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Audits Reviews and Compilations

Audits - Highest level of assurance

An audit includes a review of internal controls, testing of selected transactions, and communication with third parties. Based on findings, a report is issued whether the financial statements are fairly stated and free of material misstatements.
A highest level of assurance is obtained because third party confirmations are typically sent to:

  • Attorneys, for information on pending or threatened legal action

  • Banks, to confirm cash, investment, debt balances and interest terms

  • Customers, to confirm outstanding receivable balances

  • Vendors, to verify outstanding payable balances

Physical inspections are also done at the end of the accounting period by observing inventory and performing test counts. Audit papers include a detailed work program to document the examinations and testing performed, as well as the client’s supporting work papers. Audits are more expensive than reviews and compilations.

Review - Limited level of assurance

A review engagement consists primarily of analytical procedures that are applied to the financial statements, and various inquiries that are made of the organization’s management team. If the financial statements or supporting information appear inconsistent or otherwise questionable, additional procedures may be performed.

Limited level of assurance is obtained because a review doesn’t require studying and evaluating the company’s internal controls or verifying data with third parties or physically inspecting assets.

Compilation - Lowest level of assurance

A compilation engagement compiles information provided by the management and expresses no opinion or assurance on the statements. Compilations do not require inquiries of management or analytical procedures.

Audit Vs Review

The objective of an audit is to provide a reasonable basis for expressing an opinion regarding the financial statements taken as a whole. A review does not provide a basis for the expression of such an opinion because a review does not contemplate obtaining an understanding of the internal control structure or assess control risk, tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter through inspection, observation or confirmation, and certain other procedures ordinarily performed during an audit. A review may bring to the accountant’s attention significant matters affecting the financial statements, but it does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit.

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