INSIGHTS Audit vs. Review vs. Compilation: What’s the Difference?

Financial statements are an important tool for communicating the financial health of a business. Owners, lenders, investors, boards, and other stakeholders often rely on financial statements to make decisions about financing, operations, growth, and risk management. However, not all financial statement engagements provide the same level of assurance.

For many businesses, the question is not simply whether financial statements are needed, but what type of CPA engagement is appropriate: an audit, a review, or a compilation. Each serves a different purpose, involves different procedures, and provides a different level of assurance.

Below is an overview of how these services differ and how to think about which option may be right for your business.

Audit vs Review vs Compilation: a Quick Comparison

What Is an Audit?

An audit provides the highest level of assurance among the three engagement types. In an audit, the CPA obtains reasonable assurance about whether the financial statements are free from material misstatement, whether due to error or fraud.

At the conclusion of the audit, the CPA issues an audit opinion. A clean, or unmodified, opinion generally states that the financial statements present fairly, in all material respects, the financial position and results of operations of the business in accordance with the applicable financial reporting framework.

Typical Audit Procedures

Audit procedures are more extensive than those performed in a review or compilation. Depending on the business and the risks identified, procedures may include:

Understanding the company’s business, industry, accounting processes, and internal controls

• Assessing risks of material misstatement
• Testing selected transactions and account balances
• Confirming certain balances with third parties, such as banks, customers, lawyers, or lenders
• Examining supporting documentation, such as invoices, contracts, and bank statements
• Observing inventory counts, when applicable
• Performing analytical procedures
• Evaluating estimates, judgments, and financial statement disclosures
• Communicating significant findings to management and, when appropriate, those charged with governance

When an Audit May Be Appropriate

An audit may be required or preferred when:

• A lender or investor requires audited financial statements
• The business is seeking significant financing or outside investment
• A company has bonding, regulatory, or contractual reporting requirements
• Ownership or governance wants a higher level of independent assurance
• The business is preparing for a sale, merger, or acquisition
• There are complex accounting matters, significant estimates, or multiple stakeholders

Because audits involve more extensive procedures, they generally require more time, documentation, and cost than reviews or compilations.

What Is a Review?

A review provides limited assurance. In a review engagement, the CPA performs procedures designed to determine whether any material modifications should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

A review does not provide the same level of assurance as an audit. The CPA does not express an audit opinion and generally does not perform procedures such as confirmation of balances, detailed transaction testing, or observation of inventory.

Typical Review Procedures

Review procedures are primarily analytical and inquiry-based. They may include:

• Discussing the business, accounting practices, and financial results with management
• Performing analytical procedures to identify unusual trends or relationships
• Comparing current results to prior periods, budgets, or expectations
• Inquiring about significant transactions, estimates, contingencies, and subsequent events
• Reading the financial statements to determine whether they appear appropriate in form and content
• Considering whether the financial statements conform to the applicable financial reporting framework

When a Review May Be Appropriate

A review may be suitable when:

• A lender or regulator requires reviewed, but not audited, financial statements
• Owners or investors want some independent assurance at a lower cost than an audit
• The business is growing and needs more formal financial reporting
• Management wants a CPA to evaluate whether the financial statements appear reasonable at a high level
• The company does not have audit requirements but wants increased credibility for external users

A review can be a practical middle ground: it provides more assurance than a compilation but is typically less extensive than an audit.

What Is a Compilation?

A compilation is the most basic of the three services. In a compilation, the CPA assists management in presenting financial information in the form of financial statements. A compilation provides no assurance on the financial statements.

The CPA does not express an opinion or provide limited assurance. Instead, the CPA issues a compilation report stating that management is responsible for the financial statements and that the CPA has not audited or reviewed the statements. Unlike an audit or review, a compilation can be performed by a CPA who is not independent of the business, as long as the report discloses that lack of independence.

Typical Compilation Procedures

Compilation procedures are generally limited compared to audits and reviews. They may include:

• Obtaining an understanding of the financial reporting framework to be used
• Compiling financial information provided by management into financial statement format
• Reading the financial statements for obvious errors or inconsistencies
• Assisting with basic financial statement presentation and disclosures, if applicable
• Issuing a compilation report

Because a compilation is based primarily on information provided by management, the business remains responsible for the accuracy and completeness of the underlying accounting records and financial statements.

When a Compilation May Be Appropriate

A compilation may be appropriate when:

• Financial statements are needed for internal use or basic external reporting
• A lender or third party accepts compiled financial statements
• The business does not need assurance but wants professionally prepared financial statements
• Owners want financial statements for planning, budgeting, tax preparation, or management review
• The business is smaller or has straightforward reporting needs

A compilation can be a cost-effective way to present financial information in a professional format, but it is important to understand that it does not provide assurance to users.

Practical Considerations for Businesses

Choosing between an audit, review, and compilation depends on several factors. Before deciding, businesses should consider the following:

1. Who Will Use the Financial Statements?

The needs of the financial statement users are often the most important factor. A lender, investor, bonding company, franchisor, or regulatory agency may specify the type of engagement required. If a third party is requesting financial statements, businesses should confirm the required level of service before beginning the engagement.

2. What Level of Assurance Is Needed?

If users need a high level of confidence, an audit may be required. If users need some independent assurance but not a full audit, a review may be sufficient. If no assurance is needed and the goal is simply to present financial information clearly, a compilation may be appropriate.

3. What Are the Costs and Timing?

Audits typically involve more planning, testing, documentation, and coordination, which can increase cost and time. Reviews are generally less extensive, while compilations are usually the least time-intensive. Businesses should plan ahead, especially if financial statements are needed for loan renewals, investor reporting, or other deadlines.

4. How Complex Is the Business?

Companies with multiple locations, inventory, debt agreements, complex revenue streams, significant estimates, or outside investors may benefit from, or be required to obtain, a higher level of service. Simpler businesses may find that a review or compilation meets their needs.

5. Are the Accounting Records Ready?

Regardless of the engagement type, accurate and complete accounting records are essential. Well-organized records can make the process more efficient and help reduce delays. Businesses should ensure bank reconciliations, accounts receivable, accounts payable, payroll records, inventory records, and supporting documents are current and complete.

Which Engagement Is Right for Your Business?

There is no one-size-fits-all answer. The appropriate service depends on your business objectives, the needs of financial statement users, lender or investor requirements, contractual obligations, and applicable professional standards.

As a general guide:

• Choose an audit when the highest level of assurance is required or expected.
• Choose a review when limited assurance is sufficient and users do not require an audit.
• Choose a compilation when no assurance is needed, but professionally prepared financial statements are desired.

A CPA can help you evaluate your options, understand the requirements of third parties, and determine the most appropriate engagement for your situation.

Finding the Right Level of Assurance for Your Business

Audits, reviews, and compilations each play an important role in financial reporting. Understanding the differences can help business owners make informed decisions, meet stakeholder expectations, and avoid unnecessary costs or delays.

Reynolds + Rowella provides audit and assurance services with an approach grounded in an understanding of your business and the risks it faces. We communicate throughout the engagement and discuss findings that may help strengthen your financial processes. Contact our team to discuss your organization’s audit and assurance needs.