Under the standards of the AICPA (American Institute of Certified Public Accountants), "Financial Statement Preparation," "Compilation," "Review," and "Audit" are four different levels of services, each offering varying depths and degrees of assurance. The CPA registered accountants at Flushing CPA Center have over 15 years of audit experience, assisting businesses ranging from small and medium-sized enterprises to publicly traded companies and public institutions in handling various levels of financial statement audits, reviews, compilations, and other services. As members of the AICPA, we adhere to the principles of objectivity, integrity, and disclosure in executing any professional service, ensuring no conflicts of interest and avoiding intentional misrepresentation of facts. As a trusted licensed accounting firm serving the Chinese business community in the United States, Flushing CPA Center firmly believes in the cornerstone of professional ethics—objectivity, integrity, and disclosure.

 

Financial Statement Preparation

Financial statement preparation is one of the most basic services, typically carried out by internal company accountants. In this service, accountants are responsible for collecting, organizing, and preparing financial statements but do not provide substantial assurance regarding the accuracy of financial information. It is not an independent audit service and does not include any elements of auditing or review.

 

Compilation

Compilation is a service under AICPA standards that has higher professionalism and responsibility compared to financial statement preparation. In compilation, accountants collect, organize, and arrange financial information but do not verify the substantive accuracy of this information. Unlike financial statement preparation, compilation is usually accompanied by a report explicitly stating that no substantial procedures were performed.

 

Review

Review is a service under AICPA standards that offers a higher level of assurance than compilation. In a review, the auditor conducts some analysis, inquiries, and an understanding of internal controls to provide limited assurance. The review report clearly states the auditor's limited assurance on the financial statements, which is more stringent than the assurance provided by compilation or preparation.

 

Audit

Audit is the most comprehensive and in-depth service provided under AICPA standards. In an audit, the auditor conducts a thorough, independent, systematic examination, including an evaluation of internal controls and a detailed examination of financial information. The audit report explicitly states that the auditor provides reasonable assurance on the fairness of the financial statements.

In summary, these four services exhibit a gradual increase in the level and depth of assurance they provide, ranging from financial statement preparation (the most basic) to compilation, review, and finally, audit (the most comprehensive and independent). The choice of the appropriate service depends on client needs, regulatory requirements, and relationships with stakeholders.

 

Basic Financial Statement Preparation

Intended for business owners to manage their operations, similar to content provided by internal financial directors or chief financial officers for large companies.

May fulfill some lender requirements for small loans.

Does not involve formal reporting on financial statements.

The service frequency can be tailored to the client's needs, often performed monthly, quarterly, or annually.

Financial statement preparation services are primarily for internal use, providing the latest information on the financial condition of the business for decision-making. Although these statements can be shared externally, each page includes a notice from the registered accountant stating "no assurance is provided."

As the accountant directly prepares financial statements from the provided records, there is no verification of the accuracy or completeness of the information, and no formal reporting on the financial statements is required.

 

Compilation

Intended for use by lenders and other external parties who may appreciate the association between the business and the registered accountant without needing a certain level of assurance on the accuracy of financial statements.

Typically suitable for seeking initial or lower amounts of financing or credit, or situations with substantial collateral.

The CPA issues a compilation report.

Compilation involves a more visible role for the registered accountant concerning external parties, and specific requirements must be met. The accountant must disclose any impairment to independence in the compilation report if not independent from ownership, management, and other relationships with the client.

The accountant must also read the financial statements in accordance with the chosen financial reporting framework, considering their form and ensuring no obvious material misstatements.

However, the registered accountant does not provide any assurance in a compilation because they do not need to verify the accuracy or completeness of the information provided, and no evidence is collected for expressing audit opinions or review conclusions.

The compilation report states that the registered accountant did not audit or review the financial statements and, therefore, does not provide any opinions, conclusions, or assurances.

Compilation is often appropriate when seeking initial or lower amounts of financing or credit, where no assurance is provided, but external parties may appreciate the connection with the registered accountant, evident in the formal compilation report.

 

Review

Intended to provide a basic level of assurance on the accuracy of financial statements for lenders and other external parties.

Typically suitable for businesses seeking larger and more complex financing and credit levels.

The CPA issues a review report.

Review services involve the registered accountant performing analytical procedures, inquiries, and other procedures to provide limited assurance on the accuracy of financial statements, representing a fundamental level of attestation services.

Similar to compilation, the registered accountant must determine their true independence. If they determine they are not independent, a review cannot be performed.

In review engagements, the registered accountant needs to understand the industry in which the client operates, including accounting principles and practices commonly used in that industry. The accountant also needs to obtain knowledge about the client, including its business and the accounting principles and conventions used, to identify areas where significant misstatements are more likely to occur in the financial statements.

The scope of a review is much narrower compared to an audit. It does not mean understanding internal controls, assessing fraud risks, or testing accounting records through procedures like examinations, observations, external confirmations, or procedures typically performed in an audit.

In a review engagement, the registered accountant issues a formal report, including a conclusion on whether, based on the review, they are aware of any significant modifications that should be made to the financial statements to comply with the applicable financial reporting framework.

As businesses develop and seek larger, more complex financing and credit levels, a review is often appropriate. It is also useful when business owners seek more confidence in financial statements for assessing outcomes and making critical business decisions.

 

Audit

Intended to provide a high level of understanding for creditors, investors, and other external parties about the accuracy of financial statements.

The CPA issues a formal report stating whether financial statements are fairly presented in all material respects according to the applicable financial reporting framework.

Typically required when seeking high-level financing, external investors, or selling a business.

Audit is the highest level of assurance service performed by a registered accountant, aiming to provide users with confidence in the accuracy of financial statements. Procedures are conducted to obtain reasonable assurance, defined as a high but not absolute level of assurance, that there are no material misstatements in the financial statements.

In an audit, the registered accountant needs to understand the client's internal controls and assess fraud risks. They obtain audit evidence through inquiries, physical inspection, observation, third-party confirmations, examination, analytical procedures, and other procedures to confirm amounts and disclosures in financial statements.

In conducting audit engagements, the registered accountant must ensure that their independence is not impaired. Similar to a review, if independence is impaired, an audit cannot be performed.

The registered accountant issues a formal report stating whether the financial statements are fairly presented in all material respects according to the applicable financial reporting framework.

Additionally, the registered accountant must report to you any significant or material