What’s the Difference, and Which One Do You Actually Need
If you have ever gotten a call from your bank asking for a review engagement and
thought, don’t I already pay someone for that, you are not alone. Accountants throw
around terms like compilation, review, and audit like everyone just knows what they
mean. Most people don’t, and honestly, why would you. So let’s clear it up.
There are three main types of engagements accountants perform on financial
statements, and the difference between them comes down to one thing: how much
assurance is being given that the numbers are actually right.
Compilations
This is the most basic level, and it’s what most small and mid sized owner-managed
businesses actually need. A compilation takes the information you give us and
organizes it into a proper set of financial statements. We are not verifying anything, we
are not testing anything, we are just making sure it’s presented correctly and
consistently. Think of it as making sure your numbers are dressed appropriately for the
occasion. This is generally enough to satisfy CRA compliance and give you statements
you can actually use to run your business or hand to a lender who is not asking for
anything fancier.
Review Engagements
This is a step up, and it’s usually requested when there is a third party involved who
wants some level of comfort in the numbers. Most often that’s a bank, sometimes it’s a
private investor, sometimes it’s a shareholder who is not involved day to day. In a
review, we actually perform some analysis and inquiry into the financial statements,
enough that we can say we are not aware of anything that would lead us to believe the
statements are not free of material misstatement. That’s called limited assurance. It’s
not a guarantee, but it’s a meaningful step beyond just organizing numbers, and it costs
more because there’s real work behind it.
Audits
This is the most rigorous engagement, and by a wide margin the most expensive. An
audit involves detailed testing, external confirmations, and enough evidentiary work that
we can actually give an opinion that the financial statements are fairly presented, free of
material misstatement. This is called reasonable assurance, which sounds like a
modest upgrade from limited assurance but represents a completely different scope of
work. Audits are usually required for larger companies, public companies, or businesses
with specific lending covenants or regulatory requirements that demand that level of
scrutiny.
So Which One Do You Need?
Honestly, it usually isn’t up to you. It’s determined by the people reading your financial
statements. If it’s just you and CRA, a compilation is probably fine. If your bank wants
more comfort before renewing your line of credit, they’ll tell you they need a review. If
you’re dealing with public reporting requirements or specific covenants, you’re in audit
territory whether you like it or not.
A Quick Note on Cost
Since it comes up constantly: compilations are the least expensive, reviews cost
more because of the actual testing and inquiry involved, and audits are significantly
more expensive again because of the depth of work required. If someone quotes you
an audit price for review level comfort, ask questions.
At Oviatt Accounting, I perform compilation engagements and review engagements.
Those cover the vast majority of what owner-managed businesses in Alberta actually
need. If you’re in a position where you specifically require an audit, I’m happy to point
you toward a firm that specializes in that work. It’s not something I offer right now,
