05 Jan Audits, Reviews, Compilations, or Preparations – what type of service does my small business need?
Audits, reviews, compilations, and preparation services provide different levels of transparency for financial reporting. Each results in a final product of financial statements but vary widely in cost and levels of assurance provided by the CPA. Choosing which level is needed includes understanding them in terms of cost and benefit compared to the expectations and needs of the end user.
Audits provide the highest level of assurance. An audit report is issued stating the financial statements are free of material misstatements. A CPA will perform tests including confirmations with banks and customers, examination of invoices and receipts for sales and purchases, and inquiries of company personnel. Due to the scope of work and the risk assumed by the CPA, the audit costs more than other services.
Reviews provide limited assurance and cost less than an audit. A limited-assurance review report is issued by the CPA. Tests performed by the CPA include inquiries of company personnel and analytic predictive tests.
Compilation services include assembling accounting information and formatting it to comply with reporting standards. A compilation report providing no assurance is issued to show the CPA was associated with the financial statements. The cost is less than a review, and the CPA performs no tests.
Preparation services are an accumulation of information from management. The CPA does not issue a report, no assurance is provided, and no tests are performed. This service costs the company the least.
Financial statements are considered the best way to evaluate business performance and debt paying ability by most bankers, venture capitalists, and private investors. If your small business expects to need these funding sources, carefully consider the cost and benefit for each compared to what is needed to fulfill business goals.