Notice to Reader (Compilation Engagement)

Definition

The Notice to Reader is the old name for the report that accompanied compiled financial statements in Canada. Under CSRS 4200, effective for periods ending on or after December 14, 2021, the report has been renamed the Compilation Engagement Report. It still provides no assurance, but the content and procedures behind it are more robust than the legacy Notice to Reader.

Key rules

CSRS 4200 requires the practitioner to:

1. Accept the engagement only when the basis of accounting is acceptable for the intended use of the financial information.
2. Obtain knowledge of the entity's business and operations.
3. Discuss and document the basis of accounting, which must be described in a note to the compiled information.
4. Compile the financial information based on records and explanations from management.
5. Make inquiries when information appears to be incorrect, incomplete, or otherwise unsatisfactory.
6. Issue a Compilation Engagement Report in the prescribed form.

Example

A reader should find a Compilation Engagement Report identifying the information compiled, management's responsibilities, the practitioner's role, and the absence of audit or review assurance. The accompanying note describes the basis actually used.

For example, a small corporation may use cash accounting with selected accruals described in that note. That is not automatically ASPE. Only claim ASPE compliance when the complete requirements are met. Ask the practitioner to prepare the report and basis note for the actual engagement; this page is not a report template.

Common mistakes

• Continuing to call the report a "Notice to Reader" on a letterhead cover page while attaching a CSRS 4200 report. Pick one name.
• Omitting the basis of accounting note. It is mandatory under CSRS 4200.
• Taking on the engagement without documenting knowledge of the business. CSRS 4200 requires working paper evidence.
• Issuing a report while not independent, without disclosing the lack of independence. Compilation does not require independence, but the basis of presentation should still be clear.
• Accepting a compilation when the intended user requires assurance. Third-party use alone does not prohibit a compilation; the practitioner must assess CSRS 4200's acceptance conditions.

Compilation, review or audit?

A compilation is one of three engagements a Canadian public accountant can perform on financial statements. The three differ in the level of assurance provided, the procedures behind the report, and the report's title. Choosing the right one depends on who will rely on the statements (a bank, minority shareholders, a buyer) and what they require. CSRS 4200 replaced the old Section 9200, Compilation Engagements, under which the report was the Notice to Reader. Reviews follow CSRE 2400, in force for periods ending on or after December 14, 2017, and audits follow the Canadian Auditing Standards.

Which one does your corporation need?

Three parties can set the level, and each answers to a different rule.

• CRA. The T2 does not require audited or reviewed statements, and CRA accepts compiled statements for the T2. Schedule 141 records who was primarily involved with the financial information and what they did: an audit (line 300), a review (line 301), a compilation (line 302), accounting services (line 303), bookkeeping services (line 304) or something else (line 305). It also asks whether that person has a professional designation in accounting (line 095) and whether they are connected with the corporation (line 097).
• Your corporate statute. The statute the corporation is incorporated under starts from an audit and lets the shareholders waive it. In BC, a company must have an auditor unless all of the shareholders, whether or not their shares otherwise carry the right to vote, pass a unanimous resolution to waive the appointment, and the waiver covers one financial year only (Business Corporations Act s.203). In Ontario, a corporation that is not an offering corporation is exempt for a financial year if all of the shareholders consent in writing to the exemption for that year (Business Corporations Act s.148). A federal corporation that is not a distributing corporation may resolve not to appoint an auditor if all shareholders consent, including those not otherwise entitled to vote, and the resolution is valid only until the next annual meeting (CBCA s.163). A one-person corporation normally renews the waiver with its annual resolutions.
• Your lender. No law ties the engagement level to a loan size. The lender sets it in the commitment letter or loan agreement, scaled to the size and risk of the loan: a compilation is often enough for a small operating line, larger term loans commonly call for a review, and an audit is usually reserved for large borrowing, outside investors or public reporting. Read the reporting covenant before year end, because it decides what work the accountant has to do on that year.

A T2 return does not itself require a compilation engagement. Decide whether one is needed based on corporate obligations and the intended users of the information. When the owner applies for a mortgage or a larger business loan, the bank may require a review.

Mistakes when choosing the level

• Assuming the CRA needs audited financial statements. It does not.
• Confusing a compilation with bookkeeping. CSRS 4200 is an engagement with a practitioner's report; bookkeeping is not, and Schedule 141 lists them on separate lines.
• Letting the annual audit waiver lapse. In BC the waiver covers one financial year, and under the CBCA it lasts until the next annual meeting, so a missed resolution leaves the statutory audit requirement in place for that year.
• Skipping the independence assessment for review and audit engagements.
• Presenting comparatives that were prepared under a different engagement level without clearly stating so in the notes.
• Asking for an audit only to save on lender fees, without budgeting for the time and cost that full CAS procedures require.

Related concepts

A compilation sits at the lowest level of practitioner involvement. For higher assurance see compilation, review, and audit. The basis note may describe an alternative basis rather than full ASPE, and the basis of accounting is disclosed in the notes.