Is There a Difference Between an Audit, Review, and a Compilation?
To be clear, rarely do we get asked the question, “What’s the difference between an audit, review, and compilation?” Believe me, I would not be the most popular guy at any social gathering, if I was talking about financial statement attestation levels. That said, we often find ourselves talking to companies who are being asked for financial statements that are “signed-off" by their accountant. That’s the rub – under our professional standards, we can’t just “sign-off” – there are actually standards around the work that we do and the nature of the report we can deliver.
There are three types of reports we can provide on a company’s financial statements and each one is tied to the level of work we perform:
- Audit – An audit provides the highest level of assurance over a company’s financial statements. In essence we are representing (based on the work we perform) that the financial statements are not materially misstated. That really means, we are giving a fairly high degree of comfort, and to give that type of assurance, we are doing detailed testing on a company’s account balances and transactions. We are looking for third-party evidence to support our testing and considering a company’s internal controls and how they may impact the testing we need to perform.
- Review – A review is less in scope than an audit. Our report largely says that nothing came to our attention that would suggest the financial statements were materially misstated, which is a notable difference from what we represent when performing an audit. During a review, we rely on inquiries and analytics to get comfortable with a company’s financial statements. Unlike an audit, we are doing very little, if any, actual testing of transactions.
- Compilation – A compilation is the lowest level of assurance that an accountant can provide. During a compilation, we are basically relying on the financial statements provided by the company and will only make corrections to misstatements that jump out as us based on our understanding of the client and their transaction processing. There is no analysis or test work performed to substantiate amounts on the balance sheet or P&L. There is also no opinion given by your accountant as to the reasonableness of the numbers.
Now that you know the difference between the various types of assurance that your accountant can provide, you can decide which approach is best for you. In the end, it depends on how much assurance you, the regulators, and your business partners require. The key is to talk with your accountant to get the best sense of what you need.
Written by: Mike McCumiskey, Manager