Compilations vs. reviews vs. audits
Certified public accountants (chartered professional accountants in Canada) can supply different types of financial reports to their clients. Each serves a specific purpose, from providing a correctly-formatted financial overview to offering insights into budgets, taxes and overall performance.
Though the needs of each client can vary, there are three main categories of reports that accountants can provide: compilations, reviews and audits. Compilations and reviews are less-detailed options that provide financial data and informal assessments. Audits are more in-depth studies that assess whether or not formal financial documents reflect the actual condition of a company or organization.
All three types of engagements provide independent insights into a company’s finances. Transparency and independence are why companies often work with an outside CPA. This professional can provide objective services that offer honest insights into the company’s finances, policies and accounting practices.
Here is a closer look at these three types of reports you can offer clients and the details and benefits each one provides.
What is a compilation?
A compilation is the least detailed type of report accountants provide. It contains financial data from company ledgers. As an accountant, you will present the data in the form of a financial statement or report. However, you do not need to perform any additional research to check on the accuracy of the numbers or confirm whether or not they meet industry expectations or standards.
CPAs should tell their clients that a compilation provides no assurance. This means that you will not check the internal accounting and bookkeeping practices or look for instances of fraud while compiling the report.
When you perform this service for a client, you will look at the form of the financial statements, check for clerical errors, and ensure that the reports meet the usual practices for the client’s industry. It is helpful to be aware of the standards for the sector, including formatting and details to include in the statement.
Specialized compilation and review software can make these engagements efficient and straightforward. For example, intake checklists and guides can help you understand the client’s exact needs. Meanwhile, statement forms, report templates and automated letter drafting can streamline the tedious aspects of a compilation engagement. Finally, the automatic nature of these systems can help you avoid human error and catch problems before submitting a final report.
When to provide a compilation?
Compilations are for clients who need simple, correctly-formatted financial statements to use internally or provide financial information that does not have to meet any legal requirements or standards. Companies may hire an outside accountant to double-check the numbers and format of their financial statements. Perhaps they will use the information in statements to complete tax documents or apply for loans or lines of credit.
An accountant typically explains the process and limitations of this type of engagement to the company stakeholders and ensures that they do not need additional assurances for compliance or to provide to lenders or investors.
What is a review?
A review is a more in-depth and detailed process than a compilation. Like a compilation, you will check the formatting and figures of financial statements. However, you will also look into supporting documents, such as bank statements and other records.
During a review, you may also ask about accounting practices and bookkeeping systems, financial planning policies and management, and practices for correcting errors and detecting theft or fraud.
When you perform a review for a client, you agree to provide limited assurances that the statements are correct and meet standards for the industry. For example, you will assess the finances, records and accounting practices to see if they meet the standards set out by the generally accepted accounting principles (GAAP).
You will report that the statements and practices meet or don't meet these standards. However, unlike an audit, you only have to provide limited supporting evidence.
When to offer your clients a review?
A review is more in-depth than a compilation, so it provides some insight into a company’s accounting practices. If a company has an established relationship with lenders or stakeholders, and the law does not require them to perform a complete audit, a review is a cheaper and faster option.
Because they do not require the same level of investigation as audits, reviews are generally cheaper. This fact can make them a good option for a smaller company that wants to verify the accuracy and effectiveness of its statements and accounting practices while still keeping to its budget.
What is an audit?
An audit is the most in-depth service an accountant provides to their clients, usually requiring auditing software solutions. An audit delivers the highest level of assurance that published fiscal reports and statements are accurate and reflect the real financial performance of the company.
An auditor will look at the same information as the other two types of engagements, but they will also investigate the entire accounting and financial records system of the company. The goal of this research is to verify that all practices meet industry and legal standards.
During an audit, you will collect evidence to help create the final report and use it to support your findings. The auditing process will follow the generally accepted auditing standards (GAAS), so you will need to complete specific steps during the engagement.
A company can have both internal and external audits. Contracted third-party accountants or in-house auditors perform internal audits. They share the results internally but do not have to make them public. An internal audit can help companies find areas for improvement or assess performance in accounting and bookkeeping, fraud prevention practices and other related areas. The firm can also use internal audits to correct compliance or reporting issues before an external audit.
External audits look at the veracity of a company’s financial statements and decide whether or not they create an accurate picture of the company’s finances.
When to offer an audit?
An audit offers the highest level of assurance that financial statements are accurate and representative of the actual state of the company. There are several reasons for an accountant to offer this type of service to their clients.
First, all publicly-traded companies in the U.S. need to have their financial statements audited by law. In Canada, soliciting corporations with more than $250,000 in revenue and non-soliciting corporations earning more than $1 million per year must also have external audits.
There are several reasons why companies not required by law to get an audit would still want one.
Small firms may wish to have an external audit to show potential lenders or investors. Or they may simply want to make their clients and customers more confident and build a reputation as an honest and transparent company.
Companies of all sizes can benefit from internal audits if the reports identify problem areas and lead to improvements.
Key differences between a compilation, review, audit?
It is important to understand the key differences between compilations, reviews and audits so that you can explain each to your clients. Here are the critical details for each.
- Amount of work:
- Compilations require the least amount of work because you do not have to assess internal controls or bookkeeping practices.
- Reviews take slightly longer because you perform a general investigation into these practices.
- Audits take the longest because you need to conduct an in-depth study of internal practices, policies and controls, and must collect evidence to support your final report.
- Level of assurance:
- Compilations do not assure the veracity of the client’s financial statements. The goal is to ensure correct numbers and formatting.
- Reviews provide limited assurance because you will look at the practices and controls to ensure they meet industry and general accounting principles.
- Audits provide the highest level of assurance because you perform an in-depth analysis of financial practices, policies, controls and decisions related to accounting, bookkeeping and finance.
- Type of client:
- Compilations are usually for smaller companies that do not have to meet specific financial reporting requirements.
- Reviews are for small and medium-sized enterprises that need to provide some assurances to investors, lenders, clients or stakeholders, but are not required by law to have full audits.
- Audits are for publicly-traded companies or companies that exceed revenue thresholds that trigger audit requirements. Businesses that do not have to meet legal obligations can still commission audits to improve their performance or to show to investors, lenders or clients.
Regardless of your client’s needs, you will want to streamline the engagement by using review, compilation and tax software and systems that help you collect and organize data, manage and streamline workflow, and populate necessary documents easily.
Compilations vs. reviews vs. audits: Which is right for your clients?
CPAs need to communicate with their clients and gain insights into their exact needs before advising them on the best type of engagement. It is essential to discuss all three options with your clients. While they may have annual auditing requirements, they may need a review or compilation in addition to the legally-required option. Also, it is important to make a distinction between internal and external audits, while also explaining the benefits of each.
The client's decision will affect the final cost and time commitment, so you should strive to make sure they understand the differences between these options.
Regardless of their choice, you can build trust and offer full transparency by making your reports and other documents available in the cloud. This can be especially useful for audits and reviews where you need to collect information from in-house accountants or bookkeepers.