Compilation, Review or Audit? What Early-Stage Companies Should Know

Does my emerging technology company need a compilation, a review or an audit?

This is a question that often comes up for early-stage companies and must continually be reassessed throughout the lifecycle of a business.

Schneider Downs offers three types of assurance services: compilations, reviews and audits. A new company might not need any of these services during its first few years, but it may eventually require a compilation or review as it grows. Then, as the company further matures, an annual audit can become beneficial or may be required by investors or lenders. 

What’s the difference between a compilation, a review and an audit?

• A compilation entails organizing client data into a financial statement format but does not offer any sort of assurance.
• A review involves inquiry and analysis and offers limited assurance that the financial statements are free from material misstatement.
• An audit, meanwhile, is the highest level of assurance service we provide. In an audit engagement, we obtain evidence through testing and inquiry to provide reasonable assurance that the financial statements are free from material misstatement.

How do I determine whether my company requires one of these services, and which is the most appropriate?

Compilations are the least time-consuming and the least costly, but do not provide any assurance from the accounting firm regarding completeness or accuracy of the information presented within the compiled financial statements. During a compilation, the accountant does not gain a full understanding of the control environment nor perform any procedures related to fraud risk or any substantive testing of source documents. Compilations can be appropriate for smaller businesses that are seeking a personal or business loan and need to provide compiled financial statements to a bank but don’t want to incur the expense of a review or audit.    

Reviews are often required as a business grows or begins to seek more significant financing. Reviews are more in-depth and time-consuming than compilations. A review provides limited assurance that the financial statements are being presented in accordance with the relevant accounting framework. It involves inquiry and analytical procedures but does not include any internal control or fraud procedures nor any substantive testing. Limited assurance means the accounting firm did not encounter any information during its review procedures that would suggest that material modifications need to be made in order to be compliant with the applicable framework. Reviews are often required by banks when companies take out smaller business loans or open a revolving line of credit.

Audits deliver the highest level of assurance provided by CPAs. To perform an audit, an accountant must be independent, and they must obtain an understanding of the business’ internal control environment, assess the risk of material misstatement and perform procedures related to fraud risk. They will perform a combination of substantive testing, third-party confirmations, physical observation, inquiry and analytical procedures to obtain reasonable assurance that the financial statements are free from material misstatement. Audits are more time-consuming and costly but are often required when a company is receiving grants, securing larger loans or lines of credit, raising equity or being sold. Additionally, audits are required when businesses are publicly traded.

If you’re questioning whether your business requires one of these services, Schneider Downs can help. We’ll consult with you to determine your needs, requirements and future growth goals, and we will weigh the costs of an audit, review, or compilation. If you think you may need an audit in the future, it can make sense to start having one performed now, in order to gain comfort on beginning balances for future years. Having an independent CPA perform an audit of your business can also result in beneficial consulting or recommendations related to your internal controls, business processes or accounting records, and it can give you access to the other services and expertise we offer for early-stage companies.  

Whether you’re a new business considering your first compilation, review or audit, or a growing company that needs additional assurance or has a new audit requirement, the Schneider Downs Emerging Services team is here to assist. 

Related Articles

This article is part of a series exploring the complex business challenges startup and early-stage companies may encounter as they grow. Additional articles include:

• Best Practices After an Equity Raise for Start-Up Companies
• Five Tax Considerations for Start-up Companies
• Understanding Leases In Technology Arrangements
• Pros and Cons of IPO for Early-stage Companies
• Emerging Technology Companies and the R&D Tax Credit
• Top Accounting Advisory Needs for Emerging Technology Companies

About Schneider Downs Emerging Technology Services

Schneider Downs understands the ever-changing landscape and business challenges facing companies focused on emerging technologies and software. Our clients represent a wide range of organizations, from emerging growth companies to large mature companies, and we are well-versed in the unique challenges they face. Our team of seasoned professionals has experience working with emerging technology companies in all phases of their evolution.  

To learn more, visit our Emerging Technology page.