Audit, Review and Compilation: What Is the Difference?

An image of a Burlington Accountant reviewing financial documents for an audit

Every company, whether a startup, small business, or public corporation, needs a Chartered Professional Accountant (CPA) to prepare their financial statements according to specific requirements. Financial statements serve many purposes, such as budget review, tax filing, financial updates to investors, creditors, and government agencies, identifying inefficiencies and financial fraud, or submitting loan applications to banks. A CPA can provide three types of financial reports – compilation, review, and audit – depending on your business requirements.

The three reports differ based on their detailing, scale of procedures, and time spent. This article will discuss the three financial reports, what they offer, and when you need them.

What Do Compilation Services Offer?

The most basic level of engagement is compilation. A CPA will compile all the information you provide (bank statements, invoices, ledger books) into an income statement, balance sheet, and cash flow statement as per the usual industry standard. The accountant will check for any clerical or formatting errors and prepare a report called a “Notice to Reader.” The notice will state that the financial statements are unaudited and there is no assurance that they are free from material misstatements.

Compilation services are sufficient if the purpose does not require financial statements to meet legal standards. Small companies that need financial reports for internal use to complete tax filing, or to apply for loans can consider compilation services as they are cost-efficient and do not require much detailing or procedures.

However, a compiled financial report may not be sufficient if legal procedures are involved or you need to find anomalies in your business finances. You might want to consider more advanced reporting.

What Do Review Services Offer?

In review services, the CPA does more than just compilation of information into a specific format of financial statements. The accountant reviews financial statements analytically and determines whether the numbers are plausible. As part of the review, the CPA may

  • Look at supporting documents, such as bank statements and other records,
  • Discuss accounting practices, bookkeeping systems, and financial planning policies to identify any gaps, and
  • Perform some analytical procedures.

Once the CPA is convinced the amounts in the financial statements are plausible, he/she will issue a review engagement report. The report may provide a low-level assurance that nothing material has come to the CPA’s attention that would make him believe that the financial statements have not followed the accounting standards.

Review services are ideal for small and medium-sized companies who want to give some assurance to their investors, lenders, clients or stakeholders with whom they have an established relationship. The company can also use review services to verify the accuracy and effectiveness of its statements and accounting practices. Here again, the purpose should not be for legal compliance.

When legal compliance is involved, audit services are your best option.

What Do Audit Services Offer?

While compilation and review services touch the surface, audit goes in-depth, verifying and physically examining all documents, policies, procedures, and systems. An audit involves substantiative procedures but also provides a high degree of assurance at the legal level.

  • In an audit, the auditor or CPA will physically examine invoices, purchase orders, inventory, and assets and collect evidence of the amounts stated in the financial statements.
  • The accountant will also develop an understanding of the internal controls, policies, and practices and check for any deficiencies to include them in the report, with supporting evidence.
  • The CPA then prepares an audit report stating that financial statements are free of material misstatement and follow industry practices and legal standards.
  • Along with the audit report, the professional provides a “Management Letter” stating the honest evaluation of the company’s finances, internal control, policies and accounting practices with recommendations for improvements. The professional may also highlight any other significant findings in the letter.

In Canada, soliciting corporations with more than $250,000 in annual revenue and non-soliciting corporations with over $1 million in revenue are required by law to conduct external audits. However, even smaller companies that do not have a legal obligation can perform external audits to attract potential lenders and investors prevent fraudulent practices in financial reporting and improve the performance of the internal bookkeeping systems.

Every business situation is different and may have different requirements. You can talk to a CPA to clarify which type of financial report will serve your purpose.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Accounting Needs

A professional accountant will understand your business requirements and suggest the reporting service you might need and why. While an audit may seem tedious, it can identify major fraud, saving the company a lot of money. To learn how Edelkoort Smethurst CPAs LLP can provide you with business accounting and financial reporting services, contact us online or by telephone at 905-517-2297.