Many times we have been contacted by clients and potential clients inquiring about our firm performing an audit for them, and more importantly, what will it cost? Some of the first questions we ask are “who is asking for it” and “do you think you really need an audit”?
The answer depends on who will be using the financial statements and the needs of the creditors, investors or agencies. The major difference in the three types of financial statements is the assurance level. In all three levels, the reporting entity is primarily responsible for the financial statements.
The most basic level of service with respect to financial statements is the compiled financial statements. The CPA makes certain that the data received from the client are in the correct format and free of clerical errors. A report on the compiled financial statements is issued that states no assurance is expressed as to whether changes are necessary to be in conformity with generally accepted accounting principles.
The next level is the reviewed financial statements. In addition to evaluation of the format presentation of the data, the CPA is required to make inquiries of management, apply analytical procedures and obtain representations from management. The additional requirements allow the CPA to express limited assurance that he is not aware of any material modifications that should be made to the financial statements to be in conformity with generally accepted accounting principles.
The highest level of assurance is expressed on audited financial statements. Procedures in an audit include confirmation with outside parties, observation of inventories, and testing of selected transactions by examining supporting documents. Even though an audit is the CPA’s highest level of assurance that financial statements are free from material errors and fraud, it does not provide a guarantee of absolute assurance.
The costs involved for preparation of financial statement increases as the expression of assurance level on them increases. Governmental agencies may require from a small entity, say under $100,000 net worth, reviewed financial statements to apply for certain licenses. The cost for such a financial statement seems disproportionate as to the value of the entity. Make sure you know which one of the financial statements you really need because the cost difference can be astounding.