Nonprofit Accounting Basics

Audit vs Review vs Compilation

Author: 
Topics: 

A nonprofit organization can engage a Certified Public Accountant (CPA) to prepare its financial statements.  There are three levels of financial statement services offered by CPAs: Audits, Reviews, and Compilations.

Audits

An audit provides the highest level of assurance on an organization’s financial statements.  An audit provides assurance that an organization’s financial statements are free of material misstatement and are fairly presented based upon the application of generally accepted accounting principles.

An audit includes:

  • confirmation with outside parties
  • testing selected transactions by examining supporting documents
  • completing physical inspections and observations
  • considering and evaluating the internal control system of the organization  

Reviews

A review provides limited assurance on an organization’s financial statements.  During a review, inquiries and analytical procedures present a reasonable basis for expressing limited assurance that no material modifications to the financial statements are necessary; they are  in conformity with generally accepted accounting principles.  This “does it make sense” analysis  is useful when the organization needs some assurance about their financial statements, but not the higher level of assurance provided by an audit.

Compilations

A compilation provides no assurance on an organization’s financial statements.  The CPA takes financial data provided by the nonprofit and puts them in a financial statement format that complies with generally accepted accounting principles.  There are no testing or analytical procedures performed during a compilation.