Companies may be required by law or industry regulations to provide financial statements certified by a chartered accountant. Here are some of the most common reasons why a company in Quebec may need to have its financial statements certified:
- Compliance with legal requirements: Companies with a legal obligation to produce audited financial statements, such as corporations, cooperatives, subsidized not-for-profit organizations (NPOs) and publicly-funded companies, must have an audit or review engagement carried out every year.
- Need for credibility: Companies wishing to enhance the credibility of their financial statements in the eyes of investors, creditors, suppliers and other stakeholders may choose to have a review engagement or audit prepared. This shows that the financial statements have been reviewed or audited, by an independent third party, and that their accuracy has been reviewed or audited as appropriate.
- Internal control improvement: Companies may request a review engagement or an audit to help improve their internal control processes. Chartered accountants use rigorous procedures to analyze the accuracy and completeness of internal control processes, which can help identify certain deficiencies, to which the chartered accountant will propose recommendations.
- Improved decision-making: Audited or reviewed financial statements can help companies make more informed decisions by providing accurate and reliable financial information on their financial performance. Companies can use this information to assess their profitability, solvency, liquidity and ability to generate cash flow.
It is generally accepted that managers understand the importance of their company’s financial statements in making the right financial decisions. However, managers are often unaware of the various certifications that CPAs can perform on their company’s financial statements.
It’s not uncommon to hear managers claim that their financial statements have been “audited” by their accountant. But this is not always the case, depending on the service provided. That’s why it’s vital to understand the type of service provided, and the difference between each of these assurance engagements.
When certifying financial statements, what are the differences between compilation, review and audit engagements?
In Quebec accounting firms, compilation, review and audit engagements are different accounting services with distinct objectives and levels of assurance.
Here are the main differences:
- Compilation engagement: This involves compiling the company’s financial statements without performing any verification or validation of the data. This compilation engagement is not considered an assurance engagement, as it does not include any assurance work. The accountant (CPA) simply gathers the accounting information provided by the client, compiles and classifies it to present the financial statements. The compilation engagement confirms that the financial statements are consistent and mathematically correct, but does not seek to validate the accuracy and completeness of the information provided. The compilation engagement report simply states that the accountant has compiled the information provided by the client without verifying it, and that the reader should bear in mind that the information contained in these financial statements may not suit his or her needs. The professional provides no assurance or opinion on the financial statements or the information they contain. This does not mean, however, that the information contained in the financial statements is false or fraudulent. Nevertheless, the information presented must be complete according to the information provided by the client, and the professional ensures that there are no inconsistent elements.
- Review engagement: A review engagement is an intermediate service between a compilation engagement and an audit. It is an assurance engagement in which a professional CPA auditor issues an opinion and provides assurance on the company’s financial statements, albeit to a lesser degree than an audit. Unlike a compilation engagement, the professional uses analytical procedures such as variance and gross margin analyses, and questions the management team and shareholders to better understand the company’s operations and accounting. SMEs and creditors often prefer the review engagement to certify their financial statements, as it offers sufficient assurance at a lower cost than the audit engagement. However, unlike the compilation engagement, this certification engagement requires that the financial statements comply with Canadian Generally Accepted Accounting Standards, thus offering an increased level of comfort for readers.
- Audit: Audit is the most formal and comprehensive of the three services. Formerly known as “verification”, the audit engagement, or simply audit, is the highest level of assurance that can be issued on financial statements. In this type of report, the CPA Auditor will ensure that the information contained in the financial statements gives a true and fair view of the company. Unlike a review engagement, which expresses an opinion suggesting that there is nothing to suggest that everything is not in order, an audit affirms that what is presented gives a true and fair view of the company. Of course, this assertion is made with a view to ensuring that inaccuracies that are not considered material do not affect the true and fair view of the financial statements, and that the user of the financial statements can therefore use them without risk of being misled. Like the review engagement, the audit uses a threshold of misstatement to judge what is material and what is not for the user of the financial statements. In carrying out the audit, the auditor will evaluate the internal control system, and perform substantive and analytical procedures to obtain a sufficient level of assurance on the financial statements. This is where the concept of materiality comes into play. The audit report is mainly produced in the case of companies with several shareholders, at the explicit request of creditors and financial institutions, or within the framework of specific regulations.
To conclude
The main difference between a notice to reader, a review engagement and a firm audit in Quebec is the level of assurance offered. A notice to reader offers no assurance at all, followed by a review engagement, which offers an average level of assurance, while an audit offers the highest level of assurance as to the reliability of the financial statements.
The choice between these services depends on the company’s needs and the applicable legal and regulatory requirements.
Our certification team is available to answer your questions!
An article by Suzie Glazer
