Banka: Demystifying an accountant’s business engagement letter

Once you meet with the accountant, you will be asked to sign an engagement letter usually before any work commences on the file.

As the owner of a corporation you will need to find an accountant to prepare your year end financial statements and corporate tax returns.

Once you meet with the accountant, you will be asked to sign an engagement letter usually before any work commences on the file.

This is a working agreement between you and the accountant and attempts to explain the nature of the work to be performed and outlines who will be responsible for what.

An accountant can perform an accounting engagement which means that you require a ‘notice to reader,’ also sometimes called a ‘compilation,’ which would normally be for tax purposes.

In this type of engagement, the accountant does not give an opinion on the accuracy of the information contained in the financial statements.

The other two types of engagements are a review and an audit and these are considered to be ‘assurance’ engagements, in that the accountant needs to make some sort of statement as to the quality and accuracy of information contained in the client’s financial statements. The review engagement requires negative assurance indicating that nothing has come to the accountant’s attention that might be out of the ordinary.

The audit requires positive assurance that the financial statements present fairly the results of the operations of the corporation.

The engagement letter formats are all slightly different. For a notice to reader, the standard to follow can be found in section 9200 of the CICA handbook.

The CICA handbook is published by the Canadian Institute of Chartered Accountants and contains the Canadian Accounting and Auditing standards that all designated accountants must adhere to, regardless of the educational degree obtained.

The review engagement letter standard to follow is contained in the CICA handbook in section 8200—Public Accountants Review of the Financial Statements—Agreeing the Terms of the Engagement.

The assurance engagement letter standard to follow is contained in Canadian Auditing Standards (CAS) 210—Agreeing the Terms of Audit Engagements.

These standards for audits and review engagements have recently changed due to the adoption of International Financial Reporting Standards (IFRS) that came into effect Dec. 14, 2010.

Audits now follow Canadian Auditing Standards (CAS) instead of Generally Accepted Auditing Standards (GAAS).

Review standards are now called Accounting Standards for Private Enterprises (ASPE).

I want to review the  ‘notice to reader’ version of the engagement letter.

The engagement letter is made up of several sections. The first part is who to address the letter to. It should be addressed to the chief executive officer or to the person with the authority to sign on behalf of the company.

The first section explains the objective and the scope of the work to be performed. It states that financial statements will be compiled and that no audit or review will be performed.

An example of the report that can be expected to be attached to the financial statements is included in this section.

The next section outlines the responsibilities of management or those persons responsible for the governance of the corporation.

The important points to note here is that you are agreeing that you are responsible for the numbers in the financial statements and you are responsible for your system of internal control to detect any fraud or error in your corporation—basically that you are responsible for the condition that your company is in.

This section also states that you will provide complete and accurate information necessary to compile the statements.

This type of financial statement does not necessarily need to comply with Canadian Generally Accepted Accounting Principles (GAAP) and may not have all the disclosures that would be required for all the types of persons who might need to look a financial statements, such as potential buyers, investors, or creditors.

On the other hand, we as accountants need to make sure and move items around or provide disclosure by way of notes so that the financial statements are not misleading for the purpose that they are required which is usually to file taxes.

The next section indicates the work that will be performed and may include items such as performing necessary bookkeeping and preparation of the federal and provincial tax returns.

There may be a discussion about the preparation of working papers and who has ownership of those working papers.

There may be paragraphs related to fees, interest charges, disbursements, confidentiality of information, proceeds of crime disclosure requirements, privacy act disclosure requirements.

This engagement letter does not need to be renewed every year if the conditions of the engagement remain the same, but I find that it is better to renew the document to bring the responsibilities of each party back to top of mind.

To guard against default if a corporation winds up or becomes insolvent, many accountants include the principle shareholder in the wording of this engagement so that the corporation and the shareholder both become accountable.

Kelowna Capital News

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