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Banka: Understand due diligence of accountants
When you require an accountant to prepare year-end documents, there are certain items that are required depending on the engagement.
For example, an audit requires access to all the financial and non-financial documents and access to office personnel.
The purpose is so that the accountant performing the audit can draw reasonable conclusions in order to form an opinion on the financial statements compiled by the company.
Most people understand what an audit is and that all or substantially all information is looked at so most are okay with providing complete information and extra information if asked.
In a review engagement, users of the financial statements will be relying on the accountant’s report of negative insurance meaning that nothing out of the ordinary was found.
They will also be relying on the information contained in the financial statements.
Because of this reliance, the information that the accountant performing the review requires should allow the accountant to perform procedures such as enquiry, analytical procedures and discussion with the officers of the company.
If some questionable items arise after performing these procedures, the accountant may be required to perform some procedures normally considered auditing procedures.
The reason is to be assured that there is nothing misleading in the financial statements that needs to be corrected or disclosed in the review engagement report.
With the above two types of engagement, if the accountant asks for an item and it isn’t provided, then that is considered to be a scope limitation, which means that the accountant is unable to determine if the financial statements are correct or not because not all the information was provided.
In a compilation, or a notice to reader, the requirement is for the accountant to arrange the financial information received from the client into financial statements.
The information needs to be arithmetically correct, but the accuracy and completeness does not need to be verified to the extent that is required in the other two types of engagements.
As I have stated before, although the financial statements in a compilation engagement do not need to comply with generally accepted accounting principles, they also cannot be false or misleading.
How do we as accountants ensure that the financial statements are not false or misleading?
The method most commonly used is by third party verification such as balancing the bank to the bank statement or balancing the payroll withholdings to the Canada Revenue Agency payroll account.
A rule of thumb is that if the company is able to comply with the statutory requirements, the statements are more likely to represent the financial results fairly. There is also some reliance on the bookkeeper that performed the data entry.
So what about the non-financial information that may be required?
Accountants routinely ask for the corporate minute book and for proof that the appropriate fees have been paid to the Registrar of Companies.
The reason for the need to see the corporate minute book, especially if the client is new, is that the accountant needs to know who the directors are and how many directors there are so that the financial statements can be prepared with the correct number of signature lines on the balance sheet.
The accountant also needs to know what the share structure is to disclose that information in the notes for the readers of the financial statements. The accountant needs to see the Articles of Incorporation to determine if there are any restrictions on the payment of dividends on any class of shares.
Finally, the accountant needs to see that the company is holding annual meetings and keeping minutes that disclose the payment of dividends and/or bonuses to shareholders /directors in keeping with the requirements of the B.C. Company’s Act.
The reason to ask for proof of payment to the Registrar of Companies is that if your company is no longer registered, then it is no longer in existence and there is no point in producing financial statements for a company that is no longer in existence.
The other reason that an accountant needs information on a corporation’s shareholders is for the Canada Revenue Agency.
When filing a corporate tax return, the schedule 50 requires that any person or corporation holding more than 10 per cent of the shares of a corporation be disclosed.
What is required is the name and the social insurance number of an individual, or if the shareholder is a corporation, the business number and the percentage of common or preferred shares held.
So the next time you wonder why you are being asked for such non-financial information, you can rest assured that it can only help the credibility of your financial statements.