Many companies provide their financial statements, along with a CPA’s report, to lenders, investors, suppliers and customers. Informed readers of the report will gain varied levels of comfort based on the type of financial statement provided.
Not all reports are the same. A CPA can provide different levels of service related to a company’s financial statements.
There are three levels of financial statement engagements your accountant can provide.
- Compilation (often called “Notice to Reader” engagement)
- Review
- Audit
Each engagement has a varying level of work required and therefore cost to you. Reviews and audits are referred to as assurance engagements and are subject to a set of formally developed accounting (GAAP) and service standards (CSRE or CAS).
Compilations are not subject to any presentation or disclosure requirements and therefore there use is often limited.
Compilation
A compilation engagement is typically used when the readers of the financial statements are restricted to the owner, the tax authorities, and possibly a secured lender. There are no financial statement disclosure or presentation requirements associated with this engagement. An accountant has no obligation other than to ensure it is not associated if he/she is aware of any false or misleading results.
The simplicity of this engagement comes from the definition itself. Other than “compiling” the client’s trial balance into a financial statement format, there is generally little work carried out however this does differ between providers.
Review
As an assurance engagement, the concept of materiality is applied to the financial statement results. This concept ensures that only errors that would lead to a “material misstatement” are contemplated and that although there may be smaller errors present, in essence, they would not affect an average person’s perspective on the overall results and financial position.
As stated earlier, a review is considered an assurance engagement and therefore GAAP must be followed. This requires, among other things, specific note disclosures and presentations.
The work carried out by the accountant must follow the Canadian Standard on Review Engagements (CSRE) and primarily consists of enquiry, analysis and discussion and uses the benchmark of plausibility as its standard.
Procedures such as verification, examination and scrutiny that are associated with an audit are not performed in a review engagement. The review engagement report attached to the financial statements includes wording that informs the reader that an audit has not been performed.
Although not as rigorous as an audit, a review is often performed where required by a 3rd party lender or where there are multiple owners that just want some higher level of assurance.
Audit
An audit is also an assurance engagement and provides the highest level of assurance. While the concept of materiality is still applied, the level of procedures required under Canadian Auditing Standards (CAS) in order to satisfy the auditor’s obligation is much more comprehensive.
In addition, the controls implemented by management to mitigate the risk of fraud and error are assessed by the auditor and any perceived weaknesses are communicated to the Board of Directors. This assessment also informs the auditor as to which financial reporting areas may be subject to a greater risk of material misstatement and therefore these areas are targeted for additional audit procedures and examination.
An audit engagement lends itself to a more rigorous testing of the client’s financial reporting routines and practices. Therefore, more reliance can be placed by the reader on the overall results and disclosures.
It is important to determine what level of engagement you require and to balance the level of assurance desirable with the cost of the services.