Financial Statements

Fast Facts: The Three Types of Financial Statements

By: The Vanilla Team | Download PDF

Accounting firms generally provide three types of financial statement services: a Compilation, a Review, or an Audit. Which one is right for you? That depends on the size of your business and how you plan to use the information. Each type of statement is designed to provide a different level of assurance, and your choice will largely depend upon whom you intend to share the information with (e.g. your partners, bankers, investors, etc.).

Basic financial statements (or “Compilation”)

  • Suitable for most small, privately held businesses.
  • Relatively straightforward and inexpensive to prepare.
  • Generally intended for use by owners and/or management only (not for outside parties).
  • Basically, the CPA uses common sense to prepare statements that are free from obvious material errors, but expresses no opinion on the financial statements.

Intermediate financial statements (or “Review”)

  • More time-consuming and expensive than a Compilation (but much less than an Audit).
  • Often prepared for companies that have bank loans, creditors, or outside investors, in cases where those third parties do not require audited statements.
  • The CPA firm performs additional work known as “inquiry and analytical procedures.”
  • Upon completion, the CPA firm issues a report providing limited assurance that the financial statements are presented fairly.

Advanced financial statements (the dreaded “Audit”)

  • Provides the highest level of assurance to shareholders, third parties, and the general public.
  • More time-consuming and expensive than a Review, due to extensive planning, testing, and verification procedures.
  • Upon completion, the CPA firm issues a report providing reasonable assurance that the financial statements are presented fairly and in conformity with Generally Accepted Accounting Principles (GAAP).
  • Contrary to popular opinion, Audits are not designed to provide absolute assurance: They are designed to reduce the possibility of misstatement to +/- 5%.