An audit, review, and compilation are three of the most common types of financial statement services provided by CPAs. Each service differs significantly in terms of the level of assurance provided and the procedures performed to achieve that level of assurance, if any.
Understanding these differences is important for business owners, lenders, and other financial statement users as the level of assurance, if any, directly impacts how much reliance can be placed on the financial information.
Audit
An audit engagement provides the highest level of assurance over financial statements. In an audit, the CPA performs extensive procedures to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to error or fraud. These procedures typically include:
- Gaining an understanding of internal controls
- Assessing areas of risk
- Examining and testing underlying accounting records
- Confirming balances with third parties
- Performing analytical procedures
At the conclusion of the engagement, the auditor issues an audit opinion, stating whether the financial statements are fairly presented in accordance with the applicable financial reporting framework, such as Generally Accepted Accounting Principles (GAAP). While an audit provides the highest level of assurance, it does not provide absolute assurance.
Review
A review engagement provides a lower level of assurance than an audit, often referred to as limited assurance. In a review, the CPA performs primarily:
- Analytical procedures (such as trend and ratio analysis)
- Inquiries with management
Unlike an audit, a review does not involve detailed testing of transactions.
At the conclusion of the engagement, the accountant issues a review report stating whether any material modifications are needed for the financial statement to be in accordance with the applicable financial reporting framework, such as GAAP.
Compilation
A compilation engagement involves assisting management in presenting financial information in the form of financial statements. In this type of engagement:
- The CPA relies entirely on information provided by management
- No procedures are performed to verify accuracy or completeness of the information
- No assurance is provided on the financial statements
The accountant issues a compilation report stating that no assurance is provided.
Why the Distinction Matters
Understanding the differences among these services is important for a couple of reasons:
- Level of Confidence: Financial statement users, such as lenders, investors, or stakeholders, need to understand how much assurance, if any, was placed on the information.
- Scope of Work: Each service requires a different level of effort and procedures, which directly impacts cost and timeliness.
Selecting the Appropriate Service
Choosing between an audit, review, or compilation depends on your specific circumstances, including:
- Third-Party Requirements: In many cases, the type of engagement is dictated by external parties, such as banks, bonding companies, or regulatory agencies.
- Business Needs: Selecting the appropriate service ensures that the level of assurance aligns with the company’s need for such service.
Reach Out to Learn More
Audit, review, and compilation engagements each serve a distinct purpose within financial reporting. The key difference lies in the level of assurance provided, if any, and the procedures performed. By understanding these distinctions, business owners and financial statement users can make more informed decisions and ensure that the selected service aligns with their operational, financial, and strategic needs.
If your business circumstances require any type of financial statement assurance services, reach out to the Assurance team at H2R CPA.
Share:
