In this article we look at the key differences between the three main types of financial statements for Canadian owner-managed businesses as performed by a Chartered Professional Accountant (CPA). This includes an audit, a review and a compilation financial statement engagement.
If you tick any of these boxes, you will be interested in this article:
- You are looking to sell or acquire a business and want to understand the company’s financial condition
- You want confidence in the accuracy of your accounting records
- You might require business financing now or in the future
- You are an owner or shareholder in a organization (sole owner, joint partnership, private company with multiple owners, etc.) and you:
- take a passive role (you’re not active in every aspect of the company)
- manage the day to day operations, but have no financial training
- want to assure yourself and/or other shareholders of the business’s financial health
What business owners need to know about “assurance”
Assurance can be provided by an independent Chartered Professional Accountant (CPA) who is able to form an opinion and conclude that a business’ financial statements are presented fairly. Assurance is sought by business owners who want confidence in their company’s financial position. Business owners may also require financial statements for their investors, shareholders, banks, creditors, or potential buyers. The most famous financial statement scandal was Enron, when in 2001 it was discovered that its reported financial health was fraudulent.
This article looks at these three common financial statement engagements for privately-held businesses in Canada:
- Compilation Report: A new standard from CPA Canada replacing the “Notice to Reader” financial statement (effective December 14, 2021).
Each of these engagements provide different levels of or no assurance. As the level of assurance varies, so does the amount of work involved as well as the associated cost. The appropriate financial statement engagement for your business depends on a number of factors like business size, ownership structure, business life cycle and financing arrangements.
Let’s dig a little deeper into the 3 options for annual financial statements.
Compilation Report (formerly Notice to Reader or NTR)
Level of Assurance Provided: None
Compilation reports are basic financial statements. The distinguishing factor is that they provide no assurance. Essentially, accountants will take information provided by the client in order to compile unaudited financial statements. In addition, compiled financial statements do not have to be prepared in accordance with accounting standards for private enterprises and generally do not include the information disclosed in notes to the financial statements. As a result, the financial statements prepared in an compilation report are usually not appropriate for banks and other creditors, who often require a set of financial statements that provide assurance (or more certainty) on the business’s financial condition. Despite the fact that no professional opinion is offered in an NTR, the involvement of a professional accounting firm does lend increased credibility to the information being presented.
A compilation report may be right for your business if you require financial statements for basic tax purposes or for internal use when understanding the company’s financial performance. Since a compilation does not involve any assurance work, it is the most common and economical financial statement engagement.
Level of Assurance: Low
A review engagement focuses on whether the information presented in financial statements is “plausible” or “fairly presented.” A review does not give an opinion on the financial statements (only an audit does), rather it expresses that nothing has come to the attention of the accountants that would cause them to believe that the financial statements are not fairly presented. Accountants achieve this by utilizing a mix of analysis of financial data, as well as discussion with business owners and managers. Unlike a compilation, but like an audit, financial statements in a review engagement must be prepared in accordance with generally accepted accounting principals including all required disclosures.
Since a review provides a low level of assurance, there is no assessment of the risk of fraud or the effectiveness of internal controls and procedures. The cost of a review is less than an audit. Depending on the situation, banks and other parties requiring financial statements may accept review level assurance for their needs.
Level of Assurance: Reasonable
The purpose of an audit is to “enhance the degree of confidence” in financial statements. Having your financial statements audited means that an independent chartered professional accounting firm has provided their opinion on your company’s financial statements. This opinion determines whether there is reasonable assurance that the statements are free from material misstatement and presented fairly under the applicable accounting frameworks. Audit engagements also assess the risk of fraud as well as the effectiveness of your business’s internal controls and procedures.
Since audits provide some assurance, a higher cost is associated. In addition, banks, creditors, shareholders, investors and potential buyers will often require audited financial statements so that they are confident about the information being provided to them.
Which financial statement is right for your business? Contact us to discuss your accounting needs.
Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.