There are different types of financial statements that your business may need.
- Prepared financial statements
- Compiled financial statements
- Reviewed financial statements
- Audited financial statements
Which type is right for your business and where do you start? Let’s take a closer look at each one in more detail.
Prepared Financial Statements
The first, and simplest type of financial statement is the Prepared Financial Statement. This is a service that provides you with up-to-date information about the financial health of your business, allowing you to make informed decisions.
This service is similar to what an in-house controller or CFO would offer to management in a larger company. Your certified public accountant (CPA) will prepare the financial statements based on the records you provide.
Although a CPA can assist in the preparation of your financial statements, it’s important to note that they will not verify the accuracy or completeness of the information provided. As a result, they will not issue a formal report on the financial statements.
If you choose to share your financial statements with external parties, your CPA will need to include a notice on each page of the statements stating that no assurance is provided.
Compiled Financial Statements
A compiled financial statement helps you better understand your business’s financial position, and it can also be shared with external parties like investors, lenders, or suppliers. In this service, the role of the CPA is more apparent to those parties, and the requirements for performing this service are more explicit.
If the CPA has any relationship with you or your business’s ownership or management that could affect their independence then the CPA must disclose any lack of independence in the compilation report, which is the first page before the financial statements and is written on the CPA’s firm’s letterhead.
The CPA must read the financial statements and ensure that they:
- comply with the applicable financial reporting framework,
- are in the correct format,
- and have no obvious material errors.
However, the CPA is not accountable for ensuring the accuracy or entirety of the data given or collecting proof to provide an audit opinion or review conclusion, as they are not obligated to do so.
The compiled financial statement report explicitly states that the CPA did not audit or review the financial statements. The report does not offer any opinion, conclusion, or assurance on the financial statements. But, having a compilation report from a CPA can be valuable for you when seeking financing or credit or when significant collateral is in place.
Reviewed Financial Statements
Reviewed financial statements involve an independent CPA performing analytical procedures, inquiries, and other procedures to obtain “limited assurance” on the accuracy of your financial statements. The main objective of this service is to provide the company with a level of comfort regarding the accuracy of their financial statements.
The CPA is required to assess their independence in a review engagement, just like in a compilation. If the CPA determines that they are not independent, they are not allowed to perform the review engagement.
During a review engagement, the CPA will obtain an understanding of the industry in which your business operates, including the accounting principles and practices that are commonly used in that industry.
The CPA will also gain knowledge about your business and accounting principles to identify areas where material misstatements are more likely to arise. However, a review engagement provides limited assurance and does not include the same level of testing and verification as an audit engagement.
And unlike an audit, this type of financial statement does not involve assessing fraud risk, testing accounting records, or examining source documents. Instead, the review is substantially narrower in scope.
During a review engagement, the CPA will prepare and issue a formal report that includes a conclusion regarding whether any significant changes are needed to make the financial statements comply with the relevant financial reporting framework.
Reviewed financial statements are typically appropriate as a business grows and seeks larger levels of financing and credit or when the business owner seeks greater confidence in their financial statements to make key business decisions.
Audited Financial Statements
During an audit engagement a CPA provides the highest level of assurance which aims to give you greater confidence in the accuracy of your financial statements. The CPA performs procedures to obtain “reasonable assurance” that the financial statements are free from significant errors. As part of this, the CPA needs to understand your business’s internal control and assess the risk of fraud.
In preparing this type of financial statement they will corroborate the amounts and disclosures in your statements by obtaining audit evidence through:
- Inquiry
- Physical inspection
- Observation
- Third-party confirmations
- Examination
- Analytical procedures
- Other processes
The CPA must determine whether their independence has been impaired and, like a compiled financial statement and reviewed financial statement, cannot perform the audit engagement if their independence has been compromised. The CPA will provide a formal report that gives an opinion on whether your financial statements are presented accurately and fairly based on the relevant financial reporting standards.
As part of the audit engagement, the CPA is required to identify and report any significant or material weaknesses in your business’s system of internal control. This means that if the CPA discovers any issues or vulnerabilities that could potentially impact the accuracy of your financial statements.
An audit is typically required when seeking high levels of financing and credit, when seeking outside investors, or when preparing to sell or merge with another business. By becoming aware of internal control weaknesses and discussing these with your CPA, you may be able to improve your business practices.
Comparison Table
Comparing the different types of financial statements.
Prepared Financial Statements | Compiled Financial Statements | Reviewed Financial Statements | Audited Financial Statements | |
Level of CPA Assurance | None | None | Limited | Reasonable (defined as high, but not absolute) |
Objective | Prepare financial statements | Assist management in presentation | Report on material modifications | Express opinion on fairness |
CPA Independence | No | No (indicate if applicable) | Yes | Yes |
CPA Requirements | None | None | Inquiry and analytical procedures | Verification, substantiation, understanding of internal control and fraud risk |
Formal Report | No | Yes | Yes | Yes |
Appropriate Situations | Business owner’s own use or share with third parties | Initial or lower amounts of financing or credit with significant collateral | Seeking larger and more complex levels of financing or business owners seeking greater confidence | Seeking complex or high levels of financing, outside investors, selling or merging the business |
Cost Differences | Varies | Least time consuming with a formal report | More time consuming than a compilation, but less than an audit | Most work and most CPA time involved |
The type of financial statement your company needs depends on what those statements will be used for. With over 15 years of experience in financial statement preparation, we can assist you with CPA compiled financial statements and CPA review statements.
Contact us for a free consultation about these services.
