Question

How can an external audit engagement be distinguished from the following other engagements:

a) Review engagement;

b) Agreed-upon procedures; and

c) Compilation

Answer 1

Each year businesses face a choice - what report do they want on their year-end financial statements. There are several types of financial statements that we can prepare, including the following: audited financial statements (most costly), reviewed financial statements, compiled financial statements.

Audit Report: We give an opinion as to whether the financial statements, taken as a whole, are fairly presented. This opinion is given after extensive tests of the accounting records are made. The tests include confirmation with outside parties, analytical procedures, inquiry of client personnel and a detailed study of the accounting records.

Review Engagment Report: We express limited assurance that we have not noted any items that would require adjustments that should be made to the statements in order for them to be in conformity with accepted standards. The accountant must conduct a review and be satisfied as to the reasonableness of the statements through inquiry and analytical procedures.

Compilation Report: We expresses no assurance on the correctness of the financial statements. We only disclose, in the form of financial statements, information that is the representation of the management of the business entity.

The most common reason for obtaining the more costly audited financial statements include the requirements of outside parties (such as banks, bonding companies, creditors, absentee owners, or potential purchasers). Reviews are adequate for many businesses, because they give us enough familiarity with our clients to provide tax planning advice and a consulting perspective where appropriate. Compilations are generally appropriate for simple situations where limited business and tax advice is required.