As a business owner not well-versed in the world of financial reporting, understanding the differences between audits, reviews, and compilations is crucial for businesses of all sizes. These services are provided by Certified Public Accountants (CPAs), like those at Demera Demera Cameron, and offer varying levels of assurance and serve different purposes. Understanding the differences between these financial services will help you determine which service best suits your business needs.
What is a Compilation?
A compilation involves the organization of financial data into a formal financial statement by a CPA without providing any assurance on the accuracy of the information or auditing services. The CPA compiles the data provided by the client into a structured, easily digestible format.
Process:
- Collection of financial data
- Presentation of standard financial statements
- No testing or verification
Compilation reports typically accompany financial statements to demonstrate that the financial statements are a representation of the company’s management and have not been reviewed or audited.
What is a Review?
A financial review is a limited examination of financial statements to better understand a business’s financial health by a CPA, providing limited assurance that the financial statements are free from inconsistencies and identifying potential areas for improvement. Unlike an audit, a review involves fewer procedures and is less extensive.
Process:
- Analytical procedures
- Inquiries of management
- Limited verification of data
Reviews are suitable for mid-sized businesses and are often required by lenders or investors.
What is an Audit?
An audit is a comprehensive examination of a company’s financial statements conducted by a CPA. The primary goal of an audit is to provide the highest level of assurance that the financial statements are accurate and comply with generally accepted accounting principles (GAAP). Unlike reviews or compilations, audits provide sufficient evidence to the business owner to allow the CPA to express an accurate opinion on if all financial statements are accurately and fairly stated.
Process:
- CPA requests a copy of business’s trial balance, general ledger, and schedules
- Detailed testing of financial records
- Verification of transactions and balances
- Examination of internal controls
Audits are typically required by law for public companies and are beneficial for large businesses or when high assurance is needed. However, audits are not designed to detect fraud; a forensic investigation would be necessary for that need.
Key Differences Between Audits, Reviews, and Compilations
- Level of Assurance:
- Audit: High assurance.
- Review: Limited assurance.
- Compilation: No assurance.
- Scope of Work:
- Audit: Extensive testing and verification.
- Review: Limited procedures and inquiries.
- Compilation: Data organization only.
- Cost and Time:
- Audit: Most expensive and time-consuming.
- Review: Less costly and time-consuming than an audit.
- Compilation: Least expensive and quickest.
How to Decide Which Service You Need
Choosing the right financial statement service depends on several factors, including the size of the business. For example, larger businesses may require audits, while smaller ones might only need compilations. Public companies are mandated to have audits. In other cases, investors and lenders might require reviews or audits. For smaller businesses, compilations are the most cost-effective option.
Practical Examples:
- Small business applying for a loan: Compilation
- Mid-sized business seeking investors or loans: Review
- Large business preparing for an initial public offering (IPO), large lines of credit, or long-term financing: Audit
Selecting the appropriate financial statement service is vital for ensuring the accuracy and reliability of your financial information. As a business owner, the last thing you want to worry about is finances, so you can put all your focus into your business.
If you are a business owner in Fresno and you are unsure of your financial needs, consult with Demera Demera Cameron and we’ll let you know if an audit, compilation, or review is right for you. In addition to these core services, DeMera DeMera Cameron also offers specialized services to Fresno and Clovis businesses, such as asset protection services, QuickBooks payroll services, and professional bookkeeping. Our comprehensive approach and deep understanding of the local business environment makes us a valuable partner for businesses seeking reliable financial guidance and support.
DeMera DeMera Cameron is a well-established accounting firm based in Fresno, California, with a rich history of serving the Central Valley for over 80 years. We offer a wide range of services with years of financial experience, including auditing, income tax planning, estate and succession planning, and more. Our team of experienced professionals and licensed CPAs, provide tailored solutions to meet the diverse needs of our clients.
Consult with a CPA at Demera Demera Cameron to determine the best option for your business and for personalized advice and services.
