There are three different reporting standards that CPAs use that reflect their underlying work performance standards. These performance standards allow us to express a level of assurance about the financial statements being prepared. Those three are:
|Performance Standard||Level of Assurance|
Financial statements are most frequently relied on by third parties (funding sources, governmental agencies, creditors, investors, potential buyers, etc.) who want to make a judgment about engaging in some form of business relationship with our clients, whether it be a loan, an acquisition, an endowment, etc., or in determining whether or not the business is in compliance with certain regulatory requirements.
The levels of assurance-none, limited and positive-relate to the fair presentation of financial statements in accordance with generally accepted accounting principles ("GAAP").
A compilation essentially gives no level of assurance. Compilations basically utilize management's records to prepare a set of formal financial statements in accordance with GAAP. Compilations are generally used for management purposes - so that upper-level management has at its disposal a set of compiled financial statements that illustrate the performance and financial position of the business as of a certain year-end date.
In performing a review, we apply our knowledge of our clients and industries served to develop certain expectations about the financial statements being reviewed. Through a careful analysis of ratios, relationships, and certain key figures, along with conversations with management, we ensure that the financial statements are presented in accordance with GAAP, and that all necessary material modifications have been made. Reviews do not provide positive assurance; however, that the financial statements are entirely free of material misstatement. Reviews are generally used for obtaining financing, business valuations, and for non-profit organizations that generate over $100,000 in annual gross receipts.
Audits involve in-depth analysis and thorough testing of the accounts and figures illustrated in the financial statements, as well as the business' internal control environment. The purpose of an audit is to express an opinion on the fairness of the presentation of the financial statements. Audits can provide a business a tremendous level of understanding of its financial structure, operating performance, susceptibility to fraud, internal control environment, and opportunities for improvement. Audits are required for all publicly-traded companies, as well as non-profit organizations that generate over $250,000 in annual gross receipts.