Financial audits are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the financial statements of the organization, through evaluation based on work performed on a test basis. It is designed to reduce the risk of material financial statement misstatement whether caused by fraud or error. Audits satisfy shareholders and investors as to the creditability of the statements. Some bank covenants require an audit. Organizations that receive grants, especially government grants, are required to have an audit.
A review engagement consists primarily of analytical procedures applied to the financial statements and various inquiries of the company management team. A review expresses limited assurance that the firm's financial statements do not require any material modification for them to be in conformity with the provisions of generally accepted accounting principles. A review is usually conducted when you need assurance, without incurring the expense of an audit. It may be required when obtaining a construction bond or other financing.
A compilation is a report on financial statements stating it was performed in accordance with AICPA professional standards, but no assurance is expressed that the statements are in conformity with generally accepted accounting principles, or another comprehensive basis of accounting. Banks often require compilations from an independent CPA as part of their lending requirements.