As your trusted advisors we want to inform you of changes that will impact the compilation engagement(s) (informally known as a "Notice to Reader") we perform for your business. The following is intended to support you in your understanding of the new standards and to assist you in the discussions we will have as they pertain to your business(es).
For the first time in over 30 years, the Canadian Auditing and Assurance Standards Board has issued new compilation engagement standards to update and strengthen the requirements for accepting, conducting and reporting on compilation engagements, Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements.
These new standards are effective for compiled financial information for periods ending on or after December 14, 2021.
Expected Changes to Your Compilation Engagement
Under the old standards, your trusted advisor would refer to your compilation engagements informally as "Notice to Reader" or "NTR." Moving forward, you can expect to have these engagements referred to as compilations or compiled financial statements.
The following are a summary of changes you can expect to ensure your business' compiled financial statements adhere to the new standards:
- Discussion of details related to your overall business, specific operations, accounting system, and accounting records.
- Discussing signi?cant judgments that we have assisted management within the preparation of the compiled ?nancial information. An example of a signi?cant judgment could include the determining allowance for doubtful accounts or how revenue is recognized and measured. These judgments are discussed to assist you in understanding their impact on the compiled ?nancial information and accepting responsibility for them.
Significant judgements are discussed so that you understand their impacts on the compiled financial information and accept responsibility for them.
- Reviewing questions that may arise if we believe the compiled ?nancial information appears false or misleading.
- Discussing the expected basis of accounting to be used in the preparation of your financial information and the related note disclosure.
Changes to Your Year-End Engagement Letter
The year-end engagement letter will be revised to include the following sections: objective, scope, intended use of the financial information, our responsibilities, and your responsibilities and acknowledgments as required by the new standard. In addition, the following information will also be included:
1. Disclosing if your financial information is expected to be used and/or accessed by a third party (i.e. your lender) and whether the third party has access to additional information.
Your acknowledgement of this third party access to information is required before the advisor can accept or continue working on the engagement.
2. The description of the basis of accounting applied to the financial statements. This description will document the agreed upon method in how the compiled financial information is to be prepared.
3. A draft of the compilation engagement report that will be attached to the compiled ?nancial information.
Detailed Explanation of Changes
The following is a detailed description of the implemented changes as they adhere to the new standards.
| Requirements under the new standards | Expected changes |
| Basis of accounting when there are third party users |
Your advisor will ask you whether the compiled financial information will be used by a third party(ies) and whether those third parties have permission to request further information during the engagement. A common third party is expected to be the Company's lender(s). Many lending agreements include clauses which allow the lender to request and obtain further information. If you do not grant third parties access to your engagement, then your trusted advisor will ask whether you and the third party have agreed upon the basis of accounting. When this occurs, you and the third party will have to agree to the basis of accounting prior to the start of the engagement. |
| Acknowledgement of the basis of accounting |
Your trusted advisor will have a discussion with you on the expected basis of accounting applied in preparing the compiled financial information. While your advisor may provide guidance on the different basis of accounting available and beneficial to your business, you will ultimately be responsible for the compiled financial information, including the selection of the basis of accounting. Your acknowledgement of this responsibility is required before the engagement can continue. You will also be asked to provide acknowledgement at the end of the engagement due to the possibility of the basis of accounting changing during the engagement. |
| Terms of the engagement | You will be asked to sign a new engagement letter that will include the objective and scope of the compilation engagement, the intended use of the financial information, the responsibilities of the advisor, your responsibilities, and acknowledgements as specified in the new standard. |
| Understanding the business, operations, accounting system, and accounting records | Common questions your trusted advisor may ask include how transactions are recorded, classified, and summarized. This knowledge will allow your advisor to perform the engagement in accordance with the new standard. |
| Significant judgements |
Your advisor will have a discussion about significant judgments they have assisted you with in the preparation of the compiled financial information. An example of a significant judgment could include the allowance for doubtful accounts or the recognition and measurement of revenue. These judgments are discussed so that you understand their impact on the compiled financial information before accepting responsibility for them. |
| Additional work if information appears to be false or misleading |
Your advisor will attentively review your engagement and using their knowledge of your business and the chosen basis of accounting, consider whether the compiled financial information appears false or misleading. If any matters of concern are identified your advisor will contact you for additional information or clarification. In addition, if, after issuance of the compiled financial information, your trusted advisor becomes aware of a fact which, if previously known, may have caused them to believe the compiled financial information appeared misleading, they will contact you to discuss this and determine the appropriate action needed. |
| Responsibility for the compiled financial information |
Under the new standards you are required to acknowledge that you are responsible for the final version of the compiled financial information. Your advisor will have this documented through one of the following methods:
|
| New compilation engagement report |
The new engagement report will include:
|
What is the Basis of Accounting?
In adherence to the new standards, your compiled financial information will now include a note describing the basis of accounting applied to your business.
A description of the basis of accounting being used by your business is now being included to help you as management understand how the financial information is prepared. Examples of commonly encountered used basis of accounting are:
- A cash basis of accounting
- A cash basis of accounting with selected accruals and accounting estimates
- A basis of accounting prescribed by a contract or other form of agreement established by a creditor or a regulator
As your trusted advisor, your accountant may assist you in selecting the basis of accounting to be applied to your business' compiled financial information; however, the basis of accounting is still your responsibility as management, (or those charged with governance, as appropriate). Your advisor will ask you for your acknowledgement of this responsibility before the engagement can commence.
The following is one possible example of the basis of accounting for a real estate company:
The basis of accounting applied in the preparation of the balance sheet of "XYZ Company" as at December 31, 2021, and the income statement for the year then ended, is the historical cost basis and reflects cash transactions with the addition of:
- Amounts received
- Investments recorded at cost
- Rental property recorded at historical cost and amortized on the same basis as for income tax
- Accounts payable and accrued liabilities
- Current income taxes payable as at the reporting date
The New Engagement Report
The following highlights the changes in the new compilation engagement reports compared to the current Notice to Reader communications your business receives.
| New Compilation Engagement Report | Notice to Reader Communication | |
| Title | Compilation Engagement Report | Notice to reader |
| Addressee (no change) | To Management of ABC Company | To Management of ABC Company |
| Introductory Paragraph | On the basis of information provided by management, we have compiled the balance sheet of ABC Company as at December 31, 20X1, the statement of income and retained earnings for the year then ended and Note X, which describes the basis of accounting applied in the preparation of the compiled financial information [and, if applicable, other explanatory information] ("financial information"). | On the basis of information provided by management, we have compiled the balance sheet of ABC Company as at December 31, 20X1, and the statement of income and retained earnings for the year then ended. |
| Description of Management's Responsibilities | Management is responsible for the accompanying financial information, including the accuracy and completeness of the underlying information used to compile it, and the selection of the basis of accounting. | None |
| Description of Trusted Advisor's Responsibilities | We performed this engagement in accordance with Canadian Standard on Related Services (CSRS) 4200, Compilation Engagements, which requires us to comply with relevant ethical requirements. Our responsibility is to assist management in the preparation of the financial information. | None |
| Limitation of the Compiled Financial Information and a Caution to Reader | We did not perform an audit engagement or a review engagement, nor were we required to perform procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an audit opinion or a review conclusion or provide any form of assurance on the financial information. Readers are cautioned that the financial information may not be appropriate for their purposes. | We have not performed an audit or a review engagement in respect of these financial statements and, accordingly, we express no assurance thereon. Readers are cautioned that these statements may not be appropriate for their purposes. |
| Signatory (no change) | [Advisor's signature] [Date of the report] [Advisor's address] |
[Advisor's signature] [Date of the report] [Advisor's address] |
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
