation.
Reviewed financial statements are often prepared for entities that have bank loans, outside investors, trade creditors and/or to those third parties do not require audited statements.
Compiled Financial Statements represent the most basic level of service CPAs provide with respect to financial statements. In a compilation, the CPA must comply with certain basic requirements of professional standards, such as having a knowledge of the client’s industry and applicable accounting principles, having a clear understanding with the client as to the services to be provided, and reading the financial statements to determine whether there are any obvious departures from generally accepted accounting principles (or, in some cases, another comprehensive basis of accounting used by the entity). Upon completion, a report with no assurance is issued expressing that the statements are in conformity with generally accepted accounting principles.
Compiled financial statements are often prepared for management of entities without the ability to generate financial statements, thus, help them to review the result of operation and financial conditions. Compiled financial statements are also submitted to financing facilities.