Is a Compilation an Attest Service?
Navigate the complexities of financial reporting by understanding the distinct levels of assurance provided by various accounting services.
Businesses of all sizes rely on financial statements to understand their economic position and performance. These statements, such as balance sheets and income statements, provide a snapshot of a company’s financial health, guiding decisions for owners, investors, and creditors. Accounting professionals play a crucial role in ensuring these financial reports are prepared accurately and presented in a clear, understandable format. Different levels of service exist to meet varying needs for financial reporting, each with distinct characteristics and purposes.
Understanding Compilation Services
A compilation service involves an accountant assisting management in presenting financial information in the form of financial statements. The accountant’s role is primarily to compile client data into financial statements without offering assurance on accuracy or completeness. The accountant does not verify transactions, evaluate internal controls, or corroborate client-provided information. The accountant relies on management’s data, assuming its accuracy and completeness.
A compilation engagement typically results in financial statements accompanied by a compilation report. This report states the financial statements are management’s representations and have not been audited or reviewed. It explicitly clarifies that no opinion or assurance is provided. Compilations are a cost-effective option for businesses needing financial statements for internal use or for external parties not requiring higher assurance, such as for smaller loan applications.
Understanding Attest Services
Attest services involve a Certified Public Accountant (CPA) issuing a report concluding on the reliability of an assertion, typically by management. These services provide assurance to financial information users. CPAs perform procedures to gather evidence supporting their conclusion, enhancing information credibility. Attest engagements are governed by professional standards from organizations like the American Institute of Certified Public Accountants (AICPA).
Common examples of attest services include audits and reviews. An audit provides a high level of assurance that financial statements are free from material misstatement and conform with accounting principles. This involves extensive procedures like evaluating internal controls, verifying with third parties, and inspecting assets. A review engagement provides limited assurance that no material modifications are necessary for financial statements to conform with the reporting framework. This typically involves inquiries and analytical procedures, but not the detailed testing performed in an audit.
Distinguishing Compilation and Attest
A compilation is not an attest service, despite sometimes being grouped with assurance services. This distinction is crucial due to fundamental differences in the level of assurance provided, independence requirements, and scope of work. While both services involve an accountant and financial statements, their objectives are distinct.
The primary difference lies in the level of assurance. Compilation engagements provide no assurance that financial statements are free from material misstatement or conform to accounting principles. In contrast, attest services like reviews provide limited assurance, and audits provide reasonable assurance. A compilation report explicitly disclaims any opinion or assurance, whereas attest reports express a conclusion or opinion.
Independence requirements also differ. For attest services like audits and reviews, the CPA must be independent of the client in fact and appearance. This means avoiding relationships that could compromise objectivity. While independence is generally not required for a compilation, non-independence must be disclosed in the compilation report. However, AICPA professional standards require an accountant to consider independence when performing both compilation and nonattest services for the same client.
The scope of work is another key differentiator. In a compilation, the accountant primarily assists in presenting management-provided financial data, performing no verification procedures. Conversely, attest services involve performing systematic procedures to gather evidence and evaluate management assertions. For instance, an audit involves detailed testing and verification, while a review includes inquiries and analytical procedures to identify unusual items or trends.
Importance of the Distinction
Understanding the difference between compilation and attest services is important for stakeholders. For financial statement users like lenders, investors, and creditors, the distinction directly impacts their reliance on the information. Higher assurance from attest services offers greater confidence in financial statement reliability and credibility, influencing lending or investment choices. Without assurance, users must rely solely on management’s assertions.
Business owners and management also benefit from understanding these differences, as it helps them choose the appropriate service for internal or external reporting needs. For example, a startup seeking smaller financing might find a compilation sufficient and cost-effective. However, a company pursuing significant bank loans or outside investors will likely need an audit or review to satisfy lender or investor expectations for higher credibility. The service choice depends on financial statement users’ specific needs and the credibility required for the purpose.