What is the difference between an audit, review, and compilation financial statements?
When it comes time to review financial statements, business owners look to different options in order to reduce time and cost. But how can you be sure which method will provide the correct method of assurance, and which is required for your specific needs?
Learn the difference between the three methods of analyzing your business’s financial records here and make a more informed decision in confidence.
A compilation is a basic summary of your company’s financial statements written by a CPA using data provided by your company.
Unlike a review or an audit, this method provides no assurance. There are no tests performed, and the accountant does not examine any internal controls.
During a compilation, a CPA will review and inquire about your business’ financial statements but will not compare them to any of their expectations. This means that they cannot provide any opinion or assurance.
Due to its informal nature, the CPA performing a compilation is not required to be independent of your business. This means your current CPA can also perform your compilation for you.
A compilation should only be used in very straightforward, uncomplicated situations.
If you need to present the company’s financial information from your financial statements on a surface level, or if your business simply needs a second set of expert eyes to review the financial records, then a compilation may be a sufficient enough method for your needs.
There are changes to accounting standards taking effect for fiscal years ending December 14, 2021 and later. The old “Notice to Reader” financial statements are being replaced with “Compilation Engagement” financial statements. Under the new rules, there will be additional procedures and documentation. When deciding on the need for financial statements, you might consider:
It is always recommended, however, to first consult with a CPA to ensure that you choose the correct method that will cover the amount of assurance needed for your unique situation.
A financial review is a limited examination performed by a CPA, reporting on the plausibility of your financial statements.
A review provides limited assurance, while an audit provides a reasonable amount of assurance.
This method is narrower in scope than an audit, still providing an evaluation of your business’s books, but limiting the CPA’s analysis to analytical procedures and assessment of management.
The outcome can only determine the plausibility of your business’ financial statements. A CPA can only vouch that your financial statements are free from any material misstatements, and determine if they meet generally accepted accounting principles.
Many business owners who are not legally required to have an audit, but would still like an analysis of their financial records, many opt to instead have a review in order to save time and money.
While there are currently no laws that require reviewed financial statements, some grantors or lenders may include an annual reviewed financial statement requirement in your loan or grant agreement.
Many business owners also find a financial review to be beneficial to their business even though it is not required of them, as the insights and moderate assurance provided give a level of confidence that is reassuring to them, their board, lenders, and investors.
It is commonly thought that a review can be an easy first step for transitioning into an audit in the following year, but this is not always the case.
You should always consult with a CPA to make sure that you are performing the correct financial assessment method for your business and to ensure that there is value in performing a review instead of moving directly to an audit.
It is commonly thought that a review can be an easy first step for transitioning into an audit in the following year, but this is not always the case.
You should always consult with a CPA to make sure that you are performing the correct financial assessment method for your business and to ensure that there is value in performing a review instead of moving directly to an audit.
An audit is a very thorough examination of the financial records for your business, which determines if the information correctly reflects the financial position at the given time.
An audit is a much more critical, systematic process that requires detailed testing such as examining your business’ accounting records and looking through financial statements. The auditor may even interview employees within your company to survey internal controls.
As a result, the results of an audit lead to the highest level of assurance that can be provided.
In some circumstances, it will be required for your business to perform an audit. Certain states require audits for businesses over a revenue threshold, or the audit may be required by your grantor or lender.
In this case, a financial review will not be sufficient. Your business will need the help of a qualified auditor to assess your needs and situation and perform the full processes of an audit.
As a result, the results of an audit lead to the highest level of assurance that can be provided.
The processes and procedures required for an audit, review, and compilation all differ significantly, which means that the costs will differ significantly as well.
A compilation takes the least amount of time, which makes it the lowest cost option for your business. However, it is the least comprehensive of the methods.
A review requires much fewer hours than an audit, but more hours and processes than a compilation, making it the second cheapest option for your business.
While an audit tends to be the most expensive option, it is also the most thorough and complete analysis and overview of your financial statements.
As a result, the results of an audit lead to the highest level of assurance that can be provided.
Making the choice between an audit, review, or compilation will come down to a question of your needs and the needs of your business. While of course cost is always considered, it should not always be the determining factor. Making a thorough, thought out plan with your CPA can lead you to the correct decision for your business.
We, at Dusangh & Co, have the knowledge and know-how to lead your business in the right direction, and help you choose the option right for you.