Financial Statement Service Levels

Did you know that auditors don’t just audit financial statements? In fact, there are a variety of financial statement service levels provided, including compilations, reviews, and of course, audits. While many Organizations are required to have an audit, as bylaws or their state Attorney General’s office may require it, some Organizations may find that a lower level of service is sufficient to meet the needs of interested parties. In order to make this decision, it is important to consult with a Certified Public Accountant (CPA) to gain an understanding of the differences between each level of service.

First, there is the highest of the financial statement service levels: an audit. This service involves an evaluation of internal controls, assessing risk of material misstatement and other various operating and industry conditions, establishing audit procedures to provide reasonable assurance that the financial statements are free from material misstatement and are presented fairly in accordance with generally accepted accounting principles (GAAP). In other words, this level of service provides the highest level of assurance. Audit procedures include but are not limited to: confirming balances with outside parties, testing transactions by tracing to supporting documentation, and performing inspections and observations. Generally, this service is the greatest in cost due to the in-depth testing performed.

The second level of service is a review. This service is more narrow in scope than an audit and typically includes inquiry of management personnel and analytical procedures only. While the goal is to ensure that the financial statements are in conformity with GAAP and that no material modifications are considered necessary, the results provide only limited assurance. The reason for this is that CPA’s are relying primarily on management responses to inquiries regarding significant or unusual variances or amounts in the financials.  Therefore, confirming or tracing to source documentation to verify balances is not included in this level of service. As one would expect, with less testing, the cost is also lower than an audit.

The third level of service is a compilation, which can almost be explained in its entirety by its name, as it involves a “compilation” of financial information into financial statement format that complies with GAAP. Unlike an audit and a review, which provide reasonable and limited assurance, respectively, a compilation provides no assurance that material modifications may exist. During a compilation engagement, no testing or analytical procedures are performed. This service is generally the lowest in cost.

In conclusion, the value of services is based on the needs of the Organization. Discussing these services with a CPA will help to determine the most appropriate level of service for the Organization based on needs and budget. Even if one of the services is not required, donors find comfort in contributing to Organizations that have had at least one of the services listed above.  Taking this step, or increasing service level may not just be a compliance move, but rather a testimony to future contributors that the Organization is transparent, and run effectively and efficiently.

For assistance determining the correct service level for your Organization, contact Daniel Owens, CPA, Audit Principal or JeanAnne Murphy, CPA, Audit Senior, at 651-483-4521.

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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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