FSSummary

Almost every organization -- whether it's a privately held business, a publicly owned
corporation, or a nonprofit organization -- must prepare reports on its financial performance.
Such reports help owners and managers make operating decisions, enable creditors to
evaluate loan applications, and provide individuals with information to make investment
decisions.

The accounting profession recognizes that the different entities have different accounting
needs. Acknowledging these differences, the profession has developed standards that enable
CPAs to offer a range of financial statement services to private companies.

A CPA may provide a client with three distinct services involving financial statements. Each is
designed to meet a different need.

A Compilation is useful to small, privately held companies that need help in preparing their
financial statements.

A Review, on the other hand, may be adequate for entities that must report their financial
positions to third parties, such as creditors or regulatory agencies. Reviewed financial
statements may also be useful to business owners who are not actively involved in managing
their companies.

An Audit is the third and most extensive service. An audit is appropriate for businesses that
must offer a higher level of assurance to outside parties. An unqualified opinion from a CPA
after an audit provides reasonable assurance to outside parties that the entity's financial
statements fairly present its financial position and results of operation in accordance with
certain accounting principles.

Preparing financial statements based on information provided by the entity's management.

Through compilation services, a CPA prepares monthly, quarterly, or annual financial
statements. However, he or she offers no assurance as to whether material, significant,
changes are necessary for the statements to be in conformity with generally accepted
accounting principles -- the set of rules regarding financial accounting and reporting. During a
compilation, the data is simply arranged into conventional financial statement form. No probing
is conducted beneath the surface unless the CPA becomes aware that the data provided is in
error or is incomplete.

However, before agreeing to perform a compilation, a CPA will take a "common sense" look at
the organization's accounting system to decide whether the client needs other accounting
services, such as help in adjusting the accounting records.

Here's what a compilation entails:
The CPA becomes familiar with the accounting principles and practices common to the client's
industry, and acquires a general understanding of the client's transactions and how they are
recorded.

After compiling the financial statements, the CPA is obliged to read them and consider whether
they are appropriate in form and free from obvious material errors. The CPA then issues a
standard report that says, in effect, that the financial statements were compiled, but because
they are not audited or reviewed, no opinion is expressed.

Compilation standards permit an accountant to compile financial statements that omit footnote
disclosures required by generally accepted accounting principles. This is allowable as long as
the omission is clearly indicated in the report and there is no intent to mislead users. However,
when footnote disclosures have been left out, the CPA adds a third paragraph to the
compilation report stating that management has elected to omit disclosures normally required
by generally accepted accounting principles. This paragraph lets the user know that if the
financial statements contained this information, it might affect the user's conclusion.

A compilation is sufficient for many private companies. However, if a business need to provide
some degree of assurance to outside groups that its financial statements are reliable, it may
be necessary to engage a CPA to perform a review.

Inquiry and analytical procedures applied to financial statements.

A private company may engage a CPA to perform a review of its financial statements and
issue a report that provides limited assurance that material changes to the financial
statements are not necessary. With respect to reliability and assurance, a review falls
between a compilation, which provides no assurance, and the more extensive assurance of an
audit.

Before a review, the CPA may have to compile the financial statements; however, in all cases,
the financial statements are management's statements, not the CPA's. Management must
have a sufficient understanding of the financial statements to assume responsibility for them.

Two other factors differentiate a review from a compilation -- the CPA must remain
independent of the client during a review, and all appropriate disclosures must be included in
the reviewed statements.

Here's what a review entails:
The CPA obtains a working knowledge of the industry in which the entity operates and
acquires information on key aspects of the organization, including operating methods,
products and services, and material transactions with related parties.

The CPA will then make inquiries concerning such financial statement-related matters as
accounting principles and practices, record keeping practices, accounting policies, actions of
the board of directors, and changes in business activities. Then the CPA will apply analytical
procedures designed to identify unusual items or trends in the financial statements that may
need explanation. Essentially, a review is designed to see whether the financial statements
"make sense" without applying audit-type tests.

Keep in mind that during a review, a CPA does not confirm balances with banks or creditors,
observe inventory counting, or test selected transactions by examining supporting documents.
However, in many instances, a review -- with its limited assurance -- may be adequate for a
business or its creditors. If more assurance is necessary, the organization may need to
engage a CPA to perform an audit.

Includes such procedures as confirmation with outside parties, observation of inventories, and
testing selected transactions by examining supporting documents.

A public or private company may engage a CPA to audit its financial statements and to issue a
report that provides the highest level of assurance that the financial statements are presented
fairly in conformity with generally accepted accounting principles.

In an audit, as in a review, the CPA must be independent of the client and the financial
statements must contain all required disclosures.

Here's what an audit entails:
To gather evidence on the reliability of the financial statements, the CPA performs "search
and verification" procedures. In an audit, the CPA generally confirms balances with banks or
creditors, observes inventory counting, and tests selected transactions by examining
supporting documents. In addition, the CPA contacts sources outside the client organization
to gather information that may be more objective than that obtained from internal sources.
For example, the CPA usually obtains written confirmation from a client's customers about
amounts owed to the client at a specific date. By accumulating this type of evidence, the CPA
tries to reduce the risk that the financial statements will be materially misstated.

The auditor then issues a report stating that the financial statements are presented fairly, in
all material respects, in conformity with generally accepted accounting principles.

An audit is planned and performed with an attitude of professional skepticism; that is, the
auditor designs the audit to provide "reasonable assurance" that significant errors or fraud
are detected. However, irregularities or fraud concealed through forgery or collusion may not
be found because the auditor is not trained to catch forgeries, nor will customary audit
procedures detect all conspiracies.

An audit provides a reasonable level of assurance that the financial statements are free of
material errors and fraud. An audit does not, however, provide a guarantee of accuracy.