Financial Statements 101: Compilation vs. Review vs. Audit
Although you may never need formal financial statements prepared by a CPA firm, it’s wise to know what the options are just in case you ever do. For example, if you decide to apply for a bank loan or seek capital from outside investors, you're going to need a lot more than your homemade QuickBooks P&L.
Basically, there are three types of financial statement services offered by accounting firms. They vary in cost and complexity based on the amount of work performed:
1. Compilation Financial Statements
- Relatively straightforward and inexpensive to prepare.
- Suitable for most small, privately held businesses.
- Generally intended for use by owners and management only (not for third parties).
2. Reviewed Financial Statements
- More time-consuming and expensive than a compilation, but considerably less than an audit.
- Often prepared for companies that have bank loans, creditors, or outside investors (in cases where audited statements are not required).
- The CPA firm performs additional work called “inquiry and analytical procedures,” and issues a report providing limited assurance that the financial statements are presented fairly.
3. Audited Financial Statements
- Provides the highest level of assurance to shareholders, third parties, and the general public.
- Much more time-consuming and expensive than a Review due to extensive planning, testing, and verification procedures.
- Upon completion, the CPA firm issues a report providing reasonable assurance that the financial statements are presented fairly and in conformity with Generally Accepted Accounting Principles (GAAP).
- Audits are an annual ritual for large, publicly-held companies (i.e. they're required).
Legal stuff: This information is provided for educational purposes only and does not constitute advice for your specific situation.