Understanding the Key Differences Between a Compilation, Audit, And Review.

Introduction

A compilation is a financial statement that presents information according to GAAP, but with no assurance from the auditor that the statements are free of material misstatements. An audit is an examination of a company’s financial statements performed by an independent auditor to express an opinion on whether the statements are fairly presented in accordance with GAAP. A review is less extensive than an audit and provides a lesser level of assurance than a compilation.

When reviewing financial statements, business owners seek to reduce time and cost. However, how can you ensure which method will provide the correct level of assurance, and which is required for your specific needs?

 

What is a compilation?

A compilation is a formal summary of a company’s financial statements written by a certified public accountant. This method uses data provided by the company and does not test for accuracy or completeness. The accountant will review and inquire about the company’s financial statements but will not compare them to any expectations. This means that the accountant cannot provide any opinion or assurance about the statements.

Although it is not required, it is generally recommended that businesses seeking a compilation have an independent Certified Public Accountant (CPA). This means that your current CPA can also perform the compilation for you.

Compilation: When is it performed?

A compilation report 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, a compilation may be a sufficient enough method for your needs. However, it is always recommended 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.

What is a review?

A financial review is a limited examination conducted by a certified public accountant (CPA) to evaluate the plausibility of an organization’s financial statements. Compared to an audit, a review has a narrower scope since the CPA only conducts analytical procedures and assesses management, rather than providing a reasonable amount of assurance.

The auditor’s opinion on your financial statements cannot alone determine the plausibility of your business. The auditor can express an opinion on whether the financial statements are free of material misstatements and whether they are in compliance with generally accepted accounting principles.

Needs of financial review.

Although an audit may not be legally required, many business owners opt for a review in order to save time and money. A review provides an analysis of financial records and can be a useful tool for identifying areas of improvement.

What is an audit?

An audit is an in-depth analysis of the financial records for your business. The purpose of an audit is to determine whether the information in the financial records is an accurate reflection of the business’ financial position at a given point in time.

An audit is a more critical and systematic process than simply examining financial records and statements. The auditor may also interview employees within your company to get a better understanding of internal controls.

The results of an audit provide the highest level of assurance that can be given.

Can a review turn into an audit?

It is not uncommon for people to think that a review can be an easy first step for transitioning into an audit in the following year. However, this is not always the case. You should always consult with a certified public accountant (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.

The key differences between a compilation, an audit, and a review.

An audit or review can be beneficial for a private company in several ways, such as during the due diligence process for a funding event. savvy investors often understand the value of an audit or review opinion, as it can provide confidence in the company’s financials. Furthermore, lenders may require an audit or review for a private company before approving a commercial loan. Ultimately, an audit or review can help simplify the due diligence process for any funding event.

FEWER DELIVERABLES DURING DUE DILIGENCE

The investor may require fewer deliverables during due diligence because of the assurance already provided by the auditor or reviewer. This could mean less work for the business owner!

Further audits can be beneficial in identifying weaknesses in internal controls. Where weaknesses are identified, management can take active steps to change procedures and ensure that misstatements to the financials do not occur due to error or fraud.

A compilation may be useful when management is having difficulty determining how to record their financials on the proper basis of accounting, or if they lack the accounting sophistication to create effective financial reporting altogether.

How much it will cost someone?

As a business owner, you may find yourself wondering whether you need to invest in an audit, review, or compilation. It is important to weigh the cost against the benefit before making a decision. In some cases, a business owner may have no choice to comply with the necessary covenants of their funding sources. However, when that is not the case, it is important to note that audits are generally costly. On the lowest end, they are likely in the range of $25,000 to $50,000. A review is generally somewhat less expensive but will likely still come with a price tag in the tens of thousands.

The cost of compilation will vary depending on the level of assistance the business owner needs. More assistance will usually result in higher expenses.

How to prepare for it?

One of the key factors that can contribute to the increased cost of audits, reviews, and compilations is the lack of preparedness on the part of the company being examined. If you are unsure of what is needed to obtain a clean opinion from your audit or review, speaking to a professional CPA who has experience with audits can help you understand the process and what is required. Additionally, if you are planning to seek any type of funding, it is important to have this conversation now. It is advisable to have audited financial statements before engaging in due diligence with an investor, as this can delay or cancel funding if you seem unprepared to the investor.

Conclusion

While a review is similar to an audit, there are key differences between the two services. A compilation is the least expensive and least comprehensive of the three services, while an audit provides the highest level of assurance. If you are looking for an objective opinion on your financial statements, an audit is the best choice.

A compilation, audit, and review all serve different purposes when it comes to financial statements. A compilation is the cheapest and quickest method, and provides minimal assurance. An audit is more expensive and time-consuming, but provides a moderate level of assurance. A review is less extensive than an audit and provides a lesser level of assurance than a compilation. When deciding which method to use, business owners should consider their needs and budget.