July 17, 2017

The annual audit of financial statements is required for many organizations, often becoming a process their accounting staff has come to dread. For a lucky group, a review or compilation of their annual financial statements is adequate and is an attractive and less burdensome alternative to an audit. Understanding the difference can save your organization time and money and help you easily navigate many operational activities.

Audit vs. Review vs. Compilation – what is the difference?

An audit of financial statements is the highest level of assurance that a CPA provides and is a deep dive into the organization that includes evaluation of internal control, an assessment of fraud risk, and other procedures with the goal of obtaining reasonable assurance about whether the financial statements are free from material misstatement.  Following the audit, the independent auditor issues an opinion stating that the financial statements are fairly stated and in accordance with generally accepted accounting principles.

Reviews and compilations are very different from audits and do not include testing of transactions or pulling samples. By comparison, a compilation offers no statement on the fairness of the financials, but rather puts the client’s data in the form of financial statements.

A financial statement review puts the client data in the form of financial statements and simply states that the CPA is not aware of any necessary adjustments. This form of limited assurance is obtained by the performance of inquiry and analytical procedures on client data. Additionally, reviews and compilations do not typically require contemplation or analysis of internal control. However, one key similarity is that generally accepted accounting principles are the same regardless of whether you are being audited, reviewed, or compiled.

What to expect during the process

At the start of your review or compilation, your CPA expects that your books are closed and that all major balance sheet accounts are reconciled.  Additionally, be sure revenue and expenses are recorded in the correct period.  If your financial statements need anything more than minor adjustments, your CPA is likely to charge you for out-of-scope accounting/bookkeeping work.

Your CPA will typically ask for items such as bank reconciliations, accounts receivable aging reports, the fixed asset (property) schedule, accounts payable aging reports, support for loan balances, support for other material balance sheet items, and a reconciliation of amounts recorded as salaries to the IRS payroll returns.  In addition to these items and for the required disclosures, your CPA will also need information about the purpose of your business, your basic accounting policies as well as additional information such as details on loans, leases, retirement plans, warranties, etc.

Your CPA will also want to schedule an in person meeting or a phone call to go over all of the inquiries that are required by accounting standards. If your CPA is also doing tax work for you, there will likely be more data requested.

What results from the review or compilation?

The “output” of a compilation or review is nearly identical to that of an audited financial statement in terms of appearance; however, the major differences include:

Audit Outputs

States that the financial statements present fairly, in all material aspects, the financial position, results of operations and cash flows of the organization in accordance with generally accepted accounting principles.

Review Outputs

States that the CPA is not aware of any material modifications necessary for the financial statements to be in accordance with generally accepted accounting principles.

Compilation Outputs

Offers no attestation and states that neither an audit nor a review has been performed. Does not include an opinion on compiled financial statements.

When does an organization need a compilation or review?

In many cases, parties that request financial data from your organization use terms that are generic or otherwise inconsistent with the language that accountants speak.  For example, banks often request a “CPA prepared financial statement”. In many cases though, statements from the organization’s accounting system are adequate, saving them time, money and effort. Before embarking upon an audit, ask the person or organization making this request to clarify exactly what is required for your stated purpose.  If you receive any type of federal or state funding, you should become familiar with the reporting requirements of the funding agency to avoid last minute surprises.  It should be noted that many non-accountants use the term “audit” interchangeably with financial statement, compilation, review, etc. so determining which is most appropriate for your needs is essential before engaging your CPA.

As an accounting professional, understanding the difference and practical application of the audit, review and compilation will help you select the best solution for your financial reporting needs.  For more information on reviews and compilations, contact John Pace, Partner, Gelman, Rosenberg and Freedman CPAs at jpace@grfcpa.com or 301-951-9090.

John R. Pace, CPA, CVA

Partner and Director, Outsourced Accounting & Advisory Services