The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 26

AUDITS OF FINANCIAL REPORTS

External Examinations of Financial Statements—What Types and Why

Businesses of all shapes, sizes, and forms are often required to produce financial statements that have been examined in one form or another by an outside party. The most commonly utilized outside party is a CPA, or the dreaded Certified Public Accountant, but you should also be aware that other parties are sometimes used to examine financial statements and present a report or findings (e.g., an insurance company preparing an actuarial analysis on a business to estimate future potential losses). Further, it is important to understand that there are different types of examinations completed by CPA firms that generally fall into three primary types of reports:

1. Compilations: A compilation is basically nothing more than a CPA firm taking the financial statements produced by a company, reformatting them to a more accounting friendly appearance (along with placing the financial statements on the CPA’s letterhead), and then offering a worthless disclosure that basically states, “Here’s the financial statements for XYZ, Inc., read them at your own risk as we can’t provide any assurance that they comply with GAAP.” Generally speaking, “compiled” financial statements are only used by very small businesses with a limited need to disclose financial results to external parties. Further, compiled financial statements almost never include financial statement footnotes (Chapter 21).

If you ...