When it comes to financial reporting, entities have different needs depending on their size, stakeholders, and regulatory requirements. Choosing the right type of accounting engagement is crucial for making sure your financial information is accurate and meets the needs of your entity and its stakeholders. In this article, we’ll break down the three main types of accounting engagements — audits, reviews, and compilations — and help you understand when you might need each one.

What Are Audits, Reviews, & Compilations?

1. Audits: The Most Comprehensive Option
An audit is the most thorough and in-depth type of engagement. During an audit, an independent CPA examines an entity’s financial statements and supporting documentation to provide an opinion on whether the statements are presented fairly and in accordance with generally accepted accounting principles (GAAP).

When to Choose an Audit:

• Regulatory Requirements: Some entities are required by law to have their financial statements audited.
• Stakeholder Assurance: If you have investors, lenders, or other stakeholders who need the highest level of assurance about your financial statements, an audit is the best option.
• Internal Controls: Audits often include gaining an understanding of your internal controls, helping to identify any weaknesses or areas for improvement.

 
2. Reviews: A Limited Assurance Service
A review is less extensive than an audit but more involved than a compilation. In a review, a CPA performs analytical procedures and makes inquiries to provide limited assurance that the financial statements are free of material misstatements. Unlike an audit, a review does not involve examining underlying documents or gaining an understanding of internal controls.

When to Choose a Review:

• Cost-Effectiveness: Reviews are generally less expensive than audits because they require less time and fewer resources.
• Moderate Assurance Needs: If your stakeholders need more assurance than a compilation provides but don’t require a full audit, a review can be a good middle ground.
• Private Companies: Private companies that do not have significant regulatory requirements but still want some level of external verification may opt for a review.

 
3. Compilations: The Basic Level of Reporting
A compilation is the most basic type of financial statement service. During a compilation, a CPA takes the financial data provided by the entity and compiles it into a financial statement format. The CPA does not perform any verification or provide any assurance about the accuracy of the financial statements.

When to Choose a Compilation:

• Internal Use: Compilations are often used for internal management purposes or for small entities that do not need audited financial statements.
• Simplicity and Speed: Because compilations involve no analysis or assurance, they are typically quicker and less expensive than audits or reviews.
• No Assurance Needed: If your entity simply needs financial statements prepared without any assurance, a compilation may be sufficient.

 
How to Decide Which Service Is Right for You

Choosing the right type of accounting report depends on several factors, including the size of your entity, your industry, your financial statement users, and your budget.

Here are a few questions to consider:

• Who will be using these financial statements? If you’re preparing statements for external stakeholders like investors or lenders, you may need the higher level of assurance provided by an audit or review.
• What are the regulatory requirements? Certain industries or types of entities, have specific requirements for audits.
• What’s your budget? Audits are the most expensive type of service due to their thoroughness, while compilations are the least expensive.

 
Understanding the differences between audits, reviews, and compilations is crucial for selecting the right service for your entity’s needs. Whether you’re looking for the assurance of an audit, the limited assurance of a review, or the basic reporting of a compilation, a trusted CPA can help guide you through the decision-making process.

If you’re unsure which type of financial statement service is right for you, contact us to help you navigate your options and choose the right report for your entity.