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CPAs and Financial Statements

What are the differences between compilation, review and audit engagements? What role does the CPA play? Here’s what you need to know to navigate the engagement landscape. Most entities, whether corporations, NFPOs or government agencies, are legally required to present annual financial statements to their shareholders, members or the government, as the case may be. The law also requires certain entities to have their financial statements audited. In most cases, an entity’s management, with oversight from those charged with governance, is responsible for preparing financial statements. The scope of the CPA’s mandate depends on the entity’s needs and the requirements it must satisfy. Chartered professional accountants provide three levels of service with respect to communications (reporting) on financial statements—an audit, a review or a compilation. CPAs perform these services in accordance with their code of ethics and assurance standards established by the Canadian Auditing and Assurance Standards Board (AASB). Assurance standards (which include audit, review and compilation standards) are contained in the CPA Canada Handbook – Assurance. The nature and extent of the work performed by CPAs has a direct impact on the level of assurance or credibility given to the financial statements and the cost of audit, review and compilation services. For each service, the CPA provides a different communication (i.e. “Independent Auditor’s Report,” “Review Engagement Report,” or “Notice to Reader”), which sets out the extent of work performed and the level of assurance expressed by the CPA.

Audit engagement

Independent Auditor’s Report

Review engagement

Review Engagement Report

Compilation engagement

Notice to Reader

Nature of involvement  Application of Canadian generally accepted auditing standards  Application of Canadian generally accepted standards for review engagements Application of Canadian compilation standards
Professional activity reserved for Chartered Professional Accountants (CPAs) who hold a public accountancy permit  Chartered Professional Accountants (CPAs) who hold a public accountancy permit  Chartered Professional Accountants (CPAs)
Characteristics An audit provides reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error. The key concept is “reasonable” assurance, which is not an absolute level of assurance. Absolute assurance is not attainable due to inherent audit limitations which result in most of the audit evidence on which the auditor draws conclusions and bases his or her opinion being persuasive rather than conclusive. A review consists primarily of inquiry, analytical procedures and discussion related to information supplied to the CPA by the client. The CPA’s objective is to determine whether the information being reported on is plausible in the circumstances within the framework of appropriate criteria. “Plausible” is used in the sense of appearing to be worthy of belief. A review does not require the CPA to seek supporting or independent evidence or to study and evaluate internal control  Compilation consists in compiling an entity’s financial statements based on information available without providing any assurance whatsoever regarding such statements. The CPA receives information from a client and arranges it in the form of a financial statement. The CPA is concerned that the assembly of information is arithmetically correct. Some clients and other users do not need financial statements containing all disclosures normally required in financial statements that comply with a financial reporting framework included in Canadian GAAP, nor do they need the assurance that can be provided by a CPA who performs an audit or a review. Normally, such clients and users would have, or be able to obtain, further information.
Presentation standards Choice of several financial reporting frameworks included in Canadian generally accepted accounting principles (GAAP) Choice of several financial reporting frameworks included in Canadian GAAP Financial reporting framework chosen by management
Code of ethics of CPAs Members must not sign, prepare, produce or even associate their name with any documents which they know, or should know, contain false or misleading information, out of complacency or without ensuring that such documents are in compliance with good practices or current scientific knowledge.
Level of assurance Provides the highest level of assurance (reasonable assurance) Provides a moderate level of assurance Provides no assurance
Communication provided Independent Auditor’s Report Review Engagement Report Notice to Reader
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