This article will explore the differences between an audit, a review, and a compilation. Audits, reviews, and compilations are three important services that help businesses and organizations make informed decisions about their finances. We will discuss each of these services in detail to provide clarity on what makes them unique from one another. Finally, we'll look at when it might be most beneficial to use one over the other. With this knowledge, business owners and managers can choose the most beneficial service for their needs.

What are Audits, Reviews, and Compilations?

An audit is the most comprehensive type of assurance service and requires the auditor to express an opinion on a Company’s financial statements prepared in accordance with Generally Accepted Accounting Practices (GAAP). Audits are typically required as a result of financing, Investor, or governmental requirements. Typically, during an audit, an independent auditor evaluates a Company’s internal accounting system and its financial records. The auditor will then issue a report containing the findings of their audit.

For an Audit, the objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes an opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists.

A review is a more limited assurance service and involves the accountant performing analytical procedures on financial statements to get a general understanding of the Company’s finances. An important difference between an audit and a review is that an audit provides more reasonable assurance, whereas a review does not and the accountant does not express an opinion. Reviews primarily include applying analytical procedures to management’s financial data and making inquiries of a Company's management. A review is also a potential requirement if the Company has financing.

For a Review, the auditor’s responsibility is to conduct the review engagement in accordance with Statements and Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for the reporting whether the auditor is aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America.

Compilation involves compiling a Company’s financial information into general-purpose financial statements, such as balance sheets and income statements. A compilation may also involve helping clients plan their budgets or other documents they may be required to report. While compilations are less expensive than audits and reviews, they provide no assurance since no opinion is expressed on the financial statements or other documents.

For a Compilation, the auditor will have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. We do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

Comparing audit, review, and compilation:

One way to think about the three services is to think in terms of small (compilations), medium (reviews), and large (audits). In general, the three services tend to differ based on the scale of required procedures, time to complete the engagement, and level of detail.

• Assurance Level. Audits offer the most assurance that a client's financial statements are free from material misstatements, while reviews provide a limited level of assurance, and compilations provide no assurance.
• Dependence on Management. For every type of service, the auditor begins with the general ledger account balances provided by management. An audit involves comprehensive confirmation of some of this data. A review consists of minimal testing of supplied information while a compilation is mainly dependent on provided facts and figures from management.
• Internal controls. An audit includes understanding some of the Company’s internal controls; reviews and compilations do not involve any testing. For an audit, an understanding of internal control relevant to the audit is obtained in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. Accordingly, no such opinion is expressed.
• Hours to Complete the Work. An audit entails a substantial amount of hours because of the required audit procedures that need to be completed. Conversely, reviews necessitate much fewer hours, while the task related to compilations is comparatively minimal.
• Cost. Accountants typically bill by the hour or the size of the engagement. Therefore, you can expect to pay the most for an audit because they entail more time, procedures, and information. Compilations require the least amount of time and reviews tend to land somewhere in the middle.

How to Choose an Audit, Review, or Compilation

When it comes to choosing between an audit, review, or compilation, business owners and managers should first consider the level of assurance they need. An audit provides the most comprehensive level of assurance, while a review offers an intermediary level of assurance. A compilation is the least expensive option but also provides no assurance since no opinion is expressed on the financial statements or documents. For businesses that need the highest level of assurance, an audit is the best choice. For those who only need minimal assurance and have tight budgets, a compilation may be sufficient. Those in between can opt for reviews to balance their needs with cost considerations. Depending on your Company’s situation, an audit may be required which makes the decision simple. Ultimately, it is important to consider all factors before making a decision.

In conclusion, it is important for businesses to know which service best suits their needs, and which service may be required, in order to get the most benefit out of their financial statement preparation.