Your bank approved the loan and the agreement carries one line you did not expect: reviewed financial statements, due within 120 days of year end. Here is what that line asks for and how it differs from the other reports a CPA can issue.
Four engagements, four levels of assurance
An audit, a review, a compilation, and a preparation engagement produce different reports. The one you need is the one the person asking will accept.
- Audit. The highest level of assurance. The CPA tests records, confirms balances with banks and customers, and reports on the statements as a whole.
- Review. Limited assurance. The CPA asks questions of management and runs analytical procedures, then states that nothing came to their attention that needs a change.
- Compilation. No assurance. The CPA puts your numbers into financial statement form and issues a compilation report.
- Preparation. No assurance and no report. The CPA prepares the statements for your own use or for a party that accepts them as prepared.
What a review involves on your side
Expect a list of questions about the year: large or unusual transactions, related-party dealings, debt terms, and anything that changed in how you record revenue. You will also sign a representation letter that confirms the answers you gave.
Clean books shorten the engagement. A general ledger that reconciles to the bank each month is the single biggest time saver.
Bring the letter or the loan covenant to the first call and you will get a straight answer on which engagement it calls for.
When the request does not actually call for a review
Some lenders write “reviewed” when a compilation would satisfy them, and some grant agreements say “audited” out of habit. Before the engagement starts, we read the wording with you and, if a lower level of service meets it, we say so. A review costs less than an audit, and a compilation costs less than a review.
Questions about a request you received? Call (617) 378-1995 or use the contact form.