We all know the importance of keeping track of finances. Personal, or business, keeping “good books” helps one avoid surprises, audits, and potential fines by the IRS or other taxing authority. We also know it is always a good idea to have a professional accountant assist with one’s financial records. In order to do this, we enter into a Financial Reporting Engagement. Now, this is not the type of engagement which requires rehearsal dinners, flowers, and receptions. A Financial Reporting Engagement is basically a Statement of Work (S.O.W.) agreement between the accountant and the client detailing what type of financial reporting will be done and can be broken into four main types: financial statement preparation, compilation, review, and audit. In addition to this type of engagement, there are many other services a CPA firm can provide (payroll, tax preparation, etc.).
Financial Statement Preparation
The most basic of the four, financial statement preparation is presenting the financial information given to the accountant into the form of a specific financial reporting framework. This report is intended for the business owner, or owners, to have the current information regarding the current financial standing of the business and is like what an in-house controller would provide in a larger company. However, the accountant is NOT responsible for validation of the information received and will be obligated to disassociate with the company and/or individual if they become aware of any false or misleading information given. In addition, because a compilation is limited in scope, the resulting financial statements will not express the preparer’s opinion of the resulting reports.
Compilation
Compilation is like financial statement preparation. The financial information given to the accountant is placed into the form of a financial statement. The accountant is NOT responsible for validation of the information received and will be obligated to disassociate with the company and/or individual if they become aware of any false or misleading information given. In addition, because a compilation is limited in scope, the resulting financial statements will not express the preparer’s opinion of the resulting reports. However, the accountant may assist the company’s management in presenting the financial statements providing the accountant indicates if the compilation was completed independently or in-house in the compilation report. Compilation reports are typically used when there is significant collateral in place, or initial or lower level financing or credit is sought.
Review
The review financial reporting engagement is a little more involved and provides limited assurance of the accuracy of the financial statements. This process starts with receipt of the financial statement(s), which is 100% the responsibility of the client to provide. This understanding is outlined in the financial reporting engagement. Once the financial statement(s) arrive at your accountant’s desk, inquiry, comparison, discussion, and use of funds are organized. Only mistakes which would lead to “material misstatement” are contemplated. Verification, examination, scrutiny, and other errors which do not affect the perspective results as a whole are not considered in a review accounting engagement. And, as with a compilation, the preparer does not provide an opinion of the financial statements but will include a report that includes a conclusion of whether any material modifications should be made to the financial statements.
Audit
The audit financial reporting engagement is the most detailed of these three engagements. All records received are verified and inspected by the preparer to ensure the values do not contain “material misstatement.” The accountant assesses all errors, implements controls to reduce the risk of fraud, and reports these findings and any area which may be viewed as “material misstatement.” Unlike a compilation and review, an audit will provide a formal report from the accountant which expresses an opinion of whether the financial statements are presented fairly in accordance with applicable reporting procedures. Some of the reasons an audit is needed include lending agreements requirements, absentee shareholder(s) require it as a protection of their investment, or it is required by a government agency.
Understanding Accounting Engagements
As one of my professors always said, “You must have at least a basic understanding of accounting to run any business.” However, with the complexities of tax codes, even basic financial maintenance, and for your financial protection, the best practice is hiring a CPA to help navigate your financial records. In addition to financial reporting engagements, Lawhorn CPA Group offers a wide range of comprehensive business and individual accounting services that cover all your accounting, consulting, tax, and business needs to provide you with customized and strategic solutions that will help you reach your financial goals. Contact Lawhorn CPA Group here to discuss how they can help you.