Preparing for Your Compilation Engagement: A Client’s Roadmap

The world of financial reporting and accounting is always evolving, and one of the most significant recent changes in Canada has been the introduction of the CSRS 4200 standard. Effective December 14, 2021, CSRS 4200 replaced Section 9200, which had remained largely unchanged since 1987. This new standard is designed to clarify the responsibilities of management and accountants during a compilation engagement and to ensure that the compiled financial information meets current user needs. But what exactly is a compilation engagement, and how should you, as our client, prepare for it?

What is a Compilation Engagement?

A compilation engagement involves compiling your business’s financial information into financial statements. Unlike a review or an audit, a compilation engagement does not provide assurance from the accountant on the accuracy of the financial statements. The primary purpose is to assist management in presenting financial information in the form of financial statements.

Why CSRS 4200 Matters

CSRS 4200 was published to address potential misunderstandings surrounding the intended users of the financial information, the extent of work performed, and to assist in performing compilation engagements in our current business environment. It aims to clearly communicate the responsibilities of both management and accountants and the nature and scope of the compilation engagement.

How to Prepare for the Compilation Engagement

To ensure a smooth compilation engagement under CSRS 4200, preparation is key. Here’s how you can get ready:

1. Understanding Your Responsibilities: Be aware that you, as management, are responsible for the information provided during the engagement. You should understand the limited nature of the engagement and that the accountant will not be auditing or verifying the information provided.
2. Intended Use of the Compiled Financial Information (FI): Consider how you will use the compiled financial statements. Will they be for internal purposes, such as assessing profitability or planning for the next year? Or will they be used by third parties, such as banks or for legal matters? Understanding the intended use is crucial for us to tailor the engagement to your needs.
3. Providing Necessary Documentation: You will need to provide us with accurate and complete financial information. This includes, but is not limited to, all relevant business transactions, the nature of these transactions, and any other information that we request.
4. Choosing the Appropriate Accounting Framework: Discuss with us the accounting framework that will be applied to prepare your financial information. Ensure that you acknowledge and agree that the chosen framework is appropriate for your circumstances.

Our Checklists and Procedures

To facilitate the compilation engagement, our firm uses several checklists and procedures:

• PEG 3-Step CSRS 4200 Compilation Approach: This approach ensures that we cover all aspects of the compilation engagement thoroughly.
• Time Budget Worksheet: Helps in planning and managing the engagement efficiently.
• Engagement Acceptance/Continuance: We assess whether we can accept or continue the engagement based on various risk factors and quality management policies. Our engagement acceptance checklist is comprehensive. It includes evaluating engagement risk factors for new clients, contacting predecessor practitioners, inquiring about the intended use of financial information, and discussing the expected basis of accounting with you.
• Knowledge of the Entity: We gather detailed knowledge about your entity to ensure that the financial information reflects the true nature of your business.
• Completion Checklist: Ensures that all necessary steps have been taken before finalizing the engagement.
• Withdrawal Worksheet: If necessary, this worksheet outlines the procedures for withdrawing from the engagement.

Engagement Acceptance

At the core of our firm’s engagement process lies a stringent and methodical approach to engagement acceptance and continuance. This is more than a mere procedural step; it is a critical assessment that ensures our firm’s values, quality management policies, and the standards set by CSRS 4200 are upheld throughout our professional relationship.

Engagement Acceptance Checklist: A Deep Dive

Our engagement acceptance checklist is designed to be comprehensive, multifaceted, and reflective of the nuanced nature of each client’s business environment. Here’s a closer look at the key components:

1. Quality Management Considerations: Before we commence any new engagement, we meticulously evaluate whether accepting or continuing with a client aligns with our firm’s stringent quality management policies. This ensures that we maintain the highest standards of professionalism and compliance.
2. Engagement Risk Factors: For new clients, we perform a thorough assessment of potential risks. This includes an internal discussion about the prospective client’s reputation and business practices. For instance, when The Garden Shop Inc approached us, our partner Shafiq undertook a detailed review on December 9, 2023, and confirmed that there were no concerns with accepting them as a new client.
3. Communication with Predecessor Practitioners: A pivotal step in our checklist is reaching out to predecessor accountants to gain insights that may influence our decision to accept the engagement. This communication is critical and is carried out diligently, respecting all confidentiality requirements.
4. Inquiries About New or Emerging Risks: We continuously scan the horizon for any new or emerging risks that might impact the engagement. These could include changes in the business sector, evolving regulatory requirements, or shifts in economic conditions. We delve into the specifics—whether it’s the nature of the business, such as cryptocurrency ventures or gold trading, or external factors like interest rates and regulatory changes that could affect the business.
5. Understanding the Limited Nature of the Engagement: A clear understanding between the client and our firm about the limited nature of the compilation engagement is crucial. We ensure that our clients, like Jill from The Garden Shop Inc, understand that the engagement does not include a review or audit of the financial information.
6. Intended Use of the Compiled Financial Information (FI): We engage in detailed discussions with our clients to comprehend how they intend to use the compiled financial information. Understanding whether the FI is required for internal management purposes, such as assessing profitability or external uses like obtaining financing, is vital for tailoring our services appropriately.
7. Expected Basis of Accounting: A dialogue about the expected basis of accounting is initiated to ensure that both parties agree it is suitable for the client’s circumstances. This is documented through a written communication or, alternatively, noted in detail within our working paper file.

A Rigorous Approach to Engagement Continuance:

Our commitment to thoroughness does not end once the engagement is accepted. We revisit these considerations regularly, especially when there are significant changes within the client’s business or regulatory environment that might affect the nature or scope of our engagement. Each year, we re-evaluate whether a new engagement letter is required and confirm that the compiled financial information will continue to meet the client’s needs and adhere to the applicable financial reporting framework.

By adhering to our comprehensive engagement acceptance and continuance checklist, we ensure that every client relationship is built on a foundation of mutual understanding, rigorous risk assessment, and unwavering commitment to quality. This meticulous approach underpins our ability to deliver exceptional service in line with CSRS 4200 and sets the stage for successful and enduring professional engagements.

Knowledge of the Entity

The foundation of a successful CSRS 4200 compilation engagement is rooted in an in-depth understanding of your entity. This knowledge is not just a cursory glance at your financials, but a comprehensive dive into the various facets of your business. By gaining a thorough understanding, we ensure that the financial information we compile accurately reflects the true nature and nuances of your business operations.

How We Gain Knowledge of Your Entity

1. Entity Type and Structure: We start by examining the type of entity you operate, whether it’s a private company, partnership, or any other structure. We delve into your corporate structure, governance, key management personnel, and any significant ownership or investment relationships. For instance, with Jill Connor’s Garden Shop Inc, we noted that it is 100% owned by Jill and carefully reviewed the roles of key personnel like May Black, the shop manager, and Margaret Wing, the controller.
2. Jurisdiction and Legal Framework: Understanding the jurisdiction of incorporation and the relevant legal and regulatory framework is crucial. This includes scrutinizing statutes such as the Business Corporations Act and any other legal compliance requirements specific to your industry.
3. Business and Operations: We delve into the industry you operate in, the nature of your operations, your products and services, and the size of your entity in terms of revenue, assets, and employee numbers. For example, understanding that the Garden Shop’s operations include retail, services, and rentals provides us with essential context for compiling their financial information.
4. Financial Relationships and Users of the FI: We identify all significant users of your financial information, including management, shareholders, lenders, and other stakeholders like People’s Bank in the case of the Garden Shop Inc. We also consider the presence of any third-party users and their requirements.
5. Accounting Systems and Records: A thorough review of your accounting systems and records is conducted. We assess who manages the data input and the primary accounting software used. This review extends to understanding how transactions are recorded, classified, and summarized, including major transaction streams such as revenue, receivables, purchases, payroll, and other significant transactions.
6. Debt and Financing Arrangements: Any existing debt or financing arrangements are closely examined. This includes understanding the terms of loans, mortgages, and other financial obligations, which are critical in presenting an accurate financial picture.
7. Significant Changes and Transactions: We stay vigilant to any significant changes from prior periods, such as new loans, acquisitions, or changes in operations. For instance, we noted the new rental property acquired by the Garden Shop Inc and its impact on their financial standing.
8. Complexities and Unique Aspects: Every business has unique aspects or complexities. We identify and understand these, whether they are related to specific industry issues, complex transactions, or unusual accounting treatments. This could involve analyzing investments in gold or foreign currency transactions, as may be relevant to your business.

By comprehensively understanding every aspect of your entity, we position ourselves to compile your financial information in a way that truly represents your business’s financial reality. This detailed knowledge is not just a requirement under CSRS 4200; it is a commitment from us to provide you with the highest level of professional service, ensuring that the financial statements we compile are a true and fair reflection of your business.

Conclusion

The introduction of CSRS 4200 is a significant change that reinforces the need for clear communication and thorough preparation for compilation engagements. As our client, your understanding and cooperation are essential to a successful engagement. Rest assured, our team is equipped with the expertise and tools to navigate these requirements efficiently. As always, we are here to guide you through this process, ensuring that your financial information is compiled in compliance with the new standard while meeting your specific needs.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.