Compilation vs. Review vs. Audit: Which Financial Statements Do You Need?

A compilation, a review and an audit are three different levels of work an accountant can do on your financial statements. A compilation gives no assurance: the accountant assembles your statements without checking them. A review gives limited assurance through inquiry and analysis, and an audit gives reasonable assurance through testing and evidence. The right one depends on who will read your statements and what they need to rely on.

For most small private corporations in Ontario, a compilation is enough. You need a review or an audit when a lender, investor, funder or law requires it. Here’s how to tell which applies to you.

What is the difference between a compilation, a review and an audit?

Each engagement follows its own Canadian professional standard, issued by the Auditing and Assurance Standards Board.

The table shows the trade-off. More assurance means more work, which means more cost and more of your time.

What is a compilation engagement?

A compilation engagement is the simplest level. Your accountant takes your trial balance and records and assembles them into financial statements. Under CSRS 4200, the accountant doesn’t verify the numbers, test controls or express an opinion. They do have to understand your business and the basis of accounting being used, and they’ll step in if something is obviously wrong or misleading.

CSRS 4200 replaced the old Notice to Reader standard. The report is now called a Compilation Engagement Report, and the statements must include a note describing the basis of accounting. That note tells readers how the numbers were put together, for example whether assets are recorded at cost and how revenue is recognized.

Compilations are the workhorse for owner-managed corporations. They support the T2 return and give you a clean annual picture for your own planning. The CRA’s Schedule 141, filed with every T2, asks who prepared or reported on the financial statements and how involved they were. It doesn’t demand a review or an audit.

What is a review engagement?

A review engagement under CSRE 2400 sits in the middle. The accountant asks management questions and performs analytical procedures. For example, they’ll compare this year’s gross margin with last year’s and ask you to explain significant changes. They don’t confirm balances with your bank or customers, count inventory or test transactions in depth.

The result is limited assurance, expressed in a negative form. The report says, in effect, that nothing has come to the accountant’s attention that causes them to believe the statements aren’t fairly presented. That’s meaningful comfort for a lender, and it costs considerably less than an audit.

The reviewer must be independent of your business. Since a review is an assurance engagement, in Ontario it must be done by a person permitted under the Public Accounting Act, 2004, as the province’s guide to the Not-for-Profit Corporations Act notes.

What is an audit?

An audit under Canadian Auditing Standards gives reasonable assurance, the highest level available for historical financial statements. The auditor assesses the risk of material misstatement, understands your internal controls, and gathers evidence. That evidence can include bank and customer confirmations, inventory counts, testing a sample of transactions and reviewing subsequent events.

The audit opinion states whether the statements present fairly, in all material respects, in accordance with the applicable framework. Reasonable assurance isn’t a guarantee, but it’s the standard investors, regulators and larger lenders rely on.

Audits take the most time. Expect planning before year-end, fieldwork after year-end, and more requests for documents and explanations than a review would involve.

Who requires a review or an audit?

Most private businesses choose their level of engagement based on who asks for it.

Lenders and investors

Banks often set the engagement level in your loan agreement. A small operating line might accept a compilation, while a larger facility may require a review or an audit, along with covenants that depend on those numbers. Read your credit agreement before year-end so you aren’t caught short. Equity investors and buyers in a sale process usually want audited or at least reviewed statements.

Not-for-profit corporations in Ontario

Ontario’s Not-for-Profit Corporations Act sets minimums based on revenue and on whether the corporation is a public benefit corporation (generally charities and non-profits that receive significant donations or government funding). The Government of Ontario summarizes them:

A waiver requires an extraordinary resolution: at least 80% of the votes cast at a special members’ meeting, or the written consent of all voting members. It only lasts until the next annual meeting, so it has to be renewed each year.

Grant funders

Government programs and foundations often require reviewed or audited statements, or a special-purpose audit report on how the grant was spent. Check your funding agreement early, because these reports can have their own deadlines.

Business corporations

A private business corporation can generally opt out of an audit if every shareholder consents. Under the federal Canada Business Corporations Act, section 163, the shareholders of a non-distributing corporation may resolve not to appoint an auditor, but all shareholders must agree, including those without voting rights. The resolution is valid only until the next annual meeting. Ontario’s Business Corporations Act has a similar exemption.

How much do they cost, and how long do they take?

We can’t give a single price, because fees depend on the size of your business, the state of your records and the complexity of your transactions. As a rough guide:

• Compilation: the lowest fee and the fastest turnaround, often a few weeks once your records are complete.
• Review: usually a meaningful step up from a compilation, because of the analysis and inquiries involved.
• Audit: typically several times the cost of a review, with planning before year-end and fieldwork after it.

The biggest cost driver you control is the quality of your records. Statements built on reconciled, well-documented books take far less time at every level.

Who can perform each engagement in Ontario?

In Ontario, public accounting is regulated by the Public Accounting Act, 2004. Audits and review engagements must be performed by a person permitted under that Act, which in practice means a Chartered Professional Accountant licensed by CPA Ontario as a public accountant. That’s what the LPA (Licensed Public Accountant) designation signals. Because independence is required for reviews and audits, your reviewer or auditor also can’t be someone with a financial interest in your business.

When choosing a firm, ask whether the partner signing your report holds a public accounting licence and has relevant industry experience. For more on preparing for outside scrutiny of your books, see our guide to preparing your corporation for a CRA audit, which is a separate process from a financial statement audit.

How MNJ CPA can help

Manraj Chahal, CPA, LPA, is licensed to perform compilations, review engagements and audits in Ontario, so we can recommend the level you need rather than the one we sell. Learn more about our financial statement services and audit and assurance work, or contact us to talk through your situation.