Accounting is a process within companies to identify, analyze, summarize, record, and present financial transactions. This process involves an accountant obtaining data from various business transactions.
Once they have the required data, they can start inputting it into a company’s financial systems. Most modern accounting systems process the data and prepare the result automatically.
Accounting allows companies to analyze their finances. Consequently, they can understand how to improve various areas to improve performance and profitability.
On top of that, it helps companies prepare financial statements. These statements serve as a communication channel between a company and its stakeholders.
All stakeholders can make well-informed decisions based on the information produced through accounting.
Accounting is a crucial part of any company and its operations. Without this process, companies cannot analyze their financial performance and position.
On top of that, they cannot establish the resources that they have available for use. Most companies maintain a separate finance department that overlooks the accounting process. This department performs all tasks associated with financial transactions and their processing.
Some companies may, however, outsource their accounting function. Sometimes, companies may perform the basic tasks internally and use external services to process them.
Most companies hire an external accounting firm to overlook these functions. These firms can provide various services. One of these includes the compilation of financial statements.
What is the Compilation of Financial Statements?
The compilation of financial statements refers to a service that accountants provide to a company. This service involves assisting the management in preparing financial statements. Most specifically, it includes compiling financial information into a financial statement format. This presentation does not consist of any assurance activities. For example, it does not entail material modifications to the prepared information.
Similarly, compiling financial statements does not entail following specific rules and regulations. The financial statements produced through this service may not conform with the applicable financial standards.
It implies that they may not follow the IFRS or GAAP standards. Therefore, the compilation of financial statements does not involve inquiries, analytical procedures, or review procedures.
Moreover, the compilation of financial statements does not require an understanding of internal controls. When an accounting firm provides this service, it does not engage in any audit procedures. While these firms may also perform auditing services, the compilation does not include them.
Compiling financial statements is a separate service that most accounting firms provide. However, it does not fall under any standards or regulations.
The compilation of financial services also involves obtaining information from a client. Once the provider gets that information, it can prepare the financial statements.
Consequently, these statements constitute compiled financial statements. These are not a part of certified or audited statements. Companies may release the statements to the investors before certification. Usually, it happens when they need to share information promptly.
Overall, the compilation of financial statements involves an accounting firm helping companies prepare those statements.
It does not entail providing any additional services, such as assurance. In some cases, accounting firms may provide these services as a part of their assurance engagements.
However, these services constitute the lowest form of assurance compared to audits and reviews. These services may also involve a basic inspection of the provided data.
How does the Compilation of Financial Statements work?
As mentioned above, the compilation of financial statements occurs through an external party. Therefore, it may not use a similar path as preparing those statements. The process may differ from one company to another and between various accounting firms. However, some steps remain the same regardless of the parties involved.
Nonetheless, some steps involved in compiling financial statements include the following.
Gathering Data
The primary requirement for the compilation of financial statements is gathering data. This data comes from the company that obtains external services from an accounting firm.
As mentioned above, this process may differ based on the client’s requirements and the method used by the firm. Nonetheless, the data obtained from the client may include some crucial documents that aid in preparing financial statements.
Accounting firms gather data to support account balances and other items on the financial statements. Similarly, they need it to verify the amounts on those statements are accurate.
The firm may obtain various documents to compile these statements. Some of those documents may include the following.
- General ledgers.
- Bank statements.
- Investment statements.
- Loan balances.
- List of revenues and expenses.
- Detailed transaction listing of all financial statement accounts.
- Any other supporting documents to verify transactions.
Analyzing Data
Before compiling the financial statements, accountants may also perform essential checks on the data. Usually, this involves ensuring the financial data is free from obvious errors.
However, these services are an extension of the compilation process. Compilation standards do not require accountants to perform any procedures to verify or corroborate that data. Accounting firms may, however, choose to do so voluntarily.
As mentioned above, compilations are the lowest service related to the financial statements. Accountants don’t need to confirm balances with any external parties.
For example, they may include bankers, suppliers, investors, etc. Nonetheless, they may perform basic checks on the information to catch obvious errors. During this process, they may also come across information that involves other underlying issues.
Recording Adjusting Journal Entries
The compilation of adjusting journal entries does not involve gathering data and putting it into formats only. It also includes recording and adjusting journal entries. Usually, these entries relate to any issues or misstatements in the above process.
If an accounting firm discovers an obvious error in the compiled data, it will record an adjusting journal entry. This journal entry aims to correct the amount or treatment of the mistreated transactions.
Correcting journal entries also involve ensuring the data includes supporting evidence. Usually, accounting firms prepare the compiled financial statements under the applicable financial standards.
However, some clients may also require a different presentation, for example, an income tax basis. In this part, the service provider is not responsible for ensuring conformity with standards. However, they may provide that service if agreed with the client.
Drafting Financial Statements
The last step in the compilation of financial statements is drafting. This process involves the firm issuing a report with the compiled statements. Usually, this report includes a reminder of those statements not being certified, reviewed, or audited.
Similarly, it does not express an opinion or any other assurance from the service provider. As mentioned above, these requirements do not fall under the process of compiling financial statements.
Moreover, the process does not include drafting the financial statements only. It will also cover the notes to those financial statements. These notes consist of the accounting policies used to compile the underlying statements.
Similarly, they only provide information related to those financial statements. The accounting firm may prepare it as a part of its services. However, companies may not present them. Some services may also mention this beforehand and ignore the notes.
compiled financial statements vs. audited Financial Statements
Compiled financial statements are often used to provide a general overview of an organization’s financial position compared to another period, such as year-over-year or month-over-month financial results.
Compiled financial statements are generally created by the organization itself and do not require independent verification from an outside source.
Audited financial statements go through a much more rigorous process than compiled statements. They are reviewed and verified by an independent auditor with no personal stake in the accuracy of the information reported.
This review process is often lengthy and may include examining documents, physical assets, and internal controls. Auditors will also typically assess company management’s understanding of processes that affect financial reporting.
Audited statements ensure that all material misstatements or departures from Generally Accepted Accounting Principles (GAAP) are discovered and corrected before the statement’s release.
The most significant difference between a compiled and audited financial statement is the level of assurance they provide stakeholders.
A compiled statement gives readers only limited assurance that it is accurate because it has not been independently reviewed. At the same time, an audited version provides greater assurance that it will be free from material misstatement as it has gone through a thorough external review process by qualified professionals.
Ultimately, organizations must decide which type of financial statement meets their needs depending on their particular situation, requirements, and expectations for accuracy and protection against misstatements.
Compilation and Review of Financial Statements: What Are the Different?
Compiled and reviewed financial statements provide an overview of an organization’s current financial position, but they differ significantly in the assurance they provide.
Compiled statements are created solely by the organization and do not require independent verification or assurance.
Reviewed financial statements are prepared by a Certified Public Accountant (CPA) and involve a more involved review process.
A compilation is typically considered low-level assurance since an outside accountant does not perform procedures to verify the accuracy of the information presented.
The CPA guarantees that the information has been put together following Generally Accepted Accounting Principles (GAAP). A review involves much more detailed work than a compilation, including inquiries into management and analytical procedures such as ratios and trend analysis.
As a result, it provides a higher-level assurance and can sometimes identify issues that would otherwise be missed with just a compilation alone.
The most significant difference between a compiled and reviewed financial statement is the level of assurance they provide stakeholders.
A compiled statement only gives limited assurance that it is accurate. In contrast, a reviewed statement provides greater assurance that it is free from material misstatements due to its thorough external review process.
Ultimately, organizations must decide which type of financial statement meets their needs depending on their particular situation, requirements, and expectations for accuracy and protection against misstatements.
Different Between Compilation of Prospective Financial Statement
Compiled prospective financial statements are created solely by the organization, with no independent verification or assurance of accuracy.
As such, they provide limited assurance that the information presented is correct. Prospective financial statements contain forward-looking information, meaning they are based on assumptions and forecasts rather than actual results.
In contrast, reviewed prospective financial statements involve a more thorough review process by an independent accountant.
In addition to verifying internal controls and procedures and conducting analytical procedures and inquiries of management, the CPA will also express an opinion about how reasonable the estimates of expected future results used in preparing the statement are believed to be.
As a result, these statements provide GAAP standards that have accurately prepared higher-level assurance than the figures reported.
The primary difference between compiled and reviewed prospective financial statements is the level of assurance they offer stakeholders.
A compiled version only gives minimal assurance that it is accurate. In contrast, a reviewed version provides greater confidence that it is free from material misstatements due to its external examination process by qualified professionals.
Ultimately organizations must decide which type of statement best meets their needs depending upon their particular situation, requirements, and expectations for accuracy and protection against misstatements.
Conclusion
The compilation of financial statements involves an external party compiling financial data for a company. This process falls under assurance services, although it is the lowest form.
Usually, the compilation differs from one company to another and between different firms. However, it may involve a similar process, including the steps above.
