The difference between an audit, a review, and a compilation

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What is an Audit?

An audit is a systematic examination of an entity’s financial statements and related records to determine whether they are presented fairly in accordance with an applicable financial reporting framework. It involves evaluating evidence, internal controls, and accounting estimates using professional judgment and skepticism. The objective is to provide reasonable assurance to users that the financial statements are free of material misstatement, whether due to error or fraud.

What is a Review?

A review is an assurance engagement that provides limited assurance that no material modifications are needed for financial statements to conform with the applicable reporting framework. The procedures primarily consist of inquiry and analytical procedures rather than detailed testing of transactions and controls. As a result, a review offers a lower level of assurance than an audit and does not result in an audit opinion.

What is a Compilation?

A compilation is an engagement in which an accountant assists management in presenting financial information in the form of financial statements without providing any assurance. The accountant does not verify the accuracy or completeness of the information and performs no audit or review procedures. The objective is limited to organizing financial data in accordance with the applicable financial reporting framework.

Related AccountingTools Courses

How to Conduct a Compilation Engagement

How to Conduct a Review Engagement

How to Conduct an Audit Engagement

Comparing an Audit, Review, and Compilation

In short, the differences between an audit, a review, and a compilation are as follows:

  • Level of assurance. The level of assurance that the financial statements of a client are fairly presented is at its highest for an audit and at its lowest (none at all) for a compilation, with a review somewhere in between.

  • Reliance on management. In all three cases, the auditor begins with the account balances provided by management, but an audit requires in a significant amount of corroboration of this information. A review requires some testing of the information, while a compilation almost entirely relies on the presented information.

  • Understanding of internal control. The auditor only tests the internal controls of the client in an audit; no testing is conducted for a review or a compilation.

  • Work performed. An audit requires a significant number of hours to complete, since there are many audit procedures to be performed. A review requires substantially fewer hours, while the effort associated with a compilation is relatively minor.

  • Price. It requires vastly more effort for an auditor to complete an audit, so audits are much more expensive than a review, which in turn is more expensive than a compilation.

Another issue is the level of demand for each of these services. The users of financial statements, such as investors and lenders, nearly always demand an audit, since it provides the greatest assurance that what they are reading is a fair representation of the financial results, financial position, and cash flows of the reporting entity.

The following exhibit summarizes the key differences between an audit, a review, and a compilation.