When a business retains a certified public accounting firm to assist with the preparation of its financial statements, the level of service will be determined and documented in an engagement letter signed by the client and the firm.
The three levels of financial statement service are generally referred to as either a compilation, a review, or an audit.
Compilation and review engagements are conducted under Statements on Standards for Accounting and Review Services (SSARSs) which are issued by the AICPA Accounting and Review Services Committee.
What is a Compilation?
A compilation is the lowest level of service your certified public accountant (CPA) can provide. Compiling financial statements includes obtaining a general understanding of your business and bookkeeping system. The CPA will provide assistance so that the entity's financial statements are in an accepted format. When performing compilation services, your CPA expresses no assurance about the accuracy of the numbers presented. The compilation report that accompanies your financial statements will emphasize this point.
Independence is not required of your CPA in order to provide compilation services. However, a CPA is required to be independent to provide review or audit services.
Compiled financial statements can omit footnotes and any informational statements generally required to present the financial condition or results of operations of the entity.
What is a review?
An engagement for reviewed financial statements is appropriate when the level of assurance provided by an audit is not required. During a review, inquiries are made about your business, accounting policies and procedures, industry, operations and personnel. Inquiries will also be made about changes in any accounting policies.
When conducting a review, your CPA will perform analytical procedures, such as ratio analysis, comparison of your operating performance to prior accounting periods as well as other financial analyses that may be deemed appropriate. These analyses provide your CPA with a better understanding of key relationships among certain ratios and account balances. This understanding provides the basis for determining the reasonableness of the financial condition as presented in the financial statements. The independent accountant's review report will accompany the issued financial statements and describe this process.
If a CPA is not independent, the service of providing reviewed financial statements is not allowed. Footnote disclosures are required as part of reviewed financial statements along with any individual statements necessary to properly present the entity's financial condition or results of operations.