Businesses and nonprofit organizations are sometimes asked to provide audited, reviewed, or compiled financial statements to lenders, investors, funding organizations, or other interested parties.
Although these services involve financial statements and are performed by accounting professionals, they provide different levels of assurance and involve different procedures. Understanding these differences can help an organization determine which type of engagement may satisfy its financial reporting requirements.
The three principal types of engagements are financial statement audits, financial statement reviews, and compilations.
Financial Statement Audits — Reasonable Assurance
A financial statement audit provides reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether caused by fraud or error. Reasonable assurance represents a high level of assurance, but it is not an absolute guarantee.
During an audit, the auditor assesses risks of material misstatement, obtains an understanding of relevant internal controls, and performs procedures designed to obtain sufficient appropriate audit evidence. These procedures may include examining selected transactions, confirming balances with third parties, evaluating accounting estimates, and reviewing the presentation and disclosures in the financial statements. Audit procedures generally involve testing selected items rather than examining every transaction.
At the conclusion of the engagement, the auditor issues an independent auditor’s report expressing an opinion on the financial statements, as applicable.
Financial statement audits are commonly required when organizations have reporting obligations to lenders, investors, boards, grantors, or other parties that specifically require audited financial statements.
For information about our services, see Financial Statement Audit Services.
Financial Statement Reviews — Limited Assurance
A financial statement review provides limited assurance. A review is substantially less extensive than an audit and consists primarily of inquiries of management and analytical procedures. The accountant evaluates financial relationships, significant changes, and unusual items, and performs additional procedures when necessary.
Unlike an audit, a review does not involve obtaining an understanding of internal control for audit risk assessment or performing the extensive testing associated with an audit.
The accountant issues an independent accountant’s review report stating whether the accountant is aware of material modifications needed for the financial statements to be in accordance with the applicable financial reporting framework. The review report communicates a conclusion, not an audit opinion.
Reviews may be appropriate when a lender, investor, board, or other interested party requests independent accountant involvement but does not require an audit.
For information about our services, see Financial Statement Review Services.
Financial Statement Compilations — No Assurance
A financial statement compilation is different from both an audit and a review. In a compilation engagement, an accountant assists management in presenting financial information in the form of financial statements. The accountant does not perform audit or review procedures to obtain assurance on the financial statements. A compilation therefore provides no assurance.
The accountant issues a compilation report that explains the nature and limitations of the engagement. Unlike audits and reviews, independence is not required for a compilation, although an accountant who is not independent must disclose that fact in the compilation report.
Compilations may be appropriate when an organization needs financial statements accompanied by an accountant’s compilation report but the intended users do not require assurance.
Audit vs. Review vs. Compilation: Key Differences
| Feature | Audit | Review | Compilation |
|---|---|---|---|
| Level of Assurance | Reasonable assurance | Limited assurance | No assurance |
| Primary Procedures | Risk assessment and audit evidence procedures, including testing selected balances and transactions | Primarily inquiry and analytical procedures, with additional procedures when necessary | Assistance in presenting financial statements; no audit or review assurance procedures |
| Independent Accountant Required | Yes | Yes | No, but lack of independence must be disclosed when applicable |
| Report Issued | Independent auditor’s report | Independent accountant’s review report | Accountant’s compilation report |
| Report Communicates | Auditor’s opinion | Accountant’s conclusion | No opinion or assurance conclusion |
| Common Circumstances | Lender, investor, funding, governance, or contractual audit requirements | Reporting requirements that accept limited assurance | Financial statement reporting needs that do not require assurance |
How Do You Determine Which Engagement You Need?
The most important consideration is the specific reporting requirement your organization must satisfy. For example, a loan agreement may expressly require audited financial statements. In that situation, a financial statement review or compilation would not satisfy the requirement.
Another lender may accept reviewed financial statements. Some users may only require compiled statements, or financial statements prepared by management without any assurance engagement. The appropriate service depends on the wording of the agreement, the expectations of the intended users, and the organization’s financial reporting needs.
Before selecting an engagement, consider these questions:
- Does the lender, funder, investor, board, or agreement specify audited, reviewed, or compiled financial statements?
- Is independent assurance required?
- If assurance is required, what level is acceptable?
- What financial reporting framework must the statements follow?
- What reporting deadline must be met?
When the requirements are unclear, contact the requesting organization and obtain clarification before engaging an accountant. Management remains responsible for the financial statements regardless of whether an audit, review, or compilation is performed.
Choosing the Appropriate Financial Statement Service
Audits, reviews, and compilations serve different purposes. An audit provides reasonable assurance and an auditor’s opinion. A review provides limited assurance and an accountant’s conclusion. A compilation provides no assurance.
The right engagement is not necessarily the one with the most extensive procedures. It is the engagement that satisfies the organization’s financial reporting requirements and the needs of the intended users.
The Accounting Firm LLC provides financial statement audit and review services for businesses and nonprofit organizations. To discuss your reporting needs, schedule a consultation.
Further Reading
AICPA — What Is the Difference Between a Compilation, Review, and Audit? (opens in a new tab)
This article is general information, not tax, legal or accounting advice for your specific situation.