When is it worth requiring a review or audit engagement from the seller?

A buyer deciding what to ask of a seller’s financial statements is choosing a level of assurance. CPA Québec explains that chartered professional accountants provide three levels of service on financial statements: an audit, a review or a compilation. A seller’s statements may carry any of these, or none. Requiring a review or an audit makes sense only if the added assurance changes a decision you are about to make. This page sets out what each level covers and the questions that help you decide.

What each level tells you

CPA Québec says an audit provides reasonable assurance that the financial statements as a whole are free from material misstatement, whether due to fraud or error, and that reasonable assurance is not absolute. A review is a limited assurance engagement under Canadian standards for review engagements (CSRE 2400). It consists primarily of inquiry, analytical procedures and discussion. A compilation provides no assurance at all, and for each service the accountant’s report sets out the extent of work performed and the level of assurance expressed. Read the report, not just the cover label.

Questions that decide whether to ask

• What will the price or the financing rest on? If a lender or investor needs a stated level of assurance, ask that party what it will accept before you ask the seller.
• What level do the statements carry today, and for which years? A report on one year does not cover the others.
• What will it cost and how long will it take? CPA Québec notes that the nature and extent of the work affect both the level of assurance and the cost.
• Who pays, and is it a condition in the letter of intent or only a request?
• Is the number you care about inside the statements at all? A report speaks to the statements as a whole, not to an adjusted earnings figure.

Limits to keep in mind

The absence of an audit is not a warning sign by itself. Under the CBCA, the shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor, if all shareholders consent, including those not otherwise entitled to vote (s.163(1), (3)). Subject to s.161(5), a person who is not independent of the corporation is disqualified from being its auditor (s.161(1)). Provincial statutes have their own rules. If a full audit is out of proportion, your own accountant’s work on the numbers may be the alternative. See the comparison of quality of earnings and audit.