Compilation vs Review vs Audit

If you’re a startup, chances are at some point your investors have asked you to provide “Audited GAAP Financials” for your next fundraising event. However, few investors truly understand the cost and time involved in providing Audited GAAP Financials. In another article, we discuss the nuances of GAAP vs nonGAAP financials, but in this article we wanted to tackle the nuances of Audited Financials.

First things first. There are actually three degrees of “Audited” financial statements: a Compilation, a Review, and a full Audit, which increase in scope, time and cost as you move upward, Here are some of the basics that distinguish the differences between these types of reporting:

Compilation Review Audit
Overview A compilation report establishes that a CPA has compiled the financial statements. It does not attest to accuracy or completeness of financials, which is the responsibility of the management team. A review report establishes that a CPA has reviewed and analyzed the financial statements for topical cohesion. It does not attest to accuracy or completeness of financials, which is the responsibility of the management team. An audit report establishes that a CPA has investigated 1) the completeness and accuracy of key account balances through independent analytical procedures, 2) internal controls and opportunities for fraud and misstatement of financial performance, and 3) provides "reasonable assurance" that the financial statements are free from a material misstatement
Time 3 Business Days 2 Business Weeks 3+ Months
Cost $500+ per year attested $2,000+ per year attested $20,000+ per year attested
Who Can Perform the Work a CPA (Kruze can recommend one) Independent CPA (Kruze can recommend one) Independent CPA, accredited for Audit
Key Factors Does attest to accuracy or completeness of financials
Typically Requested by Landlords Banks/Lenders Series B+ Investors
Report Generated 1 Coverpage 3-5 Pages of Reporting 50+ Pages of Reporting
Scope Cursory Topical In Depth
- Examine the general business model - Perform Analytical/Variance Analysis - All Previous Procedures
- Provides confidence of a CPA working relationship - Review Accounting Principles Used - Investigate Inventory, AR, and AP balances with Clients/Vendors
- Relies solely on information as presented - Review Schedules for Accuracy and Completion - Investigates and reports on Internal Controls

For a more detailed report on all that goes into the various types of attestation, check out this AICPA guide. Also keep in mind that this is just a basic and high-level overview of the 3 types of reports that a CPA can get you.

One other important thing - a non-CPA can’t really give you any real “report.” So, while it’s fine to get anyone off the street (or some supposedly automated software) to try to put together your books, only a credentialed, CPA can provide a Compilation Report, a Review or an Audit that will have any legitimacy in the eyes of an investor, bank or acquiror.