Do You Need an Audit, Review, or Compilation? Understanding Assurance Levels for Canadian Businesses

Introduction

Many Canadian business owners are unsure whether they need an audit, a review engagement, or a compilation (formerly Notice to Reader). Each type of engagement serves a different purpose, provides a different level of assurance, and meets different requirements for banks, investors, regulators, and internal management. Choosing the wrong option can lead to loan delays, CRA scrutiny, inaccurate financial statements, or unnecessary professional fees. This guide explains the differences between audits, review engagements, and compilations, when each is required, and how they affect financing, compliance, and decision-making.

Why Assurance Engagements Matter

Assurance engagements provide financial credibility. Banks, investors, shareholders, regulators, and potential buyers rely on assurance-level financial statements to assess business solvency, evaluate profitability, verify financial accuracy, reduce fraud risk, support loan decisions, and ensure compliance with regulations. Businesses that understand assurance requirements avoid delays and ensure financial information meets stakeholder expectations.

Overview of the Three Levels of Financial Statement Engagements

In Canada, the three primary options are audit (highest assurance), review engagement (moderate assurance), and compilation (no assurance). Each type involves different procedures, costs, and reporting standards under Canadian Auditing Standards (CAS) or Canadian Standard on Review Engagements (CSRE 2400).

What Is a Compilation (Unaudited Financial Information)?

A compilation provides no assurance. The accountant simply compiles financial information provided by management into financial statements. Key characteristics include no verification of accuracy, no testing of transactions, no inquiry or analytical procedures, and suitability primarily for internal use. Compilations are best for simple operations, owner-managed companies, and businesses without external reporting needs.

When a Compilation Is Appropriate

A compilation is ideal for small businesses without debt, owner-managed corporations, tax filing purposes, management-only reporting, and internal budgeting and decision-making. It is the most affordable option but not appropriate when third parties require assurance.

What Is a Review Engagement?

A review engagement provides moderate assurance and is conducted according to CSRE 2400. The CPA performs inquiries with management and analytical procedures such as ratio, trend, and variance analysis. The CPA expresses negative assurance, meaning nothing has come to their attention suggesting the financial statements are materially misstated.

When a Review Engagement Is Required

Reviews are appropriate when banks require assurance but not a full audit, shareholders need confidence in financial accuracy, investors want financial credibility, or companies prepare for growth or acquisition. Review engagements balance cost and assurance, making them common for mid-sized businesses.

What Is an Audit?

An audit provides the highest level of assurance under Canadian Auditing Standards. Audit work includes detailed transaction testing, internal control evaluation, bank and supplier confirmations, inventory observation, verification of supporting documentation, and risk assessment procedures. The auditor expresses a positive opinion on whether the financial statements are fairly presented.

When an Audit Is Mandatory or Recommended

Audits are often required for large bank loans, publicly accountable enterprises, nonprofit organizations receiving government funding, shareholder agreements requiring audits, companies preparing for sale, and corporations needing maximum financial credibility. Audits provide the strongest reassurance for lenders and investors.

Key Differences Between Audit, Review, and Compilation

Purpose: audit gives highest assurance, compilation gives none
Cost: audit > review > compilation
Procedures: audit involves testing and verification, review involves inquiries and analytics, compilation involves only preparation
Stakeholders: lenders prefer audit/review, owners may accept compilation
Time commitment: audits take longest, compilations are fastest

How Lenders and Investors Interpret Assurance Levels

Banks typically require review engagements for moderate loans and audits for large or high-risk loans. Small credit lines may accept compilations. Investors often request audited or reviewed financials before investing.

CRA and Assurance Engagements

CRA does not normally require audits but may view audited statements as more reliable. Weak financials or compilation-only statements may trigger books-and-records reviews, GST/HST audits, payroll audits, or net-worth assessments. Accurate statements reduce CRA audit risk.

Industry Considerations

Different industries have different assurance expectations. Construction companies often need reviews for bonding purposes. Nonprofits may require audits due to donor or funding rules. E-commerce and restaurants may use compilations until financing or investors become necessary. Professional practices may require audits when ownership changes.

Cost Considerations

Compilation: lowest cost
Review: moderate cost
Audit: highest cost
Costs vary based on transaction volume, quality of bookkeeping, inventory complexity, number of bank accounts, and industry risk profile. Strong bookkeeping lowers assurance costs significantly.

Signs Your Business Needs a Higher Assurance Level

You may need to upgrade assurance if your bank requests assurance, you are applying for financing, you have active investors, your business is growing, fraud risk is increasing, or financial statements are needed for acquisition or sale. A downgrade may be appropriate if external requirements decrease.

How to Prepare for Any Assurance Engagement

Maintain clean reconciled books, documented internal controls, organized digital records, inventory counts, revenue and expense support, proper GST/HST tracking, and complete shareholder agreements. Preparation reduces time, costs, and audit pressure.

Mackisen Strategy

At Mackisen CPA Montreal, we help businesses evaluate whether a compilation, review, or audit is appropriate. We prepare financial statements, perform assurance engagements, strengthen internal controls, and support bank or investor reporting. Our goal is accurate, compliant, credible financial reporting with minimal disruption to operations.

Real Client Experience

A Montreal distribution company secured major financing after upgrading to a review engagement. A nonprofit maintained compliance with grant obligations through annual audits. A family business preparing for sale relied on audited statements to increase buyer confidence. A startup resolved inconsistencies and moved from compilation to review for investor readiness.

Common Questions

Do banks accept compilations? Only for small loans. Does CRA require audits? Rarely. Which is cheapest? Compilations. Which gives highest credibility? Audits. Can I switch levels? Yes depending on needs and stakeholders.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal provides reliable, transparent, and compliant financial reporting tailored to your assurance needs, helping businesses meet requirements of lenders, investors, regulators, and strategic partners.