Three Types of Financial Statements Acuity Prepares

There are three types of financial statements that accountants prepare – Audit, Review, and Compilation (also known as Notice To Reader)

Essentially, a compilation requires the accountant to prepare financial statements based on representations made by management, with no effort to verify this information. In a review, the accountant conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is reasonably correct. The result is a limited level of assurance that the financial statements do not contain any “material” errors. In an audit, the auditor must corroborate the balances in the clients accounts and disclosures. This requires the examination of source documents, third party confirmations, physical inspections, tests of internal controls, and other procedures as needed.

The key differences between an audit, review and a compilation are as follows:

 Level of assurance. The level of assurance that the financial statements are fairly

presented is at its highest for an audit and at its lowest (none at all) for a compilation,

with a review somewhere in between. Audits and reviews are generally required when

the company has external debt or many shareholders in order to protect the creditor

and shareholder interests. Canada Revenue Agency only requires compilations for

corporate tax clients.

 Reliance on management. In all three cases, the auditor begins with the account

balances provided by management, but an audit requires a significant amount of

corroboration of this information. A review requires some testing of the information,

while a compilation almost entirely relies on the information provided by management.

 Understanding of internal control. Testing internal controls of a client is only required in

an audit; no testing is conducted for a review or a compilation.

 Work performed and consequently price. An audit requires significantly more time and

expertise, since there are many audit procedures to be performed and the risk of error

are greatest to the auditor. An audit is the most costly. A review requires substantially

fewer hours and falls somewhere in the middle in terms of price. A compilation requires

the least effort and has the lowest risk to the accountant and is therefore the least

expensive.

That said, not all businesses are created equally. The time and effort required to prepare a

compilation for one business may be the same as that required for a review or audit of

another business.