Notice to Reader vs Review vs Audit: Which Does Your Bank Want?

Which Financial Statement Do You Need? The Short Answer

Your accountant just asked whether you want a compilation, a review, or an audit for this year end. Your bank sent a letter asking for “financial statements.” Nobody explained the difference, and the price gap between the three is thousands of dollars. Here is the plain version. For most private companies in BC a compilation engagement, what everyone still calls a Notice to Reader, is enough. It covers your T2 filing, your own internal use and plenty of smaller credit applications. You move up a level only when someone outside your company needs comfort that the numbers hold up, and the level they need is written down somewhere you can go and read.

• Compilation if the statements are for you, your shareholders and CRA, and no lender has asked for more.
• Review engagement if a bank is giving you a real term loan or an operating line with covenants, or a minority investor wants some independent comfort.
• Audit if your loan agreement literally says the word “audited,” or you are a regulated entity, a public company, a society or charity whose bylaws or funders demand it, or you are heading into a sale or a big financing round.

The single most useful thing you can do before spending anything: pull out the loan agreement and read the exact wording. A covenant that says “annual financial statements” does not mean audited. A covenant that says “audited financial statements prepared by a licensed public accountant” absolutely does. Businesses pay for audits they never needed because nobody read the clause.  

Compilation (Notice to Reader) Explained: What CSRS 4200 Changed

A compilation is your accountant taking the information you provide and putting it into financial statement format. No opinion, no conclusion, no assurance. The accountant is not checking whether your revenue is real or your inventory exists. What changed is the paperwork around it. CSRS 4200 took effect for periods ending on or after December 14, 2021 and replaced the old Section 9200. The practical differences you will notice:

That basis of accounting note matters more than it sounds. It tells the reader whether you are on cash basis, a modified accrual basis, or full ASPE. And if the report says ASPE, the statements have to actually comply with ASPE in full, not “mostly.” One more thing worth knowing: if a third party such as a lender is going to use the compiled statements, your accountant has to confirm that the third party can request further information from you, or has already agreed to the basis of accounting. Some banks will not sign off on that, which is often the moment a compilation quietly stops being an option.  

Review Engagement: What “Limited Assurance” Actually Means

A review is the middle tier, done under CSRE 2400. Your accountant is not testing every transaction, but they are not just typing your numbers either. What actually happens in a review:

• The practitioner builds an understanding of your business, your industry and your accounting policies.
• Inquiry. Structured questions to you and your staff about how things are recorded and where judgment was applied.
• Analytical procedures. Ratios, trends, margins, and this year against last year. Anything that moves in a way the business does not explain gets flagged.
• Follow up work only where something looks like it could be materially wrong. That is where documents actually get pulled.

The conclusion is written in the negative: nothing came to the practitioner’s attention to suggest the statements are materially misstated. That wording is deliberate. It is comfort, not a guarantee, and it is exactly the level of comfort most commercial lenders are satisfied with. Reviews also catch things. A margin that slipped four points, a payable that never cleared, a shareholder loan that grew without anyone noticing. Plenty of owners get more value from the questions than from the report, and if that last one sounds familiar, the rules on shareholder loans and the one year rule are worth reading before your year end closes.  

Audit: When It’s Required and What the Auditor Tests

An audit gives reasonable assurance, the highest level available, and the report is a positive opinion: in our opinion, the statements present fairly, in all material respects. To get there, the auditor does substantially more:

• Sets materiality and assesses risk, including fraud risk, at the assertion level
• Obtains an understanding of your internal controls and may test them
• Sends confirmations directly to banks, customers and lawyers
• Attends inventory counts and physically observes assets
• Samples and vouches transactions back to supporting documents
• Evaluates going concern, estimates, and related party transactions
• Reports significant findings and control weaknesses to your board or shareholders

An audit also pulls your team in far more than the other two. Expect requests for schedules, reconciliations and support that run for weeks, not days. Worth separating two things that share a name: this kind of audit is a voluntary or contractual engagement performed by your accountant, and it has nothing to do with CRA knocking on the door. That is a different process entirely, and our comparison of a CRA audit versus a CRA review explains how that one works.  

Side by Side: Assurance Level, Procedures, Cost and Timeline

Costs swing a lot with complexity. Inventory, multiple entities, foreign operations, weak bookkeeping and first year engagements all push the number up, and our breakdown of what accounting services cost in Canada gives you the wider range to budget against. The cheapest way to reduce any of these fees is the same in all three cases: clean, reconciled books before the file lands on your accountant’s desk, which is most of what a professional bookkeeping service includes.  

What Lenders, Investors and CRA Actually Ask For

CRA. This is the one that surprises people. CRA does not require audited or reviewed statements from a private corporation. Your T2 is filed with GIFI schedules, and Schedule 141 simply asks which level of involvement your accountant had: auditor’s report, review engagement report, or compilation. A compilation is a perfectly normal answer. It does not raise a flag. If the corporate return itself is new territory, start with the difference between a T2 and a T1 return. Banks and credit unions. Reviewed statements are the common ask for standard term loans and renewing operating lines. Compilations are often accepted at smaller facility sizes, and audits show up on larger, syndicated or covenant heavy credit. Policies vary between institutions and even between account managers, so ask before you assume. Investors and buyers.

Angel and small private investors usually accept a review. Institutional investors, acquirers running real due diligence, and anything approaching a public market will want audited statements, often for two or three years back. If you are on the other side of that table, our financial due diligence checklist for buying a business shows what a buyer will actually open. BC corporations. Under the Business Corporations Act, a BC company must have an auditor unless every shareholder unanimously waives it, and that waiver needs to be renewed rather than signed once and forgotten.

Most private BC companies do exactly this every year without thinking about it, and where several shareholders are involved the waiver usually sits alongside the other terms in a shareholder agreement in BC. Societies and charities in BC. There is no automatic revenue threshold that forces an audit. What forces it is your bylaws or a funder’s grant agreement. Check both before you budget for one.  

How to Choose: A Decision Path for BC Business Owners

Run through these in order and stop at the first yes:

1. Does any agreement you have signed use the word “audited”? Then it is an audit.
2. Are you regulated, publicly accountable, or a society whose bylaws require an audit? Audit.
3. Is a lender, investor or major supplier extending real credit and asking for independent comfort? Review, unless they specifically said audited.
4. Are the statements for you, your shareholders and CRA only? Compilation.

Two practical notes. First, level up when the need appears, not before. Paying for an audit “in case” is one of the most common wasted expenses in owner managed business. Second, some lenders will accept a review as a first step and negotiate on the audit clause, especially if your covenant history is clean. It is worth asking. If you are not sure which tier your situation actually lands in, this is a fifteen minute conversation, not a project. The team at Maxpro Financials reads your lender and shareholder agreements with you, tells you the minimum level that satisfies everyone involved, and quotes a fixed fee for it. No pressure to buy a level you do not need.  

What Your Accountant Needs From You for Each Engagement

The list grows with the assurance level. For a compilation

• Year end trial balance or bookkeeping file
• Bank and credit card statements for the final month
• Loan statements and lease agreements
• List of accounts receivable and payable at year end
• Details of any shareholder transactions

For a review, add

• Bank reconciliations for every account
• Support for major balance sheet items
• Explanations for significant variances against last year
• Signed management representation letter
• Minute book and any new agreements

For an audit, add

• Full working paper support for every material balance
• Inventory count records and observation access
• Signed confirmation authorizations for banks, customers and lawyers
• Documentation of internal controls over key processes
• Board minutes and evidence supporting estimates and judgments

Getting these ready in advance is the difference between a smooth engagement and a bill with extra hours on it. Businesses that already produce monthly financial reports hand almost all of this over on day one, which is also why their lenders stop asking for interim numbers every quarter.  

FAQ: Notice to Reader, Review and Audit Engagements

Is a Notice to Reader the same thing as a compilation engagement?

Effectively yes. “Notice to Reader” is the retired name. Since CSRS 4200 the document is called a Compilation Engagement Report, but almost everyone still says NTR in conversation.

Can I use compiled statements to apply for a mortgage or business loan?

Sometimes, usually for smaller facilities. Larger loans and covenant based lending typically require at least a review. Ask the lender before your year end so you are not redoing the work.  

Does CRA prefer audited financial statements?

No. CRA accepts compiled statements with a T2 filing. Schedule 141 records the level of involvement and a compilation is a normal answer.  

Can my bookkeeper prepare these statements?

Your bookkeeper can prepare the underlying records. Compilation, review and audit reports must be issued by a CPA holding the appropriate public practice licence, which is part of the difference between a CPA and a tax accountant in Canada.  

How much more does a review cost than a compilation?

Expect roughly two to three times, depending on the state of your books and the complexity of your business. First year reviews cost more because prior year balances need work.  

Do I need to be independent of my accountant for a compilation?

Independence is not required for a compilation. It is required for both reviews and audits, which is why some firms cannot do your bookkeeping and your audit.  

What happens if I file a compilation but my loan agreement required a review?

That is technically a covenant breach. Most lenders will ask you to fix it, but it can give them the right to demand repayment. Fix it before your reporting deadline rather than after.  

Can I switch levels partway through a year?

Yes, but the earlier you decide the cheaper it is. Deciding on an audit after the year has closed makes inventory observation and some testing impossible or expensive to work around.

Will a review or audit find fraud?

Neither is designed to guarantee that. An audit is planned to consider fraud risk and is far more likely to catch it, but no engagement is a fraud investigation.  

How long are these statements valid to a lender?

Most lenders want statements within 90 to 120 days of year end. Interim statements are usually requested quarterly on top of that.  

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