Choosing between an audit, review or compilation? Lenders and regulators often ask for audited financials, but you may be able to provide all the info they need with a simple compilation or review instead.
Most businesses don’t realize that. They choose the most expensive service, but you can avoid overpaying by learning the difference between the three services and how to determine which one your business needs.
In a hurry? Request a free consultation to determine whether you need an audit, or if a review or compilation would meet your needs. No upsell. No pressure.
Audits, Reviews and Compilations: Three Unique Services, Varying Assurance Levels
What Is the Difference Between an Audit, a Review and a Compilation?
Compilation: Financial Statement Without Verification
A compilation costs less than a review or an audit. It’s a straightforward, simple financial statement, and your lowest cost option.
Small firms keep compilations for basic internal use, to apply for small bank loans, or submit simple regulatory filings. Compilations are considered ZERO-assurance by regulatory standards.
Compilations do NOT include:
- Opinions
- Testing
- Internal Control Review
Review: Limited Assurance Backed by Inquiry and Analytics
Reviews cost more than compilations, but less than audits. They’re best for small to mid-sized businesses, including nonprofit organizations and growing private companies.
Reviews may include descriptions of analytical procedures, management inquiries, ratio comparisons. etc. They provide limited assurance (more than a review) without the cost or complexity of an audit. You may find a review is a lower-cost option if you operate in states that don’t require an audit.
Reviews do NOT include:
- Transaction Testing
- Internal Control Evaluation
Audit: The Highest Level of Assurance (May Be Required by State Law)
Audited financial reporting is required by law in some states. Since audits are more comprehensive than compilations and reviews, lenders and state and federal regulators are happy to accept them, even if a compilation or review would have satisfied their requirements just as well.
We can help you determine if you truly need an audit, or could pay less for a compilation or review instead.
Audits provide a higher level of assurance, or “reasonable assurance” as defined by ESG reporting standards (ISSA 500), providing credibility to reassure stakeholders, but NOT a guarantee, since only a sample of your financial transactions will be reviewed, and the audit may not uncover any instances of deliberate material misstatements (fraud.)
Audits Include:
- Transaction Testing
- Confirmations
- Internal Control Evaluation
- Materiality Assessment
- Auditor’s Opinion (level of assurance)
Do You Need an Audit or a Review? Don’t Pay for the WRONG Assurance Service
Do you need an audit or a review? Regulators, lenders and banks often verbally tell clients they need an “audit.” But most clients DON’T need one. Other CPAs just upsell audits because they make more money on audits than reviews.
Say you’ve been told you need an assurance service. If you call a CPA, most are happy to provide the most expensive one, and might not tell you there are three different types of assurance services: compilations, reviews and audits.
They’ll quote the most expensive service, and you won’t know the difference.
You’ll submit the audit to the lender/regulator/bank, and never know you could have chosen a less expensive service. The bank is happy, because you’ve provided the most comprehensive document and they have what they need.
But maybe a review or compilation would have been enough.
When you contact Clarity Tax, the first question we’ll ask is “Who’s requiring this, and why?” because that’s what determines the service you need. You may not need an audit at all.
Thresholds and Legal State/Country Requirements
Audit requirements are based on multiple variables, including:
- Place of operations (laws in each state and country where you do business)
- Entity type (LLC vs. nonprofit vs. HOA or private company)
- Funding sources (especially nonprofits using federal grant funds requiring single audits)
- Size triggers (varies based on state law)
How Much Do Audited Financial Statements Cost?
Audited financial statements, as well as compilations and reviews, are priced based on the following factors:
- The number of staff hours required to complete your service
- The level of audit staff required (senior auditor, partner) based on the complexity of your business
Compilations require the lowest number of staff hours, with no partners involved, so these are the fastest and therefore, least expensive type of assurance service.
Reviews require approximately 40% more hours than a compilation, and audits require the most. The more complex your business is, the more hours required.
How Long Does It Take to Complete an Audit, Review, or Compilation?
The amount of time required to complete your assurance service is largely based on you —how responsive you are to our requests for information, and how audit-ready your books are.
Here’s the typical timeline:
- Compilations: typically 1-3 weeks for completion
- Reviews: typically 3-5 weeks
- Audits: typically 6-8 weeks, but highly contingent on your level of responsiveness*
* Your team’s ability to provide information quickly is key here. If your books are audit-ready, your audit could be completed in as little as 4 weeks.
But delays in getting the information we need can extend the audit timeline. Some audits can take up to 3 months or more in this scenario.
Your prompt response is often what makes the difference.
How to Determine Whether You Need an Audit, Review, or Compilation
When you receive a request for an “audit,” ask the requester what level of assurance they need.
If you receive $1 million or more in federal grants, you need a single audit.
If the requester is a lender, investor or state regulator, your threshold will determine which service you need. State thresholds for mandatory filings are usually based on your annual contributions or annual revenue.
If you want a financial statement for internal use only, a compilation is probably enough.
Are Your Books Audit-Ready?
The secret to a good audit is having good books. Otherwise, your audit will contain a negative opinion and be a waste of your money.
We can help you clean up your bookkeeping before completing your audit if needed.
Learn more about how our bookkeeping service can help get your books audit-ready.
Clean books make for a quicker, easier audit for everyone involved. When we see clean, audit-ready books, we can proceed directly to the audit with no clean-up required and avoid an audit that includes a negative opinion of the financial state of your business.
Why Work With Clarity Tax Group on Assurance?
Financial statements can make or break a business. We adhere to the highest standards for quality and customer satisfaction, including:
- Registration with the PCAOB (Public Company Accounting Oversight Board)
- We are peer-reviewed every 18 months (most recent opinion available on request)
- Our senior auditors run our engagements. Unlike some competitors, we do not hand the assurance work off to junior auditors.
- We provide same-day responsiveness when you need us, year-round, with no off-season closures.
- We’re happy to tell you when you DON’T need a costlier service.
Tell us who’s requesting the audit, and we’ll help you determine if you need an audit, or if a review or compilation would be enough.