Dealing with financial issues for a non-accountant can seem like being lost in a forest--all the trees look alike. When your expertise lies in areas outside of accounting, a few quick descriptions may help you see a little better in the forest of accounting.

Everyone has heard familiar accounting terms--audits, compilations, and reviews. The next few paragraphs intend to help you become comfortable with these buzz words. You may see these three procedures as overlapping and perplexing. You simply need to recognize their distinctions so you can decide which one your organization needs.

Compilations

The objective

The accountant applies their knowledge and expertise to assist management in the presentation of the organization's financial statements without providing any assurance or verification to the accuracy of accounting documents.

In general, a compilation engagement is one in which an accountant uses his or her expertise to “read and report” on financial statements.

It is the lowest level of assurance.

What NOT to expect from a compilation

• ​It does NOT require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements.

• Accordingly, your accountant will NOT express an opinion or a conclusion, nor provide any assurance on the financial statements.

• It is NOT a preparation of financial statements.

Fees

Compilations fees can start as low as $1,200 for smaller organizations.

Time

Completed in just 3-5 days.

Reviews

The objective

A review is when the accountant obtains limited assurance that the organizations financial statements are presented without the need for material changes. This is accomplished primarily through inquiry and analytical procedures.

Your accountant would take-on the responsibility of analyzing the dollar amounts and disclosures that are part of the financial statement. They will scrutinizes information and interview the organization management and staff to provide a cursory assurance that they are not aware of anything that needs to be in the financial statement.

It is the mid level of assurance.

What NOT to expect from a review

• It does NOT take into account the organization's internal controls; assess fraud risk; test accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit engagement.

• It will NOT include a report expressing an opinion regarding the financial statements.

• It CANNOT be relied upon to identify or disclose any financial statement misstatements, including those caused by error or fraud, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations.

However, keep in mind that your accountant WILL inform the appropriate level of management of any material errors and of any evidence or information that comes to their attention during the performance of the review.

Fees

Review fees can start as low as $2,400 for smaller organizations.

Time

Completed in approximately 1 week

Audit

The objective

An audit is an analysis of your financial records that goes deeper and becomes more complicated. It supplies the strongest investigation of your organization’s financial status, and the accountant must affirm the accuracy of the information. The accountant dedicates many hours to this in-depth probe.

Accountants providing audits validate the dollar amounts and disclosures included in the financial statements. They thoroughly inspect all the financial documents even to the point of carefully evaluating the physical state of the documents. They research and confirm third-party corroborations.

Auditors also spend additional time understanding your organization’s internal controls and analyzing the effectiveness of management’s infrastructure. The audit presents an over-all exploration of your organization.

An audit culminates in a document that presents the professional opinion of the audit team and its comprehensive results. The final report includes the audit team’s position that the financial statements are accurate and honestly represent the financial status of your organization. This summary also states that your organization is in compliance with generally accepted accounting principles (GAP). The audit represents that the audit team finds the financial statements to be reasonably complete and accurate.

Fees

Audit fees can start as low as $6,000 for smaller organizations.

Time

Completed in 2-3 weeks.

As you move from compilation -- to review -- to audit, you realize your accounting team puts-in more time and effort with each step. Your organization also puts in more time and effort with each advanced step. In determining which of these three services your organization needs, you must factor-in your staff’s availability to assist with the service. Your team may have responsibilities for providing information and reviewing results of the service.

When determining whether your organization needs a compilation, review or audit, consider first who will view and evaluate your financial statements and what type of assurance they will demand. Grantors, creditors, your Board, and others connected to your organization may require different levels of assurance . . . they won’t all request an audit.

Knowing your options and which tree in the forest is best for your organization is something you should discuss with your accountant. Your accountant is the lumberjack who can help you pick out the best tree for your organization.

Before yelling “timber”, connect with your accountant and discuss the level of analysis of your financial statements.

Keep in touch with our blog. We have articles on several nonprofit industry topics including: audit, bookkeeping, tax, fundraising and management. You may also contact our not-for-profit team leader at trent@tbfosteraccounting.com.