Audits, Reviews, Compilations, and Agreed Upon Procedures: Understanding the Differences
Lindsay Andrews, CPA
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In the financial and business world, audits, reviews, and compilations are three distinct services provided by public accounting firms on a company’s financial statements.  For those who are unfamiliar with these services, there may not seem to be much of a difference.
There is, however, a significant difference in the level of assurance between an audit, a review, and a compilation. An agreed upon procedure is also an option and is the only service where the contents of the report is specifically tailored and is not in the form of a financial statement.
Determining what type of service is needed is not something to take lightly. The best option for a company can vary based on a number of factors including stakeholder requirements and regulatory issues.
For a better understanding of the differences between an audit, review, compilation, and agreed upon procedure, here’s an overview of the process and level of assurance of each service:
Audit
An audit provides the highest level of assurance on a company’s financial statements. The process involves an in-depth examination and verification of a company’s financial statements and records. Auditors use systematic methods such as confirmations, inquiries, analytical procedures, and inspection to verify the accuracy of the financial statements. The details of various transactions and related supporting documentation are provided to the auditor. Audits can be required by stakeholders, creditors, or regulatory bodies, and they offer the most comprehensive assessment of an organization’s financial condition.
Review
On the other hand, reviews offer a moderate level of assurance. They are less detailed and intensive than audits. In a review, the accountant primarily uses analytical procedures and inquiries to analyze the financial statements. While a review does not delve as deeply as an audit, it can still provide stakeholders with a reasonable degree of confidence in the financial statements. Reviews are often sufficient for smaller entities or those with fewer regulatory requirements.
Compilation
Compilations provide no assurance on the financial statements. In a compilation, the accountant simply presents the financial data provided by the client in the form of financial statements. There is no verification or analysis of the data.
Agreed Upon Procedure Report
An agreed upon procedure report is not a report added to a company’s financial statements but rather a type of attestation engagement where the accountant performs specific tailored procedures as agreed upon and reports findings on these procedures. If a company has any concerns about a specific aspect of their financials or operations, procedures can be developed and agreed upon just to address the areas of concern. At times, third parties may require agreed upon procedures to be performed to demonstrate compliance with loan terms, grant stipulations, or other specific compliance terms. Agreed upon procedures can be an efficient way to have concerns internal to an organization specifically addressed and tested by an independent third party.
Summary
The choice between what type of service best suits a company depends on the needs of the organization and the requirements of its stakeholders. By understanding these differences, businesses can make informed decisions about which service best suits their needs.
For further guidance on what procedure may be the best option for your company, reach out to your Louis Plung & Company advisor, or email [email protected].
