Not All Financial Statements Are The Same - Compilations, Reviews & Audits
By Nizam Shajani, CPA, CA, MBA, Partner & Olena Kravchenko, CPA, CGA
Year-end financial reporting can take various forms and the report at the beginning of those statements is telling. A complete set of financial statements normally include a balance sheet, an income statement, a statement of cash flow and explanatory notes. However this is not the case for all year end reporting.
Financial statements provide information about the financial position, performance and changes in financial position of the enterprise to a wide range of users, such as shareholders, prospective investors, suppliers, customers, banks, and the government and are used for decision-making purposes. As such, a detailed set of financial statements can be useful however may not be necessary. Both the users of those statements and value for producing those statements should be considered.
Different users require different level of assurance. Assurance is a declaration by the accountant and intended to provide a degree of confidence in the financial statements. This can range from no assurance to one that is free of material misstatement.
The objective of a compilation engagement is to take information provided by the management of an entity and prepare financial statements that are arithmetically correct and are not false or misleading in the opinion of management. No assurance is provided on this type of engagement and no opinion on reliability of the compiled information provided.
Each page of compiled financial statement has a “Notice to Readers” heading which indicates that no audit or review engagement was performed and that information presented may not be useful for the reader’s purposes. Although an accountant express no opinion on these statements – a prudent accountant should be able to help you find constructive solutions for maximizing profitability, efficiencies and meeting you goals. However, the words “Notice to Readers” should indicate the statements were compiled by a professional accountant.
The objective of a review engagement is to assess whether information covered by the review engagement report and presented on financial statements is plausible within the framework of accepted reporting criteria. Review procedures consist of inquiry, discussion and analytical procedures and provide a moderate level of assurance that reviewed financial statements are free of material misstatement. This assurance can only be provided by a designated accountant that has completed the comprehensive endeavour to provide this opinion.
Review engagements are an opinion from independent evaluators of the financial statements. These financial statements require a more detailed analysis and inquiries of the information that had been compiled. The benefit of a review engagement is the added level of assurance on the financial statements and may be requested by lenders, investors and management if significant decisions are being based on the financial statements.
An audited set of financial statements will consider the above and test on a sample basis the source documents for the information included in the financial statements. This will include an accountants’ highest level of opinion and therefore includes a fair deal of examination, including documentation of the processes within the organization being audited. The benefit of an audited set of financial statements is the added level of assurance and may be requested by lenders and investors if significant decisions are being based on the financial statements or the number of users warrants one.
This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.