Compilation, Review, or Audit: Which Engagement Does Your Business Need?

When it’s time to prepare your annual financial statements, you must choose between three types of accounting engagements: compilation, review, and audit. Each provides a different level of assurance and addresses distinct needs. Understanding these differences is essential to making the right choice — and avoiding paying for a level of service you don’t need.

The Three Levels of Assurance

In Canada, CPA Canada standards define three types of engagements for financial statements, ranked by increasing assurance level:

1. Compilation (no assurance): the CPA assembles financial information provided by management without verifying it
2. Review (moderate assurance): the CPA performs analytical procedures and inquiries to determine whether the financial statements are plausible
3. Audit (reasonable assurance): the CPA performs detailed procedures to obtain assurance that the financial statements are free of material misstatement

Compilation Engagement: When and Why?

Compilation is the most common type of engagement for Canadian SMBs. The CPA uses financial information provided by management to prepare financial statements in accordance with the applicable accounting framework (typically ASPE). No verification procedures are performed.

When to choose a compilation:

• Your bank or creditors don’t require a higher level of assurance
• You are the primary user of your financial statements
• You want to minimize costs while having standards-compliant financial statements
• Your business is small with relatively simple operations

The CPA’s report on a compilation engagement clearly states that no assurance is provided on the financial statements. Since 2021, the new Canadian Standard on Related Services (CSRS 4200) requires an engagement letter, an understanding of the accounting framework, and communication of any identified material misstatements.

Review Engagement: When and Why?

A review engagement provides an intermediate level of assurance. The CPA primarily performs analytical procedures (ratio analysis, prior period comparisons, trend analysis) and inquiries of management. The CPA concludes whether anything has come to their attention that causes them to believe the financial statements are not prepared in accordance with the applicable framework.

When to choose a review:

• Your bank or a business partner requires moderate assurance
• You want an external perspective on the plausibility of your financial statements without the cost of a full audit
• Minority shareholders request some level of verification
• You operate in a sector where debt covenants require at minimum a review

Audit Engagement: When and Why?

An audit is the highest level of assurance. The CPA plans and executes detailed procedures, including external confirmation of balances (banks, customers, suppliers), document inspection, physical observation (inventories), tests of internal controls, and substantive analysis. The CPA expresses an opinion on the fairness of the financial statements.

When to choose an audit:

• Law or regulation requires it (publicly traded companies, not-for-profit organizations of certain sizes, cooperatives)
• Your bank financing covenants require it
• You’re preparing for a business sale, acquisition, or fundraising
• External shareholders or investors need the highest level of assurance

Comparing the Three Engagements

• Assurance level: Compilation (none) → Review (moderate) → Audit (reasonable)
• Relative cost: Compilation ($) → Review ($$) → Audit ($$$)
• Typical duration: Compilation (1-2 weeks) → Review (2-4 weeks) → Audit (4-8 weeks)
• Client involvement: Compilation (low) → Review (moderate) → Audit (high)
• Report type: Compilation (notice to reader) → Review (negative assurance conclusion) → Audit (audit opinion)

How to Decide: A Decision Framework

To choose the right engagement, ask yourself these questions:

1. Who are the primary users of your financial statements? (you alone, your bank, investors)
2. Are there specific legal or contractual requirements? (banking covenants, articles of incorporation)
3. What is your budget for professional fees?
4. Do you anticipate significant transactions in the near term? (sale, acquisition, financing)

At Stamped, we help our clients choose the most appropriate engagement type for their situation. Our transparent approach includes a clear explanation of the differences and a recommendation tailored to your actual needs — without pushing toward a more expensive service than necessary.