What is the difference between reviewed and compiled financial statements?

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Compilation
Get Help from the Expert CPAs and Auditors at Aprio
Audited Financial Statements
Reviewed Financial Statements
Compiled Financial Statements
The Bottom Line on Audits, Reviews and Compilations

Sometimes, a third party will request a copy of your financials that have been reviewed or prepared by a CPA. These external parties are requesting “assurance.” They want to verify the financial integrity of your organization. This assurance certifies the correctness and validity of the financials reviewed by the CPA.

There are three levels of these services, with increasing assurance provided by the CPA: Compilation, Review and Audit.

Compiled Financial Statements

Compiled financial statements represent the most basic level of service we provide with respect to financial statements. In a compilation, we assist management in presenting financial information in the form of financial statements, without providing assurance that no material modifications should be made to the statements.

In a compilation, we don’t perform inquiries, analytical procedures, or other procedures ordinarily performed in a review; nor do we obtain an understanding of internal control, assess fraud risk, test records, or any of those procedures performed in an audit. As such, we do not provide assurance that no material modifications should be made to the financial statements.

The result of a compilation is generally considered an expression of “no assurance.” Compiled financial statements are often prepared for clients that do not need a higher level of assurance expressed by a CPA.

Reviewed Financial Statements

Reviewed financial statements provide the user with comfort that, based on our review, we are not aware of any material modifications that should be made to your financial statements for them to be in conformity with the applicable reporting framework.

In a review, we perform procedures like inquiries and analytical procedures that give us a reasonable basis for obtaining limited assurance that the financial statements do not require material modifications. As with a compilation, a review does not involve obtaining an understanding of your entity’s internal control, assessing fraud risk, testing accounting records, or other audit procedures.

Audited Financial Statements

The objective of an audit is to obtain a reasonable level of assurance about whether the financial statements as a whole are free of material misstatement.

This allows us as auditors to express an opinion about whether the financial statements are presented fairly, in all material respects.

In an audit, we corroborate the amounts and disclosures in the financial statements by obtaining audit evidence, performing analytical procedures, observations, confirmations, etc. We also obtain an understanding of your entity’s internal control and assess fraud risk.

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Any business needs credibility in its financial statements. There are three main ways to do so: a compilation, a review, and an audit, the latter being the most formal option. We’ll uncover the differences between a compilation vs. a review vs. an audit.

Say you’re finally about to close a deal that could change everything for your company. But before you take such a momentous step, you have to take a good, hard look at your records – maybe just in the financial assurance mirror through a compilation, but it could possibly mean under the microscope of an audit.

To choose the right level of scrutiny for your financial reports, you’ll need to get help from an auditor or a certified public accountant (CPA) and pick one of three views: a basic compilation report, a more involved review or the most thorough, an audit.

Compilation

This is the most basic accounting service, a cover page written by a CPA that accompanies a set of your financial statements. Having compiled financial statements shows lenders you have an association with a CPA, but doesn’t offer a deep level of assurance on the accuracy of the financial statements.

Since the CPA does a cursory check on basic features of your financial statements to write a compilation letter, no special preparation is required on your part.

A compilation may be sufficient for a small business owner seeking a personal loan. But most of the time, a more credible reviewed financial statements or an audit will be required for a business loan.

Review

Overall, the review process involves:

Review and inquiries on financials;
Making inquiries related to the accounting practices and principles used by the business; and
Performing analytical procedures to understand current-year and prior-year balances, or current-year balances outside the CPA’s expectations.

To know where to look for potential accounting errors, the CPA needs to have enough information about your company and understand your industry and its accounting principles. You need to gather all documents requested in advance by the CPA, including your:

Trial balance;
Bank reconciliations; and
Accrual schedule, deferred revenue and more.

A review will usually satisfy prospective lenders, buyers and investors who don’t have a lot at stake. In particular, reviewed financial statements are used for seeking a smaller line of credit or a small business loan.

When the loan requires a company to comply with certain loan covenants, a review vs. audit discussion is probably needed. Businesses often use a review as a stepping stone to reduce the challenges of a first-year audit.

Audit

The audit is the most thorough assurance service, requiring considerably more effort on the CPA’s part — and yours, as you’ll field more information requests.

In an audit, a CPA is required to obtain evidence through inquiry with appropriate personnel, physical inspection, verification and substantive testing procedures. A CPA or auditor also will examine supporting or source documents, send third-party confirmations to confirm the balances and legal matters, and perform analytical and other procedures.

Auditors want to be sure your financial statements are free from material error or fraud. Audits are generally required if you are:

Planning a major financing;
Looking for extended credit from major suppliers;
Raising equity;
Planning to sell a business;
Expecting your company to have a public offering in the future; or
Expecting your company will be funded by the federal or state governments.

All publicly traded companies are required to have their financial statements audited and reported to the SEC on a quarterly and annual basis.

Get Help from the Expert CPAs and Auditors at Aprio

When considering an audit vs. review vs. compilation, don’t buy an electron microscope when a magnifying glass will do. Depending on your business goals, a simple compilation may work well instead of a full audit. Knowing what level of service you need can save you time, energy and money. Consult with the expert CPAs and auditors at Aprio to identify the service level suitable to your needs.

Sometimes, a lender or other outside party will request a copy of a business’s financial statements. They may ask for financial statements that have been audited, reviewed or compiled by a CPA. What they’re really asking for is some form of “assurance” that the company’s financial statements are accurate.

However, there are significant differences between an audit, a review and a compilation — in terms of cost as well as the level of assurance provided.

Audited Financial Statements

An audit is the highest level of assurance a CPA can provide. The objective is to obtain “reasonable assurance” about whether the company’s financial statements as a whole provide a fair view of the company’s financial position. An audit also ensures that the financial statements conform to the applicable reporting framework, such as U.S. generally accepted accounting principles (GAAP).

To reach that level of reasonable assurance, the auditors corroborate the amounts and disclosures in the financial statements by:

Making inquiries of management and others to get an understanding of the company’s internal control and assess the risk of fraud
Evaluating the company’s internal control system
Performing analytical procedures to look for unexpected variances in account balances or transactions
Gathering documentation to support amounts shown in the financial statements, including bank statements and reconciliations, accounts payable and accounts receivable aging schedules, revenue records, contracts, etc.
Making observations, such as watching a physical inventory count or viewing fixed assets
Confirming amounts with third parties, such as cash, accounts receivable, and loan balances

The keyword here is “reasonable.” Auditors cannot offer absolute assurance that there are no errors in the company’s accounting records because there are inherent limitations of audit procedures. For example, auditors typically test a sample of transactions, rather than 100% of transactions, and auditors assess the company’s accounting based on their interpretation of accounting standards.

Because of the work involved, audits are typically the highest-cost assurance service that a firm provides.

Reviewed Financial Statements

A financial statement review aims to provide the user with assurance that the firm is not aware of any material modifications required in the financial statements. Essentially, it asks, “Do the numbers make sense?” This is a step down from the level of assurance that an audit provides.

During a review, accountants perform analytical procedures to look for trends and unusual variances. These analytical procedures may include comparing prior year numbers to the current year and comparing financial ratios to industry benchmarks. If the accountants find unexpected variances, they may ask management more questions or seek out supporting documentation.

Accountants don’t evaluate the company’s internal controls, assess fraud risk, test accounting records or perform other audit procedures.

CPAs must be independent to perform audits and reviews. This generally means that the accountant doesn’t have a financial interest in the company they’re auditing or reviewing, doesn’t serve the client in an advisory or management role, and isn’t under pressure to promote or defend the client’s interest.

Compiled Financial Statements

The objective of a compilation is to assist management in presenting financial information in the form of financial statements. Essentially, the accountant takes company-provided data and creates financial reports in the appropriate format.

During a compilation, the accountant gains a general understanding of the business and its financial reporting policies and procedures. An accountant does not perform analytical procedures, evaluate the company’s internal controls, assess fraud risk or test accounting records. However, the accountant might ask for certain documents — such as bank statements, loan amortization schedules, and contracts — to properly draft the financial statement footnotes.

Because a compilation’s scope is so limited, the compilation report doesn’t offer any assurance that the financial statements are free from error or conform to the applicable reporting framework.

Accountants can issue compilation reports even if they’re not independent. However, the compilation report must disclose that fact.

The Bottom Line on Audits, Reviews and Compilations

If your business receives a request for audited or reviewed financial statements, discuss the request with your CPA firm to determine what the lender, investor or other outside party really needs. It can be tricky to strike the right balance but taking the time to discuss the matter can ensure you select the right level of assurance for your company and your budget. It’s important to select the appropriate level of assurance that balances the costs and the benefits.

For more information, reach out to our audit experts.