AUDIT, REVIEW,
AND COMPILATION ENGAGEMENTS
According
to the Business Corporations Act, each incorporated company is legally required
to have an audit. The law does allow companies that have shares, which are not
traded on the public market, to waive the requirement for an audit provided
that certain conditions are met.
Audited
financial statements are the accepted means by which most business corporations
report to their shareholders, to bankers, to creditors, and to the government.
Federal and Provincial legislation in Canada generally requires a limited company
to prepare annual financial statements for audit by a qualified independent
auditor. Specific legislation may also require the auditor to provide other
information in the report.
It is
important to note that some companies may be exempted from the audit
requirement if all shareholders agree, in writing, to waive the appointment of
an auditor.
The
objective of an audit engagement is to enable an independent public accountant
to form an opinion on whether your company’s financial statements present
fairly the financial position, results of operations, and cash flows. This
opinion is given in the form of a written report which normally consists of
three paragraphs. The first, or introductory paragraph, identifies the audited
statements and sets out the responsibility of management and the auditor; the
second, or scope paragraph, briefly states the scope or extent of the audit and
informs the reader that professional standards were used in the audit and that
evidence is acquired through inspection, observation, enquiry, confirmation,
computation and analysis. The last paragraph summarizes the auditor’s opinion
based on his or her examination.
The
audit consists of an examination of the accounting records and other evidence
supporting those financial statements. Through the study and evaluation of the
company’s system of internal control, and by inspection of documents,
observation of assets, making of enquiries within and outside the company, and
by other generally accepted auditing standards, the auditor will gather the
evidence necessary to determine whether the financial statements present a
fair picture of the company’s financial position and its activities during the
period being audited.
REVIEW ENGAGEMENTS
The
objective of a review engagement is to review financial statements to determine
whether the statements are reasonable and worthy of belief. Where an audit is
not required or the shareholders have waived the appointment of an auditor,
financial statements may be prepared on a review basis. This degree of
assurance is less than that resulting from an audit and is expressed as
negative assurance that nothing has come to the accountant’s attention that
would indicate the financial information is not presented in accordance with
Canadian generally accepted accounting principles.
In
performing a review, the Certified General Accountant would acquire sufficient
knowledge of the client’s business to make informed enquiries and assessment of
the information obtained. The review would include enquiries concerning all
relevant information, comparisons of financial data for the current and prior
periods and discussion governing the information received. In addition, the
financial statements are critiqued with the responsible and appropriate level
of management.
If,
after reviewing the financial statements, the accountant is satisfied that the
financial statements are in accordance with Canadian generally accepted
accounting principles, a review engagement report would be attached to the
financial statements.
COMPILATION
ENGAGEMENTS
The
objective of a compilation engagement is to compile financial information into
financial statement format based on financial information supplied by the
client. It is not necessary to adhere to
Canadian generally accepted accounting principles.
A
Notice to Reader communication, which is stamped or printed on each page or
attached to the financial information, is a clear warning as to the limited use
of the compilation engagement. If the
Notice to Reader communication is not stamped or printed on each page of the financial
statements, then each page of the financial information or statements should
identify the nature of the engagement by carrying the following reference:
“Unaudited – See Notice to Reader.”
A
compilation engagement is appropriate only where the client and other users do
not need financial information that:
·
Conforms
in all respects to Canadian generally accepted accounting principles,
·
Audit
or review assurance is not required, and
·
All
users of the information understand and accept its limitations
A
compilation may be applicable when management does not require information
derived from the entity’s financial statements to assist in informed decision
making.
It is
important to note that Certified General Accountants must not be associated
with financial statements which they know, or have reason to believe, are false
or misleading.