Of the financial statement services typically offered by CPAs, an audit offers the highest level of assurance regarding the accuracy of the financial statements, followed by a review, which offers less assurance, followed by a compilation, which offers no assurance.
To obtain that assurance or higher level of assurance, additional, more extensive procedures are required for an audit or review engagement than for a compilation. Example: testing of account balances for an audit vs. requesting corrected information should information provided by management be incorrect, for a compilation.
For that reason, audits and reviews are often required by funding sources like lenders, investors, donors and grantors when a large amount of financing and credit, or financing and credit at a more complex level, is the objective. They also give a business owner or non-profit organization (NPO) Director more confidence in the organization’s financial statements as a tool to aid in decision-making. They can demonstrate credit-worthiness for a commercial enterprise, and financial responsibility and good stewardship of financial resources by a non-profit organization seeking to gain the confidence of donors and the community.
The objective of a compilation, on the other hand, is to “apply accounting and financial reporting expertise to assist management in the presentation of financial statements”. For organizations not thoroughly familiar with generally accepted accounting principles (US GAAP), this can be a very useful service. It can help the organization present its financial data so that it’s more meaningful to the reader and less misleading, which gives users a better understanding of the organization’s financial condition and operating results. Thus it can be used to obtain financing, although generally in smaller amounts than with an audit or review, or when initial financing is sought. Significant collateral may be required by the funding source.
Naturally, because audits and reviews are more time-consuming to complete than a compilation, audits and reviews are more costly for the client. Conservatively speaking, an audit can cost as much as 500% or more of what a compilation would cost, and a review, 200 – 250% of the cost of a compilation. Saving such amounts as these are one way to demonstrate credit-worthiness or good financial stewardship; the funds saved can be spent by a business in any number of ways beneficial to the business, and by a NPO on programs that benefit the community.