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Audit, Review & Compilation Engagements

A guide to understanding

Audit Engagements
The objective of an audit engagement is to enable independent public accountants to render an opinion on the fairness of the clients financial statements.
This option is given in the form of a standard written report which normally consists of three paragraphs as set out below. The first paragraph identifies the financial statements and distinguishes between the responsibilities of management and the auditors; the second describes the scope and level of assurance; the third contains the expression of an opinion. The following auditors standard report prefaces the financial statements:

Auditors Report
To the Shareholders of (name of company) We have audited the balance sheet of (name of company) as at (date) and the statements of income, retained earnings and cash flows for the (period) then ended. These financial statements are the responsibility of the companys management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the company as at (date) and the results of its operations and its cash flows for the (period) then ended in accordance with Canadian generally accepted accounting principles. City Date (signed) Certified General Accountants

Audited financial statements are the accepted means by which many business corporations report to shareholders, to bankers, to creditors, and to government. Federal and provincial legislation in Canada generally requires an incorporated company to prepare annual financial statements for audit by qualified independent auditors. Some companies may be exempt from the audit requirement if all shareholders agree, in writing, to waive the appointment of auditors. The financial statements subject to audit are the responsibility of the companys management. The auditors responsibility is to express an opinion on those financial statements. Initial planning for the audit involves establishing an overall audit strategy to ascertain the nature, timing and extent of resources necessary to perform the engagement. This process guides the development of a more detailed audit plan. This plan may encompass many differing audit procedures to allow the auditor to form an opinion on the financial statements. Such procedures may include studying and evaluating the companys system of internal controls, inspecting documents, observing assets, making enquiries within and outside the company as well as many other generally accepted auditing procedures. This process will gather the evidence necessary to determine whether the financial statements present fairly the companys financial position and its activities during the period being audited. In some cases the auditors may disagree with the company on the accuracy or fairness of the financial information presented and will qualify the audit report. Departures from Canadian generally accepted accounting principles are usually the cause of a disagreement. The auditors will then state the nature of such disagreement and explain the effect on the results of operations or the financial position of the company in the audit report. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

Review Engagements
The objective of a review engagement is to prepare and review financial statements to ascertain whether they are plausible, that is, worthy of belief.
After reviewing the financial statements, and the accountants are satisfied that the financial statements are not misleading, the following accountants standard report will preface the financial statements:

Review Engagement Report

To (person engaging the accountant) We have reviewed the balance sheet of (name of company) as at (date) and the statements of income, retained earnings and cash flows for the (period) then ended. Our review was made in accordance with Canadian generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the company. A review does not constitute an audit and consequently we do not express an audit opinion on these financial statements. Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not, in all material respects, in accordance with Canadian generally accepted accounting principles. City Date (signed) Certified General Accountants

Where an audit is not required or the shareholders have waived the appointment of an auditor, financial statements may be prepared on a review basis. Reviews provide limited assurance that the financial information conforms to Canadian generally accepted accounting principles. In performing a review the accountants would acquire sufficient knowledge of the clients business to make intelligent enquiry and assessment of the information obtained, with the limited objective of determining the plausibility of the information reported on. The review should entail enquiries, analytical procedures and discussion with responsible client officials. The degree of assurance is less than that resulting from an audit and is expressed as either: the negative assurance that nothing has come to the accountants attention that would indicate the financial information is not presented in accordance with Canadian generally accepted accounting principles, or a reservation together with appropriate disclosure and explanation of the reservation, or where the client has approved the use of differential reporting principles for their financial statements, the above report would be modified to identify this to the reader.

Compilation Engagements
The objective of a compilation engagement is to compile unaudited financial information into financial statements, schedules or reports based on information supplied by the client.
The following Notice to Reader appears on each page or prefaces the financial information and warns of the limited involvement of the accountants:

Notice to Reader
On the basis of information provided by management, we have compiled the balance sheet of (name of company) as at (date) and the statements of income, retained earnings and cash flows for the (period) then ended. We have not performed an audit or a review engagement in respect of these financial statements and accordingly we express no assurance thereon. Readers are cautioned that these statements may not be appropriate for their purposes. City Date (signed) Certified General Accountants

If the above communication is not stamped or printed on each page of the financial statements then each page of the financial information will identify the nature of the engagement by carrying the following reference: Unaudited See Notice to Reader. A compilation engagement is appropriate only where the client and other users do not need financial information that conforms in all respects to Canadian generally accepted accounting principles, audit or review assurance is not required, and the client understands that the statements may not be appropriate for general purpose use. Uninformed readers could be mislead unless they are aware of the possible limitations of the statements and of the accountants very limited involvement. Where independence of the Certified General Accountants may be impaired, the Notice to Reader communication will be modified to disclose the nature of any interest, influence or relationship between the accountants and the client. A compilation may be appropriate where financial statements are prepared for the exclusive use of the companys management or for income tax purposes. Certified General Accountants must not be associated with financial statements that they know, or have reason to believe, are misleading or incorrect.

Independence
To remain objective in the performance of professional engagements, independence from a client is very important. The principle of independence is embedded in the CGA Code of Ethical Principles and Rules of Conduct (CEPROC) and the CGA Independence Standard to which all Certified General Accountants are bound. The CICA Handbook also provides independence guidance to accountants when completing professional engagements. For assurance engagements such as audits or reviews, an assessment of independence must be well documented. If Certified General Accountants are not independent of their client or if sufficient safeguards cannot be implemented to provide such independence, then they can not undertake an audit or review engagement for the client. Accountants are not required to be independent to provide compilation engagement services. However, in cases where independence is not achieved, the nature of the interest, influence or relationship must be disclosed in the Notice to Reader communications.

Certified General Accountants (CGAs) are highly qualified professionals that offer a range of sophisticated assurance and advisory services to virtually every segment of the economy. Incorporated by a public act of the Manitoba Legislature, the Certified General Accountants Association of Manitoba certifies fully qualified professional accountants and auditors who have completed a rigorous program of professional studies and appropriate work experience. CGAs are bound by a comprehensive Code of Ethical Principles and Rules of Conduct (CEPROC) and the CGA Independence Standard. To assure the highest level of service CGAs must also meet a mandatory standards program of continuing professional development, practice review, professional liability insurance and member discipline.

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CERTIFIED GENERAL ACCOUNTANTS ASSOCIATION OF MANITOBA

Four Donald Street South Winnipeg, Manitoba R3L 2T7 (204) 477-1256 (800) 282-8001 www.cga-manitoba.org