This may seem like a confusing question, but the differences between an Audit, a Review and a Compilation are easy to understand once you break each one down. In all cases, a complete set of business Financial Statements include:
- Profit & Loss Statement (P & L)
- Balance Sheet
- Statement of Cash Flows
All three, whether Audit, Compilation or Review, are prepared by a Certified Public Accountant (CPA) who has analyzed your business’ financial information. The type of report delivered will depend on your needs as the business owner, coupled with the requirements of your creditors, and/or investors.
Compiled Financial Statements
The compiled financial statement is the most basic. The CPA, when preparing this report, is expected to have a knowledge of the industry so that he or she can identify any questionable transactions. Before the report is completed, the CPA may make some adjusting entries in your existing financial records to correct something or to bring it into compliance with typical financial statement formats.
When the report is finalized, a statement is included that the document was prepared according to American Institute of Certified Financial Planners (AICPA) standards, but no assurance is expressed that the statements conform to accepted accounting principles or that they accurately represent the business’ financial condition.
Reviewed Financial Statements
On the other hand, reviewed statements include a bit more investigation – namely that the CPA performs certain financial inquiries and analytical procedures, beyond what is done in a Compilation.
When completed, a statement reads that the review was done according to AICPA standards, and that there is “limited assurance”; meaning that the CPA is not aware of any material modifications that should be made for statements to be in conformity with generally accepted accounting principles (GAAP). This is usually sufficient for bank loans and trade creditor type situations. This type of report is not as detailed as an audited financial statement.
Audited Financial Statements
The audited financial statement is the highest level of assurance and the most detailed report. The CPA performs all of the steps above, as well as many additional verification and substantiation procedures. These procedures may include correspondence with third parties to verify vendor amounts and bank account balances, physical inspection of inventories, and a close review of contracts. The CPA must also learn the company’s internal control system. Only with an audited financial statement can the CPA say with certainly that the report was done according to accepted auditing standards and that there is “positive assurance” that the financial and operational details are true.
The audit is clearly the report to order if you need a professional financial opinion for some reason, such as selling the business or potentially purchasing one. Also, if you have investors, this is definitely the level of scrutiny they will expect. If there are multiple owners in the business, this is also the preferred report as it gives everyone a high level of assurance that everything is correct with you business’ accounting and financial reporting.