Audit, Review, Compilation financial statements, and bookkeeping reports

What is an audit engagement versus a review engagement versus a Compilation (NTR) engagement versus a bookkeeping report and tax return engagement.

The type of financial statements your company requires will dictate which of the engagement types you will need. Every business must prepare annual financial statements for various users such as shareholders, the CRA, lenders, and other stakeholders in the business.

It’s those users who determine the level of assurance that is required to satisfy regulatory and non-regulatory obligations (such as bank financing agreements). These obligations and requirements are what determine the type of engagement the company will require.

Audit and review financial statements must also be prepared according to certain standards. In Canada, there are three basic standards: IFRS – international financial reporting standards, ASPE – accounting standards for private enterprises, and ASNPO – accounting standards for Not-for-profit Organizations. These standards dictate certain rules for recording and reporting financial information.

Audits

Audited financial statements provide the greatest amount of assurance that your financial statements are accurate. Audits are typically performed for public companies, larger private companies, and some not-for-profit organizations to provide assurance to their stakeholders. The auditor provides an opinion to the effect that the financial statements are presented fairly in all material respects.

In addition to the balance sheet, statement of earnings, and cash flow statement, audited financial statements also include a variety of other schedules and comprehensive notes to the financial statements to provide all the information relevant to the users.

With few exceptions, audits are not required for most smaller businesses.

Review Engagement

Reviews provide some degree of assurance to the users of your financial statements. In fact, it’s really negative assurance since the accountant’s report has wording to the effect that nothing has come to their attention that the financial statements are not presented fairly in all material respects.

Because of the cost and inconvenience, business owners rarely have a review performed unless it is required by external users. Typically, banks or other lenders will require you to get a review to obtain financing. A review may also be needed when selling your business, for a bonding agency, or when there are multiple shareholders.

Reviewed financial statements generally contain the balance sheet, statement of earnings, statement of retained earnings, cash flow statement, and supporting notes and schedules.

During a review, your accountant will take a deep dive into your year-end numbers. This will include:

Performing analytics through comparisons of year-end balances with previous periods, budgets, and expectations.
Performing inquiries with management and other personnel
Evaluating the evidence obtained

Compiled Financial Statements

In 2021, changes were announced to how CPA’s prepare ‘Compiled Financial Statements’. You can read about the changes in our Blog Post here.

Some businesses are required to provide their Financial Statements to third parties; however those third parties don’t require a review or an audit. Compiled financial statements also help the business in preparing their T2 corporate tax return to ensure the books are clean and stay in compliance with tax law, which states that there must be adequate financial information to support the information on the T2. A properly prepared Compilation Financial Statement helps you ensure you are not providing false or misleading information to the regulators, and it provides third party users of the financial statements clarity on the basis of accounting that the company has selected in preparing its financial statements.

It is important for business owners to understand that they, and not their accountants, are responsible for ensuring their financial information is accurate. Accountants are under no obligation to do any more than compile the statements in an appropriate format according to CSRS 4200. Taxpayers are responsible for their own tax returns, so we recommend that you hire a competent tax professional and review your financial statements and tax returns carefully. The accountant’s report contains cautionary language advising readers that the statements may not be appropriate for their purpose.

The Compilation report provides no assurance by the accountant that the financial statements are presented fairly and excludes the accountant’s name and any report from the accountant.

Financial (bookkeeping) Report and Tax Return

Most small businesses need a financial (bookkeeping) report for their T2 corporate tax return just to ensure the books are clean and stay in compliance with tax law, which states that there must be adequate financial information to support the information on the T2. A properly done financial (bookkeeping) report helps you ensure you are not providing false or misleading information to the regulators.

The financial (bookkeeping) report provides no assurance by the accountant that the financial statements are presented fairly and excludes the accountant’s name and report entirely.

A financial (bookkeeping) report allows your accountant to take a high-level look at your books for the purpose of ensuring the information ‘hangs together’ and to allow the accountant to anticipate potential problem areas with the CRA, saving you time and money, and giving you peace of mind.

Our year-end Approach is Different

For Compilations and financial (bookkeeping) report and tax return engagements, we’re under no obligation to examine our clients’ financial information, but we still do it for ethical reasons to ensure that your bookkeeping is as correct as possible and to ensure that the information making its way onto your corporate tax return is as correct possible within the scope of the engagements. We don’t want our clients to provide false or misleading information to the CRA. That can lead to CRA audits—something we don’t want our clients to experience.

We don’t dig as deep as we would in a review engagement, but we do enough to get our own level of comfort. We take a look at each of your trial balance accounts, focusing primarily on the balance sheet, and look for supporting documentation that the owner or bookkeeper has reviewed the balances in those accounts. Our approach is to:

Ensure the amount of cash agrees with a bank statement or bank reconciliation.
Check accounts receivable and accounts payable aging reports for validity.
Check the additions and disposals in the property, plant, and equipment accounts to ensure they look reasonable.
Ask questions about some expenses, such as repairs and maintenance, to determine if any items should be capitalized.
Run amortization calculations to ensure you’re following the right tax treatments and rates.
Check if the balance in prepaid expenses makes sense.
Discover whether you have reconciled your actual inventory counts to the balance sheet amount.
Review taxes owing and see if that matches what CRA and provincial governments have on file and whether they’ve received the payments you made.
Examine deferred revenues to make sure those are calculated properly.
Ask about other tax considerations like life insurance, meals and entertainment expenses, legal fees, and automobile expenses.
Check that your salaries have been properly recorded for the period. This includes analysis to ensure the amounts recorded in your financial statements and tax return are the same as what is reported on your T4s.
Conduct a high-level check on GST and advise you if there’s a problem with your GST returns.
Ensure that the simple items that the CRA checks with their analytics are correct before they’re submitted.

We quite frequently find that businesses lack good bookkeeping and have to make significant adjustments before we can prepare the financial statements. This creates more work for us, but also highlights the fact that the financial information provided throughout the year is not helpful to the owners of the business. If you find that your accountant has to make a lot of adjustments to your books, you may need to consider tightening up your bookkeeping practices to help you reduce costs.