REPORTING ON FINANCIAL PERFORMANCE
Almost every organization whether it’s a privately held business, a publicly owned corporation, or a nonprofit organization must prepare reports on its financial performance. Such reports help owners and managers make operating decisions, enable creditors to evaluate loan applications, and provide individuals with information to make investment decisions.
The accounting profession recognizes that different entities have different accounting needs. Acknowledging these differences, the profession has developed standards that enable CPAs to offer a range of financial statement services.
DIVERSE ACCOUNTING SERVICES FOR DIVERSE NEEDS
A CPA may provide a client with three distinct services involving financial statements. Each is designed to meet a different need.
A compilation is useful to small, privately held entities that need help in preparing their financial statements. In a compilation engagement the CPA prepares financial statements from information provided by management. However, the CPA provides no assurance as to whether material, or significant, changes are necessary for the statements to be in conformity with generally accepted accounting principles, the cash basis, or the income tax basis of accounting.
A review may be adequate for entities that must report their financial position to third parties, such as creditors or regulatory agencies. Reviewed financial statements may also be useful to business owners who are not actively involved in managing their companies. In a review engagement the CPA applies inquiry and analytical procedures to financial statements provided by management to determine if they are reasonable. A review provides limited assurance that no material changes need to be made to the financial statements.
An audit is the third and most extensive service. An audit is appropriate for entities that must offer a higher level of assurance to outside parties. An audit provides the highest level of assurance that the financial statements fairly represent the entity’s financial position and results of operation in accordance with generally accepted accounting principles. In an audit engagement the CPA examines financial statements by conferring with outside parties, completing physical inspections and observations, and testing selected transactions by examining supporting documents.
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