The terms Audit, Review, Compilation, and Preparation have very specific meanings as they pertain to a CPA's involvement with a practice's financial statement presentation to users of that financial information.
The CPA may prepare the financial statements, which means applying prescribed methods of showing financial outcomes using specific financial frameworks. A framework could be Cash Basis or Income-Tax Basis methods, as examples.
A CPA may also report on the presentation fo the financial statement and the extent to which independent analysis was conducted to determine accuracy and fairness, thus provided different levels of assurance.
Stockholders, creditors, and private investors often need assurance that the financial statements accurately represent the true financial position of a company.
Your stockholders, creditors, or private investors have different levels of risk tolerance, and you should know what your options are when you engage a CPA firm for financial statement reporting and/or preparation.
Audit - Highest Level of Assurance
An audit provides the highest level of assurance. An audit is a methodical review and objective examination of the financial statements, including the verification of specific information as determined by the auditor or as established by general practice.
An audit requires a review of internal controls, testing of selected transactions, and communication with third parties. Based on findings,the CPA's report attests whether the financial statements are fairly stated and free of material misstatements.
An Audit allows you to...
Here's what an audit does...
You receive the highest level of assurance because the auditors go outside your company to obtain more information. Typically, they will have written communication with:
The engaged firm will also perform physical inspections by observing your inventory counting methods and perform test counts. They document and test each operating cycle, including sales and cash receipts, expenses and cash disbursements, and payroll. The audit papers include a detailed work program to document the examinations and testing performed, as well as the client's supporting work papers.
Audits Not Just for Public Entities
All public companies are required to have an annual audit, but some nonpublic entities must undergo an annual audit as well. These include local governments, not-for-profit agencies and other organizations receiving government grants.
Moreover, some financial institutions require audits of nonpublic companies based on the financing amount and/or the bank's assessment of the company's risk. Also, companies with absentee ownership (such as those owned by investment firms, or individuals who no longer run the business) may order audits as checks of their management teams.
Occasionally, very large, multi owner veterinary practices will periodically engage audits to satisfy the shareholders as to the transparency and correctness of operational and financial activities, as will as provide comfort to practice accounting staff who like outside third party evaluation of the practice that is reported back to shareholders and the board of directors.
Our firm does not provide audit engagements, but we can discuss your options with you. Many practice administrators seek services that are not an audit engagement but something else, like an internal control assessment.
Review - Limited Assurance
Less extensive than an audit, but more involved than a compilation, a review engagement consists primarily of analytical procedures we apply to the financial statements, and various inquiries we make of your practice's management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, we may need to perform additional procedures.
A review doesn't require us to study and evaluate your practice's internal controls or verify data with third parties or physically inspect assets. Rather, a review report expresses limited assurance in the form of the statement: "We are not aware of any material modifications" for the financial statements to be in conformity with the Generally Accepted Accounting Principles (GAAP). Reviewed financial statements must include all required footnotes and other disclosures.
Why might a veterinary practice director request a review engagement? It can be a good middle ground, providing the advantages of a CPA's technical expertise without the work and expense of an audit. However, the most common reason is the fact of bank loan covenants that stipulate a review is required.
Compilation - Lowest Level of Assurance
In compiling financial statements for a client, we present information that is the "representation of management" and expresses no opinion or assurance on the statements. Compilations don't require inquiries of management or analytical procedures.
Instead, we rely on our knowledge of accounting principles and a general understanding of your veterinary practice to assist management in the presentation of financial statements in accordance with the applicable financial reporting framework and to cover the financial statements with the requisite CPA's compilation report.
Banks often require compilations from an independent CPA as part of their lending covenants.
Financial Statement Preparation Service
A preparation engagement is exactly what it sounds like. We prepare the veterinary practice's financial statements for your practice. We do not issue a report to cover them or discuss whether or not we are independent of your practice.
The financial statements can go to users outside of management (practice owners) and they may omit explanatory notes of the various accounts and transactions.
Which Report Should You Use?
Our preparation services are very similar to a compilation engagement except for the absence of the single page report covering the statements. However, whether outside third party users such as banks will accept this level of service is unknown and must be clarified when you decide how reports must be used.
Each type of financial statement engagement may suit specific circumstances, depending on requirements from your bank or other parties, as well as meet practice budgetary needs.