Audit , Review or Compilation – What does it all mean?
An audit provides the highest level of assurance. An unqualified audit opinion provides reasonable assurance that a set of financial statements is fairly stated in all material respects in accordance with Generally Accepted Accounting Principals (GAAP). In an audit engagement the CPA will carry out procedures to obtain an understanding of internal control, and perform substantive tests of transactions. They will also use analytical procedures on financial data and perform tests of details on account balances.
Compilation and review engagements are similar to audit engagements in many ways. In all three types of engagements, the CPA performs certain procedures in accordance with professional standards before issuing a report on a set of client financial statements. The major difference between those engagements is the level of assurance the CPA provides in the report.
A Review Report provides less assurance than an Audit Report, but also requires less work by the CPA, which results in a lower fee. A Review Report expresses limited assurance that there are no material modifications that should be made to a set of financial statements in order for them to be in conformity with a particular basis of accounting. This is sometimes referred to as negative assurance. The procedures performed in a review (primarily inquiry and analytical procedures) are substantially less in scope than those performed in an audit engagement.
A Compilation Report does not express an opinion or provide any assurance about the fairness of a set of financial statements. In this type of engagement, the CPA merely submits client information in the form of financial statements, and is not required to perform any verification procedures.
In practice, Not For Profit Organizations usually request Audit or Review services if they are subject to the state (or other) requirements. Sometimes an organization may request a Compilation Report, along with the 990 preparation services. This report would not be filed with the state but used internally or for other purposes (such as a funding source requirement.)