The backbone of your business finances

Lets face it...trying to read a set of financial statements is like watching paint dry. There are only so many ways that a balance sheet can be made interesting. Rather than bore you to tears about why you need a set of financial statements, this page will give you some pointers on HOW to make sense out of them. Statements 101.

Notice to Reader

The lowest level of involvement the CPA can have with financial statements, leading to a communication, is the compilation engagement. This type of engagement can be used in those limited circumstances where the owners, management and other users do not need financial statements containing all of the disclosures that are normally required for general-purpose use nor do they need the assurance provided by an audit or a review. In a compilation engagement, the financial statements need not necessarily be in accordance with a financial reporting framework in Canadian ASPE (for example, the statements may lack disclosure required by the financial reporting framework or be prepared on a cash basis). Nevertheless, such statements may be appropriate for users such as management who are aware of the possible limitations of the statements.

Review Engagement

In a review engagement, the responsibilities and the report that explains the CPA's involvement with the financial statements differ significantly from those of an audit. The objectives are different and accordingly, so are the procedures.
The CPA's objective in an audit is to express an opinion on the financial statements; whereas in a review engagement, the objective is to determine whether the financial statements are plausible in the circumstances. "Plausible" is used in the sense of being worthy of belief, which is a moderate level of assurance. A review consists primarily of enquiry, analytical procedures and discussion. This type of engagement is useful when a company does not need audited financial statements, but management or third parties (e.g., banks, granting agencies, etc.) want some assurance that the financial statements are plausible. A CPA reviews financial statements in accordance with established professional standards. If the CPA discovers the financial statements depart materially from the applicable financial reporting framework, this fact is disclosed in the review engagement report.

Audit

The audit is the highest level of assurance that can be provided on financial statements. The audit provides reasonable assurance that the entity's financial statements present fairly its financial position, financial performance and its cash flows in accordance with the applicable financial reporting framework.
The key concept is "reasonable" assurance. The auditor does not provide absolute assurance, because this is not attainable due to factors like the need for judgment, the use of testing, the inherent limitations of internal control and the fact that audit evidence is generally persuasive rather than conclusive.

An audit of financial statements by an independent auditor may be required for various reasons. For example, a company's banker may require an audit to support an application for financing; an audit may be necessary when negotiating the purchase or sale of a business; or management or owners may find value in having an audit.

An auditor of a corporation is responsible to the shareholders. On behalf of the shareholders, an auditor examines the company's financial records and operations to determine whether the information reported in the financial statements is presented fairly. The CPA communicates this assessment to shareholders through the expression of the audit opinion. It is important to remember that, in the end, management is responsible for the preparation and fair presentation of the financial statements.
If the CPA discovers the financial statements depart materially from the applicable financial reporting framework, this fact is disclosed in the auditor's report.