Financial Statements: How to Weigh Compilation vs. Review vs. Audit

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Any business needs credibility in its financial statements and will need to weigh a compilation vs. a review vs. an audit, the most formal option.

Say you’re finally about to close a deal that could change everything for your company. But before you take such a momentous step, you have to take a good, hard look at your records – maybe just in the financial assurance mirror, but possibly under a microscope.

To choose the right level of scrutiny for your financial reports, you’ll need to engage a CPA and pick one of three views: a basic compilation report, a more involved review or the most thorough, an audit.


This is the most basic accounting service, a cover page written by a CPA that accompanies a set of your financial statements. It shows lenders you have an association with a CPA, but doesn’t offer a deep level of assurance on the accuracy of the financial statements.

Since the CPA does a cursory check on basic features of your financial statements to write a compilation letter, no special preparation is required on your part.

A compilation may be sufficient for a small business owner seeking a personal loan. But most of the time, a more credible review or audit will be required for a business loan.


Overall, the review process involves:

  • Review and inquiries on financials;
  • Making inquiries related to the accounting practices and principles used by the business; and
  • Performing analytical procedures to understand current-year and prior-year balances, or current-year balances outside the CPA’s expectations.

To know where to look for potential accounting errors, the CPA needs to have enough information about your company and understand your industry and its accounting principles. You need to gather all documents requested in advance by the CPA, including your:

  • Trial balance;
  • Bank reconciliations; and
  • Accrual schedule, deferred revenue and more.

A review will usually satisfy prospective lenders, buyers and investors who don’t have a lot at stake. In particular, reviews are used for seeking a smaller line of credit or a small business loan.

When the loan requires a company to comply with certain loan covenants, a review vs. audit discussion is probably needed. Businesses often use a review as a stepping stone to reduce the challenges of a first-year audit.


The audit is the most thorough assurance service, requiring considerably more effort on the CPA’s part — and yours, as you’ll field more information requests.

In an audit, a CPA is required to obtain evidence through inquiry with appropriate personnel, physical inspection, verification and substantive testing procedures. A CPA also will examine supporting or source documents, send third-party confirmations to confirm the balances and legal matters, and perform analytical and other procedures.

Auditors want to be sure your financial statements are free from material error or fraud. Audits are generally required if you are:

  • Planning a major financing;
  • Looking for extended credit from major suppliers;
  • Raising equity;
  • Planning to sell a business;
  • Expecting your company to have a public offering in the future; or
  • Expecting your company will be funded by the federal or state governments.

All publicly traded companies are required to have their financial statements audited and reported to the SEC on a quarterly and annual basis.

When considering compilation vs. review vs. audit, don’t buy an electron microscope when a magnifying glass will do. Consult with your CPA to identify the service level suitable to your needs.

Non-profits are eligible for tax credits that put cash into their coffers. A free study is available for your organization.

By Thomas Prevatt, senior manager

As a part of the Patient Protection and Affordable Health Care Act (ACA), Congress is offering a tax credit designed to encourage small employers to provide health care coverage to their employees. The good news for non-profits is that the tax credit can be claimed by tax exempt organizations who meet certain criteria as well.

Your organization can claim the tax credit whether it has paid-in taxes or not. Additionally, your organization only has to have paid premiums for employees and meet a few other conditions to qualify. The credit can be worth up to 25 percent of your organization’s health care premium costs through tax year 2013. Furthermore, the IRS has announced an enhanced version of the tax credit effective Jan. 1, 2014, which increases the rate from 25 percent to 35 percent.

A quick and simple example of how this could benefit your organization is as follows: Say your tax exempt organization paid $20,000 a year for employees’ health care premiums. If you qualify for the max credit of 25 percent you can request a credit of $5,000 for each year through 2013 and possibly an additional $7,000 in tax year 2014 thanks to the enhanced version of the credit. In this example, the credit would translate to a total saving of $17,000 if claimed for tax years 2012, 2013 and 2014. Those are significant dollars for most non-profits.

Organizations who are not taking advantage of this credit are leaving money in the IRS’ pocket. If you’re interested in how your non-profit may be able to benefit from this tax credit, contact Thomas Prevatt at We’ll be happy to provide a free study to determine if your organization qualifies.

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