Join Rivero Gordimer & Company Assurance Team managers Patrick Goodwin, CPA and Matthew Saucier, CPA, as they provide an overview of audits, reviews, and compilations. They will explain the differences between these attest engagements, their processes, and the importance of preparing audit-ready financial statements. Patrick has been with the firm since 2016, focusing on nonprofit and governmental industries and clients in the rent-to-own industry. Matthew has been with Rivero Gordimer since 2020 and has considerable experience working with not-for-profit and commercial organizations.
Here are the key takeaways:
Understanding Audits, Reviews, and Compilations
Audits, reviews, and compilations are the three general financial statement services provided by CPAs critical to organizations that often engage in audits, reviews, and compilations to present their financial statements effectively. Each type of engagement offers different levels of assurance and involves various processes. This session provides an in-depth overview of these attest engagements and offers practical tips for preparing audit-ready financial statements.
Types of Attest Engagements
Audits: High Assurance, Detailed Examination
An audit is the most comprehensive type of financial statement examination. It provides reasonable assurance that financial statements are free from material misstatements due to fraud or error. Auditors gain an understanding of the entity, assess internal controls, and perform detailed testing of transactions and account balances. The result is an auditor’s report, which can be unmodified, qualified, adverse, or a disclaimer of opinion.
Key Terms in Audits:
- Reasonable Assurance: High, but not absolute, certainty that financial statements are accurate.
- Material Misstatements: Significant errors that could influence financial judgments.
Reviews: Limited Assurance through Analytical Procedures
Reviews provide limited assurance and are less detailed than audits. They rely on analytical procedures and management inquiries to identify any material modifications needed for financial statements to conform to generally accepted accounting principles (GAAP). Reviews do not involve understanding internal controls or detailed transaction testing.
Key Aspects of Reviews:
- Objective: Obtain limited assurance.
- Procedures: Analytical procedures and inquiries.
Compilations: No Assurance, Data Presentation
Compilations involve assisting management in presenting financial data in the form of financial statements without providing any assurance on the accuracy of the information. Auditors compile financial data prepared by the client and format it according to GAAP, but they do not verify the accuracy or completeness of the data.
Key Aspects of Compilations:
- Objective: Assist in presenting financial data.
- Assurance: None provided.
Preparing Audit-Ready Financial Statements
Ensuring that financial statements are audit-ready requires a thorough reconciliation of balance sheet accounts. This process enhances the accuracy, compliance, and reliability of financial reporting.
Steps for Balance Sheet Reconciliation:
- Bank and Investment Accounts: Reconcile monthly to ensure the accuracy of cash balances and expenses. Compare internal records with bank statements and external documents.
- Accounts Receivable: Match receivables to the ledger and review aging buckets to identify overdue payments. Implement the current expected credit loss (CECL) model for proactive allowance estimates.
- Inventory: Regularly evaluate purchases and sales, write off unused or damaged items, and ensure the accuracy of inventory balances.
- Prepaid Expenses: Capitalize large expenses and match them to appropriate periods. Maintain an internal spreadsheet to track monthly expenses.
- Property, Plant, and Equipment: Maintain a depreciation schedule, record additions and disposals accurately, and ensure compliance with capitalization thresholds.
- Liabilities: Review unpaid invoices, ensure proper cutoff procedures, and compare outstanding principal balances to lender statements.
- Equity: Reconcile retained earnings with prior year balances and ensure accurate recording of distributions and ownership changes.
Common Issues and Solutions:
- Timing Differences: Adjust for outstanding checks, deposits in transit, and late invoices.
- Data Entry Errors: Correct transpositions, duplicate postings, and incorrect amounts.
- Missing Transactions: Identify and record depreciation entries, accruals, and bank charges.
- Complex Transactions: Use reliable calculation methods for intercompany amounts, deferred revenue, and accrued expenses.
Conclusion
Understanding the differences between audits, reviews, and compilations is essential for effective financial reporting. Organizations can ensure accuracy, compliance, and strategic decision-making by engaging in the appropriate type of attest engagement and preparing audit-ready financial statements. Regular reconciliation and proactive management of financial data not only enhance transparency but also save time and resources during the audit process. Implement these practices to fortify your financial reporting and build confidence in your business operations.
Rivero Gordimer & Company has CPAs with experience in audits, reviews, and compilations in various industries. We are a full-service accounting and advisory firm based in Tampa Bay. From routine bookkeeping solutions to major business decisions, we work closely with you and your team to give you the service and information you need when you need it.
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