What Small Business Owners Need to Know About Audits, Compilations, and Reviews

As a small business owner, it's essential to understand the different types of financial assessments your company may face—compilations, reviews, and audits. Each serves a unique purpose and can help you present accurate financial information to investors, lenders, or regulatory bodies.

Compilations

A compilation is the most basic level of financial statement preparation. In this process, a CPA assembles financial data provided by the business into a formal financial statement format. The CPA does not provide any assurance that the numbers are accurate but simply compiles the information. Small businesses often use compilations when they need formal financial statements for internal use or low-risk external purposes like seeking a small loan.

Reviews

A review is a step up from a compilation. In this case, the CPA performs analytical procedures and makes inquiries of company management to ensure that the financial statements conform to generally accepted accounting principles (GAAP). A review provides limited assurance that no material modifications need to be made. This is typically used by businesses looking for moderate levels of assurance for third parties, such as potential investors or lenders.

Audits

An audit provides the highest level of assurance. During an audit, the CPA examines financial statements and underlying records in detail, using various tests and confirmation procedures to ensure their accuracy. An audit provides a high level of assurance that the financial statements are free from material misstatements, making it ideal when businesses are required to submit audited financial statements by law, regulators, or when seeking significant investments or loans.

Which One is Right for Your Business?

The type of financial assessment your business requires depends on your specific needs, regulatory requirements, and the expectations of external parties like investors or lenders. If you're applying for a large loan or seeking investors, an audit may be necessary to provide the highest level of assurance. For smaller loans or internal financial decision-making, a compilation or review may suffice.

Understanding these financial reporting options is critical for ensuring transparency and trust in your business. Knowing when and why to pursue a compilation, review, or audit will help you navigate financial reporting requirements efficiently.