Comparative Overview: What is the Difference Between a Financial Statement Preparation, Compilation, Review and an Audit?

Our review course offers a CPA study guide for each section but unlike other textbooks, ours comes in a visual format. This article was originally posted on December 16, 2011 and the information may no longer be current. You can customize your plan based on your is your business income subject to self needs (migration of the accounting system, complex transactions, etc.) and we will assign a dedicated CPA from our team to accompany you. In addition, under the Chartered Professional Accountants Act, only CPAs may carry on the business of public accounting.

• Under the standards of AICPA, the certified public accountant is liable to conduct the engagement according to Statements on Standards for Accounting and Review Services(SSARSs).
• Where the financial statements have been materially misstated, the accountant should desist from issuing financial statements that are misleading.
• The accountant may include a reference to the compilation report note at the bottom of each financial report to notify the reader that a compilation report exists.
• The purpose of having an audit is to provide financial statement users with an opinion by the auditoron whether the financial statements are prepared in accordance with the proper financial reporting framework.

When the financial statements prepared by the accountant are to be used by external parties, he must also submit a report along with the financial statements. When the accountant has completed the engagement and prepared financial statements, he must read the statements to confirm that there are no material errors. The accountant must possess an understanding level of the industry in which the client’s business operates. It includes understanding generally used accounting frameworks, procedures, and principles in most industry entities that will help accountants compile industry standards.

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However, if the auditor concludes that the departures from GAAP are so significant that the financial statements as a whole are not fairly stated, an adverse opinion must be issued. An adverse opinion will include language describing what the auditor believes is materially misstated in the financial statements, and the effects of the misstatements. Having compiled financial statements is the first step in establishing financial credibility for start-ups and/or smaller organizations. Compilations provide financial transparency in an organization and allow the organization to make better decisions involving financial matters. While independence is required at the other levels of service, the CPA does not have to be independent of your organization to perform a compilation. To obtain reasonable assurance, items are observed, tested, confirmed, compared or traced based on the auditor’s judgment of their materiality and risk.

• A compilation report is a report prepared by the accountant tasked with performing compilation service by a client and should accompany the compiled financial statements.
• In a review engagement, the auditor conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct.
• The compilation statement is a requirement of many business entities seeking loans or other purposes.
• In an audit engagement, the CPA expresses an opinion according to which the financial statements are free from material misstatements and that users may use this information with reasonable assurance.
• Some of the documentation includes the engagement letter, financial statements, and communication with management regarding significant issues identified during the audit.

The report attached to the financial statement emphasizes that the service is a compilation. Depending on the size, nature, and industry of a business, there are varying financial reporting requirements for every business entity. Small and medium enterprises usually do not prepare formal financial statements and rely on bookkeeping. However, there are many circumstances when the presentation of formal financial statements is necessary.

Some of the information contained in an engagement letter includes the services to be provided, the amount and timing of payments, specific due dates, how the parties can terminate the contract, etc. Most compilation engagement letters will state that the accountant will prepare and present financial statements and provide a compilation service. Compilations allow companies without an accountant to have financial statements prepared by an outside professional without the higher cost of reviewed or audited financial statements. With compilations, or compiled financial statements, the outside accountant converts the client’s data into financial statements without providing any assurances or auditing services.

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The accountant is also not required to gather any evidence for the purpose of verifying the information provided. Aside from presenting the financial condition and results of operations of the organization, a compilation is useful in that it provides the organization’s financial statements a level of credibility from an independent certified accountant. Although no assurance is given by the accountant, third parties will still appreciate an organization who hires an accountant for compilation services based on the professionalism, reputation, and skills of the accountant involved. Also, it does not provide assurance that the company has complied with the accepted accounting principles. Therefore, the accountant engaged in a compilation engagement is not required to use analytical procedures, review procedures, or inquiries, or engage in other audit procedures.

However, the essence of the compilation is hidden in the purpose of the compilation. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Access and download collection of free Templates to help power your productivity and performance.

What is a review?

In a review engagement, the auditor conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct. The result is a limited level of assurance that the financial statements being presented do not require any material modifications. In an audit engagement, the auditor must corroborate the ending balances in the client’s accounts and disclosures. This calls for the examination of source documents, third party confirmations, physical inspections, tests of controls, and other procedures as needed. Because a review engagement is substantially less intensive in scope than an audit, the CPA cannot express an opinion on the fairness of the financial statements taken as a whole. The reason why the accountant does not offer any assurance in the compilation report is that he or she is not required to check the completeness or accuracy of the data given by the organization.

A qualified opinion due to a scope limitation alerts the reader that, except for the matter to which the qualification relates, the financial statements present fairly, in all material respects, the company’s financial position. If the scope limitation is severe enough, the auditors may disclaim an opinion on the overall financial statements. Contrary to review and audit engagements, the accounting expert is not required to verify the accuracy of the information included in a compilation report and assumes no responsibility for it. Many people might be concerned about the objective of compilation if it is not equivalent to a review or audit of the financial statements. Through compilation services, Fred Albi, Chartered Professional Accountant can prepare monthly, quarterly, or annual financial statements.

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Depending on the terms of the engagement, the accountant may be required to prepare a single financial statement or a set of key financial statements. In some cases, a compilation engagement allows companies without an in-house accountant to hire an outside professional accountant to prepare their financial statements without incurring higher costs of preparing audited financial statements. A compilation involves (1) gaining a general understanding of your business, accounting principles used and financial reporting system and (2) presenting financial information in the accepted format of proper financial statements. The CPA expresses no assurance about the accuracy of the financial statements presented.

What is a Review or Compilation?

This brochure compares a basic financial statement preparation, compilation, review and audit engagements and can assist you in educating your clients on the differences between the levels of service. Click on the link below to download the PDF for this brochure, which can be personalized for your firm and provided to your clients. The objective of a financial “review” conducted by an independent auditor is to examine the nonprofit’s financial statements and determine whether the financial statements are consistent with generally accepted accounting principles. A review shares the goals of an audit, however, a review is not conducted with the same level of investigation or analysis as an independent audit. The compilation report may be a full disclosure report with complete footnote explanations of certain amounts and policies contained in the financial statements. Omission of this information is not permissible under the other levels of service.

After compiling the financial statements, consideration will be given to whether they are appropriate in form and free from obvious material errors. Once completed, a standard report may be issued that says, in effect, that the financial statements were compiled, but because they were not audited or reviewed, no opinion is expressed. A compilation differs significantly from a review or an independent audit of financial statements. A compilation is literally a compilation of financial records into a format required by accounting standards.

A compilation refers to a company’s financial statements that have been prepared or compiled by an outside accountant. The compilation statement is a requirement of many business entities seeking loans or other purposes. Many financial institutions or creditors do not rely on the compilation statements as there is no assurance provided in the statements.

Instead the review provides a limited level of assurance that the financial statements are free of misrepresentations. The auditor’s report after a review will note whether the auditor is aware of any “material modifications” that should be made to the financial statements. The report after a review is not considered to provide a professional opinion about the nonprofit’s financial statements as a whole. The purpose of having an audit is to provide financial statement users with an opinion by the auditoron whether the financial statements are prepared in accordance with the proper financial reporting framework. An audit enhances the degree of confidence that intended users, such as lenders or investors, can place in the financial statements.

After gathering appropriate evidence through this process, the auditor issues an opinion about whether the financial statements are free from material misstatement. The auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, and whether the misstatements are from error or fraud. Compilation engagements, audit engagements and review engagements can be prepared by Chartered Professional Accountants (CPAs) in accordance with professional standards and ethics. As the chart indicates, a compilation engagement is not a certification and the expert does not offer any assurance regarding the financial statements.

The external accountant, mostly a CPA, assists a company’s management in presenting the accounting data in the form of financial statements. The presentation of data does not cover any assurance about any material modifications needed to make the statements according to a prescribed accounting framework(GAAP or IFRS). When a company’s financial statements are prepared or compiled by an external certified public accountant, it refers to a compilation of financial statements. In order to provide financial statements and compilation report, an accountant must follow the Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. These standards stipulate that financial statements include a balance sheet or statement of financial position, an income statement and a statement of cash flows. The balance sheet presents the assets, liabilities, and equity of the organization.