Bob Gauvreau breaks down three financial reporting options: audits give the highest assurance and are usually bank-required, review engagements include analytical work and are common for borrowers, and compilations are the cheapest with minimal disclosure.
Okay, so you've got a business and you want to understand the differences in financial reporting options. We've all heard the word audit before, and unless it's a government backed audit, it's actually a good thing. So an audit essentially allows an external company, like a CPA firm to come in and do a more thorough review over your processes or systems, validating that there's enough control in place to ensure that your numbers that are being reported are accurate and reliable. Now, audits aren't very common and typically the banks are the only ones that require an audit to take place. And normally we can argue to them to drop it down a level to a review engagement. Now, with an audit, there's extensive work that goes into it, they're more expensive, and you're getting a higher level of assurance that your information included is accurate. Now, a review engagement, for example, is the next step down, way more common, especially in higher level businesses that have borrowing with the banks. The banks will typically ask if you get over a certain level of borrowing that you go up to a review engagement. A review engagement means there is more analytical review over the numbers and assessment and queries into how those numbers come together. But it's not an audit. We're not going into the extent looking at systems validating individual transactions. It's more inquiry, discussion and analytical procedures. Now, the financial statements that get reported are almost identical to that of an audit with a different reporting letter. One says audit, one says review engagement. But the financial statements that you're getting with a review engagement are the exact same as far as disclosures go and the requirements according to the accounting standards. So with a review engagement and an audit, you're getting a more beefed up financial statement package that outlines some key measurements and essentially accounting rules and principles that you're following so that it clearly outlines the financial rules that the business is playing for anybody who's using them. The last step is a compilation engagement. Now, a compilation engagement is a much more simplified practice for financial statement preparation. So a lot of times in here there aren't even note disclosures on the back end of a compilation agreement. So way different than a review that requires you to follow accounting standards. A compilation engagement says you don't have to put in the same sorts of disclosures and detail in the financial statements. Now, with a compilation engagement, at least with my firm and my team, we like to put in a few notes that talk about the policies and we typically put any debt and we put any capital assets on there because those are the major items that hit the financial statements again, the level of detail in those financial statements is going to be a little bit less than a review engagement. And a review engagement is going to look the exact same as an audit. So if you are looking for different levels of data and detail in your financial statements, a review engagement is going to be the enhanced one you would choose. And if you're not so concerned about it, a compilation engagement is what you should go with.
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