Introduction

Canadian businesses and organizations use various types of financial statements to communicate their financial health and performance to stakeholders, including investors, creditors, and government agencies. These financial statements serve different purposes and undergo varying levels of scrutiny. In Canada, the four primary types of financial statements are internal financial statements, compilation reports, review engagements, and audit reports. This article will explore the key differences between these types of financial statements and when they are typically used.

1. Internal Financial Statements

Internal financial statements, also known as management financial statements or unaudited financial statements, are prepared by a company's management for internal use. These statements are not subject to external verification or assurance. Their primary purpose is to provide the company's management with a clear overview of the organization's financial performance and position.

Key characteristics of internal financial statements:

• Not subject to external review or audit.
• Prepared solely for internal decision-making purposes.
• Typically prepared more frequently (e.g., monthly or quarterly) than external statements.
• May include detailed operational and management information not disclosed in external reports.
• Used by management for strategic planning and decision-making.

2. Compilation Report

A compilation report is a type of financial statement engagement where a Chartered Professional Accountant (CPA) assists in organizing financial data and presenting it in the form of financial statements. However, CPAs do not provide any level of assurance or verify the accuracy of the information. The compiled financial statements are often presented with a "Notice to Reader" that explicitly states that no assurance is provided.

Key characteristics of compilation reports:

• Prepared by CPAs but without any assurance or verification.
• Often used for small businesses or organizations with minimal reporting requirements.
• The CPA's role is to organize the financial information provided by the client and present it in a standardized format.
• Typically the most cost-effective option for businesses seeking to formalize their financial reporting.

3. Review Engagement

A review engagement is a more in-depth financial statement engagement compared to compilation. In a review, a CPA assesses the financial statements for any material misstatements or inconsistencies. While this provides a higher level of assurance than a compilation, it is not as comprehensive as an audit.

Key characteristics of review engagements:

• CPA provides limited assurance but does not express an opinion.
• Financial statements are assessed for material misstatements or inconsistencies.
• More suitable for organizations with moderate reporting requirements.
• May be required by certain stakeholders, such as banks, as a condition for lending.

4. Audit Report

An audit report is the most comprehensive type of financial statement engagement. During an audit, an independent auditor examines the financial statements, internal controls, and supporting documents to provide a high level of assurance about the accuracy and reliability of the financial information. Audited financial statements are typically required for publicly traded companies, large private enterprises, and organizations that receive government funding.

Key characteristics of audit reports:

• Conducted by independent external auditors.
• Provides the highest level of assurance.
• Involves extensive testing, including sampling and substantive procedures.
• Required by regulatory bodies, lenders, and investors to ensure the integrity of financial information.

Conclusion

In Canada, financial statements play a critical role in conveying an organization's financial performance and position to stakeholders. Understanding the differences between internal financial statements, compilation reports, review engagements, and audit reports is essential for businesses and organizations to choose the most appropriate type of financial statement engagement based on their specific needs, regulatory requirements, and the expectations of their stakeholders. Whether for internal decision-making or external reporting, the right financial statement type can provide the necessary level of assurance and transparency required in today's complex financial landscape.