What are your financial reporting needs as a business owner? When looking to an accounting firm to compile financial reports for your business, do you ever ask yourself whether what you really need is a simple review or an audit? If you are the owner of a small business, you may only need something called a Notice to Reader, or a Compilation Review.
If you are familiar with the term Notice to Reader, you know that it a report prepared by a professional accountant to provide a client with an overview of their business’s financial information based on the data provided by the business. This is often requested when a business is required to make significant decisions based on the company’s financial performance or status. These reports do not come with any level of assurance, as opposed to audited financial statements.
Assurance means that the accountant has carefully reviewed all of the financial data to ensure it’s accuracy. When preparing an audit for assurance purposes, the CPA aims to obtain in order to express a conclusion designed to enhance the degree of confidence of the intended users that the financial statements are free from significant misstatement due to fraud or error. In the case of a Compilation Review, the accountant relies solely on the data as provided by the business, so they cannot provide the same level of assurance because they have not vetted the information. They simply identify issues and other factors based on the information they were given.
The Notice to Reader preparation by your accountant can be used in those limited circumstances where the owners, management and other users do not require financial statements containing all the disclosures normally required for general-purpose use, nor do they need the assurance provided by an audit or a review. Further, the financial statements need not necessarily be in accordance with a financial reporting framework such as ASPE (Accounting Standards for Private Enterprise) and instead may be prepared on another basis of accounting, such as a cash basis.
If you are now thinking that a Notice to Reader or Compilation Engagement might be required for your financial reporting needs, it’s important that you read the following information on the upcoming changes to these services, as set out by the CPA.
CPA Changes Standards for Compilation Engagement Reports
The CPA Auditing and Assurances Standards Board has recently issued a new standard for Compilation Engagement Reports. The impact of these changes will be felt by a wide variety of stakeholders, such as loan officers who use compiled financial information when granting loans or extending credit to small and mid-sized companies. This new standard becomes mandatory on December 14, 2021, but professional accountants are permitted to use the new standard before this effective date.
Reason for the Change
The change was necessary because of the following two points:
- There was often a misunderstanding by users of compiled financial information as to the extent of the work performed by the professional accountant when creating these reports.
- The compiled information provided no information as the basis of accounting applied in its preparation.
Highlights of the Changes
The major changes from the current Notice to Reader to the New Compilation Engagement Report are:
- The introductory paragraph will contain a reference to a note to the report and the note describes the basis of accounting applied in the preparation of the compiled information.
- The new Compilation Engagement Report includes a Description of the business management’s responsibilities with respect to the accuracy and completeness of the underlying information used to compile the information and the selection of the basis of accounting.
- A description of the accountant’s responsibilities has also been added. This part of the report states that the work was done in accordance with the Canadian Standard on Compilation Engagements and that this standard requires the practitioner to comply with relevant ethical requirements.
- The Limitation of the Compiled Financial Information and Caution to the Reader part of the Report have been amended to state that neither an audit nor a review of the financial data contained in the report has been completed in the preparation of the compilation report.
Changes in the Interactions with your Accountant
- Your accountant will ask you whether the compiled financial information is intended to be used by a third party (such as a bank) and whether the third party has access to additional information. The purpose of this question is to ensure that a third-party reader of the compiled information understands the basis and limitations of the report. This means that you must acknowledge that the third party is in a position to request and obtain further information from you or that the third party has agreed with the basis of accounting.
- You will need to have a discussion with your accountant prior to the preparation of the report about the following issues:
- The expected basis of accounting. This can be a written communication or an oral discussion with your practitioner.
- A discussion about your business and operations, accounting system, and accounting records.
- A discussion about significant judgements that your accountant has assisted management with in the preparation of the compiled financial information.
- If your accountant believes the financial information provided may be misleading in any way, you have an obligation to answer any questions they may have about this.
- As mentioned in the changes to the new Compilation Engagement Report content, you acknowledge that you take full responsibility for the final version of the financial information.
While all these changes may seem like the Compilation Engagement process will become more onerous, they will also ensure a better result. The new standards should eliminate any uncertainty for readers of your Compilation Engagement Report. As well, your relationship with your professional accountant will become stronger by encouraging in-depth discussions of the expectations and responsibilities of each party. Also, as your business grows and the demands for financial information increase, your accountant will be in a better position to provide the review service.
Contact Edelkoort Smethurst Schein in Burlington for
If after reading this blog, you would like more information about reporting or assurance services for businesses, please contact the CPAs at Edelkoort Smethurst Schein CPAs LLP. Our Chartered Professional Accountants will provide you with an overview and help to guide you towards the best process for your company’s needs. Please reach out to us by calling 905-517-2297 or contact us online.