Audit: Confirmation with outside parties, observation of inventories, and testing selected transaction by examining supporting documents

An audit opinion represents the highest level of assurance that the financial statements fairly represent the entity's financial position and results or operation in accordance with generally accepted accounting principles (GAAP).  However, the auditor can only obtain reasonable, rather than absolute, assurance that a client's financial statements are fairly presented in all material aspects because of the following limitations:

• Audit procedures involve selective testing
   
• Evidence gathered during the audit is often suggestive rather than conclusive
   
• Fraud typically involves efforts by the perpetrator o conceal it through collusion, falsification of records, and providing misinformation.

Review: Inquiry and analytical procedures applied to financial statements.

A review provides limited assurance that no material changes need to be made to the financial statements.

The most significant difference between a compilation engagement and a review engagement is that inquiry and analytical procedures must be performed and properly documented before the CPA can express limited assurance on the financial statements.  In addition, an accountant must be independent of the client for review engagements.

Compilation:  Preparation of financial statements based on information provided by the entity's management.

A compilation is useful when limited, in-house capabilities or preparing financial statement exist.

The most significant advantage of a compiled financial statement is that it allows an accountant to render assistance with financial statements at reduced cost to a client by limiting the CPA's efforts to the mechanics of putting information in the form of the financial statements.