Compilation, review or audit: which financial statements to prepare before selling

The financial statements a buyer and a lender read may be prepared by you, by a bookkeeper, or by an accountant who attaches a report at one of three levels. The level is a choice, and it costs time and money. This guide is written from the seller’s side of that choice. It explains what a compilation, a review and an audit each are, in the terms CPA Québec, the Quebec CPA Order, uses on its public page about financial statements. It then covers what corporate law says about auditors and what to ask the people who will rely on the statements before you commission any engagement. It does not tell you which level to pick.

What the three engagements are

CPA Québec says that chartered professional accountants perform audit, review and compilation services under assurance standards established by the Canadian Auditing and Assurance Standards Board. An audit provides reasonable assurance that the statements as a whole are free from material misstatement, whether due to fraud or error, and is carried out under Canadian generally accepted auditing standards. A review is done under the Canadian standard for review engagements, CSRE 2400, and provides limited assurance. A compilation is done under Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements, and provides no assurance whatsoever.

What the work behind each one involves

In a review, CPA Québec says the practitioner’s procedures consist primarily of inquiries of management and others and analytical procedures. They are substantially less in extent than those in an audit, and a review does not require the accountant to seek supporting or independent evidence or to evaluate internal control. In a compilation, the accountant assembles statements from information management provides. The sample compilation report says the accountant did not perform an audit or a review and was not required to perform procedures to verify the accuracy or completeness of that information. CPA Québec also notes that the nature and extent of the work affect both the level of assurance and the cost.

What each report says about the work done

Each engagement ends in a report that sets out the extent of the work and the level of assurance expressed, and CPA Québec says that in most cases the entity’s management is responsible for preparing the statements. If your older statements carry a “Notice to Reader”, note that CPA Québec says the compilation engagement report replaced it for fiscal periods ending on or after December 14, 2021. Ask your own accountant to explain in plain terms what each report you hold does and does not say.

Does corporate law require an auditor?

Under the Canada Business Corporations Act, the shareholders of a corporation that is not a distributing corporation may resolve not to appoint an auditor (s.163(1)). That resolution is valid only until the next annual meeting of shareholders (s.163(2)). It is not valid unless every shareholder consents, including shareholders not otherwise entitled to vote (s.163(3)). Ontario’s Business Corporations Act (s.148) exempts a corporation from its auditor provisions for a financial year if it is not an offering corporation and all of its shareholders consent in writing to the exemption for that year. Which Act governs your corporation, and what your articles or shareholder agreement add, is a question for your lawyer. This guide does not describe other provinces’ statutes. These rules concern the corporation’s own obligations. They do not say what a buyer or lender will accept.

What to ask the buyer and the lender first

BDC says audited statements may be suitable for larger businesses and those contemplating a substantial loan or investment, and that a review may suit mid-sized and more complex businesses. That is general guidance, not a rule for your sale. Before you commission anything, put specific questions to the people who will rely on the statements, and ask a lender who is financing a buyer what its own policy requires.

• Which level of report, if any, will you accept, and would a review satisfy you where an audit was first mentioned?
• Which fiscal years must carry that report, and does the most recent interim period need one?
• Will you rely on the report directly, and does it need to be addressed to you or to the corporation?
• Would you do separate work of your own on earnings anyway, as the comparison of quality of earnings and audit describes?
• Is the engagement a condition of the deal or only a preference, and who is expected to pay for it?

Timing: an engagement covers a period that has already ended

CPA Québec’s sample audit report notes that conclusions rest on audit evidence obtained up to the date of the auditor’s report. The sample reports also name the date and period the statements cover. We found no published source saying whether a practitioner will accept an engagement on a year that has already closed, or how long that would take, so put it to the accountant directly: which years can be covered, what records they need, and how many weeks it adds before you go to market. For the state of your records, see the financial records clean-up answer and the sale-ready financials checklist.