Most corporate entities and not for profit organizations in Canada are required by law to prepare annual financial statements that are audited by a Chartered Professional Accountant with a Public Accounting License. However, certain private corporate entities may opt out of this requirement if they have unanimous stakeholder approval to do so. Or, in the case of not for profit organizations, if certain conditions of the Canada (or applicable Provincial) Not-for-profit Corporations Act are met.
If this is a possibility, the entity stakeholders must ask themselves: “what level of assurance do we need from our accountants”? And, the needs of third-party users of their financial statements (such as banks, lenders and investors) must also be considered.
There are several engagement options:
- Audit
- Review Engagement
- Compilation
- Bookkeeping
- Tax Return Preparation
An Audit Engagement will provide the users of the financial statements with the highest level of assurance. Numerous procedures, including tests of transactions and verification of balances, will be performed by the auditor to provide an opinion as to whether they believe that the financial statements and accompanying disclosures are free from material misstatement in accordance with the appropriate financial reporting framework (such as Canadian Accounting Standards for Private Enterprises).
A Review Engagement will provide a reduced level of assurance. The accountant will perform procedures primarily consisting of inquiries of management and analytical review. The accountant will not provide an opinion, but rather a conclusion whether anything has come to their attention that causes them to believe that the financial statements and accompanying disclosures are not presented fairly, in all material respects in accordance with the appropriate financial reporting framework.
A Compilation Engagement is not intended to provide any assurance to the users of the financial statements. However, the accountant will assist management in the preparation of the financial information (“FI”) in accordance with an appropriate basis of accounting and clarify if there will be a third-party user. The accountant will also attach a “Compilation Engagement Report” that refers to the FI and basis of accounting, states that management is responsible for the FI and cautions the reader that an audit or a review engagement in respect of the FI has not been performed and they express no assurance thereon.
A Bookkeeping Engagement is also not intended to provide any assurance. This service comprises the clerical process of organizing accounting data and recording journal entries in order to produce a summary general ledger and trial balance. The accountant does not attach any communication or report to these items.
Finally, for a Tax Only Engagement an accountant may only be engaged to perform the task of preparing a corporate tax return and otherwise not be involved with the entity’s financial statements or assist with the organization of accounting data.
There are many factors that stakeholders and management of private entities must consider when deciding the level of involvement to be provided by their auditors or accountants – including, but not limited to, their own needs based on the size of the entity, complexity of the accounting systems and number of employees, requirements imposed by third party lenders and interests of potential future users of the financial statements.
Additional information is included in the following articles:
Changes to Compilation Standards
Charity Financial Statements: Does Your Non-Profit Require an Audit?
Our team of accounting professionals can provide guidance to assist you in making this decision and more details on what is involved in and provided from each level of engagement.
