Compilation vs Review vs Audit — What's the Difference?

If you own a small business in Canada, you have likely heard terms like "compilation," "review," and "audit" used when discussing your financial statements. Understanding the differences between these three types of engagements is essential for choosing the right level of assurance — and avoiding unnecessary costs.

Understanding Levels of Assurance

In Canada, the CPA profession categorizes financial statement engagements by the level of assurance the accountant provides to users of the financial statements. The three levels, from lowest to highest assurance, are:

Compilation (No Assurance): The CPA assists in preparing financial statements but does not express an opinion or provide any assurance on them.
Review (Limited Assurance): The CPA performs inquiries and analytical procedures to provide limited (negative) assurance that the financial statements are free from material misstatement.
Audit (Reasonable Assurance): The CPA performs extensive testing and procedures to provide a high level of assurance that the financial statements are presented fairly in all material respects.

Compilation Engagements (CSRS 4200)

Compilation engagements, governed by Canadian Standard on Related Services (CSRS) 4200 — formerly known as "Notice to Reader" (NTR) engagements — are the most common type of engagement for Canadian small businesses.

In a compilation engagement, the CPA uses management-provided financial information to compile financial statements. The CPA applies professional expertise in accounting and financial reporting but does not perform verification procedures such as confirming balances with third parties or testing internal controls.

Key Features of Compilations

Financial statements are prepared based on information provided by management
The CPA does not express an opinion or any form of assurance
A compilation engagement report is attached to the financial statements
The engagement must comply with independence and ethical standards
This is typically the most affordable option

Who Needs a Compilation?

Compilations are ideal for owner-managed businesses that need financial statements primarily for tax filing purposes, internal decision-making, or basic banking relationships. If your bank or lender does not specifically require reviewed or audited statements, a compilation is usually sufficient and cost-effective.

Review Engagements

A review engagement provides limited assurance to users of the financial statements. The CPA performs primarily inquiries of management and analytical procedures — comparing financial data to expectations and investigating significant variances — to identify whether anything comes to their attention indicating the financial statements are materially misstated.

Key Features of Reviews

The CPA provides a "negative assurance" conclusion — stating that nothing has come to their attention indicating the financial statements are materially misstated
Procedures include inquiries and analytical reviews, but not detailed testing
More extensive than a compilation but less than an audit
Provides moderate confidence to financial statement users
The CPA must be independent of the entity

Who Needs a Review?

Review engagements are commonly required by lenders for larger loans or lines of credit, by investors or partners who need more confidence than a compilation provides, and by certain government programs or grant applications. If your bank requests "reviewed financial statements," this is the engagement you need.

Audit Engagements

An audit provides the highest level of assurance. The CPA performs extensive procedures including testing transactions, confirming balances with third parties, evaluating internal controls, inspecting physical assets, and assessing the overall presentation of the financial statements.

Key Features of Audits

The CPA provides a "positive assurance" opinion — stating that the financial statements present fairly, in all material respects, the financial position of the entity
Extensive procedures including sampling, confirmation, observation, and inspection
The CPA must assess internal controls and the risk of material misstatement
The most time-consuming and expensive type of engagement
Provides the highest level of confidence to financial statement users

Who Needs an Audit?

Audits are typically required by law for publicly traded companies, certain not-for-profit organizations, and entities above specific revenue thresholds set by provincial legislation. In Saskatchewan, for example, corporations governed by The Non-profit Corporations Act or The Business Corporations Act may be required to have an audit depending on their size and structure. Some lenders, government agencies, and franchise agreements also require audited financial statements.

Cost Comparison

The cost of each engagement type reflects the amount of work involved:

Compilation: Typically the most affordable option, often ranging from $1,000 to $5,000 for a small business depending on complexity
Review: Generally 2 to 3 times the cost of a compilation, as the CPA performs additional inquiry and analytical procedures
Audit: The most expensive option, often 3 to 5 times the cost of a compilation due to extensive testing and documentation requirements

For most Canadian small businesses with straightforward operations and no external stakeholder requirements beyond CRA, a compilation engagement provides excellent value and meets all necessary requirements.

How to Decide Which Engagement You Need

When choosing between a compilation, review, or audit, consider the following questions:

What do your stakeholders require? Check with your bank, investors, or regulatory body to confirm their specific requirements.
Is there a legal requirement? Certain corporate structures and not-for-profits may be legally required to have an audit or review.
What is your budget? If you have no external requirements for higher assurance, a compilation is the most cost-effective choice.
Do you need to build credibility? If you are seeking new investors or significant financing, a review or audit can provide the credibility needed.

Ready to Determine What Your Business Needs?

At DLA CPA, we help Canadian small business owners understand their financial reporting requirements and choose the right level of assurance. Whether you need a straightforward compilation for tax purposes or a more detailed review or audit engagement, our team provides clear guidance and professional service.