Audit? Review? Compilation? Explaining the Difference to Clients
Audit, review, compilation…three words that have clear, distinct definitions to an independent auditor. But, to the general public, these words have a myriad of meanings. Most commonly, audit means something is verified and deemed absolutely correct. Review means they “looked at” or proofread something for errors. Compile means they gathered and organized some type of information. So, how do CPAs explain the differences between audited, reviewed and compiled financial statements?
When explaining the differences between the three service levels, providing the client with an accelerated course in audit terminology can be effective. Clearly point out the key characteristics of each service and clarify the tasks, purpose and end result. Identify the potential users of each type of financial report, the amount of time needed to complete each specific service and the price of each type of engagement. And, most importantly, explain the level of assurance provided by each service in layman’s terms. Because, at the end of the day, the client is purchasing assurance.
When defining an audit to a client, begin by explaining the overall purpose of the engagement. CPAs are trained to recite the fact that an audit provides an opinion on the fair presentation of the financial statements. But this definition is too technical for many clients. In order to provide guidance, an auditor needs to understand how the client defines an audit. When it comes to audits, many people have four primary beliefs: (1) the CPA will provide absolute assurance; (2) the CPA will find any and all errors; (3) the CPA is there to uncover fraud; and (4) a “clean audit” is a reflection of the client’s performance. These client misconceptions make it essential to define and explain the concept of reasonable assurance. Manage client expectations by explaining that absolute assurance only comes with an auditor examining every general ledger transaction. Discuss that auditors provide reasonable assurance because they only examine a calculated sample of transactions, and, therefore, absolute assurance is not attainable. Explain that because of the amount of procedures performed, the audit report provides a high-level — but not 100-percent — assurance that the financial statements do not have significant mistakes and a reader can place reasonable reliance on them.
Explaining reviewed financial statements to a new client is a bit easier. Share with clients that, in order to issue a reviewed financial statement, CPAs perform some procedures, but the steps are not as in-depth as an audit because a lower level of assurance is being provided. Clients understand the word comparable, so explain that CPAs will compare financial information from various periods and analyze them. If the analysis highlights an item that requires additional discussion, the CPA will apply review procedures such as inquiry to learn more. Clients tend to understand the idea that if something “jumps out” at the CPA, more work will be done. Tell clients that a review report provides comfort to the user that the CPA is not aware of any material modifications that need to be made to the financial statements.
The client discussion about compilations is quite simple. Simply explain that, for this engagement, the CPA team will gather financial information they have created and assemble it in an acceptable financial statement format. It is the lowest level of service, and the CPA will not apply any procedures or provide assurance on the accuracy of the balances.
Just like the services themselves, explaining the differences between an audit, a review and a compilation takes more time as you move up the service ladder. If you provide clarity to the client using terminology they understand, the client not only learns the characteristics of each engagement but their appreciation of you as a service provider can also grow.
This article appeared in the September/October 2018 issue of New Jersey CPA magazine. Read the full issue.