Audit vs review vs compilation

Definition

These are the main service levels a US accounting firm offers on historical financial statements. An audit under AU-C gives reasonable assurance and ends with an opinion. A review under AR-C 90 gives limited assurance, based mainly on inquiry and analytical procedures. A compilation under AR-C 80 gives no assurance: the accountant presents management's information in financial statement form. A preparation engagement under AR-C 70 produces no report and no assurance.

Why it matters in an audit or review

The level decides the evidence, the report wording, and the independence rules. Reviews and audits require independence; compilations and preparation engagements do not, though a compilation report on a non-independent accountant must say so. Choosing the wrong level is a common source of disputes: a lender may require audited statements, and a review report will not satisfy that covenant.

Example

Illustrative: a lender requires annual financial statements with an assurance report. The borrower asks for a compilation because it costs less. The firm explains that a compilation provides no assurance, and the loan agreement is checked to see whether it names an audit or accepts a review.

Common mistakes

Treating a review as a small audit. A review lacks the confirmations and inspection of evidence an audit requires.

FAQ

Can the same firm prepare the statements and audit them?

Yes for nonissuers, but the auditor must evaluate and manage the threat to independence from the nonattest service and document the safeguards.

Sources

• AICPA, AU-C Section 200, Overall Objectives of the Independent Auditor
• AICPA, AR-C Section 80, Compilation Engagements
• AICPA, AR-C Section 90, Review of Financial Statements
• AICPA, AR-C Section 70, Preparation of Financial Statements
• AICPA Code of Professional Conduct, ET 1.295, Nonattest Services