Audit, review and compilation are three separate engagements under three separate standards, and the cheapest one is not a discounted version of the other two. The review standard says so in its own words: a review does not contemplate obtaining an understanding of the entity's internal control, assessing fraud risk, or testing the accounting records. A client asking for the cheapest level is usually asking the wrong question, because the level is often named in a document they have already signed. Find that document before you price anything.
What a Compilation Commits Your Firm To
A compilation puts your firm's name on a set of financial statements without putting any assurance behind them, and the standard is direct about why.
Assurance is the level of confidence the accountant obtains from evidence and states in the report, and it runs from reasonable assurance in an audit, to limited assurance in a review, to none in a compilation. Under AR-C section 80, because a compilation engagement is not an assurance engagement, it does not require the accountant to verify the accuracy or completeness of the information management provides, or otherwise gather evidence to express an opinion or a conclusion on the financial statements (AICPA Statements on Standards for Accounting and Review Services).
That is still not a formatting service, which is where firms misprice it. The same section requires at .13 that the accountant read the financial statements in light of an understanding of the applicable financial reporting framework and the significant accounting policies management adopted, and consider whether those statements appear appropriate in form and free from obvious material misstatement (AICPA Statements on Standards for Accounting and Review Services).
Two duties follow from that reading, and both take partner time. At .15 the accountant proposes appropriate revisions where the statements do not adequately describe the framework, where revisions are needed for them to be in accordance with it, or where they are otherwise misleading. At .16 the accountant withdraws and tells management why, either when the engagement cannot be completed because management failed to provide records, documents, explanations or other information, or when management does not make the proposed revisions, or does not disclose those departures in the statements, and the accountant determines not to disclose them in the report (AICPA Statements on Standards for Accounting and Review Services).
What the client receives at the end is a written report that says what your firm did not do. Among the elements required at .17 is a statement that the accountant did not audit or review the financial statements, was not required to perform any procedures to verify the accuracy or completeness of the information management provided, and does not express an opinion, a conclusion, nor provide any assurance on them (AICPA Statements on Standards for Accounting and Review Services).
Read that paragraph aloud before you agree to a compilation for a client who is about to ask a bank for money. It is the part of the report the credit team reads.
What a Review Buys, and Why It Is Not a Cheaper Audit
A review produces a conclusion rather than an opinion, and it is built primarily out of two kinds of procedure.
Under AR-C section 90 the accountant expresses a conclusion on the financial statements based on obtaining limited assurance, and performs primarily analytical procedures and inquiries to obtain sufficient appropriate review evidence for it. The same section defines limited assurance as a level of assurance less than the reasonable assurance obtained in an audit, but at an acceptable level as the basis for the conclusion in the review report (AICPA Statements on Standards for Accounting and Review Services). Analytical procedures are evaluations of financial information through analysis of plausible relationships among financial and nonfinancial data.
The client has to be told the limit in writing before the work starts, not after. At .16 the agreed terms of the engagement must include a statement that a review is substantially less in scope than an audit and that the accountant will not express an opinion on the financial statements, and at .76 the review report itself carries that statement again (AICPA Statements on Standards for Accounting and Review Services).
The boundary is drawn in the standard's own application material, and it is the passage to put in front of a client who thinks a review is an audit with fewer hours. A review does not contemplate obtaining an understanding of the entity's internal control, assessing fraud risk, testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation or the examination of source documents, or other procedures ordinarily performed in an audit (AICPA Statements on Standards for Accounting and Review Services).
None of that makes a review cheap to run, and this is the level firms underprice. At .19 the accountant determines materiality for the financial statements as a whole and applies it in designing the procedures and evaluating the results. At .21 and .22 the accountant possesses or obtains an understanding of the industry, and knowledge of the entity's business and of the accounting principles and practices it uses. At .27 the accountant develops an expectation of recorded amounts or ratios and evaluates whether that expectation is precise enough to give limited assurance that a misstatement will be identified which, alone or aggregated with others, may cause the statements to be materially misstated (AICPA Statements on Standards for Accounting and Review Services).
A difference that turns up is not a footnote either. Where analytical procedures identify fluctuations or relationships inconsistent with other relevant information, or differing from expected values by a significant amount, .28 requires the accountant to investigate by inquiring of management and by performing other review procedures if considered necessary in the circumstances (AICPA Statements on Standards for Accounting and Review Services).
A review also has a floor your firm cannot negotiate away. At .12 the accountant should not accept a review engagement where management or those charged with governance impose a limitation on the scope of the work such that the accountant believes it will leave the firm unable to perform review procedures that provide an adequate basis for issuing a review report (AICPA Statements on Standards for Accounting and Review Services). A client who wants the report but not the questions is asking for an engagement you are not permitted to take.
Why the Audit Is the Only One of the Three That Tests
An audit is the only level at which somebody tests the accounting records behind the numbers, rather than analyzing them and asking management about what looks odd.
Under AU-C section 200, generally accepted auditing standards require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is described at .06 as a high, but not absolute, level of assurance, obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk to an acceptably low level (AU-C 200).
Testing is not optional, and it does not disappear when the controls look good. AU-C 330 requires at .18 that the auditor perform substantive procedures for each relevant assertion of each significant class of transactions, account balance and disclosure, regardless of the assessed level of control risk. A relevant assertion is one of management's representations about a class of transactions, an account balance or a disclosure that carries an identified risk of material misstatement.
Those procedures reach the closing process by name. At .21 the auditor's substantive procedures should include audit procedures related to the financial statement closing process, such as agreeing or reconciling information in the financial statements with the underlying accounting records, including information in the disclosures, and examining material journal entries and other adjustments made during the preparation of the statements (AU-C 330).
That is the honest version of the price gap. A compilation reads the statements, a review questions and analyzes them, and an audit tests them. The hours follow the verbs. Which parts of the audit work an outside team can prepare, and which acts stay with the auditor, is a separate question answered in what audit support can and cannot move, and what the client has to assemble before fieldwork starts is covered in year-end audit preparation.
Independence Changes at Every Level
This is the difference that decides many proposals before price is discussed, and it is the one clients rarely raise.
A compilation is the only one of the three you can perform without independence, provided you say so. At .07 the accountant must determine whether the accountant is independent of the entity, and at .22 an accountant who is not independent should indicate that lack of independence in a final paragraph of the compilation report. If the accountant chooses to describe the reasons independence is impaired, .23 requires all of those reasons to be included in the description (AICPA Statements on Standards for Accounting and Review Services).
A review has no such option. At .10 the accountant must be independent of the entity when performing a review under the accounting and review standards, and an accountant who determines during the engagement that independence is impaired should withdraw from it (AICPA Statements on Standards for Accounting and Review Services).
An audit states the requirement the same way, with two narrow carve-outs. AU-C 200 requires at .15 that the auditor be independent of the entity when performing an engagement under generally accepted auditing standards, unless those standards provide otherwise or the auditor is required by law or regulation to accept the engagement and report on the financial statements. Where neither of those applies and the auditor is not independent, the auditor is precluded from issuing a report under those standards.
For a firm that also keeps the client's books, that ladder often settles the proposal on its own, and the analysis those bookkeeping services trigger is set out in what a client accounting services practice requires.
Who Actually Forces the Level
Usually not the client, and usually not your firm.
Federal money names it, and what it names is an audit. A nonprofit or governmental client that expends enough federal award money in a year must have a single or program-specific audit conducted for that year (2 CFR 200.501), and where that line sits, plus what the rules count as spending, is set out in the single audit threshold.
Franchising names it too, with a phase-in most people do not know about. The Franchise Rule requires the financial statements in a franchise disclosure document to be audited by an independent certified public accountant using generally accepted United States auditing standards, except that a start-up franchise system without audited statements may phase them in, disclosing an unaudited opening balance sheet in its first partial or full fiscal year selling franchises, and an audited balance sheet opinion as of the end of that year in its second (Franchise Rule, 16 CFR 436.5(u)).
That phase-in is conditional, and the conditions sit apart from the schedule in the rule's own text. The franchisor has to prepare audited financial statements as soon as practicable. It has to prepare the unaudited statements in a format that conforms as closely as possible to audited ones. And it has to include one or more years of unaudited statements, or disclose clearly and conspicuously that it has not been in business for three years or more and cannot include every statement the rule otherwise requires (Franchise Rule, 16 CFR 436.5(u)(2)(iv)).
Everything else is a contract, and contracts are where the misreading happens. Loan agreements, bonding programs, investor rights letters and board resolutions each name a level in their own words, and those words are not interchangeable. Audited, reviewed and compiled name three different engagements at three different fees, and a clause that asks only for statements prepared by an independent accountant is naming none of them. Ask for the clause and read it yourself, because the client is usually quoting a memory of it.
Preparation Is a Fourth Service, Not a Fourth Level
The accounting and review standards also cover a preparation engagement, which produces financial statements without any report at all.
It is worth naming in a proposal conversation only to rule it out, because it satisfies no requirement that asks for a level of assurance. Where the preparation standard applies to a firm running a client's books, and what it obliges that firm to put on the face of the statements, sits in the month-end close checklist.
Choosing Between an Audit, a Review and a Compilation
The level is a function of who reads the statements and what they signed, not of what the client wants to spend. Work through it in this order.
- Find the reader, then the document. Ask who will rely on the statements and get the loan agreement, grant condition, franchise filing or board resolution in front of you. If nothing names a level, the choice turns on what that reader will actually rely on rather than on what a rule demands, and that is a different conversation.
- Run the independence question next. If your firm keeps the books, authorizes payments or owns the close, a review and an audit may already be unavailable, and no fee changes that. A compilation may still be available, with the lack of independence disclosed in the report.
- Test the scope before you quote. A client who will not sit for inquiries, will not produce records, or wants a defined subject kept out of the work is describing a review you cannot accept. Establish that in the first meeting rather than in month two.
- Price the review as a review. Materiality, industry understanding, an expectation precise enough to catch a material misstatement, and the investigation of every significant difference are the work, and a fee built from a compilation's hours will not carry them.
- Do not relabel. If the required level is unaffordable, the two honest moves are to go back to the party requiring it and ask whether a lower level is acceptable, or to decline the engagement. There is no third move that keeps the report and drops the work.
One caution on the other side, because it cuts against the sale. A firm that signs one or two review or audit reports a year carries the full weight of the standard on each of them, and the cost of staying current on that literature does not fall in proportion to the number of reports. If that describes your practice, referring the assurance work and keeping the accounting and tax relationship is a defensible answer rather than a retreat.
The Capacity Behind Whichever Level You Propose
Every one of these three engagements assumes the underlying books are in a state somebody can work with, and getting them there is a bookkeeping job rather than a reporting one.
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The way in is deliberately small. A Free 40-Hour Proof Pilot puts a fixed block of your own representative work through the offshore team and your review chain, so your reviewer grades real output before any client file is committed. If a placement is not the right fit inside the first 30 days, the 30-Day Fit Guarantee replaces them free.
Don't trust us. Test us.