Compilation or Review? What’s Best for Your Company.
Some of the most well-known services provided by public accounting firms include tax, consulting, and audit.
Here at Delap LLP, in addition to tax, consulting, and audit, we also perform review and compilation engagements.
But what exactly are reviews and compilations? And how do they differ from your typical audits?
A ‘Wedding Cake’
First of all, you can think of compilations, reviews, and audits as a three-tiered wedding cake.
A compilation is the smallest layer at the top, as its goal is to “assist management in presenting financial information in the form of financial statements,” according to the American Institute of Certified Public Accountants.
Contrast this with a review engagement, which would be the middle tier in our wedding cake example. The purpose of a review is to “obtain limited assurance that there are no material modifications that should be made to the financial statements” for them to be in conformity with Generally Accepted Accounting Principles (GAAP), or other basis of accounting.
Lastly, an audit would be the cake’s base, or the biggest layer, because its objective is to actually “express an opinion about whether a company’s financial statements are ‘fairly presented'” in conformity to GAAP.
In other words, audits provide the most assurance to third parties and others about a company’s financial statements, while reviews offer only limited assurance (sometimes called “negative” assurance). Compilations do not give any assurance.
Practically speaking, audits are the most intensive of the three services, followed by reviews and then compilations.
Auditors’ numerous tasks include observing inventory counts, inspecting source documents, and confirming account balances with outside parties, to name just a few. Additionally, auditors are required to plan and perform an audit to obtain “reasonable assurance” about whether the financial statements are free of “material misstatement.”
Compare that to a review, where an accountant primarily performs analytical procedures and makes inquiries of management. These steps include obtaining an understanding of the entity and the industry, developing expectations and comparing them to actual and recorded amounts, and investigating any differences, based on trend analysis, reasonableness tests, and ratio analysis.
Lastly, in a compilation, accountants also become knowledgeable about the client and its industry and give the company’s financial statements “the smell test,” while asking: “On the surface, are they materially accurate and prepared in accordance to GAAP?”
In all three engagements, accountants are required to follow accounting standards, and each of the three services includes the issuance of a signed report by the CPA.
During both audits and reviews, accountants obtain certain written representations from management regarding the company’s financial statements – a procedure that is not required for compilations.
Most companies hire a CPA to perform an audit, review, or compilation for regulatory purposes or because it is required by their financial institutions, investors, or owners, among other reasons.
Reviews and compilations serve a useful purpose and can be beneficial to your company. Here at Delap, our team is happy to answer any questions you may have about this topic, or any other accounting and finance challenges you may be facing.
Delap LLP is one of Portland’s largest local tax, audit, and consulting accounting firms and is located in Lake Oswego, Oregon.