Audits, Reviews, and Compilations
Understanding what your business needs is imperative to verifying financial accuracy so owners and management can make informed decisions. This cognizance is what makes Kislay Shah CPA the best match for your business. There are three different ways that financial information can be presented to owners and shareholders – each with varying degrees of accuracy, reliance from management, internal controls, and the extent of work put into the presentation. The financial statements that are presented in accordance with accounting principles generally accepted in the United States of America (GAAP) is complying with codes established by Financial Accounting Standards Board (FASB).
Compilation
Compilation takes little preparation and can be performed by a CPA associated with the subject entity. It relies almost completely on information provided by management with little to no verification of the information so provided. Financial compilations do not test internal controls and hold the CPA marginally responsible for any inaccuracies. The Compiled financials maybe presented in accordance with GAAP. A CPA issuing a Compilation opinion is not required to be independent of subject entity.
Review
Reviewed financial statements are prepared by a CPA impartial to the subject entity with limited inquiries to test the information provided. The procedures performed in Review engagement typically entail inquiries and analytical procedures. Review provides negative (limited) assurance that show that no modifications are made. A Review financial statement is also presented in accordance with GAAP. A CPA issuing a Review opinion is required to be independent of the subject entity.
Audit
An audited presentation of financial information is the most extensive presentation and has to be performed by someone outside of the subject entity. The audit has the highest level of assurance and is the only presentation that tests the internal controls (e.g., segregation of duties) of the subject entity. The procedures performed in an Audit engagement typically entail corroboration of ending balances, examination of source documents, physical inspection, test of internal controls, and other procedures as needed. With an audit, a positive statement of compliance with GAAP can be provided. A CPA conducting an Audit is required to be independent of the subject entity.
Types of Auditor’s Opinion
Under FASB codes an auditor may issue four types of opinions:
- An unqualified opinion
- Qualified Opinion
- Disclaimer of Opinion
- Adverse Opinion
Unqualified Opinion
An unqualified opinion indicates that an auditor provides reasonable assurance that the subject entity’s financial statements are fairly stated in all material respects and are presented in accordance with GAAP. The opinion letter further indicates that their audit was performed in accordance with auditing standards generally accepted in the United States of America (GAAS). The opinion also indicates management responsibility in evaluating the subject entity’s ability to continue as a going concern for one year after the date the financial statements are issued.
Qualified Opinion
A qualified opinion is issued when an auditor is not reasonably assured in all material respect with the subject entity’s specific transaction(s), process(es) including certain internal control(s) relevant to the audit, or uncertain of accounting principles used and disclosure(s) made in the financial statements. As such, the auditor is not reasonably assured that financial statements are issued in accordance with the GAAP and are fair stated in all material respect. A qualified opinion letter is written similar to the unqualified opinion except that it indicates the reasons for the qualification. Management and readers of the qualified financial statement must pay attention and understand the reasons and implications of such qualification
Disclaimer of Opinion
A disclaimer of opinion is issued when an auditor is unable to conduct their audit procedures (are limited in their scope) or unable to obtain sufficient explanations to their questions or obtain sufficient support for the subject entity’s transactions or in their opinion certain presentation of the financial statements are not in accordance with GAAP. Management and readers of the disclaimed financial statement must pay attention and understand the reasons and implications of such disclaimer of opinion.
Adverse Opinion
An auditor issues an adverse opinion when they believe the financial statements contain high levels of material misstatements or have irregularities or have significant potential for fraud or are presented in manner that would be materially misleading to the users of the financial statements. Management and readers of the adverse financial statement must pay attention and understand the reasons and implications of such adverse opinion.
Additional Matter to an Auditor’s Opinion
In addition to the four types of auditor’s opinion discussed above an auditor’s opinion letter may contain certain additional matter of which two important inclusions are described below:
Emphasis of Matter
An auditor may include an emphasis of matter in their opinion letter which is not considered a qualification. Such emphasis of matter is included in the auditor’s report that draws attention to a matter presented or disclosed in the financial statements which the auditor considers important to users’ understanding of the financial statements.
Supplementary Information
Supplementary information is defined as information presented outside the basic financial statements, excluding required supplementary information, which is not considered necessary for financial statements to be fairly presented in accordance GAAP. However, such disclosures maybe a standard practice in an industry such a Common Interest Realty Association (Co-op and Condominium). An auditor’s report on supplementary information can be included in a separate paragraph in the auditor’s opinion letter or in a separate report if supplementary information is presented separately. Auditor’s supplementary report must also indicate that the financial statements as whole were audited, and that audit procedures were performed on the supplementary information presented. In addition, the paragraph or the separate report will contain an audit’s opinion on the supplementary information.
How They Compare
At the core, each presentation of financial information has varying levels of work performed. The more work that is put into the financial information and its presentation, the higher the level of assurance, and testing of internal controls and the lower the sole dependence on management furnished information. An audit is the most involving and preferred presentation followed by a review and last, a compilation. Kislay Shah CPA understands the differences and importance of each disposition so that information is provided in the format that is needed to best suit your needs. Feel free to contact us at kislay@shahcpaus.com or call at 646-328-1326 with further questions.