Preparing financial statements is important for managers, bankers and credit debtors. In fact, financial statements greatly influence the decision-making process when it comes to planning the company’s future operations.
In order to make financial statements more reliable and credible, Chartered Professional Accountants (CPAs) handle three types of report which have different levels of assurance: compilation engagement, review engagement and audit engagement.
In this article, we walk you through the basics of the compilation engagement and provide you with an overview of the role of CPAs and the accounting services you can benefit from.
What is a compilation engagement?
A compilation engagement is a mandate through which a certified public accountant collects the information provided by the management of the company and presents it in the form of financial statements.
Contrary to review and audit engagements, the accounting expert is not required to verify the accuracy of the information included in a compilation report and assumes no responsibility for it.
If the accountant finds that the financial data is likely to be incorrect or misleading, he must request further explanations or supporting documents from his client.
For these reasons, each page of the financial statement report must be accompanied by what is called a "Notice to reader" to inform the reader that the accountant has not prepared any audit or review engagements.
Financial Statement Engagements and Assurance Levels
Source: CPA Canada
As the chart indicates, a compilation engagement is not a certification and the expert does not offer any assurance regarding the financial statements.
With respect to the review engagement, the CPA indicates that the financial statements are plausible and appear to meet applicable standards.
In an audit engagement, the CPA expresses an opinion according to which the financial statements are free from material misstatements and that users may use this information with reasonable assurance.
What is required in a compilation report?
The compilation report submitted by the chartered professional accountant shall:
- Include a statement stating that the company management (the client) is responsible for the financial statements
- Identify financial statements
- Identify the accounting entity
- Specify the period covered
- Include a statement that confirms that the compilation was carried out in accordance with the applicable standards
- Include a statement which explains that the accounting expert has not audited or reviewed the financial statements and that he was not required to implement procedures to verify the veracity or completeness of the information provided by the client.
- Include his signature
- Include the date of the report (which should be the date when the accountant completed the compilation procedures)
What is the purpose of a compilation engagement?
The compilation engagement provides a financial statement report in an appropriate format. This report helps:
- Management to prepare tax returns.
- Management to obtain a global view of the financial health of the company before taking the decisions appropriate to its development.
- Financial institutions get a better idea of the financial condition of the company before granting it a loan.
What is the difference between a notice to reader and a compilation engagement?
According to the Office québécois de la langue française (QQLF), the notice to reader is "a written communication issued by the accounting professional following a compilation engagement". The notice to reader is therefore an affirmation that the expert has not conducted any audit or review to verify the accuracy of the information provided.
Keep in mind that the term "Notice to reader" may refer to the compilation engagement, as it is used exclusively in this type of mandate.
A compilation engagement accompanied by a notice to reader is much more advantageous than an internal accounting report. This report ensures consistency in the financial statements despite the fact that the information provided has not been verified.
This type of report is frequently used by SMEs as it is cheaper than other certification reports. It is also convenient for companies that do not have obligations with third parties.
How to prepare a compilation engagement?
The Quebec CPA order published a frame of reference that includes the standards governing each step of a compilation engagement:
- Quality control and documentation
- Acceptance of the compilation engagement
- Planning of the compilation engagement
- Implementation of the compilation engagement
- Review of cases
- Conclusion and notice to reader
- Work folders
To learn more about the standards included in each stage of the compilation engagement, consult this document.
Who can prepare a compilation engagement?
Compilation engagements, audit engagements and review engagements can be prepared by Chartered Professional Accountants (CPAs) in accordance with professional standards and ethics.
What is a CPA?
A Chartered Professional Accountant (CPA) is not just an accountant. His services must meet the specific requirements of the CPA order. The CPA is trained to the highest standards and his competencies are recognized internationally.
In addition, under the Chartered Professional Accountants Act, only CPAs may carry on the business of public accounting.
With their versatile expertise, CPAs contribute to financial management, administrative management, information systems management, etc. In addition, CPAs are hired by companies to train leaders in accounting, taxation and management.
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