What level of assurance is provided by the auditor in a review engagement?

There are several key differences between an audit, a review, and compilation. Essentially, a compilation requires the auditor to simply present financial statements based on the representations made by management, with no effort to verify this information. In a review engagement, the auditor conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct. The result is a limited level of assurance that the financial statements being presented do not require any material modifications. In an audit engagement, the auditor must corroborate the ending balances in the client's accounts and disclosures. This calls for the examination of source documents, third party confirmations, physical inspections, tests of internal controls, and other procedures as needed.

Comparing an Audit, Review, and Compilation

In short, the differences between an audit, a review, and a compilation are as follows:

• Level of assurance. The level of assurance that the financial statements of a client are fairly presented is at its highest for an audit and at its lowest (none at all) for a compilation, with a review somewhere in between.

• Reliance on management. In all three cases, the auditor begins with the account balances provided by management, but an audit requires in a significant amount of corroboration of this information. A review requires some testing of the information, while a compilation almost entirely relies on the presented information.

• Understanding of internal control. The auditor only tests the internal controls of the client in an audit; no testing is conducted for a review or a compilation.

• Work performed. An audit requires a significant number of hours to complete, since there are many audit procedures to be performed. A review requires substantially fewer hours, while the effort associated with a compilation is relatively minor.

• Price. It requires vastly more effort for an auditor to complete an audit, so audits are much more expensive than a review, which in turn is more expensive than a compilation.

Another issue is the level of demand for each of these services. The users of financial statements, such as investors and lenders, nearly always demand an audit, since it provides the greatest assurance that what they are reading is a fair representation of the financial results, financial position, and cash flows of the reporting entity.

Audits and Review Engagements are the typical year-end services offered by professional accountants to association and not-for-profit clients.

For an association, the by-laws may dictate which type of service is required. If they do not, the type of service you require will depend on the degree of assurance you need to ensure that the financial statements are free of material misstatements. The type of engagement you need could also depend on bookkeeping services required or various other factors affecting your association. Association incorporated under the Canada Not-for-profit Corporations Act (CNCA) must follow the specifics of the Act and details on this can be found in a previous article on that topic.

An Audit

The objective of an audit engagement is to enable the independent professional public accountant to issue an opinion on the fairness of the client’s financial statements. An audit provides “reasonable assurance” that the financial statements are free of material misstatement and are in accordance with Canadian accounting standards for not-for-profit organizations. The term “reasonable” is necessary because absolute assurance is not possible. It acknowledges that limitations exist in all systems of internal control, and that uncertainties and risks may exist, which no one can confidently predict with precision.

Auditors use a variety of methods to determine if the financial statements are free of material misstatement, including study and evaluation of internal controls, inspection of documents, physical counts of assets, making enquiries inside and outside the company, and other procedures that support the Canadian generally accepted auditing standards for not-for-profit organizations.

The Canadian accounting standards for not-for-profit organizations refer to a section (Part III) of the CPA Canada Handbook which outlines all current accounting standards and rules in Canada on accounting and assurance.

Canadian generally accepted auditing standards for not-for-profit organizations are standards against which the quality of audits are performed and may be judged.

A Review Engagement

While an audit is meant to give some assurance that the financial statements are free of material misstatements, a review engagement is only meant to ascertain whether or not the financial statements are believable or plausible.

A review provides limited assurance that the financial statements conform to generally accepted accounting principles. This is negative assurance. This means that as the professional accountant is only providing assurance that nothing has come to their attention that would indicate the financial information is not presented in accordance with Canadian accounting standards for not-for-profit organizations. An audit, on the other hand enables a positive assurance allowing the accountant to state in their auditor’s report that the financial statements are in accordance with Canadian accounting standards for not-for-profit organizations.

What is a Notice to Reader/Compilation?

A notice to reader or compilation is simply a compiling of information into financial statements, based on information provided by their client. No assurance is provided. Therefore a compilation is only appropriate where users do not need assurance that the financial information conforms in all respects to Canadian accounting standards for not-for-profit organizations.

What is Materiality?

Materiality is defined as “Information said to be material if omitting it or misstating it could influence decisions that users make on the basis of an entity’s financial statements”.

The concept of materiality is applied by the auditor both in planning and performing the audit. It is also used in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.

Materiality is calculated in a variety of ways. It depends on what’s best for your association based on the auditor’s judgement and professional skepticism.

Some examples of calculations used to determine if information is material or not include if it would fall within one of the following ranges:

• 5% of pre-tax income;
• 0.5% of total assets;
• 1% of equity;
• 0.5% of total revenue

If you are still unsure about what type of engagement the association requires, contact a Chartered Professional Accountant. They will be able to help you and determine your organization’s needs.

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