Audited, Reviewed or Compiled…difference?

Your question:

I understand company financial statements are often reviewed or compiled. We generally ask for compiled. But there are also unaudited, unqualified and audited. Please explain their hierarchy and all their subtle differences. Can one or more be used in place of compiled?

Linda says:

There are three basic choices and subsets within them.

Audited

The CPA does enough work to have an opinion as to whether the financial statements present fairly, in all material aspects, the financial position and results of operations. That is a LOT of work. Thus, the
audited statements are the most costly and take the most time.

The results of an audit can be an unqualified opinion meaning the CPA says
yes, in my opinion, the statements do present fairly…

A qualified opinion means there is some exception that is not a clear yes. Sometimes this is a scope problem, like a major warehouse burned down so they could not do an inventory.

An adverse opinion means the CPA cannot say yes. These tend to be rare because the company is more likely to cave in and change the presentation in their financial statements than to accept an adverse opinion.

As you might guess, there is a lot of pressure on the CPA firm not to do this if they can find any way around it as they certainly will lose the client. What is to stop a client from shopping for the opinion they want? Successor CPA firms are required to communicate with the previous CPA firm.

Unaudited

These statements come in two categories; reviews and compilations

The compilation is putting into the form of financial statements the information provided by the client. Glaring irregularities might be noticed. But the CPA is not checking facts or tracing transactions through the system. The CPA is required to understand the accounting principles and practices of the industry, understand the client’s accounting system, read the financial statements for obvious errors, etc. But much less work than an audit. Thus, a compilation is much less expensive and takes less time.

The review is in-between a compilation and an audit; in time, fees and assurances.

Who chooses and how?

Your company guidelines probably indicate which type of statements are required. This is generally based on the size of the loan and the size of the company. You said you generally asked for compiled. That is because your bank or credit union feels that the size of the loan does not warrant the higher expense of reviewed or audited statements.

Besides, your financial institution is in competition with others. If you require more, or more costly, information than the bank down the street, who wins the customer? Luckily, you do not have to make this decision. Check your company’s guidelines or check in with a mentor lender.

Can you substitute?

You asked if you could substitute a different type of statement for compiled. Yes, you can since the others are more scrutiny with a stronger statement from the CPA than the compilation.

More info:

My Workbook/Reference Guide on Financial Statement Analysis has more detail. Go to Section 3: CPA Letters, Notes, Fraud; Cost Behavior.

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