Audit vs Review: How to Know the Difference and Which is Right For You

Mar 16, 2022 | Audit

In the last few posts, we’ve been focusing on what it takes to work as a general contractor in the state of Tennessee. (Check out this one on “TN Contractor’s License Renewal Made Easy…” if you’re just getting started.)

One of the big steps in that process is preparing a financial statement. The Board of Contractors won’t accept just any statement, though. You must submit one prepared by a licensed CPA in order for your application to be considered (or renewed).

They require either an Audited Financial Statement or a Reviewed Financial Statement, but will not accept Compiled Financial Statements. Since your contractor’s license is so crucial to your success as a builder, we wanted to help by explaining the difference between audit vs review and showing you which one you may need.

contractor financial statements

Why Do You Need a Financial Statement?

According to the Licensing Steps set forth by the TN Board of Contractors:

“Every contractor is assigned a monetary limit on their license, as to the size of project they wish to contract or bid. This limit must cover the total project and it cannot be split into phases of smaller contracts to circumvent the law.”

Basically, the Board wants to ensure that contractors are able to complete projects they bid on in a safe and timely manner and that they have the financial means to do so. Their stated mission is to “assure quality and fair construction practices exist in all phases of the industry in order to protect the safety and welfare of the public.”

Imagine this scenario. If a contractor overbid and took on work that he couldn’t afford to complete, the project would eventually stop and have to be taken on by someone else. If enough people do that, the entire industry in our state would begin to be overworked, and unfinished construction sites would be everywhere. In order to keep up, we’d run the risk of contractors cutting corners in regards to materials or safety in order to simply get jobs done.

Requiring a certified financial statement from contractors in our state ultimately helps ensure “the safety and welfare of the public.” Let’s take a look at the various kinds of financial statements that are available to you in this process.

What Is an Audited Financial Statement?

An Audited Financial Statement is the highest level of service that a CPA can perform in regards to any given company’s financial position. It is meant to provide people like creditors, investors, and others (in this case the TN Board of Contractors) with “reasonable assurance” that the business’s financial statements are accurate.

When an audit is done, an independent CPA will take the time to understand a company’s internal controls and determine any risk of fraud. (They will go through your books to find out how you manage your money and evaluate if the treatment of transactions is appropriate.)

Additionally, they are required to let you know of any weaknesses within your system on managing money that they find in the process of the audit. There are often ways of doing business and handling money that people simply aren’t aware of (or aren’t doing correctly), so an audit can actually be something that makes your business better!

What is a Reviewed Financial Statement?

A Reviewed Financial Statement is one step below an audit, and it requires slightly less time and involvement on the part of the CPA. It still has to be done by an independent individual or firm, just like an audit. (Their independence must not be impaired or tainted in any way – your brother-in-law shouldn’t be the one doing it – or the report will not be valid.)

A review is designed to provide “limited assurance” to creditors and financers that a company understands its industry and has the appropriate financial management practices in place. It also helps the CPA be able to point out areas of your operation where mistakes are likely to be made.

What Is a Compiled Financial Statement?

A Compiled Financial Statement is done by a CPA, but no assurance is given as to the accuracy of the information being presented. Typically, the CPA will make the first page of the report a statement on their company letterhead stating that they were involved in putting the statement together. However, unlike an audit or review, they do not spend time verifying information or looking into the business’ financial practices. They simply look over the statements the business provides and observes whether they appear to have been prepared correctly.

This type of report is useful when very little money is being requested from a lender or if the company in question has large amounts of capital already. However, the TN Board of Contractors does not accept Compiled Financial Statements for initial licensing, so builders don’t need to spend any time on this.

audit vs financial review

Financial Review vs Audit

In order to receive your license to build in Tennessee, renew it, or request an increase in your monetary limit, you will need to provide either a Reviewed Financial Statement or an Audited Financial Statement. Which one is right for your situation?

  • Use a Reviewed Financial Statement if you are seeking a monetary limit of $1,500,000 or less.
  • Use an Audited Financial Statement if you are seeking a monetary limit over $1,500,000.

Accounting Firms For Contractors

A good CPA can help you determine which report is right for you, and since the Board requires these financial statements to be prepared by a licensed CPA…it’s in your best interest to find a firm that already has experience working with contractors.

In earlier blog posts, we’ve talked about “How General Contractor Accountants Can Help You Avoid Costly Mistakes.” Messing up on these important financial reports would be a big mistake!

Because the basis of your livelihood is riding on these statements being done right, why not partner with a firm that understands that and knows how to get the job done?

CRS CPA has been guiding TN contractors through this process for the past 40 years. Our team would love to help you too!

Give us a call at (731) 668-4482 or schedule a call with one of our contractor accountant pros today…and start expecting more from your CPA.

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