Audit, Review, or Compilation
A lender says “we need audited financials.” A grantor requests “audited statements.” A board member asks whether the organization “gets audited.” The word is used generically, but in accounting, it refers to a specific level of service with specific procedures and a specific cost.
Choosing the wrong level of service has consequences in both directions. Paying for an audit when a review would satisfy the lender wastes money the organization could deploy elsewhere. Providing a compilation when the grantor required an audit can cost the grant. The decision should be driven by who will use the statements and what they will do with them.
The Three Levels of Assurance
Audit (Highest Assurance). An independent CPA performs risk assessment, evaluates internal controls, conducts substantive testing, confirms balances with third parties, and issues an opinion on whether the financial statements are presented fairly . Audits are required for organizations expending $1 million or more in federal awards (Single Audit), for many larger loans and grant agreements, and when boards or regulators demand the highest level of assurance.
Review (Limited Assurance). The CPA performs analytical procedures and inquiries of management to assess whether the financial statements are plausible and free from material misstatement, without the extensive testing required for an audit. A review is often sufficient for boards, smaller lenders, or grantors who need a comfort level but do not require a full audit. It is significantly less expensive than an audit and can typically be completed more quickly.
Compilation (No Assurance). The CPA organizes financial data provided by management into formal financial statement format but performs no verification or testing. Compilations are appropriate for internal management reporting, tax preparation, and simple loan applications where no assurance is required.
The Decision Framework
Ask the requester what they will accept. A lender may say “audited financials” as a default but accept a review for a smaller loan. A grantor may require a Single Audit because the funding is federal. Do not assume; ask for the specific requirement in writing.
Consider the cost of being wrong. If you provide a compilation when the lender required a review, the loan may be delayed or denied. If you provide a review when the grantor required an audit, the grant may be at risk. The cost of upgrading the engagement later is often higher than the cost of doing it right the first time.
Think about the timeline. A compilation can be completed in days. A review can be completed in weeks. An audit typically requires four to eight weeks of fieldwork, plus planning and reporting. If the deadline is tight, the timeline may determine the level of service.
When the Answer Is “None of the Above”
Some organizations ask for an audit when the real issue is that the books are disorganized. An audit does not fix messy records; it identifies the problems and may result in a qualified opinion or a management letter that documents the issues. If the underlying problem is bookkeeping, a cleanup engagement followed by a compilation or review may be more appropriate than an audit.
How We Determine the Right Fit
We start by asking who will use the financial statements and what they require. If a lender has requested “audited financials,” we ask for the specific loan agreement language, because some lenders accept a review for smaller loans. If a grantor has imposed a requirement, we review the grant agreement to confirm whether a Single Audit, a financial statement audit, or a review is specified. We then match you with the appropriate service and provide a clear, fixed-fee quote before any work begins.
Why Choose Nova Tax for Assurance Services
We provide clear, plain-English explanations of what each service includes and what it does not. Our goal is to help you meet your obligations efficiently, not to sell you a more expensive engagement than necessary. We have experience with audits, reviews, and compilations for businesses, nonprofits, and government entities across the DMV. When you work with us, you get a clear timeline, a single point of contact, and a fixed fee.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are subject to change, and individual circumstances vary. Consult a qualified tax professional for advice regarding your specific situation.
