From your friendly neighbourhood CPA – what is a compilation engagement, when it’s needed, and how does it differ from audits or reviews?
A compilation engagement is a financial reporting process where a Chartered Professional Accountant (CPA) assists a client in presenting their financial data in the form of financial statements. Unlike audits or reviews, the accountant compiles the data without verifying its accuracy or offering any assurance. This service is commonly used by small and medium-sized enterprises (SMEs) that require a cost-effective method to present their financial position without the need for more in-depth scrutiny.
Key Features of a Compilation Engagement:
- No Assurance Provided: The accountant does not perform tests or analytical procedures, nor do they offer an opinion on the data.
- Financial Statements: The output includes a balance sheet, income statement, and possibly a cash flow statement, compiled based on the client’s data.
- Compilation Report: Accompanying the financial statements, this report indicates that the accountant has not audited or reviewed the data.
When Would You Need One?
Several scenarios may call for a compilation engagement, especially when businesses need financial statements presented in a formal format without a high level of assurance.
Common Situations for a Compilation Engagement:
- Loan Applications: Banks may request compiled financial statements to assess a business’s creditworthiness when applying for loans.
- Internal Planning: SMEs often use these financial statements for budgeting, performance tracking, or decision-making.
- Meeting Third-Party Requirements: Some industries or jurisdictions may require compiled financial statements to satisfy regulatory requirements.
- Tax Filing: While not mandatory under new standards, businesses may still use compiled financial statements to support their corporate tax filings.
Benefits of a Compilation Engagement
For many small and medium-sized businesses, it offers an accessible and practical solution for presenting financial data without the added expense of audits or reviews.
- Cost-Effective: Unlike audits or reviews, which require extensive verification, a compilation engagement is more affordable due to its limited scope.
- Efficient: Compilation engagements are quicker, making them ideal for businesses that need financial reporting without delays.
- Flexibility: While not providing assurance, these financial statements meet the basic requirements of lenders, regulators, or other third parties.
Documentation Needed
To ensure that your accountant can prepare accurate financial statements, you’ll need to provide the following:
- Trial Balance: A summary of all accounts at the end of the fiscal period.
- General Ledger: Detailed transaction records for the fiscal year.
- Bank and Credit Card Statements: All statements for the reporting period.
- Accounts Receivable and Payable Aging Reports: A breakdown of money owed to and by the business.
- Fixed Asset Schedule: A record of capital assets and depreciation.
Compilation Engagement vs. Review and Audit Engagements
One of the key considerations for businesses is deciding which type of engagement they need based on the level of assurance required.
Key Differences:
- Compilation Engagement: Offers no assurance. The accountant compiles financial statements without verifying the data.
- Review Engagement: Provides limited assurance with inquiry and analysis procedures.
- Audit Engagement: Offers the highest level of assurance, including verification of data and extensive testing.
Choosing the Right Practitioner
Selecting the right CPA to perform your compilation engagement is crucial. The CPA must meet the requirements set by the Canadian Standard on Related Services (CSRS) 4200, which governs compilation engagements in Canada.
What to Look For:
- CPA Designation: The practitioner must be a licensed CPA, recognized to perform compilation engagements.
- Industry Experience: Look for someone with expertise in your specific industry to ensure relevant financial reporting.
- Adherence to CSRS 4200: Ensure the practitioner is up to date with the latest standards for compilation engagements.
Conclusion: Why Work with IDM?
At IDM, we specialize in providing compilation engagement services that allow you to present your financial information accurately and professionally. Whether you need financial statements for internal purposes, tax filings, or loan applications, our team is ready to assist. Contact us today to learn more about how we can help streamline your financial reporting, so you can focus on running your business.
