Business owners are often asked to provide financial statements to a bank, lender, shareholder, investor, board of directors or other third party.

But not all financial statements provide the same level of assurance.

You may hear your accountant refer to an audit, review engagement, or compilation engagement. Understanding the difference can help you determine what your business actually needs and avoid paying for a higher level of service than necessary, or obtaining financial statements that do not meet a third party’s requirements.

Here is a practical explanation for Alberta business owners.

What Is an Audit?

An audit provides the highest level of assurance among these three types of engagements.

During an audit, the CPA performs procedures to obtain sufficient appropriate audit evidence to support an opinion on whether the financial statements are fairly presented, in all material respects, in accordance with the applicable financial reporting framework.

An audit involves more extensive procedures than a review or compilation.

Depending on the business and the risks identified, audit procedures may include:

• Understanding the business and its internal controls
• Assessing areas where material errors or fraud could occur
• Testing transactions and account balances
• Confirming certain balances with external parties
• Examining supporting documentation
• Performing analytical procedures
• Reviewing estimates and accounting policies
• Evaluating the overall presentation of the financial statements

An audit provides reasonable assurance, which is a high level of assurance, but it is not an absolute guarantee that financial statements contain no errors.

CPA Canada’s professional standards distinguish audits from review and compilation engagements based on the work performed and the level of assurance provided.

When Might an Audit Be Required?

An audit may be requested or required when financial information is being relied upon by parties who want a higher level of assurance.

For example, audited financial statements may be requested by:

• Banks or major lenders
• Government funding organizations
• Investors
• Boards of directors
• Shareholders
• Regulators
• Organizations with specific contractual requirements

The requirement depends on the organization’s circumstances.

Before requesting an audit, it is worth confirming exactly what the financial statement user requires. In some situations, a review engagement may satisfy the user’s needs and involve less work than an audit.

What Is a Review Engagement?

A review engagement provides a lower level of assurance than an audit.

Instead of performing the extensive testing normally associated with an audit, the CPA primarily uses inquiry, analysis and professional judgment to determine whether anything has come to their attention indicating that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework.

A review still requires the CPA to understand the business and its accounting system and to investigate unusual or unexpected relationships identified during the engagement.

However, the extent of the procedures is less than an audit.

This generally makes a review engagement less costly and less time-consuming than an audit while still providing a level of assurance to users of the financial statements.

When Might a Review Engagement Be Appropriate?

Review engagements are common for privately held businesses where an external party needs assurance over the financial statements but does not require a full audit.

Examples may include situations involving:

• Bank financing
• Business loans
• Shareholder reporting
• Certain investment arrangements
• Purchase or sale discussions
• Other third-party financial reporting requirements

The key is to ask the party requesting the financial statements exactly what level of engagement they require.

If your bank asks for “accountant-prepared financial statements,” do not automatically assume it requires an audit.

Confirm whether the bank requires an audit, review engagement or compilation engagement.

That simple question can make a significant difference.

What Is a Compilation Engagement?

A compilation engagement is different from both an audit and a review because a compilation does not provide assurance on the financial information.

Under the current Canadian compilation engagement standard, CSRS 4200, Compilation Engagements, the CPA assists management in compiling financial information using information provided by management.

The standard applies to compiled financial information for periods ending on or after December 14, 2021.

The CPA issues a Compilation Engagement Report with the compiled financial information.

This report makes it clear to users that the CPA has not performed an audit or review and therefore does not express an audit opinion or review conclusion.

Who Uses Compilation Financial Statements?

Compilation engagements are commonly used by small and owner-managed private businesses.

They may be appropriate where:

• Management needs annual financial statements
• Financial statements are being prepared alongside the corporate tax return
• Owners want organized year-end financial information
• A lender accepts compiled financial information
• There are limited external users of the statements
• An audit or review is not required

For many small Alberta corporations, a compilation engagement may provide the financial reporting they need without the additional procedures associated with an audit or review.

However, the needs of the financial statement users should always be considered first.

Audit vs. Review vs. Compilation at a Glance

The easiest way to understand the difference is to look at the level of assurance.

Audit

Provides a high level of assurance and involves extensive audit procedures and testing.

Review Engagement

Provides a lower level of assurance than an audit and relies significantly on inquiry, analytical procedures and professional judgment.

Compilation Engagement

Provides no assurance. The accountant assists management in compiling financial information and issues a compilation engagement report.

As the level of assurance increases, the amount of work required generally increases as well.

Your Accountant Does Not Replace Management

There is another important point that business owners sometimes misunderstand.

Regardless of whether financial statements are audited, reviewed or compiled, management remains responsible for the company’s financial information.

The business is responsible for maintaining its accounting records and providing complete and accurate information to the CPA.

Having an accountant prepare year-end financial statements does not transfer responsibility for the company’s transactions to the accountant.

This is another reason good bookkeeping throughout the year is important.

Ask Your Bank Before Your Year-End

If you have financing, one of the best things you can do before year-end is review your loan agreement or contact your lender.

Find out whether they require:

• Audited financial statements
• Review engagement financial statements
• Compiled financial information
• Internally prepared financial statements
• Specific financial ratios or schedules

Doing this before the year-end work begins can prevent delays and unnecessary costs.

It is particularly important when applying for new financing because the reporting requirements for a new loan may be different from your existing arrangements.

Which Engagement Is Right for Your Alberta Business?

There is no single answer for every business.

The appropriate engagement depends on factors such as:

• Who will use the financial statements
• What those users require
• Financing arrangements
• Ownership structure
• Regulatory or contractual requirements
• The size and complexity of the organization
• The level of assurance required

A privately owned business with no external reporting requirements may have very different needs from a company with multiple shareholders, significant bank financing or outside investors.

Financial Statement Services in Edmonton

Understanding the difference between an audit, review and compilation can help business owners choose the appropriate financial reporting service and communicate more effectively with lenders and other financial statement users.

Seniuk & Marcato, Chartered Professional Accountants provides audit, review, compilation, accounting and tax services to businesses and organizations in Edmonton and throughout Alberta.

If you have been asked to provide financial statements and are unsure which type you need, contact our team to discuss the reporting requirements and determine the appropriate engagement for your organization.

This article provides general information only. Financial reporting and assurance requirements depend on the individual circumstances of each organization.