An auditor can perform both a review and compilation as a professional service. Both are very similar to an audit; however require less assurance and extensive work. A compilation normally is done for a nonpublic company. Many nonpublic companies can be really small stores, or businesses that do not have an accounting department; therefore a CPA can assist in compiling the financial statements. A review can be offered to both public and non-public companies. A review is somewhat in the middle, both nonpublic and public companies may pay a CPA to perform a review service. A public entity usually requires a review for all interim financial information.
A review’s main objective is to express “limited assurance that no material modifications should be made to the financial statements”. An auditor is implying limited assurance and therefore has to be independent. This is crucial since the auditor is not expressing an opinion; therefore he/she cannot perform auditing work. For nonpublic entities, an auditor must conduct the audit in accordance to Statements on Standards for Accounting & Review Services (SSARS); and for all public entities the auditor must conduct the audit in accordance to Statements of Auditing Standards (SAS). A review consists only of inquiries, analytical procedures, and a client representation letter. Inquiries of all internal sources only! Analytical procedures are consistent with what is done during an audit and review. The auditor must state on the financial statements “See Independent Accountants Review Report”.
For both a review and compilation an accountant must obtain sufficient knowledge of the industry of the client before offering the professional service. As well read all the financial statements to make sure there are no obvious misstatements and mistakes on the financial statements. It’s only wise for any CPA to not be associated or even affiliated with false, deceptive, fraudulent financial statements; regardless of the level of professional service.
A compilation is when an auditor compiles the financial statements for the entity. When an auditor performs this service, he/she is assisting management in the preparation of its financial statements. The Accountant does not require independence. The auditor is not expressing any assurance and therefore does not have to be independent. The Accountant must state explicitly in the compilation report the lack of independence. If the financial statements are not expected to be used by a third party, the auditor does not have to issue a compilation report rather the engagement letter should specifically state the restricted use of the report.