Chartered Accountants Reporting On Financial Statements


 

Financial Statements – Background

Financial statements present information on the operations and overall financial position of a business for a given fiscal year or period.  For all businesses, irrespective of size, the management of the business is responsible for the preparation of financial statements.  When required, a Chartered Accountant’s ("C.A.'s") responsibility is to report on financial statements, so that users can ensure that they have been prepared based on consistent standards.

C.A.'s may provide three levels of reporting with respect to financial statements.  The purpose of this article is to describe the nature of these reports and the levels of assurance they provide to the reader of the financial statements.  A C.A.'s signature is synonymous with objectivity, reliability and credibility.

Types of Reports Attached to Financial Statements

C.A.'s sign one of three reports, which are attached to the financial statements.  The report differs for each level of service.  The differences are in the nature and extent of the work performed by the C.A., the format of the report and the inherent credibility that the C.A. lends to the statements when he/she signs the report.  These reports and the respective type of engagements are:

Type of Report Type of Engagement Level of Assurance
1. Auditor's Report Audit High
2. Review Engagement Report Review Engagement Medium
3. Notice To Reader Compilation Low

Audit Engagement

Incorporated businesses are legally required to present audited annual financial statements to shareholders.  The Ontario Business Corporations Act allows most smaller companies to waive an audit provided certain conditions are met.

The objective of an audit of financial statements is to express an opinion on whether the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows in accordance with the selected financial reporting framework.  Such an opinion is not an assurance as to the future viability of an entity nor an opinion as to the efficiency or effectiveness with which its operations, including internal control, have been conducted. 

In performing an audit of financial statements, the auditor complies with generally accepted auditing standards (GAAS), which relate to the auditor’s qualifications, the performance of the audit and the preparation of his or her report.  The auditor seeks a high, though not absolute, level of assurance whether the financial statements are free of a material misstatement, whether caused by fraud or error. 

Review Engagements

Reviews are distinguishable from audits in that the scope of a review is less than that of an audit and therefore the level of assurance provided is lower. Generally, review engagements will be required by banks or financing companies where an audit is not required by law, but they wish to have some assurance beyond a notice to reader on the content of the financial statements.  For clients with assurance requirements due to financing agreements, review engagements are the most common engagement. 

A review consists primarily of enquiry, analytical procedures and discussion related to the information supplied to the public accountant by the client with the limited objective of assessing whether the information being reported on is plausible (worthy of belief).   A significant difference between an Audit and a Review is the public accountant is not required to seek supporting or independent evidence or to study and evaluate internal control.

Compilation Engagements

Compilation engagements are also referred to as “Notice to Readers”.  This type of engagement is generally used by closely held private companies with minimal or no financing arrangements.  A compilation engagement is one in which the public accountant receives information from a client and arranges it into the form of a financial statement.  The public accountant is concerned that the assembly of the information is arithmetically correct. Unlike an audit or a review engagement in which the public accountant does sufficient work to issue a communication that provides assurance regarding the financial statements, no expression of assurance is provided in a compilation engagement.  Compilations involve no testing or detailed analysis of the financial statements, no note disclosure, and thus are more economical to the client than audit or review engagements.

Summary

There are different levels of assurance that a C.A. can provide, and credibility that the C.A. can lend to a client’s financial statements.  Open communication between the directors, the C.A. and the users of the financial statement is necessary on an annual basis to ensure that the reporting needs are met, and the most economical engagement is chosen.

 

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