A compilation is useful when limited in-house capabilities for preparing financial statements exist. A review provides limited assurance that no material changes need to be made to the financial statements.
A financial statement review is a service under which the accountant obtains limited assurance that there are no material modifications that need to be made to an entity's financial statements for them to be in conformity with the applicable financial reporting framework (such as GAAP or IFRS). A review does not require the accountant to obtain an understanding of internal control, or to assess fraud risk, or other types of audit procedures. Consequently a review does not provide the accountant with assurance that he has become aware of all the significant matters that would normally have been discovered and disclosed in an audit.
The review is more expensive than a compilation and less expensive than an audit. It is preferred by those businesses whose lenders and creditors will allow them to use this approach, thereby saving the cost of a full audit.
In a review the management takes responsibility for the preparation and presentation of the entity's financial statements, while the accountant should have a sufficient level of knowledge of both the industry and the entity to review the financial statements.
A financial statement compilation is a service to assist the management of a business in presenting its financial statements. This presentation involves no activities to obtain any assurance that there are no material modifications needed for the financial statements to be in conformity with the applicable accounting framework (such as GAAP or IFRS). Thus a person engaged in a compilation does not use inquiries, analytical procedures or review procedures, nor does he need to obtain an understanding of internal controls, or engage in other audit procedures. In short, compilation activities are not designed to provide any assurance regarding the information contained within the financial statements.
A financial statement compilation is the least expensive of the various forms of auditing services (the other two being a review and an audit), and so is preferred by those cost-sensitive entities whose financial statement users are comfortable with this form of engagement. However because there is no assurance that compiled financial statements fairly present the results and financial position of a business, a compilation is not preferred by lenders and creditors.
A compilation engagement may address either a complete set of financial statements or an individual statement.