What is a Compilation Engagement and Why You Need One in Canada

A an image representing a compilation engagement.

What is a Compilation Engagement and Why You Need One in Canada

Sebastien Prost, CPA

A compilation engagement is a type of accounting service where a practitioner compiles financial information into financial statements without providing any assurance on the information. In Canada, this service is particularly relevant for small to medium-sized enterprises that require financial statements for third parties, such as banks or creditors, but where an audit or a review is not necessary. The process involves gathering financial data from the client and arranging it into the proper financial statement format.

Recognizing the importance of compilation engagements in the Canadian financial landscape, the Auditing and Assurance Standards Board (AASB) of Canada issued the new Canadian Standard on Related Services (CSRS) 4200. This standard came into effect in 2021 and marked the first significant update in over 30 years, aiming to enhance the quality and consistency of these engagements. Under CSRS 4200, practitioners are now required to follow more rigorous standards when performing compilation engagements, including clearer documentation and communication of their responsibilities and the basis of accounting used to compile the financial information.

Businesses and practitioners must grasp the nuances of the new standard because it has implications for both the process and the outcomes of compilation engagements. For a business, understanding when and why to request a compilation engagement under the new standard is crucial. It can serve as a cost-effective way to report financial information that satisfies the needs of third parties, lending credibility to the financial statements without incurring the expense of an audit.

Overview of Compilation Engagements

In Canada, compilation engagements are a recurring service where an external accountant is engaged to prepare and present financial statements.

Definition of Compilation Engagement

A compilation engagement involves an external accountant preparing financial statements based on information provided by a company’s management. It is crucial to note that during a compilation engagement, the accountant does not perform any assurance activities, meaning they do not verify or validate the information provided to them.

Purpose of Compilation Engagement

The primary purpose of a compilation engagement is to assist management in presenting financial information in the form of financial statements. Although there is no assurance provided with the compiled financial statements, they can be helpful for management’s internal use or for fulfilling reporting requirements to third parties who may not require audited or reviewed financial statements.

Legal Framework in Canada

In Canada, the legal framework for compilation engagements revolves specifically around the standards established by professional accounting bodies and legal requirements that dictate when such engagements are needed.

Governing Bodies and Standards

The Canadian Auditing and Assurance Standards Board (AASB) is the primary body that develops and sets standards for auditing and assurance engagements, including compilation engagements. Canadian Standard on Related Services (CSRS) 4200, titled Compilation Engagements, is the specific standard that accountants in Canada must adhere to when compiling financial information. This standard ensures that compiled financial statements are prepared with professional proficiency and in accordance with accepted accounting practices.

Regulatory Requirements for Compilation Engagements

The regulatory requirements dictate that compilation engagements are necessary when a business or organization does not require an audit or review of their financial statements but still needs financial information to be compiled by a professional. This could be to meet the needs of lenders, creditors, or for internal purposes. CSRS 4200 requires that the compiled financial information must include a note clearly describing the basis of accounting applied, and it outlines when and how an accountant should undertake a compilation engagement. The new standard aims to provide greater transparency and understanding for users of compiled financial information.

Process of a Compilation Engagement

In Canada, a compilation engagement involves a systematic process where an accountant assists a client in presenting financial information in the form of financial statements. It is a fundamental aspect of financial reporting for businesses in various industries.

Documentation and Evidence Gathering

The initial phase of a compilation engagement requires the accountant to gather the necessary documentation and evidence. This entails obtaining an understanding of the business and its operations. The accountant must collect all relevant financial data, which includes transaction details, bank statements, and any other pertinent information that influences the financial statements.

Preparing Financial Statements

Once the necessary data has been collected, the accountant proceeds to prepare the financial statements. The preparation is based on the information provided by the client, without the accountant performing any assurance procedures, such as audits or reviews. It’s the accountant’s responsibility to present the data in a coherent financial format that adheres to the applicable financial reporting framework.

Compilation Report Preparation

Finally, alongside the financial statements, the accountant prepares a compilation report. This report indicates that the financial statements were compiled using information provided by management and that the accountant has not performed an audit or review. The report includes the basis of accounting note, which is new under the Canadian Standard on Related Services (CSRS) 4200, and informs the reader about the level of assurance or testing that was, or more often, was not performed.

Benefits of a Compilation Engagement

In Canada, a compilation engagement offers a practical solution for financial reporting without the extensive verification processes of reviews or audits.

Cost-Effective Financial Reporting

A compilation engagement is a budget-friendly alternative to more full-fledged financial assurance services. It involves an accountant preparing financial statements from information provided by the client’s management. This service is less costly because it does not require the accountant to verify the accuracy or completeness of the information provided.

Suitability for Small Businesses

Small businesses often find compilation engagements particularly beneficial. Since these entities might not require comprehensive audits or reviews, a compilation engagement provides a financial statement preparation service that meets their needs without incurring the higher costs associated with assurance engagements.

Compliance with Loan Covenants

Financial institutions sometimes necessitate financial statements for loan applications or monitoring purposes. A compilation engagement can satisfy these requirements by presenting compiled financial statements that assist businesses in demonstrating fiscal responsibility and meeting the covenants of their financial agreements.

When Do You Need a Compilation Engagement

A compilation engagement becomes necessary when an entity requires financial statements to be presented in a structured format, often for internal use or to satisfy third-party requests without an audit or review level of assurance.

Determining the Need for a Compilation Engagement

Entities may need to ascertain whether they require a compilation engagement based on several criteria. The need primarily arises when there is no statutory requirement for an audited or reviewed financial statement. Business owners or managers might also seek a compilation engagement when they lack the in-house expertise to prepare financial statements themselves.

  • Purpose: Understand why and when a compilation engagement is mandatory or beneficial.
  • Assessment: Evaluate whether the level of assurance provided by a compilation engagement suffices for the entity’s needs.

Common Scenarios Requiring a Compilation Engagement

Small to mid-sized enterprises (SMEs) often engage in compilation engagements due to their comparatively lower complexity and size, which may not necessitate higher assurance services:

  • Internal Planning: SMEs utilize financial statements prepared through compilation engagements for budgeting and planning purposes.
  • Credit Applications: Lenders may request financial statements as part of the lending process, and a compilation may be sufficient.
  • Statutory Compliance: Certain jurisdictions or industries may require financially compiled statements for compliance despite the lack of an audit requirement.

Factors influencing the decision for a compilation engagement may include cost considerations, the company’s ownership structure, and the intended use of the financial statements. It offers a cost-effective way to present financial information formally without the additional rigor and expense of an audit or review.

Key Differences from Other Engagements

Engagements within Canadian accounting practices vary significantly in their purpose and scope, particularly when comparing compilation engagements to review and audit engagements.

Comparison with Review and Audit Engagements

Compilation engagements differ from review and audit engagements primarily in the level of assurance provided and the depth of work undertaken:

  • Level of Assurance: A compilation engagement offers no assurance as the practitioner is not required to verify the accuracy or completeness of the information. In contrast, a review provides a moderate level of assurance, and an audit offers a high level of assurance that the financial statements are free of material misstatement.
  • Scope of Procedures:
    • In a compilation engagement, the practitioner is tasked with compiling financial statements based on information provided by the entity. No testing or analytical procedures are performed, and the practitioner does not express an opinion or assurance on the statements.
    • Review engagements involve inquiry and analytical procedures to provide a limited assurance, which is less than that of an audit but more than that of a compilation.
    • An audit requires the practitioner to conduct an extensive examination, including corroboration and verification of financial information, to express an opinion on whether the financial statements fairly represent the financial position and performance of the entity in accordance with applicable financial reporting frameworks.

By understanding these distinctions, entities can select the type of engagement that aligns with their requirements and stakeholder expectations.

Selecting a Practitioner for Compilation Engagement

Choosing a practitioner for a compilation engagement involves assessing their qualifications against the needs of the engagement. The selected individual should uphold the standards set forth in CSRS 4200 and possess strong ethical principles and relevant experience.

Criteria for Choosing a Compilator

  1. Professional Designation and Licenses: A practitioner should hold a valid CPA (Chartered Professional Accountant) designation, ensuring they are recognized by a regulatory body and authorized to perform compilation engagements in Canada.
  2. Experience in Industry-Specific Accounting: They should possess experience relevant to the industry of the client, facilitating a more nuanced understanding of the business and its financial reporting requirements.
  3. Knowledge of CSRS 4200: Familiarity with the current Canadian Standard on Related Services (CSRS) 4200 is essential since it sets the updated requirements for compilation engagements.
  4. Reputation and References: Seeking testimonials or references from former clients can provide insight into the practitioner’s reliability, quality of work, and professionalism.

Expectations from a Professional Compilator

  • Adherence to Professional Standards: The practitioner is expected to conduct the compilation engagement in accordance with CSRS 4200, maintaining compliance with all relevant guidelines.
  • Transparent Communication: They should clearly communicate the scope of the engagement, management’s responsibilities, their own responsibilities, and the limitations of the financial information compiled.
  • Timeliness and Efficiency: Timely delivery of the compiled financial statements is critical, and the practitioner should work efficiently to meet the agreed-upon deadlines.

Frequently Asked Questions

This section addresses common queries regarding compilation engagements, clarifying differences with other engagements, outlining roles, eligibility of practitioners, essential elements of engagement letters, application dates for new standards, and delineation of tasks contrasted with bookkeeping.

How does a compilation engagement differ from a review engagement?

A compilation engagement involves assembling financial information into financial statements, whereas a review engagement includes analytical procedures and inquiries to provide a moderate level of assurance about the financial statements.

What is the role of a compilation engagement report in the financial reporting process?

The role of a compilation engagement report is to assist management in presenting financial information in the form of financial statements without providing any assurance on the information contained therein.

Who is eligible to perform a compilation engagement under CSRS 4200 standards?

Under the CSRS 4200 standards, licensed public accountants or accounting firms with the relevant experience and understanding of the new standard’s requirements are eligible to perform compilation engagements.

What are the key elements to include in a compilation engagement letter?

A compilation engagement letter should include the scope of the engagement, responsibilities of both the practitioner and management, the form of the expected report, and any limitations of the engagement.

From what date is CSRS 4200 applicable for compilation engagements?

CSRS 4200 became applicable for compilation engagements for compiled financial information for periods ending on or after December 14, 2021.

What distinguishes the tasks involved in a compilation engagement from regular bookkeeping services?

The tasks in a compilation engagement are distinct from bookkeeping as they involve assembling financial information into financial statements; bookkeeping services, on the other hand, typically include recording of routine financial transactions.

Sebastien Prost, CPA

Written by Sebastien Prost, CPA

Seb Prost, a CPA with over 10 years of experience in taxation and accounting, offers a unique blend of insights from his time at the CRA and his experience in public practice. Originally from QC and now based in Nelson, BC, he specializes in guiding Canadian startups, SaaS companies and other online businesses for all of their accounting and taxation needs.

Looking for an Accounting Partner for your Business?

You May Also Like…