The difference between a compilation, a review, and an audit
In the past, we’ve detailed the many benefits to a financial statement audit and why a business might have an audit conducted. For times when a formal audit is not required, a compilation or review may satisfy the business owner’s needs. As such, it’s helpful to know the difference between the three types of accounting services.
There are three main levels of services CPAs provide to clients with respect to a Company’s financial statements prepared in accordance with a financial reporting framework (for instance accounting principles generally accepted in the United States (U.S.GAAP))–compilations, reviews, and audits.
Compilations are the most basic level of service:
- Accountant assists management in presenting financial information in the form of financial statements.
- Accountant does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
- Requires accountant to have an understanding of the industry in which the client operates, obtain knowledge about the client, and read the financial statements and consider whether such financial statements appear appropriate in form and free from obvious material errors.
- Does not include performing inquiry, analytical procedures, or other procedures which are performed in a review.
No opinion is expressed, no assurance obtained, and an Accountant’s independence is not required.
Reviews introduce a higher level of rigor:
- Accountant is not aware of any material modifications that should be made to the financial statements.
- Accountant performs certain procedures, mainly analytical procedures and client inquiry, that provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements.
- No opinion is expressed – the report includes a statement that the accountant is not aware of any material modifications that should be made to the financial statements.
Accountant’s independence is required.
For both Compilations and Reviews, an accountant is governed by Statements on Standards for Accounting and Review Services (“SSARSs”). These services do not include obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records; or other procedures ordinarily performed in an audit.
The highest level of financial statement service are Audits:
- Provide the user with an audit opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.
- Auditors follow auditing standards generally accepted in the United States of America (“GAAS”) which in general require the auditor to:
–Obtain an understanding of the company’s internal control,
–Assess fraud risk, and
–Corroborate the amounts and disclosures included in the financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third party confirmations, examination, analytical procedures and other procedures.
The Auditor issues a report that states the audit was conducted in accordance with GAAS, the financial statements are the responsibility of management, provides an opinion that the financial statements present fairly in all material respects, the financial position of the company and the results of operations are in conformity with the applicable financial reporting framework. An Auditor’s independence is required.
Determining the level of service needed or required is best decided by having a discussion amongst company management, the other users of the financial statements (such as a lender, purchaser or other third party user) and a CPA.
The AICPA provides a more detailed comparative overview of these three levels of service at AICPA Comparative Overview or contact a member of the ShindelRock audit team to learn more.