Audits, Reviews and Compilations
Many businesses appoint an external firm of auditors to present an independent report on their annual financial statements. In many jurisdictions, national law stipulates that certain businesses obtain an audit either because the business exceeds a specified size, is subject to specific regulation (such as securities legislation) or because a universal audit requirement exists. Where a business is not subject to statutory audit, it may need to appoint an auditor to report to its owners or bankers, or merely as a sign of good practice and to give additional credibility to the financial statements.
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework (such as International Financial Reporting Standards or US GAAP). Auditors conduct their engagements in accordance with auditing standards issued by a standard setter such as the International Audit & Assurance Standards Board (IAASB).
Audit is a form of “assurance engagement”. The report given as a result of an audit demonstrates a high level of credibility in the financial statements audited. There are other forms of “assurance engagement” that auditors perform that are simpler in approach and generate a report which gives a lower level in the financial statements. These reports are appropriate to businesses which seek credibility in the information that they circulate but which do not need the highest levels of assurance conveyed by an audit report. Typically, such a business may be smaller in size, privately owned, or publishing financial statements which are not widely circulated.
The most commons forms of “other assurance engagements” are review engagements and compilation engagements.
The objective of a review engagement is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to the auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with an applicable financial reporting framework.
A compilation engagement is an engagement in which accounting expertise, as opposed to auditing expertise, is used to collect, classify and summarise financial information. The experience of the accountant ensures that the financial information is presented in accordance with an applicable financial reporting framework. A report is presented which gives credibility to the presentation process.