THE DIFFERENCES BETWEEN A FINANCIAL AUDIT, REVIEW AND COMPILATION

123At some point, most small businesses and non-profit organizations need a CPA for financial statement services. The type of service is determined by your organization’s needs. Often, banks require a full financial statement audit for lending and credit agreements. Other times, a simpler review or compilation is sufficient.

There are three main levels of financial statement services:

1. AUDIT

An audit is often required by an outside funding source or financial institution. Regulatory bodies like the Attorney General or United Way may also require a full audit. Sometimes an organization’s by-laws or board of directors specifies that an audit is done as part of your financial policies.

According to the American Institute of CPAs, “Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, in conformity with the applicable financial framework. The auditor may also issue a disclaimer of opinion or an adverse opinion if appropriate.”

2. REVIEW

A review is a less costly and less involved process than an audit. There are times that financial institutions will accept a review instead of an audit. A review is often done to provide an organization’s Board of Directors and staff with an outside opinion of the financial statements prepared by management.

According to the AICPA,  “Reviewed financial statements provide the user with comfort that based on the accountant’s review, the accountant is not aware of any material modifications that should be made to the financial statements for the statements to be in conformity with the applicable financial reporting framework.” The big difference between an audit and a review is that “a review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records, or other procedures ordinarily performed in an audit.”

3. COMPILATION

A compilation might be required by an outside source, but more likely it is used as a way to assist the organization in preparing financial statements in an acceptable form. The AICPA says, “Compiled financial statements represent the most basic level of service CPAs provide with respect to financial statements. In a compilation engagement, the accountant assists management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.”

For a more in-depth discussion of audits, reviews and compilations, click here for the AICPA’s paper, What is the Difference Between a Compilation, a Review and an Audit? A Comparative Overview.

Contact your Carpenter, Evert and Associates audit expert for more information on audits, reviews and compilations at (952) 831-0085.

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