WHEN DO YOU NEED FINANCIAL STATEMENTS?
When a company is looking for financial assistance or looking for a tool to assist in their management, a set of financial statements becomes an invaluable tool.
Your lender requires a standardized tool in which to evaluate your company. The lender will take the financial statements produced by an accountant and apply a series of analysis techniques to assess the strength or weakness of a business, to determine whether the company is a good enough credit risk.
Management of a company requires a standardized set of financial statements in which they can produce a budget for the upcoming year and a methodology for evaluation of the performance of the company, much like the lender (but for different reasons).
Did You Know…?
Not all businesses need a set of financial statements! At New Heights Accounting we believe that if your needs do not include a set of financial statements, then why pay for a set? We understand that a lot of companies, when given a set of financial statements, place those statements in a file folder and never look at them again.
We will work with you to determine if your needs requires a set of statements or not. For more information call us at: 250-618-7800
Types of Engagements
Tax return only
The objective of a tax return only engagement is to prepare the tax return (T1, personal or T2, corporate) for the business. This is the cheapest engagement and is appropriate when the business does not require any external review such as a bank. The client is provided the complete tax return.
Compilation or “Notice To Reader” Engagement
The objective of a compilation engagement is to compile unaudited financial information into financial statements, schedules or reports based on information supplied by the client.
A compilation engagement is appropriate to be used where the business and external users of the financial statements do not need financial information that conforms to generally accepted accounting principles (GAAP).
The procedures performed by the accountant are not designed to provide any assurances on the reliability of the compiled information. To warn readers of this lack of assurance, the accountant attaches a “Notice To Reader” comment that states that no review has been performed on the information provided to the accountant and that the information may not be appropriate for use by the reader. The compilation engagement may be applicable where financial statements are prepared for the exclusive use of the company’s management or for income tax purposes.
Compilation (or Notice to Reader) financial statements are the most cost effective option for those who want financial statements for low level financing, or internal management purposes.
The objective of a review engagement is to prepare and review financial statements to ascertain whether they are plausible, that is, worthy of belief. If, after reviewing the financial statements the accountant is satisfied that the financial statements are not misleading, the accountants’ standard report will preface the financial statements.
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. Reviews provide limited assurance that the financial information confirms to generally accepted accounting principles (GAAP).
In performing a review the accountant must be independent from the client and have sufficient knowledge of the industry which the business operates. They would acquire sufficient knowledge of the client’s business to make intelligent enquiries and assess the information obtained, with the limited objective of determining the plausibility of the information reported on. The review would entail enquiries, analytical procedures and discussion with responsible client officials.
This degree of assurance is less than that resulting from an audit and is expressed as either:
- The negative assurance that nothing has come to the accountants’ attention that would indicate the financial information is not presented in accordance with generally accepted accounting principles, or
- A reservation together with appropriate disclosure and explanation of the reservation.
This type of engagement is more expensive than the Compilation engagement because of the additional work that is required to complete the engagement and is appropriate to situations where the external users have a requirement to the accuracy of the information provided to them.
The objective on an audit engagement is to enable the professional public accountant to render an opinion on the fairness of the client’s financial statements.
Audited financial statements are the accepted means which many business corporations report to shareholders, to bankers, to creditors and to government. Federal and provincial legislation in Canada generally requires a limited company (corporations) to prepare annual financial statements for audit by qualified independent auditors.
The financial statements subject to audit are the responsibility of the company’s management. The auditor’s responsibility is to express an opinion on those financial statements. The auditor must plan the audit to obtain a reasonable assurance that the financial statements are free of material misstatement. Through the study and evaluation of the company’s system of internal control, and by inspection of documents, observation of assets, making enquires within and outside the company, and by other generally accepted auditing procedures (GAAP), the auditor will gather evidence necessary to determine whether the financial statements present a fair picture of the company’s financial position and its activity during the period being audited.
This type of engagement is the most expensive engagement of the three types of engagements because of the extensive work that is required to complete the engagement and is appropriate to situations where the external users have a requirement to the accuracy of the information and a belief that the statements are free from errors.
It is important to note that none of the engagements are designed to detect fraud or fraudulent activities within the business albeit in the Audit Engagement the opportunity to commit fraud is sometimes identified. If your business suspect’s fraud may have occurred then a forensic auditor is engaged with the specific purposes of detecting fraud.
Services provided in addition to the above engagements will include the following:
- Compile comparative financial statements including a balance sheet, statement of retained earnings, and statement of earnings.
- Provide a detailed management letter outlining upcoming tax liability and filing responsibilities and any other concerns identified during the engagement process.
- Prepare and file the T2 Corporate Income Tax Return.
- Confirm completion of all compliance returns (GST/HST, WCB, PST etc.) and assess for reasonability.
- Complete tax planning for corporate shareholders.
- Draft letters of instructions to your lawyer to draft the necessary resolutions for dividends declared.
Please note that New Heights Accounting currently only performs the Compilation or “Notice To Reader” engagement, if the business requires the Review or Audit engagement we will be happy to refer the business to an accounting firm that specializes in these types of engagements.