These are three levels of accountant engagement for financial statements, each offering progressively more assurance to external users and required in different circumstances by lenders, investors, or regulators.
A Compilation involves no verification. The accountant compiles the financial statements from information provided by management and does not express any assurance. Most small businesses use this level for internal and CRA purposes.
A Review involves analytical procedures and inquiry but falls short of audit-level verification. It provides limited assurance that nothing has come to the accountant’s attention to suggest the statements are materially misstated.
An Audit provides the highest level of assurance through independent verification of transactions, balances, and disclosures.
The level required depends on the audience. Most lenders above a certain exposure threshold require at minimum a review. Larger credit facilities, regulated industries, and shareholders agreements often require a full audit. Not knowing which level is required, and delivering the wrong one, creates delays and renegotiations at the worst possible time.
See also: Financial Statements · Accounting Standards for Private Enterprises (ASPE) · Debt CovenantsThe level of assurance financial statements carry determines which conversations they can support. See how Wefinx approaches accounting.