The purpose of an audit is to express an opinion in an auditors report about whether your financial statements are fairly presented in accordance with generally accepted accounting principles. Audits are required for many different reasons. Some of those requirements include company by-laws, banks or lending institutions, bonding companies, stockholders, owners or members, vendors, funding agencies, etc. Auditors must be independent of the entity and not have the ability to influence management.
The audit procedures consist of planning, fraud risk assessment, testing the internal controls, interviewing personnel, testing transactions, etc.
Management is usually the winner in an audit because situations are brought to their attention and recommendations made by the auditor that improves their controls and reporting.
Review
The purpose of a review is to express limited assurance on unaudited financial statements that there are no material modifications that should be made to the statements. It is less in scope that an audit and for that reason is less expensive to perform. Those requiring reviews may be for the same reasons as audits but are willing to accept limited assurance as opposed to an auditor’s opinion. Reviewers must be independent of the entity and not have the ability to influence management.
A review consists of performing inquiries of personnel and analytical procedures but does not include understanding internal control or testing accounting records.
Compilation
A compilation is presenting in the form of financial statement information that is the representation of management without undertaking to express any assurance on the statements. The accountant can be independent or not. The financial statements can include notes or not. Compilations can be done annually like most audits and reviews but in many cases are done quarterly or even monthly.
No expression of assurance is contemplated in a compilation and therefore there is no requirement to inquire personnel or perform analytical procedures.
Most financial statements are prepared in this manner because it is the least expensive of the three major reports.
