Compilations, Reviews & Audits
In layman's terms, the purpose of an audit is to independently verify by sight, confirmation, discussion with management, assessment of internal controls and analytical procedures, that a company's financial reports are substantively correct. Audited financial statements will also include a statement of changes in financial and detailed and referenced footnotes detailing the companies accounting methods, policies, and certain financial data. Again, both the statement of cash flows and the attached footnotes and the procedures and reporting thereon are governed by the AICPA, SAS's, and other governing and regulatory agencies.
A review consist predominantly of an assessment of the company's books and records by the performance of analytical tests, certain analytical procedures (such as the comparison to prior books and records), and calculation of certain financial tests and ratios. There procedures, by their very nature are intended to give reasonable assurance to an outside reviewer, rather than the detailed verification and reporting requirements required by an audit. Reviews are frequently requested by banks or insurance companies issuing performance bonds who want a higher degree of service/verification than a compilation, which is discussed next, but not the full extent and cost of an audit.
Reviews typically also include a statement of changes in financial position as well as detailed footnotes.
The lowest level of attestation services a CPA may provide is a compilation. Essentially, a compilation is when a CPA simply compiles the books and records of a client without the performance of any substantive procedures, independent verification or confirmation of any of a clients balance. Thus, a compilation is solely the representation of a company's management as no verification or procedures of account balances on the balance sheet or the profit and loss statement are required. Also, management has the option to also exclude from compiled statements the statement of changes in financial positions and all related footnotes.