Prepared, compiled, reviewed or audited: which financial statements do you need?

The four levels

In the US, preparation, compilation and review engagements are governed by the AICPA's Statements on Standards for Accounting and Review Services (SSARS), and audits by generally accepted auditing standards. Each step up adds work and assurance.

• Prepared: the accountant puts the statements together from your records. No assurance and no report; each page is marked that no assurance is provided.
• Compiled: the accountant prepares the statements and issues a compilation report. Still no assurance. An accountant who is not independent can do it, but must say so in the report.
• Reviewed: the accountant makes inquiries and runs analytical procedures and issues a review report giving limited assurance. The accountant must be independent.
• Audited: an independent auditor tests the records and issues an opinion giving reasonable assurance that the statements are fairly presented. Done by licensed CPA firms.

Monthly statements from your bookkeeper

The statements most owners actually use are the monthly ones: a profit and loss statement, a balance sheet and a cash flow statement, produced after every account is reconciled. They are not an engagement under any of the standards above; they are simply your books, done properly.

They are also the starting point for everything else. A compilation, review or audit goes faster and costs less when the books were closed and reconciled every month.

What a month-end close involves

The close is what turns a month of transactions into statements you can rely on.

• Every bank, card and loan account reconciled to its statement
• Payroll, accruals and depreciation booked
• Receivables and payables checked against open invoices and bills
• The profit and loss statement, balance sheet and cash flow statement produced and reviewed

When a lender or investor asks for more

Banks usually set the level in the loan agreement: prepared or compiled statements for smaller loans, reviewed or audited statements as the amount or risk grows. Investors and acquirers often ask for a review or an audit, and some regulated activities require an audit, for example employee benefit plans that file as large plans must attach an independent accountant's report to Form 5500.

Before you commit to a level, ask the lender exactly what it needs and by when. Moving from prepared statements to a review can take several weeks, and an audit longer.

Who can do which

Your bookkeeper can prepare monthly statements. Compilations are done by accountants under the AICPA standards. Reviews and audits require independence, so the firm that keeps your books cannot also review or audit them.

SF Business Solutions prepares monthly statements and the schedules a reviewer or auditor asks for. It is not a CPA firm and does not perform reviews or audits; audits are available through our professional CPA partner firms.