The Difference Between Compilations, Reviews, and Audits

In Summary

• Three Levels of Assurance: Financial statement services—compilation, review, and audit—are defined by the level of assurance provided, ranging from none (compilation) to limited (review) to the highest level (audit), which requires extensive testing and results in an opinion on fairness.

• Requirements are Externally Driven: The necessary service level is typically mandated by external stakeholders like banks, grantors, or investors; for example, nonprofits spending $1 million or more in federal awards must undergo an annual Single Audit.

• Preparation is Key: Organizations should determine the required level of assurance early, ensure all financial records are well-organized and supported, and begin the process ahead of time to avoid delays and meet compliance obligations.

Organizations across every sector are asked to provide financial statements at one point or another. A bank needs them for a loan renewal. A foundation wants to see them before releasing a grant. These requests often come with deadlines, but not always with clear instructions. Many leaders hear the terms compilation, review, and audit and wonder what the differences mean for the organization. This often depends on how the financial statements will be used and what level of assurance outside parties need. Understanding these distinctions helps organizations avoid delays, reduce costs, and meet compliance obligations. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.

What’s the Difference?

Financial statement services fall into three levels, each defined by the amount of work the CPA performs and the level of assurance provided to users of the statements.

• Compilation — A compilation is the most basic option. The CPA assembles financial statements using information provided by management and gives no assurance on accuracy. There is no testing, no verification, and no inquiry work. Compilations are generally for internal reporting, early-stage businesses, or organizations that need formal statements without external scrutiny.
• Review — A review provides limited assurance. The CPA performs inquiries and analytical procedures to determine whether they are aware of any material misstatements, meaning errors or omissions that could affect how the financial statements are understood. Reviews offer more credibility than a compilation, but they are far less extensive than audits. They are commonly required for small to mid-sized bank loans, bonding programs, investor updates, and board reporting.
• Audit — An audit provides the highest level of assurance. Independent CPAs test transactions, confirm balances with third parties, and evaluate evidence to issue an opinion on whether the statements are presented fairly. Audits are usually required for larger credit facilities, investor due diligence, and many types of regulatory or grant reporting.

Typical Scenarios and Requirements

The level of assurance an organization needs is usually determined by someone else. Banks, grantors, state agencies, investors, and bonding companies often set the expectations. The specifics vary across nonprofits and businesses, but the goal is the same: stakeholders want to have confidence in the financial statements.

Nonprofits are often subject to the most defined requirements. Any organization that spends $1 million or more in federal awards during a fiscal year must complete an annual Single Audit under Uniform Guidance. Several states also require audits once revenue passes a certain threshold. Private foundations frequently ask for audited statements, which means many nonprofits undergo audits whether or not they operate at a large scale.

Smaller nonprofits with modest grant activity sometimes use reviews or compilations. But as the mix of funding grows or compliance expectations tighten, most eventually shift toward annual audits to meet state and grantor requirements.

For businesses, the main factor is financing. Loan agreements often provide the level of assurance required each year, and those expectations can increase as credit needs rise. Companies seeking investors, planning a sale, or entering acquisition discussions are often asked for audited or reviewed financial statements to support due diligence. Contractors may also need audits because bonding companies rely on them to assess financial stability.

It’s also common for organizations to move between levels over time. A small business might start with compilations but move to reviews as its credit line expands. Eventually, the business might need a financial statement audit when preparing for a major transaction. A nonprofit may begin with a review and then shift to an audit as it secures larger grants or meets regulatory thresholds. Requirements can move in the other direction too if risk decreases or funding sources change.

How to Prepare

Being prepared starts with understanding what the engagement actually requires. Loan agreements, grant letters, and state rules should provide the level of assurance required. However, sorting that out early prevents confusion and delays.

Organizations should take time to ensure their records are in good order before the work begins. A current general ledger, complete reconciliations, and clear support for major transactions help the CPA work efficiently. Missing documentation or unresolved entries can slow down any engagement, especially an audit.

Some of the most common problems come from timing. Even lighter engagements can run into delays during busy periods. Starting early gives everyone more room to work and reduces last-minute pressure.

Looking ahead can also help organizations avoid surprises. A new grant, a larger credit request, or an upcoming transaction may require a higher level of assurance in the near future. Preparing for those changes early keeps the engagement on track and minimizes disruptions once work begins.

Contact Us

Organizations are asked for financial statements every day, and it isn’t always obvious which level of assurance fits the situation. A trusted advisor can help interpret requirements and guide the process, so the engagement meets stakeholder expectations. If you have questions about the information outlined above or need assistance with another tax or accounting matter, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.