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According to the BC Business Corporations Act, each incorporated company is legally required to have an audit. The law does allow companies that have shares which are not traded on the public market to waive the requirement for an audit provided that certain conditions are met.

Audited financial statements are the accepted means by which most business corporations report to their shareholders, to bankers, to creditors and to the government. Federal and Provincial legislation in Canada generally requires a limited company to prepare annual financial statements for audit by a qualified independent auditor. Specific legislation may also require the auditor to provide other information in the report.

It is important to note that some companies may be exempted from the audit requirement if all shareholders agree, in writing, to waive the appointment of an auditor.

The objective of an audit engagement is to enable an independent public accountant to form an opinion on whether your company’s financial statements present fairly the financial position, results of operations and cash flow. This opinion is given in the form of a written report which normally consists of three paragraphs. The first, or introductory paragraph, identifies the audited statements and sets out the responsibility of management and the auditor; the second, or scope paragraph, concisely states the scope or extent of the audit and informs the reader that professional standards were used in the audit and that evidence is acquired through inspection, observation, enquiry, confirmation, computation and analysis. The last paragraph summarizes the auditor’s opinion based on his or her examination.

The audit consists of an examination of the accounting records and other evidence supporting those financial statements. Through the study and evaluation of the company’s system of internal control, and by inspection of documents, observation of assets, making of enquiries within and outside the company, and by other generally accepted auditing standards, the auditor will gather the evidence necessary to determine whether the financial statements present a fair picture of the company’s financial position and its activities during the period being audited.

The objective of a review engagement is to review financial statements to ascertain whether the statements are plausible and worthy of belief. 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. This degree of assurance is less than that resulting from an audit and is expressed as negative assurance that nothing has come to the accountant’s attention that would indicate the financial information is not presented in accordance with Canadian generally accepted accounting principles.

In performing a review the Chartered Professional Accountant would acquire sufficient knowledge of the client’s business to make informed enquiries and assessment of the information obtained. The review would include enquiries concerning all relevant information, comparisons of financial data for the current and prior periods and discussion governing the information received. In addition, the financial statements are critiqued with the responsible and appropriate level of management.

If, after reviewing the financial statements, the accountant is satisfied that the financial statements are in accordance with Canadian generally accepted accounting principles, a review engagement report would be attached to the financial statements.

The objective of a compilation engagement is to compile financial information into financial statement format based on financial information supplied by the client. It is not necessary to adhere to Canadian generally accepted accounting principles.

A Notice to Reader communication, which is stamped or printed on each page or attached to the financial information, is a clear warning as to the limited use of the compilation engagement. If the Notice to Reader communication is not stamped or printed on each page of the financial statements, then each page of the financial information or statements should 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
• all users of the information understand and accept its limitations.

A compilation may be applicable when management does not require information derived from the entity’s financial statements to assist in informed decision-making.

It is important to note that Chartered Professional Accountants must not be associated with financial statements which they know, or have reason to believe, are false or misleading.