What’s the Difference Between a Compilation and an Audit?

A compilation service is an accounting engagement where a professional organizes a company’s financial data into formal financial statements. An accountant performing a compilation provides no assurance regarding the accuracy or completeness of the information presented. The accountant relies entirely on the financial data and records provided by the client’s management.

What a Compilation Service Involves

An accountant’s primary role in a compilation engagement is to present financial information supplied by the client in a structured format. This presentation adheres to an applicable financial reporting framework. The accountant ensures the financial statements appear appropriate in form and are free from obvious material misstatements, based on their understanding of the entity.

The accountant performing a compilation does not verify the accuracy of the underlying information, nor do they examine the company’s internal controls. They also do not collect source documents to test the accuracy or completeness of transactions. Performing audit or review procedures falls outside the scope of a compilation engagement. The accountant’s work is guided by the Statements on Standards for Accounting and Review Services (SSARS), issued by the AICPA.

The output of a compilation engagement includes the financial statements, which typically comprise a balance sheet, income statement, statement of cash flows, and accompanying notes. A compilation report is also issued, which explicitly states that the accountant has not audited or reviewed the financial statements and, therefore, does not express an opinion or any assurance on them.

An engagement letter, prepared in accordance with SSARS, formally documents the terms of the compilation engagement. This letter outlines the responsibilities of both the accountant and the client’s management. Management remains responsible for the accuracy and completeness of the financial records they provide. The accountant’s responsibility is to apply their expertise to present that information formally.

When a Compilation is Useful

Compilation services are the least detailed and most cost-effective type of financial reporting service. They are suitable for smaller companies or non-public entities that do not require higher levels of assurance. These services allow businesses to present their financial information professionally without the significant cost or complexity of more extensive engagements.

Compilations are often appropriate for internal management use, helping owners and executives track their company’s financial performance and make informed operational decisions. They can also be useful when a business seeks a small business loan, where lenders might accept a compilation rather than demanding an audit or review.

Compilations can assist with basic compliance needs, such as preparing financial information for certain licensing renewals or grant applications that do not demand audited financials. The organized financial statements from a compilation can also inform the preparation of income tax returns. Compilations enhance basic financial credibility by presenting information in a proper format. The cost for a compilation for a small business typically ranges from $1,000 to $5,000. The timeframe for completing a compilation is often a few days to a couple of weeks.

Distinguishing Compilations from Other Financial Services

Financial reporting services, including compilations, reviews, and audits, vary significantly in the level of assurance provided, the scope of work performed, and consequently, their cost and time commitment. A compilation offers no assurance, as previously discussed.

A financial statement review provides a limited level of assurance. In a review engagement, the accountant performs inquiries of management and applies analytical procedures to the financial data. These procedures identify whether material modifications are needed for conformity with the applicable financial reporting framework. The accountant does not test internal controls, confirm balances with third parties, or examine source documents.

The scope of work in a review, governed by SSARS, is substantially less than an audit, but more extensive than a compilation. The accountant issues a review report stating they are not aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. The cost for a review typically ranges from $5,000 to $15,000 for a small to medium-sized business, and the timeframe can be a few weeks.

A financial statement audit provides the highest level of assurance. During an audit, the auditor performs extensive procedures to gather sufficient appropriate evidence to express an opinion on whether the financial statements are presented fairly in accordance with the applicable financial reporting framework. These procedures include testing the effectiveness of internal controls, examining source documents like invoices and contracts, physically inspecting assets, observing inventory counts, and confirming balances directly with third parties such as banks, customers, and vendors.

Audits are performed in accordance with Generally Accepted Auditing Standards (GAAS) for non-public companies, or Public Company Accounting Oversight Board (PCAOB) standards for public companies. The auditor’s report includes an opinion, such as an unqualified opinion, which signifies that the financial statements are presented fairly. Due to the comprehensive nature of the work, audits are the most expensive and time-consuming service, often ranging from $15,000 to $50,000 or more for small to medium-sized businesses, and can take several weeks to many months to complete.