Audits, reviews and compilations form the basis of any CPA’s assurance practice. Each is intended to provide a specified level of assurance that the company’s financial statements are presented in accordance with generally accepted accounting principles. The distinction between these services can be illustrated by comparing the work that is done and the assurance that is provided for each. The table below illustrates these distinctions:
| Compilation | Review | Audit |
|---|---|---|
| Procedures performed include: | ||
| Preparation of financial statements from information provided by management. | Preparation of financial statements from information provided by management. | Preparation of financial statements from information provided by management. |
| Performing analytical procedures and making inquiries of management to determine that the information presented appears to be in conformity with generally accepted accounting procedures. | Performing analytical procedures and making inquiries of management to determine that the information presented appears to be in conformity with generally accepted accounting procedures | |
| Perform tests of underlying transactions to determine that the financial statements present fairly the financial position and results of operations of the company in accordance with generally accepted accounting principles. | ||
| Document and perform tests of the company’s internal control environment. | ||
| Issue a report to management that discusses recommendations for improvements in corporate strategy, operational effectiveness, financial and non-financial reporting and internal controls | ||
| Our report reads as follows: | ||
| “We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.” | “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements…” | “In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ company and the results of its operations and cash flows in accordance with generally accepted accounting principles.” |
| What is the Relative Cost if the Cost of an Audit is Equal to 1? | ||
| .2 to .4 | .5 to .6 | 1 |