Compilations represent the most basic level of CPA services with respect to financial statements. In a compilation engagement, the accountant assists management in presenting financial information in the form of financial statements, without providing assurance that no material modifications to the statements are needed.
Compilations are generally appropriate for privately held companies and are often prepared for simple situations (e.g., a lender needs GAAP financial statements instead of the statements the internal accounting system produces, or the lender wants the security of knowing that an accountant has reviewed the financial statements).
Compilations are the simplest of the three and require fewer hours of work; therefore, they are far less costly than tax reviews or tax audits.
A review engagement involves the CPA performing procedures (primarily analytical procedures and inquiries) that will provide a reasonable basis for obtaining limited assurance that no material modifications should be made to the financial statements in order for them to conform with the applicable financial reporting framework.
Tax reviews are often prepared for privately held companies due to requirements of outside third parties (such as banks, creditors and potential purchasers) looking for assurance that the financial statements are not materially misstated.
Reviews are more costly than compilations but substantially lower in cost than tax audits.
Audited financial statements provide the user with the auditor’s opinion that the financial statements are presented fairly, in all material respects, and are in full conformity with the applicable financial reporting framework.
Audits are often prepared because outside third parties (such as banks, creditors, potential purchasers and outside investors) require an auditor’s opinion on a company’s financial statements.
Tax audits involve the greatest number of hours and, therefore, the cost is substantially higher than a review or compilation.