Although Chartered Accountants perform many types of services for clients, one of the best known is the involvement with year-end financial statements. Generally, Chartered Accountants are involved with year-end financial statements when there is an element of credibility required by a user. Sometimes banks or other lenders may ask for a copy of the financial statements, or it may be needed when establishing credit with a vendor. In a business with many owners, a minority owner may be comforted when the statements have had the involvement of an external Accountant. Chartered Accountants are engaged by a business to assist with the annual financial statements and the work performed is called an engagement. There are three different types of engagements regarding financial statements that Chartered Accountants can complete for a business: (1) Audit Engagement, (2) Review Engagement and (3) Compilation Engagement.
The Audit Engagement
The audit engagement results in an opinion on the fairness of the financial statements. This opinion is relied on by bankers, creditors, shareholders and others who may require an independent assessment of a business’s financial condition. Although the financial statements are the responsibility of the company’s management the Auditor’s task is to determine whether or not the statements are or are not materially misleading. The Auditor will evaluate the Company’s internal controls, observe assets, inspect documents and gather other evidence to support the financial statements. These procedures result in the highest level of assurance that a Chartered Accountant can provide.
The Review Engagement
The review engagement is designed to determine whether the financial statements are believable. The technical term for this is plausible and means that there is a high degree of reliance that the statements are not misleading. The Accountant will provide a Report that essentially informs the users that they can be confident that they will not be making inappropriate decisions based on the statements. The review is a limited assurance engagement and entails the application of analytical procedures, enquiries, comparisons and discussions rather than depending on examinations of documents and other evidence.
The Compilation Engagement
A compilation is appropriate only where the client and other users do not require financial statements that conform to generally accepted accounting principles and have access to information that they may need to make business decisions. The objective of this type of engagement is to accept information provided by the Company and organize it into a standard form financial statement, that is, to compile the information so that it can be understood by a reader. The report that is attached by the Chartered Accountant is called a “Notice to Reader” and advises that no review or audit has been performed and that the financial statements are not necessarily appropriate for use by the reader. Generally a compilation engagement is prepared for the exclusive use of the Company’s owners or for income tax purposes. The Chartered Accountant is required to be reasonably certain that the financial statements are not false, but is not required to determine whether they are accurate.
By: Jerry Paskowitz, CMC, CA