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 raise capital from outside investors, you're going to need a lot more than your QuickBooks P&L.

Basically, there are three types of financial statement services offered by accounting firms, and they vary in cost and complexity based on the amount of work performed:
 

1. Compilation

  • Compilation financial statements are 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. Review

  • More time-consuming and expensive than a Compilation, but considerably less than an Audit.
  • Often suitable for companies that have bank loans, creditors, or outside investors (in cases where audited financials 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. Audit

  • 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 (the wonderful world of GAAP).
  • Audits are an annual ritual for large, publicly-held companies (they're required by the SEC).

Legal stuff: This information is provided for educational purposes only and does not constitute advice for your specific situation.

William Keller