In the course of our work as Chartered Accountants, we are called upon to lend our name to the credibility of financial statements prepared by company's for use by third parties. Often a business owner is unaware of the choices in the levels of work we are able to perform and the types of reporting we are allowed to provide. This article will outline the three basic types of reporting done by chartered accountants in relation to external financial statements, and the role that we play in reporting on those financial statements.
Financial statements are the responsibility of a company's management and are the means by which the Board Of Directors and management show the results of the company's financial position for the fiscal period.
The company's accountant may make suggestions about the form and content of the financial statements or may be involved in preparing them. This does not, however, relieve management of its responsibilities; financial statements remain the representations of management.
Financial statements are often accompnaied by one of the following three reports which company's retain a Chartered Accountant to prepare:
These reports differ in both the extent of work performed and the degree of credibility added to the financial statements.
The highest level of assurance is derived from the "Auditor's Report." The auditor independently forms an opinion and reports, with reasonable assurance, whether the financial statements are presented fairly in accordance with generally accepted accounting principles (GAAP).
The key concept is "reasonable assurance." Absolute assurance is not attainable due to factors such as the need for judgement, the use of sample based testing, the inherent limitations of internal control and audit evidence generally being persuasive rather than conclusive.
The auditor's opinion is based on evidence gathered through carefully planned tests and procedures in support of each significant item in the financial statements.
There are four different types of Auditor's Reports: a standard audit opinion, and three non-standard auditor's reports.
A standard audit opinion accompanying a company's financial statements provides reasonable assurance that the statements represent the company's financial position at the date of the statements and the year's financial results in accordance with GAAP. This type of opinion is most commonly referred to as the 'unqualified' or 'clean' opinion.
The report indicates that, in the auditor's opinion, the statements are fairly presented in all material respects. It is important to bear in mind that a 'clean opinion' is not synonomous with a clean bill of financial health. Therefore, financial statements may indicate that the company has losses, working capital deficiencies, or deteriorating financial ratios. As long as this information is clearly reflected in the company's financial statements, which include the notes, the audit opinion is unqualified.
Non-standard auditor's reports are prepared in the event an auditor finds it necessary to express a reservation of opinion, usually because the statements were not prepared in accordance with GAAP or the auditor is unable to gather the evidence necessary to form an opinion.
The three types of non-standard audit opinions are:
An example of a 'clean' audit report is contained here.
While a review enagagement report is not a substitute for an audit, it can be useful for companies which are not required by law to file audited financial statements. A bank, for example, may request this type of report in order to assess a loan application. A review engagement provides less assurance and adds less credibility to the financial statements than an audit.
The objective of the review enagement is to assess whether the financial statements are plausible. Review procedures, which are generally more superficial than those of an audit, consist of inquiries and discussions with management and consideration of ratios, trends, etc. to assess the overall plausibility of the financial statements. It could be said that a review has the same breadth as an audit but much less depth.
The review engagement report is possibly the most common type of report issued by chartered accountants in connection with the preparation of financial statements. For those private companies not legally required to have an audit, a review enagagement is a cost-effective method of providing assurance on financial statements.
An example of a 'clean' review engagement report is contained here.
The most limited level of involvement the chartered accountant can have with financial statements is the compilation engagement. In this case, it is the chartered accountant, not management, who prepare the financial statements from information provided by the client. The client, however, does not require the chartered accountant to provide any assurance. This type of service is referred to as a compilation engagement.
In practice, you mostly see the Notice To Reader used when financial statements are being prepared strictly for income tax purposes. Most banks and other creditors who rely on the information presented in financial statements are not prepared to accept a notice to reader due to the lack of assurance provided.
An example of a notice to reader is contained here.
Your chartered accountant is always prepared to discuss what level of reporting is right for your company. If you have any questions, contact your financial advisor or an Ormsby & Mackan representative will be glad to discuss this topic with you.
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The information contained in this article is adapted from a publication by the Canadian Institute Of Chartered Accountants.