Auditing standards allow for professional accounting practitioners to provide a variety of services. They tailor the needs of their business entity clients, related to financial reporting. Proper understanding of the variety of services helps the management of any business entity. It allows them to request the relevant service from their professional accounting practitioner. Who then supports their objective of financial decision-making. Regarding the basic financial reporting of a business entity, there are 3 main services as described by standards. These consecutively by the descending level of assurance are audit, review, and compilation.
An audit is a regular mandatory service for any normal profit-seeking business entity. This is subject to the regulations of economic business regulations in any country. Like, the Ministry of Commerce and Industry in Kuwait.
Audit service is conducted every economic cycle, which is normally one year. Audited financial statements for any business entity, regardless of the nature, are regularly submitted to the regulator. This is routine for renewing the commercial license for that particular business.
Audited financial statements enable investors to assess and analyze the financial performance of any entity. An audit involves giving the users of financial statements positive reasonable assurance about whether the financial statements are free of material misstatements. Either due to an error or fraud, and whether they are prepared in accordance with relevant accounting framework.
Internal audit quality assessment service deliverable is an audit report accompanied with financial statements. It includes basic statements along with summary of accounting principles. Additionally, it often includes notes and disclosures for these financial statements. Thus giving rationale beyond recognition of the figures reported in the basic financial statements.
Audit by nature is a unique service, as it includes independence of the auditor in substance and form. Compliance with several ethical requirements is needed to be able to issue an independent opinion about the financial statements.
Audit opinion can be classified into 4 major categories. Unqualified (clean), qualified (specific material misstatement), adverse (significant misstatements that alters the presentation objective of financial statements), and disclaimer (providing no opinion).
A review service on the other hand is not mandated for all business entities. Review service is normally a shorter period than the audit. It is only mandated for regulated business entities, and companies listed on the Country’s stock exchange. This is where quarterly submission of financial information is mandated. The review provides a lower level of assurance compared to the audit. A review report provides users of financial statements with negative assurance about the financial information.
Negative assurance means that nothing came to the attention of the auditor to cause a belief that there is a material misstatement in the financial information.
Review includes conducting inquiries, applying analytical procedures, and other review procedures on the financial information.
Reviewed financial information includes the same components of audited financial statements. However, it has less detail as speculated by the International Accounting Standard (IAS 34). It focuses on the primary objective of interim financial reporting. Which is to provide useful insights regarding the performance of the entity during a short period of time (normally quarterly).
The compilation is intended to prepare the financial statements in accordance with relevant accounting framework. Though, without providing any assurance regarding verification of the figures or related validity of recorded transactions.
Accordingly, compilation is a non-assurance service. It is requested from professional accounting practitioners to assist in creating management accounts for a business entity or business division. Often based on the currently available accounting records, it is done before taking any decision related to providing assurance service on these management accounts.
A compilation is needed in many instances and management of any entity may need it. Often when competent finance resources in a specific business are not available for a period of time. Or, when the accounting system is not functioning properly.
Compilation involves reconciling accounting balances, posting sub-ledger balances to the general ledger, creating basic financial statements. It uses reconciled trial balances and other accounting records to do this.
International standards allow for a range of several services with different levels of assurance. These start from an audit (positive reasonable assurance), to review (negative assurance), to compilation (non-assurance service).
The objective of this variety is to allow the management of any business entity to tailor that service to satisfy a business need for financial decision-making.
Quality expertise of the management personnel always plays an important role in identifying and selecting the service that best meets the business need.
As an example, the decision to acquire or purchase a subsidiary may need an audit for an entity. Especially if its economic cycle is not completed yet. Yet the decision to expand production or transferring a business segment to another entity may best work on recently reviewed financial information. This includes measuring the operational performance of current business segments.
While, on the other side, a small retail business like a fast-food chain, lacking proper finance and accounting resources for a couple of months, may need a compilation service. This would provide the management with a raw idea about the figures flowing from this chain in that period. Then they could make a decision on these compiled financial statements, of how to take this matter forward.