21 Mar Financial Statement Reporting – What are your Options?
By Team Clearline
There are three levels of reporting that a CPA firm such as Clearline can provide both private business corporate clients as well as not-for-profit organizations. This article will introduce you to these three levels of reporting and provide you with some guidance as to which one is most likely the best choice for your company or organization.
What is financial statement reporting?
When you ask Clearline, or any other professional accounting firm, for financial statements, we need to indicate our level of involvement, or the amount of work we have performed, in a report that is attached to the front of your financial statements. There are three levels of reporting that coincide with three separate services: compilations, reviews and audits. There are key differences between these services when it comes to the type of information provided and the amount of work we perform behind the scenes.
Non-GAAP Financial Statements with No Assurance
Often referred to as Notice to Readers (or NTRs for short), we take your bookkeeping data and use it to prepare an income statement and balance sheet. Compiled financial statements are not prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and typically do not include a cash flow statement or detailed notes. Because of this, they tend not to provide enough information for banks, bonding companies, funders, and investor and are typically only used for internal purposes and reporting income taxes to the Canada Revenue Agency. Sometimes banks will accept a compilation engagement if the loan is small or if they feel they have sufficient collateral on your assets. Due to the limited scope of this work, compilation engagements are the least expensive of the three types of financial statement reporting services.
When we help prepare the financial statements in a compilation engagement, we will make adjustments for obvious items such as amortization, bad debts, and income tax expense. However, we do not conduct any in depth analytical analysis or test the bookkeeping data. This is why a compilation is not considered an assurance engagement.
GAAP Financial Statements with Some Assurance
Reviews are an assurance engagement and involve much more work than a compilation. However, they are still less detailed and include fewer prescribed procedures than an audit engagement. A review is the middle tier financial reporting service that we provide. It is more costly than a compilation and less than an audit.
Reviewed financial statements must be prepared in accordance with GAAP and should look identical to audited financial statements except that the report indicates a review was done and not an audit. In a review, we do more work to better educate ourselves about your operations and internal recordkeeping systems. With this detailed understanding, we conduct procedures to see if the data in your books makes sense. Where it doesn’t, we investigate and resolve any errors or missed items. This is why a review takes longer and costs more than a compilation. When we perform a review, we do not perform any testing for fraud. If the data in your bookkeeping records appears appropriate we do not necessarily test it and this is what differentiates a review from an audit.
Reviews are typically required by bonding companies and by banks and investors when the borrowings or amount to be invested is a moderate amount. Some funders of not-for-profit organizations will accept a review but more often than not, they will require an audit.
GAAP Financial Statements with More Assurance
An audit is the most detailed, time consuming, and expensive financial reporting service that we, or any other professional accounting firm, provides. Audited financial statements must be prepared in accordance with GAAP and should look identical to reviewed financial statements except that the report indicates an audit has been performed.
Unlike a review engagement, in an audit we obtain a very detailed understanding of the way your systems function and conduct procedures regardless of whether or not the bookkeeping data appears appropriate. This often includes recalculating items, vouching revenue and expenses to supporting documents, and confirming balances with banks and other entities. In addition, when conducting an audit we are required by professional standards to consider how fraud could take place in your organization and test for it. It is for these reasons that an audit is more time consuming and costly than a review.
Public companies are required to be audited. In the private sector, audits are typically requested by banks or investors only when the loans or investments are very large. However, government agencies and funders of not-for-profit organizations tend to prefer the peace of mind of an audit to a review.
Which Service is Right for Your Organization?
We hope that this has provided you with a better understanding of the differences between compilations, reviews and audits. When you work with Clearline, we will help guide you through these options and ensure that you select the service that best fits your organizations current and future needs. Below we have summarized the above in a table that you can use as a quick reference guide and to help clarify the differences.
If you have any questions please do not hesitate to contact us at Clearline.