Annual Financial Statement Preparation – What Are My Options?

Posted on December 19th, 2025 in General Business

All corporations, for-profit and not-for-profit, must prepare annual financial statements to accompany their tax filings with Canada Revenue Agency. However, determining the “type” of financial statements you engage your external accountant to prepare will vary depending on your organization’s specific circumstances.

In the not-for-profit world the requirements for financial statement preparation are mandated by the enacted Not-for-profit Corporation’s Acts, but directors and shareholders of for-profit corporations have much more flexibility and freedom when making their annual decision on the type of financial statements they wish to have their external accountant prepare. For further reading, please see our article on financial statement requirements specifically for NFPOs –Do We Need an Audit? An Overview of Not-for-Profit Organizations and Their Financial Statement Requirements

There are three levels of work that can be performed on a set of annual financial statements. The level of work performed by the corporation’s external accountant will vary depending on the shareholder’s specific needs and if the financial statements will be relied upon or distributed to external users such as the bank or potential investors or purchasers. Generally, these external users will want to ensure sufficient work has been performed on the financial statements by your independent external accountant to obtain a level of confidence they are relying on accurate and complete information.

Compilation Engagement Report

A Compilation Engagement Report is generally prepared when there is no intention for the financial statements to be used or relied on by external parties (unless specifically allowed by your lenders/creditors). In these engagements, the external accountant simply takes the balances provided by the corporation’s management and formats them into standard financial statement form. Minimal work is done by the external accountant to ensure the figures are accurate, and there is no requirement that the balances are reported based on any specific set of accounting rules or framework, such as Accounting Standards for Private Enterprises (ASPE) or International Financial Reporting Standards (IFRS). Since limited work to determine accuracy is performed by the external accountant and no assurance is given, fees for preparation of a Compilation Engagement Report are the lowest compared to the other two options.

When it makes sense for a Compilation Engagement Report:

• No external users
• Typically needed for tax compliance filing
• Desire to keep costs low
• No assurance required on balances reported

Review Engagement Financial Statements

The second type of financial statements provides users with limited assurance that nothing has come to the attention of the external accountant that causes them to believe that the financial statements do not present fairly, in all material respects, the financial position and results of the corporation. The external accountant is able to provide this limited assurance conclusion as the work they perform is more involved than when preparing a Compilation. This includes applying analytical procedures on reported balances and making inquiries of management and others within the entity to corroborate the reported balances. Generally, Review Engagement financial statements are prepared when there will be external users relying on the financial statements. This may be in situations where the corporation has moderate external financing and must report to the lender to ensure any financial covenants of the lending agreement are met. Review Engagement financial statements may also be requested by non-active shareholders to help give them some comfort on the results being reported by management. Unlike a Compilation, Review Engagement financial statements must follow an agreed upon accounting framework, such as  ASPE, and will include additional disclosures not typically found in Compilations. These disclosures give information to the users of the statements and allow them to further assess the reported balances.  Additional disclosures would include a Statement of Cash Flows, as well as Notes to the Financial Statements. The additional procedures performed by the external accountant along with the additional financial statement disclosures makes a Review Engagement financial statement a more expensive option than a Compilation.

When it makes sense for Review Engagement Financial Statements:

• Statements to be distributed to external users
• Typically required with moderate debt levels
• Non-active shareholders
• Limited assurance on reported balances desired

Audited Financial Statements

An Audited Financial Statement provides users with an opinion that the financial statements present fairly, in all material respects, the financial position and results of the corporation for the period being reported on. In addition to the analytical procedures and inquiries of management performed in a Review Engagement, the external accountant plans and designs audit procedures to test areas where risks of material misstatements specific to the corporation and its industry are significant. Examples of these procedures would include physically inspecting assets and confirming reported balances with third-parties. The auditor also considers the design and implementation of the corporation’s internal controls in order to design audit procedures that are appropriate in the circumstances. Similar to Review Engagement Statements, Audited Financial Statements must follow a specific accounting framework. Due to the extensive work required to give an audit opinion, the fees for Audited Financial Statements are the highest of the three options.

Generally, owner-managed corporations do not require Audited Financial Statements unless requested by their lender.

When it makes sense for Audited Financial Statements:

• Statements to be distributed to external users
• Typically required with higher external debt levels
• Non-active shareholders
• Required by law or regulation

Determining the appropriate type of financial statement you need in any given year will depend on your specific circumstances. We recommend discussing this with your external accountant as early as possible to ensure appropriate planning steps are taken at/around your corporation’s year end date to allow for a cost-effective financial statement preparation process.