A compiled financial statement is a set of financial reports—typically a balance sheet, income statement, and statement of cash flows—that have been prepared by an accountant or other qualified individual. However, unlike audited or reviewed statements, a compilation doesn't involve an independent verification or assurance of the information's accuracy or completeness. Think of it as a presentation of a client's data, not an independent assessment of that data.
This key distinction is crucial. A compilation simply presents information that the client or management has provided to the accountant. The accountant's role is to organize this data into a standardized format, ensuring it's presented clearly and consistently according to generally accepted accounting principles (GAAP) or other applicable accounting standards. They are not responsible for independently verifying the underlying data's accuracy.
What Does a Compilation Involve?
The compilation process typically includes the following steps:
- Gathering Information: The accountant collects financial data from the client, such as bank statements, invoices, receipts, and other relevant documents.
- Organizing and Formatting: The accountant organizes the raw data into a standard financial statement format (e.g., balance sheet, income statement, cash flow statement). They will ensure that the presentation follows GAAP or other applicable accounting standards.
- Checking for Arithmetic Accuracy: The accountant verifies that the numbers in the financial statements are mathematically accurate. This doesn't mean they've verified the source of those numbers, just that the calculations are correct.
- Preparing the Compilation Report: The compiled financial statements are presented with a compilation report that clearly states the accountant's role. The report will explicitly state that the accountant has not audited or reviewed the statements and therefore expresses no opinion or conclusion on their fairness.
Who Uses Compiled Financial Statements?
Compiled financial statements are frequently used by small businesses, non-profits, and other entities that might not require the higher level of assurance provided by an audit or review. They're often used for:
- Internal Management Purposes: Businesses often use compiled statements to track their financial performance and make internal management decisions.
- Bank Loan Applications: While not as acceptable as reviewed or audited statements, compiled statements might be acceptable for smaller loan amounts or from lenders with a high level of trust in the business's management.
- Tax Filings: Compiled financial statements can be used to support tax filings, though specific requirements vary depending on the jurisdiction and the complexity of the business.
What's the Difference Between a Compilation, Review, and Audit?
The level of assurance provided by each differs significantly:
- Compilation: Provides no assurance on the fairness of the financial statements.
- Review: Provides limited assurance. The accountant performs analytical procedures and inquiries to identify any significant inconsistencies or misstatements.
- Audit: Provides the highest level of assurance. The accountant performs extensive tests of the financial statements and expresses an opinion on their fairness.
What are the limitations of a compiled financial statement?
The most significant limitation is the lack of assurance on the accuracy or reliability of the information presented. Because the accountant doesn't independently verify the source data, there's a higher risk of material misstatements or errors going undetected. Users should be aware of this limitation when relying on compiled financial statements for decision-making.
Is a compilation report necessary for all compiled financial statements?
Yes. A compilation report is always included with a compiled set of financial statements to clearly communicate the accountant's limited role and lack of assurance provided. This is crucial to prevent any misunderstanding or misuse of the information.
Can a compilation report be used for all business purposes?
No, while useful for internal purposes, compiled financial statements might not be suitable for all purposes, especially when a higher level of assurance is required, such as obtaining significant financing or complying with regulatory requirements. In such cases, a review or audit is usually necessary.
By understanding the nuances of compiled financial statements, businesses and users can make informed decisions about the level of assurance required for their specific needs. Remember to always consult with a qualified accountant for advice tailored to your particular situation.
