Compilation or Review Engagement: What Does Your Business Need?
Your bank asks for year-end financial statements. Your bookkeeper can produce a balance sheet and income statement, but the lender wants an accountant’s report as well. Do you need a compilation engagement, a review engagement, or something else?
For an owner-managed business in Greater Vancouver, the starting point is who will use the financial statements and what they need from them.
The main difference is assurance
A compilation engagement provides no assurance on the financial information. Your accountant applies accounting expertise to help management prepare and present information from the records management supplies.
A review engagement provides limited assurance on the financial statements. The accountant performs procedures, primarily inquiries and analytical procedures, to support a conclusion about whether anything has come to their attention indicating that the statements are materially misstated under the applicable reporting framework.
A review is less extensive than an audit. It does not provide an audit opinion or guarantee that every error or instance of fraud will be detected.
When a compilation may fit
A compilation may be appropriate when owners need professionally prepared financial information and the intended users do not require assurance.
Canadian compilation engagements follow CSRS 4200. The information includes a note describing the basis of accounting, which helps readers understand how it was prepared. That basis is not automatically the same as full Accounting Standards for Private Enterprises (ASPE).
Management remains responsible for the information supplied and the completed financial information. The accountant’s involvement does not turn a compilation into independent verification of the records.
A lender may accept compiled information, but you should confirm this before the engagement begins. Where a third party will use it, the accountant must also assess the engagement acceptance conditions, including management’s acknowledgement that the third party can obtain further information or has agreed with management on the accounting basis.
When a review may be needed
A review may be appropriate when a lender, shareholder or another intended user requires limited assurance. For example, a financing agreement might specifically require annual reviewed financial statements.
The work can include asking management about significant transactions, comparing results with prior periods and expectations, and investigating unusual relationships or fluctuations. Additional procedures may be necessary when matters suggest the statements could be materially misstated.
The statements must follow the applicable financial reporting framework. For many Canadian private businesses, that framework is ASPE. The accountant must also meet the independence requirements applicable to a review engagement.
Ask your lender before choosing
Imagine a Burnaby wholesaler applying for a larger operating line. Its previous compilation may have met the bank’s requirements, but the new financing could require a review. The owner should obtain the reporting requirements before commissioning the year-end work.
Ask the lender to confirm:
- The required engagement: compilation, review or audit.
- The required accounting framework.
- The reporting deadline and any additional schedules or covenant calculations.
Neither being a CCPC nor reaching a particular revenue figure, by itself, answers which engagement is appropriate. Consider the users’ needs, financing terms and any applicable legal or contractual obligations.
Bookkeeping and corporate tax are separate parts of the job
Bookkeeping maintains the underlying records. A compilation or review addresses financial reporting. A corporate tax return addresses tax reporting. Agree with your accountant which services are included; commissioning one does not automatically include the others.
Before year-end, reconcile bank and credit card accounts, review receivables and payables, and gather loan agreements and supporting schedules. Discuss inventory and unusual transactions early. Good preparation helps the accountant scope the work and identify missing information before deadlines become urgent.
Talk to CLBN about your reporting needs
CLBN LLP works with owner-managed businesses across Greater Vancouver on bookkeeping, corporate tax, compilation engagements and review engagements.
If you are arranging financing, changing accountants or planning your next year-end, contact CLBN to discuss your requirements. Bring any lender reporting requirements so we can help determine an appropriate scope of work.
This article provides general information. The appropriate engagement depends on your business’s circumstances and its reporting requirements.