What is the Key Difference Between Compilation, Review, & Audit?

Introduction 

Consider a small business applying for a bank loan. The bank will require financial statements, so the business starts with a compilation, where an accountant organizes the financial data into a structured financial report without providing analysis or assurance on its accuracy. As the business grows and attracts investors, a review is needed, where the accountant examines the financials more closely to ensure accuracy. Finally, when the company goes public, a full audit is required, with a thorough examination of the financial records for complete accuracy and compliance. Each service- compilation, review, and audit offers varying levels of assurance, tailored to the business’s needs at different stages.

In this blog, we will discuss compilation, review, and audit, the key differences between them, and a step-by-step guide on how organizations can decide what level of service they require. 

What is a Compilation?

A compilation is the process by which a CPA organizes a company’s financial data into a formal financial statement without providing any assurance on its accuracy. During compilation, an accountant takes the financial information provided by the business and presents it in a structured format, such as income statements or balance sheets. 

However, the certified public accountant (CPA) does not verify the accuracy of the information or perform any detailed analysis. Small businesses often use compilation to create financial statements for internal purposes or meet external needs, like applying for a loan.

What is a Review?

A review is an accounting service that provides limited assurance on the accuracy of a company’s financial statements. During a review, an accountant performs analytical procedures and inquiries to ensure that the financial statements appear reasonable and consistent with industry norms. 

The process focuses on assessing whether there are any obvious errors or inconsistencies without extensively examining the records. Mid-sized businesses frequently utilize review to provide a certain level of guarantee to stakeholders or investors.

What is an Audit?

An audit is a thorough and detailed examination of a company’s financial statements and related records conducted by an independent accountant. The purpose of an audit is to ensure a high level of confidence in the accuracy of the financial statements and their adherence to accounting standards and regulations.

During an audit, the accountant tests and verifies transactions, inspects supporting documentation, and assesses internal controls to ensure the financial statements are free from any inaccuracies and material misstatements. An audit provides the highest level of assurance to stakeholders, such as investors, regulators, and lenders, that the company’s financial statements are trustworthy and accurate.

Difference Between Audit vs Review vs Compilation

Compilation, review, and audit are all essential processes in financial reporting, each offering different levels of assurance. They cater to varying needs depending on the complexity of the organization, regulatory requirements, and the degree of confidence stakeholders require in financial statements. Here’s how they differ:

How to Decide Between a Compilation, Review & Audit?

Deciding between a compilation, review, and audit depends on several factors, including your business’s size, needs, and the requirements of stakeholders such as investors, creditors, or regulatory bodies. Here’s how you can make an informed choice:

• Understand your business needs

  • Choose a compilation if your primary goal is to have financial statements prepared for internal use, basic external requirements, or when a high level of assurance is not necessary. 
  • Opt for a review when stakeholders, such as investors or lenders, need some level of assurance that your financial statements are free from material misstatements but do not require the in-depth scrutiny of an audit. 
  • An audit is essential when stakeholders require the highest level of assurance, such as for publicly traded companies, businesses seeking significant investment, or when required by regulatory bodies. If your company is preparing for an IPO, facing complex financial reporting requirements, or needs to demonstrate strong internal controls, an audit is the appropriate choice.

• Budget considerations

  • If your budget is limited and your financial reporting needs are straightforward, a compilation is the most cost-effective option. It provides the necessary financial statements without the additional procedures and costs associated with a review or audit.
  • A review is moderately priced, offering a balance between cost and the level of assurance provided. It’s a good middle-ground option if your budget can cover some review but not the entire cost of an audit.
  • An audit is the most expensive option due to the extensive work involved. However, it is often necessary when the stakes are high, such as compliance with regulatory requirements or when trying to secure significant investments. Be prepared for the higher costs but also for the benefits of the detailed insights and assurance an audit provides.

• Regulatory and compliance needs

  • If there are no regulatory requirements for audited financial statements, a compilation may suffice, especially for privately held companies with fewer reporting obligations.
  • A review might be required by certain regulatory bodies or financial institutions as a compromise between a compilation and an audit, especially when the company is privately held but still needs to demonstrate a reasonable level of financial accuracy.
  • If your business operates in a highly regulated industry, is publicly traded, or plans to go public, an audit is mandatory. All public companies must comply with accounting standards like GAAP or IFRS, making audits compulsory to ensure their financial reports meet these stringent requirements.

• Future business goals

  • If your business is small with no immediate plans to expand or seek outside investment, a compilation might be sufficient.
  • If you plan to grow your business, attract investors, or secure larger loans in the near future, starting with a review can provide stakeholders with more confidence in your financial reporting.
  • If your future goals include going public, expanding significantly, or entering into highly regulated markets, an audit will likely be necessary to meet the expectations of investors, regulators, and other stakeholders.

• Complexity of financial transactions

  • Compilation is suitable for businesses with straightforward, less complex financial transactions where detailed analysis isn’t necessary.
  • Review is best for businesses with moderately complex transactions that need some level of validation.
  • Audits are necessary for businesses with complex financial transactions, multiple revenue streams, or intricate financial arrangements that require detailed examination and verification.

How Can HighRadius Record-to-Report Solution Help in Compilation, Review & Audit? 

The HighRadius Record-to-Report solution ensures organizations of all sizes achieve high accuracy in journal entries and accounting processes, making financial data reliable from the start. This accuracy is crucial during the compilation process. HighRadius solution automatically collects and organizes financial data from multiple sources, reducing the month-end close time by 30% while also reducing errors and inconsistencies. The streamlined process enables businesses to quickly generate well-organized accurate financial statements, providing a solid foundation for accurate financial reporting.

When it comes to the review process, HighRadius enhances accuracy through anomaly management and advanced analytical tools. These tools help accountants identify any discrepancies or unusual trends in the financial data, solving up to 80% of anomalies ensuring that the reviewed statements are free from significant errors. The ability to maintain a consistent and detailed audit trail further supports the review process, as it allows for easy tracing of financial transactions back to their source, giving reviewers the confidence they need to validate the accuracy of the financial statements.

The detailed audit trail maintained by the HighRadius solution enables auditors to efficiently verify financial transactions and assess the effectiveness of internal controls. By automating key aspects of the audit process and ensuring data integrity, HighRadius helps organizations achieve accurate and compliant financial reporting, ultimately facilitating a smoother and more reliable audit process.

FAQs 

What is an audited financial statement?

An audited financial statement is a company’s financial report that has been thoroughly examined and verified by an independent auditor. The audit ensures that the financial statements are accurate, complete, and comply with accounting standards, providing high assurance to stakeholders about the company’s financial health.

What are reviewed financial statements?

Reviewed financial statements are financial reports that have been examined by an accountant, who performs limited procedures to ensure they are plausible and consistent with the industry standards. While less detailed than an audit, a review provides moderate assurance that the financials are free from major errors.

What are compiled financial statements?

Compiled financial statements are reports where an accountant organizes and presents a company’s financial data in a structured format without providing any assurance or verifying the accuracy of the information. These statements are primarily used for internal purposes or basic external requirements.

What is the difference between compilation and review?

The difference in compilation vs. review lies in the level of assurance provided. A compilation involves organizing financial data without verification or assurance, while a review includes limited procedures to ensure the financials are plausible, offering moderate assurance.

What is the difference between an audit and a review?

The difference between an audit and a review is that an audit provides high assurance by thoroughly examining and verifying financial statements, while a review offers limited assurance through less extensive procedures, focusing on ensuring the financials are reasonable without the detailed scrutiny of an audit.

What are the three layers of audit?

The three layers of an audit include: daily, where supervisors or team leads perform audits each shift; weekly, where middle management conducts audits weekly or bi-weekly; and monthly or quarterly, where managers or executives carry out audits on a monthly or quarterly basis.