It usually starts with a request. A funder wants "CPA-prepared financial statements," a bank asks for reviewed financials, or your state registration form mentions an audit.
The three terms sound alike. They aren't the same thing, though. Cost and timeline differ for each, and so does what the report tells a reader about how far your numbers can be trusted.
Once you know how audit vs. review vs. compilation compare, you can pick the level your situation actually calls for without paying for more than you need. You'll also know what the CPA is going to ask for before the engagement starts.
The short answer is the level of assurance. That's how much confidence a CPA's report gives a funder or bank that your numbers are reliable. An audit gives reasonable assurance that your financial statements are free of material errors. A review gives limited assurance. With a compilation, the CPA formats your statements but doesn't verify them.
Each step up means more CPA hours, so audits take the longest and cost the most.
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It can help to picture a ladder. A compilation is the bottom rung, and every step up adds more checking by the CPA and more confidence for whoever reads your statements.
A compilation is the most basic of the three. Your team hands over the financial information, and a CPA puts it into proper financial statement format. The CPA doesn't test or verify the numbers.
The Journal of Accountancy explains that a compilation is done without undertaking to obtain or provide any assurance. Both compilations and reviews fall under the AICPA's Statements on Standards for Accounting and Review Services (SSARS). Even for a compilation, the CPA has to decide whether they're independent of your organization. If they're not, the compilation report says so.
Compiled financial statements can work well when a small loan or a funder only needs professionally formatted statements and doesn't ask for verification. They can also be useful for internal reporting.
Keep in mind that a compilation is only as accurate as the books behind it, so any errors in your records carry straight into the compiled statements.
A financial statement review sits in the middle. Expect the CPA to ask your management team a lot of questions and run analytical procedures. In plain terms, they compare this year's numbers to last year's and look for amounts that don't make sense.
The National Council of Nonprofits notes that a review provides a limited level of assurance that the financial statements are free of misstatements. But the CPA won't test your internal controls or confirm your bank balances, and they don't pull source documents the way an auditor would.
Unlike a compilation, a review requires independence. If a CPA's independence is impaired for any reason, they can't take on the review, according to the Journal of Accountancy.
Reviewed financial statements are often what a bank or a mid-sized funder asks for. Some state charity registration rules accept them too, and they cost less than an audit.
A financial statement audit is the most thorough option. An independent CPA goes through your records and tests a sample of transactions. They'll confirm balances directly with your bank and other third parties, and they'll look at how well your internal controls work.
When the work is done, the auditor issues an opinion on whether your financial statements are presented fairly in line with generally accepted accounting principles (GAAP). Because of that opinion, audited financial statements carry the most weight with funders, lenders, and government agencies.
Audits also ask the most of your team. You can expect requests for documents, reconciliations, and grant agreements, plus questions about any unusual transactions. Learn more about what a nonprofit audit looks like when you're truly prepared.
In most cases, a nonprofit needs an audit, review, or compilation because someone outside the organization requires it. That's usually the federal government, your state's charity registration office, or a funder or lender. Your own bylaws can set a requirement too. Check each one before you engage a CPA, since the strictest rule wins.
If your organization spends $1,000,000 or more in federal awards during its fiscal year, you need a Single Audit. The threshold is set in the federal Uniform Guidance at 2 CFR 200.501.
Don't assume a grant isn't federal just because a state or county agency sent it. Federal money often passes through those agencies first, so check where each grant originally comes from. A Single Audit also goes further than a standard audit. It looks at how you managed the federal programs themselves.
Many states ask for audited or reviewed financial statements when a charity registers to fundraise or renews that registration. The rules vary widely from state to state, according to the National Council of Nonprofits.
Pennsylvania and New Jersey show how far apart the rules can be. In Pennsylvania, the Department of State bases the requirement on gross annual contributions:
New Jersey works differently. Organizations with gross revenue of $1 million or more in monetary donations must file audited financial statements. If you're between $25,000 and $1 million, you file an annual financial report certified by an authorized officer.
Fundraising in more than one state can mean meeting the strictest rule among them.
Even when the law doesn't require it, a foundation grant agreement, a bank loan, or your own bylaws might. It's worth reading the fine print. Grant agreements and loan documents often spell out the exact level of service and the date it's due.
Keeping track of these rules is part of nonprofit financial compliance.
Start with what's required. If a law, grant, or loan calls for a specific level, the decision is made for you.
When nothing is required, you're balancing cost against confidence. A review generally costs less than an audit, since the CPA runs fewer procedures. Size, complexity, and the shape your records are in when the CPA starts all affect the fee for any of the three.
Often, the financial review vs. audit decision comes down to who will read the statements.
For internal use, a compilation may be enough. Boards and banks are often comfortable with a review, which costs less than a full audit. An audit tends to make sense if you're pursuing large grants or planning for growth, or if you want an independent look at your internal controls.
Before you engage a CPA, ask your funders and lender what they expect. Upgrading from a review to an audit halfway through the year is a lot harder than getting it right the first time.
Usually not. Auditors have to be independent, and the independence rules limit what else an audit firm can do for the same client. That's why it's common for a nonprofit to work with two firms. One handles the day-to-day accounting and the month-end close all year. The other comes in to do the audit. Your auditor stays independent, and you still have someone keeping your books clean between audits.
Not sure your books are ready for an audit or review?
Complete Balance Accounting & Consulting works with nonprofits year-round to keep their books clean, reconciled, and audit-ready. When a third-party audit comes up, the team can support you through it, so the auditor's first document request doesn't turn into a scramble.
Whichever one you're facing, a few habits make the process faster and a lot less stressful:
Clean books can lower your fees, too, since less cleanup time for the CPA usually means a smaller bill. A clear set of nonprofit financial statements is what you're aiming for, whichever level you need.
No. A review is mostly questions and analytical procedures, which is why it only gives limited assurance. An auditor tests transactions, confirms balances with outside parties, and looks at internal controls before giving reasonable assurance. Even the IRS Form 990 instructions say a compilation or review isn't considered an audit.
Not a formal one. Anyone can prepare financial statements, but a compilation report follows CPA professional standards. State rules differ, too. Pennsylvania requires compiled statements filed for charity registration to come from a licensed CPA or licensed public accountant, while New Jersey asks smaller charities for an officer-certified report instead.
A reviewed financial statement includes a CPA's review report. In it, the CPA says they aren't aware of any material changes needed for the statements to follow GAAP. When you're weighing reviewed vs. audited financials, a review gives less assurance but usually costs less and finishes sooner.
Nonprofits usually encounter four: a financial statement audit by an independent CPA, a Single Audit of federal awards, an internal audit of your controls, and an IRS examination of your returns. There isn't one official list, though, and only the first two end in audited financial statements.
All three end with a set of financial statements. What changes is how much a funder, lender, or state regulator can rely on them. So as you weigh an audit vs. review vs. compilation, start with the requirements. When no one is requiring a specific level, let your goals and budget guide the decision.
Clean books help in every case. They make the work go faster and often mean a lower fee.
If you're ready to strengthen your nonprofit's financial foundation before your next audit or review, Complete Balance Accounting & Consulting can help. Reach out anytime to get started.
👉 Want to see where your books stand first? Grab our free 20-Point Nonprofit Financial Health Checklist, or learn more about our nonprofit accounting services.
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