A compilation is a letter written by an accountant that accompanys an organization's financial statements. It presents the financial information for the business in an accepted format and is compiled based on the financial data provided by the company management. A compilation does not require any testing by the accountant and as such does not provide assurance as to the organization's financial statements.
A review is a more thorough examination of the business financials by an accountant. The accountant must identify any errors and discrepancies in the financial statements and assess the quality of the information provided by the company. A Certified Public Accountant (CPA) will query the accounting practices and principles of the business as well as analyze current and prior-year balances that appear outside of the CPA's expectations.
An audit is the highest level of financial assurance. The CPA must ensure that an organization’s financial statements are free of material error or fraud and are fairly presented based upon the application of Generally Accepted Accounting Principles (GAAP). The accountant will obtain evidence for the audit by making inquries of relevant personnel, performing physical inspections, and verifying financial statement accuracy via testing procedures. In addition, the CPA must examine documentation and send third-party confirmations to confirm balances and legal matters.
An accurate set of financial statements is required for lenders, creditors, and investors. These statements include a trial balance, adjusted trial balance, income statement, cash flow statement, balance sheet, and statement of shareholders' equity. In addition, financial statements are accompanied by explanatory footnotes and a cover letter written by the accounting firm which encompasses the key points within the financials.