AUTHOR: April Wheeler - CPA, CGA

There are three types of financial statement reports that can be issued for a set of financial statements: Notice to Reader, Independent Practitioner’s Review Engagement Report and Independent Auditors’ Report. The type of report you should select depends not only on what you need, but also on what the other people who rely on your financial statements will require.  The users of your financial statements can include the bank, shareholders who do not take an active role in the business or potential purchaser.  They all want to be assured their interests are protected. If your business has a bank loan, the bank will want to ensure the company will be able to meet its debt payments.  If you are considering selling your business, a potential purchaser will rely on your financial statements to make their decision as to whether they buy or not.  Inactive shareholders may want added comfort that the financial statements adequately reflect the financial results of the company.


Which report is appropriate for my business?

A Notice to Reader

When an accountant issues a Notice to Reader Report, no assurance is given that the financial statements are complete or accurate.  The accountant simply takes the figures provided by the company’s management and puts them into a standard financial statement format.  Depending on the accountant, the amount of work performed to ensure that the financial statements are a true reflection of the activities of your business can vary as Notice to Reader statements are not required to comply with Canadian generally accepted accounting principles. The only requirement under the standards is to ensure the financial statements are not false or misleading.

The users of Notice to Reader financial statements must trust management to provide honest and accurate financial information. 

To highlight the financial statements limitations, a Notice to Reader report includes the following statement:

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.  

The fees are most often the lowest for this type of report.

A Notice to Reader is appropriate for a business whose shareholders monitor the financial transactions and are the only users of the financial statements.

Independent Practitioner’s Review Engagement Report

An Independent Practitioner’s Review Engagement Report offers limited assurance.  To issue this type of report, accountants are required to perform procedures in accordance with generally accepted review standards.  These standards require sufficient work be performed to give the financial statement users limited assurance that nothing has come to the accountant’s attention that causes them to believe that the financial statements do not present fairly the financial activity and position of the business.  

Procedures performed to provide the limited assurance include: 

  • Designing procedures to address areas identified to have a risk of material misstatement,
  • Focusing procedures on significant or unusual transactions and
  • To consider fraud when performing the engagement.  

Procedures undertaken for a review are limited to inquiry, discussion and analytical procedures.

Review Engagement financial statements must comply with Canadian accounting standards for private enterprises or Canadian accounting standards for not-for-profit organizations, which ensures the financial activity of the business is recorded and presented in a standardized format.

To highlight the limited assurance provided, the Independent Practitioner’s Review Engagement Report includes the following statement:

The procedures performed in a review are substantially less in extent than, and vary in nature from, those performed in an audit conducted in accordance with Canadian generally accepted auditing standards. Accordingly, we do not express an audit opinion on these financial statements.

Compliance with review engagement standards result in increased fees as the accountant must follow the procedures, presentation and disclosure requirements of the standards. However, the users have increased confidence that the financial statements accurately and completely reflect the financial transactions and position of the business.

An Independent Practitioner’s Review Engagement Report is appropriate for a business who has significant financing or is seeking financing, where there are shareholders who are not involved in the day-to-day business, and/or the business in preparing for sale or transition to the next generation.

Independent Auditors’ Report

An Independent Auditors’ Report provides the highest level of assurance.  To issue this type of report, the auditor is required to perform procedures in accordance with generally accepted audit standards.  These standards require sufficient work be performed to give the financial statement users assurance that the financial statements present fairly, in all material respects, the financial activity and position of the business. 

Procedures performed to provide this assurance include:

  • Gaining an understanding of the business’s internal controls,
  • Testing internal controls,
  • Testing samples of financial transactions,
  • Confirming balance with external parties,
  • Recalculating balances,
  • Inspecting assets,
  • Reviewing financing agreements,
  • Analyzing balances and trends and
  • Obtaining explanations from management.

Similar to Review Engagement Financial Statements, audited financial statements must comply with Canadian accounting standards for private enterprises or Canadian accounting standards for not-for-profit organizations, which ensures the financial activity of the business is recorded and presented in a standardized format.

To highlight the assurance provided, the Independent Audit Report includes the following statement:

In our opinion, the financial statements present fairly, in all material respects, the financial position of ABC Company Inc., as at (year-end date), and the results of its operations and its cash flows for the year then ended in accordance with Canadian accounting standards for private enterprise ( or not-for-profit organizations, as applicable).

Compliance with these standards results in higher fees as the auditor must perform more work to be able to obtain sufficient evidence to conclude the financial statements are fairly presented in all material respects. However, the users have the highest confidence that the financial statements accurately and completely reflect the financial transactions and position of the business.

An Independent Auditors’ Report is appropriate for a business where there are a significant number of shareholders not involved in the day to day activities of the business, has significant financing with debt covenants or have regulatory reporting requirements.

Summary

By engaging an accountant to provide one of these three types of reports, your company is providing its outside financial statement users with assurance that someone independent has looked at activities of your business and is satisfied it is accurately and completely reflected in your financial statements.   To determine which report is appropriate for your business, you should first determine who will be using your financial statements. If you have bank loans, review your loan agreement to determine whether or not the lender requires the business to provide reviewed or audited statements. Consider whether or not you are planning to sell or transition your business to the next generation. Once you have considered your user’s needs, consult with an accountant; ask questions to be sure you are purchasing the right engagement service for your business.


For more information on how to choose the right type of financial statement report, please contact your McCay Duff advisor.


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AUTHOR:  APRIL WHEELER

April provides services to a variety of clients, including small businesses, not-for-profits, hotels, and commercial leasing enterprises. She takes pride in helping businesses and organizations learn what their numbers mean and how they can contribute to strategic growth.  

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