As companies grow, have a change in financing needs or experience other evolutions to the business, a certain level of financial statement services from a CPA often becomes necessary. While it’s obvious that auditors can perform an audit of your financial statements, a review or compilation may be more appropriate, depending on your organization’s wants and needs. But what are the advantages and disadvantages of each, and how do you know what service is right for your company? Outlined below are the main differences between an audit, review and compilation.
Audits are frequently required by lenders and potential outside investors. When an audit is performed, the CPA is providing “reasonable assurance” that the financial statements are free from material misstatement. A variety of procedures are performed during an audit, including physical inspection, third-party confirmations, observation, analytical procedures and inquiries. The CPA will gain a high-level understanding of your organization’s business, internal control functions and fraud risks. In any audit or review engagement, the CPA is required to be independent from the client.
Review engagements require that the CPA obtains “limited assurance” that the financial statements are free from material misstatement and are in conformity with the applicable financial reporting framework. A review is narrower in scope than an audit; procedures such as in-depth transaction testing and internal control procedures are not typically performed. The most common procedures done by the CPA during a review are inquiries and analytical procedures. Reviewed financial statements provide users some comfort that the statements are accurate, while being less costly than an audit.
This is the most basic service provided by CPAs to prepare and present the financial statements. No level of assurance is provided and there are no additional procedures performed by the CPA outside of considering if the financial statements appear appropriate and free from obvious errors. The CPA is not required to be independent but must disclose any impairment of independence in the compilation report. Because there is substantially less work involved in a compilation engagement, compilations will have lower fees than audits and reviews.
While audits are often required by outside funding sources or regulatory bodies, a review or compilation may also be acceptable. It is important to understand what is mandatory in relation to your financial statements. In addition, you should always understand what each financial statement service would entail for your specific organization, so an educated decision can be made in selecting the service which best fits your organization’s needs.