Difference between Audits, Reviews, and Compilations
Owning a successful business is no child’s play. It takes a lot of effort and hard work. Hence, once you’ve established your company, you need to make sure that when you apply for a loan for the expansion of your business, your bank has enough evidence of your success so that they can finalize your loan without any hesitation.
So, what is this evidence that your bank would require to determine if you qualify for the loan? Financial statements.
In case you’re looking for stockholders, private investors, and creditors to invest in your company, then they too would require a record of your business’s financial position to assert whether your company is worth their investment or not.
You can prepare your financial statements by yourself. However, hiring professionals might be a better option since they’re trained and can issue financial statements that accurately represent the economic position of your business with ease.
At ThomasRoss Financial Group, we offer sublime accounting services New Jersey. Our accountants are highly-qualified and have years of experience under their belts, which ensure that all the records they draft are error-free and a true representation of your business’s financial status.
There are three different types and levels of financial statements:
1. Audit
2. Review
3. Compilation
Depending on the type of financial statement drafted, the level of assurance may vary.
1. Audit
Audit offers the most accurate representation of your business’s financial position. An auditor performs an analytical review and subjective testing to issue an audit. They can also verify a specific piece of information if they determine that it needs investigation.
The process of drafting an audit requires interaction with third parties, evaluation of internal records, and examination of specifically chosen transactions. On the basis of the research performed, an auditor issues a report that mentions whether the financial statements are error-free and properly recorded or not.
Here, we have jotted down some of the features offered through an audit:
- It provides the highest level of assurance for stakeholders, investing companies, suppliers, employees, pressure groups, and customers.
- It enables easy, accurate, and on-time payment for goods and services tax, corporate tax, and other taxes.
- It follows the bank agreements.
It enables the selling and buying of businesses with ease.
Every public company needs to have an annual audit. However, we recommend that non-public establishments, such as non-profit organizations and other entities that receive finances from the government should also get an annual audit.
2. Review
This financial statement is not as thorough as an audit but is more extensive than a compilation. A review is a record of the methodical processes used for the financial statements of a company. It also contains information about the queries made for your business’s management team. Further operations may be executed if the financial statements or information related to it seem questionable or inaccurate.
A review doesn’t need procedures such as extensive studies, evaluation of your business’s internal controls, physical examination of your business’s possessions or confirmation of statistics with third parties. Instead, a review draft provides a limited assurance as it doesn’t contain the report of any material modifications for the financial statements in accordance with the Generally Accepted Accounting Principles. A reviewed financial statement should definitely contain all the important disclosures and footnotes.
A business may ask for a review report of your business’s financial statements because it offers a neutral surface on which you can provide the data acquired by a CPA (Certified Public Accountant), without paying the hefty price of an audit report. This is advantageous for your business as well as the company interested in your business.
3. Compilation
A compilation report offers the lowest level of assurance. This procedure is simple in the sense that it only includes the compilation of the financial statements of a business. The information provided in this report is purely the representation of the management of a company, which doesn’t offer any opinion or assurance for the statements. No investigation of the management or methodical procedures is required to issue a compilation. Rather, only the knowledge of accounting principles and basic perception of your company are utilized to draft this report.
In addition to this, many times, banks need compilations in order to verify the status of your business’s financial position for loan approvals.
All three financial statements have various purposes and different things to offer. Certain situations require specific types of financial reports. Hence, it’s important that you understand the differences between these statements in order to be able to choose the one that fits your circumstance the most, since all of these financial statements have unique weaknesses and strengths.
If you need any further assistance or have a requirement for professional accountants, then please get in touch with us at ThomasRoss Financial Group.
