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Audited, reviewed or compiled financial statements?

24 Jun 2014

Stephan van RooyenAn auditor’s report on the financial statements of a business is not necessarily an audit report. In fact, it can be an audit report, a review report or a compilation report.

The type of report is determined by mutual agreement between auditors and their clients. This may depend on various factors such as the needs of the client, creditors or investors; the size and complexity of the business; etc.

The Companies Act of South Africa requires all publicly held enterprises to provide annual audited financial statements, while privately held companies often opt for reviewed or compiled statements. Credit agreements with lenders may require audited statements, even for private companies.

Regardless of the level of service performed by auditors, the financial statements are the primary responsibility of the reporting entity.

Compiled financial statements represent the most basic level of assurance with respect to financial statements. Compiled financial statements are often prepared for privately held entities that do not require a higher level of assurance expressed by the auditor.

In a compilation, the auditor has to comply with certain basic requirements of professional standards, e.g. having both knowledge of the client's industry and applicable accounting principles, and an agreement with the client regarding the exact services required. In addition, the auditor has to read the financial statements to determine whether there are any obvious departures from generally accepted accounting principles (or, in some cases, another comprehensive basis of accounting used by the entity). The auditor may also have to perform other accounting services before the financial statements can be prepared, e.g. creating the general ledger, or adjusting entries for the records.

The report that is issued upon completion states that a compilation has been performed in accordance with the International Standard on Related Services 4410 (Revised), Compilation Engagements. However, the report does not give the assurance that the statements are in conformity with generally accepted accounting principles. This is known as the expression of "no assurance."

Reviewed statements require auditors to carry out inquiry and analytical procedures in addition to the procedures required for a compilation. Reviewed financial statements are often prepared for entities that have bank loans, outside investors, or trade creditors but whose third parties do not require audited statements.

Upon completion, a report is issued stating that a review has been performed in accordance with the International Standards on Review Engagements (ISRE) 2400, Engagements to Review Financial Statements. The report also states that a review is more limited in scope than an audit, and that the auditor has not become aware of any material modifications required before the statements conform to generally accepted accounting principles. This is known as the expression of "limited assurance."
 
Audited financial statements are the product of auditors’ highest level of assurance services.

In an audit, the auditor not only performs all the steps required for compiled and reviewed statements, but also verification and substantiation procedures. These verification and substantiation procedures may include direct correspondence with creditors or debtors to verify details of amounts owed, physical inspection of inventories or investment securities, inspection of minutes and contracts, and other similar steps. Also, the auditor gains a knowledge and understanding of the entity's system of internal control.

Upon completion, the auditor's standard audit report states that an audit has been performed in accordance with the International Standards on Auditing, and expresses an opinion that the financial statements fairly present the entity's financial position and results of its operations. This is known as the expression of "positive assurance."

Audit vs. review
There are significant differences between the objectives of an audit and those of a review of financial statements.

The objective of an audit (in accordance with the International Standards on Auditing) is to provide a reasonable basis for expressing an opinion regarding the financial statements as a whole.

A review (in accordance with ISRE 2400, Engagements to Review Financial Statements) does not provide a basis for the expression of such an opinion. Its aim is not to obtain an understanding of the internal control structure, or to assess control risk and test accounting records and responses to inquiries by obtaining corroborating evidence through inspection, observation or confirmation, as ordinarily performed during an audit. A review may bring to the auditor’s attention significant matters affecting the financial statements, but it does not provide assurance that the auditor will become aware of all significant matters that would be disclosed in an audit.

Exceed is experienced in performing audits, reviews and compilations for entities of all kinds and sizes. Please contact us should you need advice or assistance.  Article by Stephan van Rooyen of Tenk Loubser & Associates - 021 852 0382

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