Compilations, Reviews and Audits

Most small business owners and managers understand that certified public accountants (CPAs) can perform audit services and issue an audit report on a company’s financial statements.  However, you may not be aware that there are alternatives to the audit engagement.  CPAs can provide two other levels of service for unaudited financial statements.  These two types of engagements are compilations and reviews.  The purpose of these engagements is to add credibility to and enhance the reliability of the company’s financial statements.  Quite often, regulatory bodies, non-management owners, banks that provide loans or other organizations that transact business with a company (such as suppliers that sell on credit or leasing companies) will request some level of involvement or participation by external CPAs in the financial reporting process.  The following information should help you make more informed decisions regarding the level of involvement of external CPAs in the financial reporting process. 


Compilation Engagement 

The compilation is the lowest level of service that a CPA can provide for a client’s financial statements.  A compilation engagement requires less time than a review or audit engagement because fewer procedures are required.  Rule 202 of the American Institute of Certified Public Accountants’ Code of Professional Conduct specifically requires accountants who perform compilation, review or auditing services to comply with all professional standards.  Rule 201 of the same Code of Professional Conduct requires that the accountant “shall obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.”  However, within the constraints of Rule 201, compilation standards do not require the accountant to perform any procedures to verify or corroborate the financial statement information provided by the client.  On the other hand, the accountant must address significant questions that arise in the course of the compilation engagement.  If the accountant has reason to believe the information supplied by the client is inaccurate, incomplete or otherwise unsatisfactory, the accountant is required to obtain revised or corrected information before reporting on the financial statements. 


The compilation standards require the accountant to possess an adequate level of knowledge about the accounting principles and practices of the client’s industry and have a general understanding about the nature of the client’s business.  The accountant is required to read the compiled financial statements and consider whether they are in appropriate form and free from obvious material errors.  Because of the limited scope of compilation procedures, the standard compilation report disclaims any degree of assurance on the financial statements.  The standard compilation report states that the accountant has “not audited or reviewed the accompanying financial statements and, accordingly, does not express an opinion or any other form of assurance on them.”  At a minimum, a compilation engagement with the accompanying accountant’s report is required any time an external CPA is associated with the financial statements of a client. 


Review Engagement 

A review engagement requires all of the procedures necessary for a compilation engagement, plus other procedures that enable the accountant to provide limited assurance on the financial statements.  These additional requirements are inquiries of client management and analytical procedures.  Inquiries should be directed to knowledgeable persons having responsibility for financial and accounting matters.  Accountants exercise their professional judgment to determine the extent of inquiries that are needed.  Although specific inquiries are tailored for each client, the inquiries should, at a minimum, relate to: the accounting practices and principles used by the organization; the procedures for recording and accumulating financial information; and the actions taken at meetings of the organization’s stockholders or board of directors. 


Analytical procedures include: 


  • comparison of current-period financial statements with statements of prior periods or with current-period budgets or forecasts; 
  • study of the financial statements to identify items or relationships between items that do not conform to expectations based on earlier reports or other information; and 
  • review and consideration of adjustments made to the financial statements of prior periods. 


The purpose of analytical procedures is to identify account balances or relationships that appear unusual so that additional inquiries can be made to determine the cause of the unexpected patterns.  Based on these inquiries, any necessary adjustments to the financial statements may be made. 


Because of the inquiry and analytical procedures, accountants are able to express limited assurance on client financial statements that have been reviewed compared to the disclaimer of any assurance on client financial statements that have been compiled.  The standard accountant’s report that accompanies the reviewed financial statements states that the review engagement is substantially less in scope than an audit engagement, and no opinion can be expressed on the financial statements taken as a whole.  The report concludes with the statement, “On the basis of our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.” 


Audit Engagement 

The audit engagement provides the highest level of assurance on the client’s financial statements, because many important audit procedures are not required for compilations or reviews.  Some of the more important auditing procedures are: 


  • consideration and evaluation of the internal control system of the company, which may include testing the effectiveness of the system; 
  • tests of the underlying documentation to support account balances; 
  • observation of the physical inventory counts (if any); and 
  • outside confirmation of account receivable balances. 


In addition, the auditor is specifically required to obtain reasonable assurance that the financial statements are not materially misstated due to fraud.  In a compilation or review engagement, the accountant is not required to document any assessment of fraud risk, nor are they required to consider fraud or search for fraud in the course of the engagement.  The standards for review and compilation engagements do require the accountant to inform management of any material errors, fraud or illegal acts that come to his or her attention during the course of the engagement.  Compilation and review standards also require the accountant to inform the client of any reportable conditions that represent significant deficiencies in internal control that come to his or her attention during the course of the engagement. 


The audit report reflects a higher level of assurance based on the more extensive procedures performed.  The standard audit report states, “In our opinion, the financial statements present fairly, in all material respects, the financial position of (client company) as of (date), and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. 




The previous discussion focuses on differences inherent in the three types of engagements.  However, two important options for reporting are similar in all three types of engagements and may present less costly alternatives to those described above.  First, all types of engagements and reports (compilation, review and audit) may apply to only one statement issued (i.e., balance sheet or income statement) and not to any of the other statements issued.  For example, the company may request only a balance sheet audit.  In this case, audit procedures relate to the balance sheet, and the audit opinion will apply only to the balance sheet and not to any other financial statements presented.  This is often an option when circumstances (such as failure to observe beginning of the year inventory) preclude the issuance of an audit opinion on the other financial statements. 


A second reporting option for each type of engagement is the presentation of statements that are prepared on certain comprehensive bases of accounting other than generally accepted accounting principles.  The other acceptable bases of presentation include those required by certain regulatory bodies; the basis of accounting used for tax reporting, cash basis or modified accrual basis; or any other basis that has substantial support.  For example, a company may maintain all books and records on the basis of accounting that is used for tax reporting rather than in conformity with generally accepted accounting principles applicable for financial reporting.  In this case, rather than adjusting all account balances to reflect generally accepted accounting principles, the CPA may issue a compilation, review or audit report that specifically states that the financial statements are prepared in conformity with tax reporting principles. 




This is a broad, general overview and comparison of the compilation, review and audit engagements.  The purpose of this discussion is to increase the level of awareness and understanding of business owners and managers regarding the options available to them with respect to the level of involvement of external CPAs in the financial reporting process.  Business owners and managers should choose the level of involvement that is required or needed based on the company’s particular circumstances.  A greater understanding of the alternatives that are available should help business owners and managers to make appropriate and cost-effective choices among those alternatives.  This discussion is not intended to provide comprehensive coverage of all of the details and requirements of these types of engagement.  For more information concerning the applicability of any of these services for your business, please contact us.