What procedures are required when a CPA performs a compilation of financial statements?

You will want to prepare your financial statements in accordance with an accounting framework that’s appropriate for your business. Most of the time, you’ll opt for a CPA to produce your financial statements. Getting an accountant’s blessing is especially useful when you are applying for more credit from a bank.

Financial statements are intended to give you current information on your business’s financial standing so you can make more informed decisions. There are three levels of overview you can choose to take — compilation, review or audit — and what you select will have a lot to do with what your objective is.

The Compilation

According to guidance from the American Institute of CPAs, a compilation is suitable for use by lenders and other outside parties who may appreciate the business’s association with a CPA. There is no assurance here, but the CPA will read the financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements.

It may be appropriate when a company is seeking only relatively minor levels of financing and may have significant collateral.

The Review

The next level is a review. According to the AICPA, the review is designed to provide lenders and other outside parties with a basic level of assurance on the accuracy of financial statements. The CPA performs analytical procedures, inquiries and other procedures to obtain limited assurance on the financial statements and is intended to provide a user with a level of comfort on their accuracy.

A review might be the right move for companies seeking larger levels of financing and have more complex credit needs.

The Audit

The highest level of assurance is an audit. The CPA performs procedures to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement, according to the AICPA. The CPA is required to obtain an understanding of your business’s internal control and to assess fraud risk. Your CPA is also required to corroborate the amounts and disclosures included in your financial statements by obtaining audit evidence through inquiry, physical inspection, observation, third-party confirmations, examination, analytical procedures and other procedures.

An audit is an annual requirement for publicly held companies and may be advisable for other companies seeking high levels of finance and opening themselves to outside investors.

How often will you want your CPA to peruse your finances? Overviews can be done in any frequency that is useful to you and your business — monthly, quarterly or annually. Some folks say that your financial statements are more than snapshots of your business but can be seen as resources to tell you where your risks and opportunities are. Financial statements can help you identify and solve potential problems before they compromise the health of your business.

Be sure to keep in touch with your accountant to decide which financial services are right for your company.

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What is the difference between a review, compilation, and audit?

When it comes time to review financial statements, business owners look to different options in order to reduce time and cost. But how can you be sure which method will provide the correct method of assurance, and which is required for your specific needs?

Learn the difference between the three methods of analyzing your business's financial records here and make a more informed decision in confidence.

A compilation is a basic summary of your company’s financial statements written by a CPA using data provided by your company.

Unlike a review or an audit, this method provides no assurance. There are no tests performed, and the auditor does not examine any internal controls.

During a compilation, an accountant will review and inquire about your business’ financial statements, but will not compare them to any of their expectations. This means that they cannot provide any opinion or assurance.

Due to its informal nature, the CPA performing a compilation is not required to be independent of your business. This means your current CPA can also perform your compilation for you.

When is a compilation performed?

A compilation should only be used in very straightforward, uncomplicated situations.

If you need to present the company’s financial information from your financial statements on a surface level, or if your business simply needs a second set of expert eyes to review the financial records, then a compilation may be a sufficient enough method for your needs.

It is always recommended, however, to first consult with a CPA to ensure that you choose the correct method that will cover the amount of assurance needed for your unique situation.

What is a review?

A financial review is a limited examination performed by a CPA, reporting on the plausibility of your financial statements.

A review provides limited assurance, while an audit provides a reasonable amount of assurance.

This method is narrower in scope than an audit, still providing an evaluation of your business’s books, but limiting the auditor’s analysis to analytical procedures and assessment of management. 

The outcome can only determine the plausibility of your business’ financial statements. The auditor can only vouch that your financial statements are free from any material misstatements, and determine if they meet generally accepted accounting principles.

Who needs a financial review?

Many business owners who are not legally required to have an audit, but would still like an analysis of their financial records, many opt to instead have a review in order to save time and money.

Am I required to get a financial review?

While there are currently no laws that require reviewed financial statements, some grantors or lenders may include an annual reviewed financial statement requirement in your loan or grant agreement.

Many business owners also find a financial review to be beneficial to their business even though it is not required of them, as the insights and moderate assurance provided give a level of confidence that is reassuring to them, their board, lenders, and investors.

What are the benefits of a financial review?

Getting your financial statements reviewed lets you have another, independent set of eyes dive into your business’ financial statements can help provide extra security, guidance, and more.

Can a review turn into an audit?

It is commonly thought that a review can be an easy first step for transitioning into an audit in the following year, but this is not always the case.

You should always consult with a CPA to make sure that you are performing the correct financial assessment method for your business and to ensure that there is value in performing a review instead of moving directly to an audit.

What is an audit?

An audit is a very thorough examination of the financial records for your business, which determines if the information correctly reflects the financial position at the given time.

An audit is a much more critical, systematic process that requires detailed testing such as examining your business’ accounting records and looking through financial statements. The auditor may even interview employees within your company to survey internal controls.

As a result, the results of an audit lead to the highest level of assurance that can be provided.

Who needs an audit instead of a review?

In some circumstances, it will be required for your business to perform an audit. Certain states require audits for businesses over a revenue threshold, or the audit may be required by your grantor or lender.

In this case, a financial review will not be sufficient. Your business will need the help of a qualified auditor to assess your needs and situation and perform the full processes of an audit.

What are the costs of an audit, review, and compilation?

The processes and procedures required for an audit, review, and compilation all differ significantly, which means that the costs will differ significantly as well.

A compilation takes the least amount of time, which makes it the lowest cost option for your business. However, it is the least comprehensive of the methods.

A review requires much fewer hours than an audit, but more hours and processes than a compilation, making it the second cheapest option for your business.

While an audit tends to be the most expensive option, it is also the most thorough and complete analysis and overview of your financial statements.

Deciding between an audit, review, or compilation

Making the choice between an audit, review, or compilation will come down to a question of your needs and the needs of your business. While of course cost is always considered, it should not always be the determining factor. Making a thorough, thought out plan with an experienced CPA firm can lead you to the correct decision for your business. A CPA has the knowledge and know-how to lead your business in the right direction, and help you choose the option right for you.

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