Audits Reviews Compilations

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Audits Reviews Compilations

Overview of Assurance Services

In accounting and financial reporting, audits, reviews, and compilations are levels of assurance services provided by certified public accountants (CPAs) or similar professionals. They help stakeholders (like investors or management) assess the reliability of financial statements. These services range from high assurance (audits) to no assurance (compilations), with reviews in between. Below, I’ll explain each one, including their purpose, process, and key differences.

Audits

An audit is the highest level of assurance, providing reasonable assurance that financial statements are free from material misstatement due to fraud or error. It’s governed by standards like those from the AICPA (in the US) or IFRS equivalents internationally.

Purpose: To express an opinion on whether the financial statements are presented fairly in all material respects.
Process: Involves extensive testing, including examining evidence, verifying transactions, and assessing internal controls. Auditors use sampling, analytical procedures, and confirmations (e.g., bank balances).
Output: An audit report with an unqualified (clean) opinion or modified opinions (qualified, adverse, or disclaimer) if issues arise.
Who Uses It: Required for public companies (e.g., under SOX in the US) and often for regulatory compliance. It’s costly and time-intensive.
Evidence: Based on GAAS (Generally Accepted Auditing Standards), audits aim for 95%+ confidence in detecting material misstatements.

Reviews

A review provides limited assurance that financial statements are free from material misstatement. It’s less rigorous than an audit but more than a compilation.

Purpose: To offer moderate confidence that no material modifications are needed for the statements to be in conformity with the applicable financial reporting framework.
Process: Involves inquiries of management, analytical procedures (e.g., ratio analysis), and some verification of key items. No detailed testing of transactions or internal controls.
Output: A review report stating that nothing came to the accountant’s attention that suggests the statements aren’t fairly presented, or noting modifications if needed.
Who Uses It: Common for private companies, non-profits, or interim financials. It’s faster and cheaper than an audit.
Evidence: Governed by SSARS (Statements on Standards for Accounting and Review Services), with a focus on plausibility rather than certainty.