by Tyler Mosley, CPA
Audit Partner at Atchley & Associates, LLP
In the public accounting world, we sometimes assume everyone knows what a financial statement audit is and what it isn’t. However, that is a misconception as the term “audit” can be used to describe a variety of compliance related activities. For example, an income tax audit performed by the IRS is completely different than a financial statement audit performed by an independent auditor. So…what is a financial statement audit?
A financial statement audit is an examination of an organization’s financial statements by an independent auditor who must be a certified public accountant (CPA). The examination is performed in accordance with Generally Accepted Auditing Standards (GAAS) and a reporting framework chosen by the party who authorizes the audit engagement. In most cases, the framework chosen is Generally Accepted Accounting Standards (GAAP) as that is what most third parties who request a financial statement audit require. However, a financial statement audit can be performed using a variety of reporting frameworks, such as but not limited to income tax basis, modified cash basis, cash basis, or statutory basis.
The independent auditors’ role in the engagement is to provide an opinion on whether or not the financial statements presented are materially correct in all respects related to the reporting framework chosen. An audit involves the independent auditors obtaining an understanding of your organization’s internal control, assessing fraud risk, substantively testing accounting records through inspection, observation, and third-party confirmation or corroborative inquiry.
Now that we have defined what a financial statement audit is, let’s discuss what it isn’t. A financial statement audit does not serve the same purpose as a financial statement compilation or review.
A financial statement review provides a conclusion as to whether they believe any material modifications should be made to the presented financial statements based on the reporting framework that has been chosen. In a review engagement, the CPA is required to understand the industry in which the organization operates including accounting principles that are unique to the industry. The CPA will also ask questions about your financial activity and perform analytical procedures to identify areas in the financial statements where material misstatements are likely to arise. The CPA does not obtain an understanding of your organization’s internal controls, assess fraud risk, or substantively test accounting records. As such, the CPA only provides limited assurance on the financial statements.
A financial statement compilation is a service that does not have to be performed by a CPA or even an independent third party. However, if the person preparing the compilation is not independent they must disclose the fact in the compilation. The CPA does not provide an opinion on if the financial statements presented are materially correct nor do they provide a conclusion like they would for a review.
We encourage all our clients to inform us of the purpose of the compilation, review, or audit engagement services they are requesting so we can assist in determining what level of service is appropriate for their needs. The time required to perform the engagement increases as you move from compilation to review to an audit.