Financial Statements - Dube & Cuttini

By: Dube & Cuttini  09-12-2011

Financial statements allow you to:

  • Plan for the future by considering past results and expected future changes.
  • Identify trends so you can take advantage of opportunities and correct problems.
  • Compare actual vs. projected financial results. Identifying unexpected problems and successes will help you with future planning.
  • Give outside users, such as bankers, a way to assess your business. Financial statements are required for them to determine the amount and types of financing they are prepared to offer your business.

Types of Financial Statements and the differences

In the world of financial statements, you should be aware of the differences between the three types of financial statements provided by accountants.  Each of these engagement services lends different levels of credibility to the financial statements, depending on the nature of involvement. For each service, the accountant provides a different report which communicates the extent of work performed and the degree of responsibility accepted by the accountant. The level of service will equate to the fee you receive from your accountant – a compilation is the least costly and the audit is the most costly.

Compilation Engagements

A compilation, also referred to as a notice to reader, provides no assurance on the financial information. In this engagement, the accountant compiles the financial statements from information provided by management. It is not necessary to adhere to generally accepted accounting principles (“GAAP”). Sometimes incomplete or estimated information will suffice, e.g. some accruals for expenses and revenues. Although no assurance is provided, the accountant cannot associate him (her) self with information that is false or misleading. The compilation financial statements will usually consist of a balance sheet, income statement and some limited notes. As no expression of assurance is provided, this is the least costly of the three engagements.

Why would you get this type of engagement:

  • The financial statements are required for internal use or a restricted use, such as for tax purposes.
  • The business is small and closely held by one shareholder, proprietor or a family.
  • The needs for financial planning, tax planning and accounting system advice are very limited.

Review Engagements

A review engagement provides more assurance than a compilation but less assurance than an audit. A review consists primarily of enquiry, analytical procedures and discussion to ensure the financial statements are in accordance with GAAP. Plausibility is the guide for the accountant in preparing a review engagement report. The accountant accepts the financial information from the client, and applies Canadian generally accepted standards for review engagements to determine the plausibility of the financial information. It must appear plausible based on the accountant’s knowledge of the client’s operations and industry, and based on the procedures performed by the accountant. A review financial statement, referred to general purpose financial statements, will normally consist of a balance sheet, statement of retained earnings, income statement, cash flow statement and many explanatory notes. In terms of fees, the cost for these types of financial statements range between the cost of a compilation and an audit for your particular industry.

Why would you get this type of engagement:

  • It is required by a regulatory body – mainly government bodies e.g. FSCO, TICO, CIDA, etc…
  • It is required by creditor, usually a bank.
  • It is required by the shareholder(s) to ensure management is discharging their responsibilities.
  • It is anticipated that your financial statements will be relied upon by potential purchasers of the business.
  • It would enhance the accountant’s ability to provide you with better financial planning, tax planning or accounting system advice, as more procedures are contemplated during this engagement

Audit Engagements

An audit provides the highest level of assurance and is the most reliable service available to the public. Incorporated businesses are legally required to present annual audited financial statements to the shareholders, however, the law provides for smaller corporations to waive an audit provided the shareholders agree in writing for the exemption. An audit consists of an examination of the accounting records and evidence supporting the amounts and disclosures in the financial statements and to ensure they are in accordance with GAAP. The accountant will gather the evidence necessary to in order to render an opinion that the financial statements present fairly the financial position and results of operations for the period under audit. This is the most costly of the three types of financial statements.

Why would you get this type of engagement:

  • It is required by a regulatory body, e.g. FSCO, TICO, CIDA, etc…
  • It is required by creditor, usually a bank.
  • It is required by the shareholder(s) to ensure management is discharging their responsibilities.
  • It is anticipated that your financial statements will be relied upon by potential purchasers of the business.
  • It would enhance the accountant’s ability to provide you with better financial planning, tax planning or accounting system advice, as more procedures are contemplated during the engagement


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