Audit, Review, Compilation, or Preparation — Here Is What Each One Actually Means

The Four Levels, Side by Side

Preparation

A preparer produces financial statements directly from management's records. No procedures are applied to verify the numbers, no report is attached, and no assurance is provided. Each page of the statements carries a notice stating that no assurance is provided. Preparation is appropriate when an owner needs statements in a proper format for internal use, for a lender who has not specified a higher level, or as a starting point before a more involved engagement. If you need the statements themselves prepared, that work is described on the financial statement preparation page.

Compilation

A compilation presents management's numbers in the proper financial statement format and attaches a report. The outside firm does not verify the underlying data or apply procedures to test it. Independence from the client is not required, but any lack of independence must be disclosed in the report. Lenders on smaller facilities, some franchisors, and certain grant funders accept a compilation when a review or audit is not specifically required.

Review

A review runs on inquiry and analytical procedures rather than testing. The outside firm asks questions of management, compares current numbers to prior periods and expectations, and looks for amounts that appear unusual. Independence is required. The resulting report is worded in the negative: the firm states that it is not aware of any material modifications that should be made to the statements for them to conform with the applicable accounting framework. That phrasing is deliberate — a review provides limited assurance, not an opinion. Banks frequently require reviewed statements on mid-size credit facilities and lines of credit above certain thresholds.

Audit

An audit is the highest level of assurance available. The outside firm tests transactions by tracing them to source documents, confirms balances directly with third parties such as banks and customers, considers the design and operation of internal controls, and evaluates whether the statements as a whole present fairly. The engagement ends with a written opinion. Audits are required by certain loan covenants, by sureties setting bonding capacity for contractors, by investors and buyers reviewing prior years, and by federal rules that apply to employee benefit plans once participant counts cross a threshold.

A Note on Who Asks for Which Level

The level required usually tracks the size of the transaction or the nature of the obligation. Banks and lenders tend to specify the level in the loan agreement or the commitment letter, and the requirement often increases with the size of the facility. Sureties setting bonding capacity for contractors — roofing, framing, concrete, remodeling — commonly require reviewed or audited statements, and that requirement is worth confirming in writing before the renewal cycle begins. Investors and buyers reviewing prior-year performance, franchisors with disclosure requirements written into the franchise agreement, grant funders, state charitable registration rules for nonprofits, and employee benefit plans with participant counts that cross a federal threshold each carry their own requirements. No dollar figures or participant thresholds are named here because they vary by state, by lender, and by program, and they change.

Cost, Time, and What the Owner's Calendar Absorbs

Each step up the assurance ladder multiplies the work, and the fee and the calendar follow the work. A compilation can turn around in days once the books are closed. A review runs into weeks. An audit runs longer still, and the timeline depends heavily on how quickly the owner can respond to requests. The largest hidden cost on any of these engagements is the owner's own time: producing schedules, pulling documentation, answering questions from the outside firm, and reviewing drafts. That cost does not appear on the outside firm's invoice, but it is real. We do not publish fee ranges here because the right number depends on the state of the books, the periods covered, the complexity of the entity, and the firm performing the work.

What to Do When the Request Is Unclear

The word audited gets used loosely in conversation and in loan paperwork. Before anyone spends money, it is worth getting the requirement in writing from whoever is asking. The written answer needs to name three things: the level of service being required, the periods the engagement must cover, and the basis of accounting the statements should follow. Lenders sometimes accept a lower level than the one first named, particularly on smaller facilities. Asking costs nothing. Getting the requirement confirmed in writing before engaging an outside firm can save a meaningful amount of money and months of calendar.

What Happens When the Level Being Asked For Is Out of Reach

Sometimes the level required is higher than what the current state of the business can support. Books that are not fully reconciled, a fiscal year that has not been closed, or transactions that cannot be documented make any attest engagement harder and more expensive. In some cases the right first step is getting the records into shape, not engaging an outside firm before the records are ready. That conversation is worth having before the engagement begins rather than after the outside firm has started billing.

What an Outside Engagement Expects to Find on Day One

Most of the friction and most of the cost overrun on these engagements comes from records that are not ready, not from the engagement itself. An outside firm starting a compilation, review, or audit expects to find:

• Bank and credit card accounts reconciled through the period end
• Accounts receivable and accounts payable aging that can be supported
• Fixed assets listed and depreciation posted through the period
• Loan balances that agree to the lender's statements
• Inventory counted and valued where it applies
• Payroll reconciled to the filed quarterly and annual returns

If the books are not at that starting line, the outside firm's clock starts running while your team catches up — and that time appears on the invoice. Getting the books reconciled and closed before an outside engagement begins is the single most effective way to control what the engagement costs.

What We Do and Where the Line Is

We prepare financial statements. We get the books to the point where an outside engagement can start. We assemble the schedules and supporting documents the outside firm asks for, and we stay in the conversation while the engagement runs so the owner is not translating between two sets of people. Where the engagement has to be performed by an outside firm licensed to issue that report, we say so clearly and help route it to the right place. That is a capability, not a limitation. Fifteen years in business and roughly sixty years of combined experience across the office means we have done this enough times to know where the handoff belongs and how to make it clean.

Craig Collins works directly with owners through this process. The goal is that you understand what the outside firm is doing and why, not just that you receive a finished document. That is the same approach we take with every return and every set of books we touch.

About Collins Income Tax Solutions

We serve individuals and small businesses from our office in Tallahassee, Florida, with the full engagement available remotely for clients anywhere in the country. Construction trades — roofing, painting, framing, concrete, remodeling — make up a meaningful share of our client base, and that is reflected in how we handle the surety and bonding conversations that come up in this work. Se habla español.

Clients in the Tallahassee and Leon County area can meet in person at 3652 Shamrock St W. Clients in the Atlanta metro and across the country work with us the same way, fully remote from first document to filing.

Find Out What They Are Actually Asking For

If a lender, surety, investor, or franchisor has named a level of service and you are not sure what it means or whether it is the right fit, the first step is a conversation. We can help you read the requirement, figure out where the books stand, and work out what needs to happen before anyone engages an outside firm.

Schedule a Conversation

Call us at (850) 391-7659 or use the contact form at /contact. There is no obligation in asking the question first.

Common Questions About Audits, Reviews and Compilations

About Collins Income Tax Solutions

Find Out What They Are Actually Asking For

Common Questions About Audits, Reviews and Compilations