Financial reporting services are often categorised into three levels of assurance: audit, review, and compilation. Each serves a different purpose and provides a different level of assurance regarding an organisation’s financial statements.
Understanding these differences is essential for nonprofits and businesses to choose the right level of financial reporting based on their needs, compliance requirements, and budget.
What Is an Audit?
An audit is the highest level of financial examination performed by an independent CPA. It provides a high level of assurance that financial statements are free from material misstatement.
During an audit, the accountant:
- Examines financial records in detail
- Tests internal controls
- Confirms transactions with third parties
- Verifies accuracy of financial statements
Audits are often required by regulators, lenders, or organisations receiving significant funding.
Audits are commonly required under federal rules such as those issued by the Internal Revenue Service for certain nonprofit reporting obligations.
What Is a Review?
A review provides limited assurance that financial statements are plausible and free from obvious errors, but it does not involve detailed testing.
Instead, the CPA:
- Performs analytical procedures
- Makes inquiries with management
- Reviews financial data for consistency
A review is less intensive than an audit and is often used by small to mid-sized organisations that do not require full audit compliance.
What Is a Compilation?
A compilation is the lowest level of financial reporting service. In this process, the CPA:
- Prepares financial statements from client-provided data
- Does not verify or audit the information
- Provides no assurance on accuracy
Compilations are typically used for internal purposes or organisations that need basic financial reporting.
Key Differences Between Audit, Review, and Compilation
| Feature | Audit | Review | Compilation |
|---|---|---|---|
| Level of Assurance | High | Limited | None |
| Testing of Data | Extensive | Minimal | None |
| Cost | Highest | Moderate | Lowest |
| Purpose | Compliance & assurance | Credibility check | Basic reporting |
Which One Does Your Organisation Need?
Choosing between audit, review, and compilation depends on:
- Regulatory requirements
- Funding sources
- Organisational size
- Stakeholder expectations
For example, nonprofits receiving significant federal funding may require a full audit under guidelines from the Federal Audit Clearinghouse.
Why This Decision Matters
Selecting the right engagement type ensures:
- Compliance with legal requirements
- Better financial transparency
- Improved trust from donors and stakeholders
- Cost efficiency for your organisation
Professional guidance from organisations like the American Institute of Certified Public Accountants can help determine the appropriate level of service.
If you’re unsure whether your organisation needs an audit, review, or compilation, our team can help you make the right decision based on your specific requirements.
Contact us today to discuss your financial reporting needs and get expert guidance tailored to your organisation.
