Hourly Based Fee
Only Advice
Call today to arrange a meeting.
1 (902) 393-1248
P.O. Box 1201     Charlottetown, PE     C1A 7M8
T: (902) 393-1248 (direct)     CorkumFinancial@pei.sympatico.ca     www.CorkumFinancial.ca

Finding Hidden Income – Analysis of Self-Employment Income

The goal of this article is to identify the common ways that self-employment income may be understated, either deliberately or inadvertently. This article was written to assist professionals in determination of income for the Child Support Guidelines, but is equally relevant to other uses. In many cases, this is a simple process; in others, it can be quite complicated. Interpretation of personal tax returns and business financial statements is not necessarily an aptitude possessed by those who are involved in this process. Ideally, in complex situations, a professional accountant with a thorough understanding of the Child Support Guidelines will be involved. The goal of this article is to identify the common ways that self-employment income may be understated, either deliberately or inadvertently. If your are aware of these situations, you will hopefully be able to identify situations where further actions can be taken to obtain a fair income figure.

The following questions will be discussed:

  1. How do business owners understate their profits in order to reduce their income for child support and/or tax purposes? How can we find these types of adjustments?
  2. How much reliance can we place on financial statements?
  3. What special issues arise when evaluating farming or fishing income statements?
  4. What payments or personal benefits may be made to spouses and where are they on the financial statements?
  5. Paragraphs 9 and 12 relate to payments or benefits to related parties and capitalization of income. What additional comments may be appropriate in these areas to ensure fair calculation of income?

1. How do business owners understate their profits in order to reduce their income for child support and/or tax purposes? How can we find these types of adjustments?

There are two approaches to “hiding” income – legally and illegally. It is less likely that an illegal approach is being used if the financial statements are reviewed or audited by a professional accountant. However, this is not a guarantee. Typical situations to watch for include the following:

  • Illegally under-reporting sales transactions or overstating expenses.

    This is the infamous underground economy. Under-reported sales are typically apparent where businesses insist on collecting cash instead of cheques for sales of goods and services and do not issue invoices. This theory is that these transactions will not be found by the Canada Revenue Agency. There are a few clues available which may detect this type of activity, as discussed later.

    Overstating expenses may include charging many personal expenses through the business, or artificially inflating expenses with false amounts. These items are easier to find by the Canada Revenue Agency because they have access to the detailed books and invoices. For Guideline income purposes, we may only have access to the financial statements.

  • Aggressively, but legally, claiming expenses to reduce taxable income.

    This situation typically arises when a person can make a case that an amount is a business expense versus a personal expense. An example would be an entertainment expense where a taxpayer argues the amount was required to increase future business opportunities, but there is no specific evidence that it was either a necessary expense or that it resulted in sales increases. Paying high wages to employed family members is another possibility.

  • Making short-term business decisions to temporarily defer income.

    Business owners can often affect the timing of their income. While possible in most businesses, this practice is particularly used by farmers and fishermen who elect to report income on the cash basis and by service businesses that can delay their invoicing.

    An example would be where the business owner has confirmed a major sale, but has requested the customer to postpone the transaction until next year, resulting in lower sales and lower income for the current year. Although this will result in higher amounts in the following year, the child or spousal support claims may be settled by that time.

  • Maximizing use of legitimate tax deductions.

    Some individuals are more aggressive at using tax deductions than others. For example, persons who use their vehicles for business purposes may claim expenses for these vehicles. Also, an office within a principal residence may be claimed to the extent that the expenses are reasonable. Other similar situations are legally allowed, but care is required because allocations between personal and business use may not always be reasonable.

    In addition, certain deductions may not require an extra cash outlay by the spouse. An office-in-home can be used to reduce taxable income, but should it reduce Guideline income? The deduction may not reflect an increase in household costs, but rather an allocation of costs that would be incurred whether or not the house was used for work.

Finding the income

To find these types of adjustments, the process starts with a careful review of the underlying financial information looking for unusual amounts, or amounts which result in unreasonable ratios within a financial report. This is an important reason to obtain three years of information, and looking at each year for inconsistencies. A good relationship with an experienced accountant will help you in these situations. Obviously, you should interview your client for leads, since most parents know a lot about their spouse’s business practices. You should ask yourself the following questions after reviewing the financial statements:

  1. Does the spouse make enough income to pay normal everyday expenses?

    If all sales transactions are not being reported, you may find that the income statement consistently reports a very low amount. In this case, you must question how that person can live on such a low income. Of course, in legitimate situations, an individual may be living off accumulated investments from past successes in which case there should be investment income reported on his or her personal tax return. They may be receiving support from relatives, or there may be some other reasonable explanation.

    When looking at net income for this purpose, there are three common adjustments you must make to convert unincorporated business income to cash flow available to the owner. A cash flow statement (also called a statement of changes in financial position) will readily provide this information, if available. Expenses typically include depreciation or amortization, which is a figure deducted for expiry of the useful life of assets used in the business. It may be a deduction for wear and tear on equipment and buildings, or the write-off of goodwill or franchise costs over their estimated useful life, for example. This expense does not use cash, so it should be added back to income to estimate cash flow available to the business owner.

    On the other hand, if capital assets are bought during the year, cash is used but not reported on the income statement. Purchases of capital assets will increase the carrying value of these assets on the balance sheet, but should not affect the income statement other than through depreciation or amortization as discussed above. Likewise bank loan proceeds and repayments are not reported on the income statement. To determine how much income the owner had to live on, these factors (and possibly others) must be considered.

    By way of example:

    Year 1 Year 2 Year 3
    Income reported on income statement $10,000 $10,000 $10,000
    Add back depreciation $1,000 $1,000 $1,000
    Deduct cost of new assets $(20,000) $(10,000) Nil
    Deduct loan principal payments $(1,000) $(1,000) $(1,000)
    Cash flow for living purposes $(10,000) Nil $10,000

    In this case, the same income each year reports three differing results. It also appears that the person is well below the poverty line, on average. You need to look further to see how this person is supporting their household.

  2. Are there big changes in amounts on the income statement from one year to the next? If so, why have these amounts changed?

    This question is particularly important with respect to those items that are discretionary. Increases in such categories as repairs and maintenance, vehicle costs, office expenses, miscellaneous expenses, and similar items may be increased this year for benefits that will occur in the future. Rather than waiting until next year, a major repair or renovation may be done now; an advance supply of office materials may be purchased; advertising may be prepaid, etc. These practices will artificially reduce income this year and be offset by an increase in the future.

    Accountants insist that management carefully scrutinize accounts receivable and inventory to ensure that they are not over valued. Spouses expecting to be involved in child support settlements may take advantage of this.

    An increase in bad debt expense may reflect an estimate by management that certain accounts receivable are uncollectable. If management is aggressive with these estimates, bad debts may be expensed this year, but actually collected and included in income next year. The result is to artificially reduce Guideline (and taxable) income this year with an offsetting increase next year after the child support claim is established. Consistent aggressive estimates could defer income for several years.

    Accountants also want to ensure that no obsolete inventory items are still given a value on the books of the company. To reduce income, a business person may report higher obsolescence on inventory than usual. This, of course, would show up as additional profit at a later date.

    This kind of inventory adjustment is not easy to find. It would result in a lower gross profit margin (see the income statement) on sales this year compared to recent years, but some business profit margins fluctuate on a year-to-year basis for a variety of other reasons. Other than by enquiry of management, your options include reviewing three years’ of financial data and looking for major declines in inventory balances on the balance sheet (without a similar reduction in sales activity) and significant changes in gross profit percentages on the income statement.

  3. Have wages increased substantially, or have bonuses been declared?

    One common legitimate tax planning device is to declare a bonus to the owner at the end of the fiscal year. This bonus becomes an immediate deduction on the financial statements and for tax purposes. However, it is not included in personal income until it is actually paid, which may be up to six months later and in a subsequent calendar year. Consequently, business and personal income is low this year, but the following year, personal income will be higher by the amount of the bonus.

    Also, look for management fees and other amounts that may be recorded as owing or paid to a related party, which need to be assessed for reasonableness and may affect timing of income.

  4. Has capital cost allowance (also called depreciation or amortization) been claimed?

    If financial statements are not prepared in accordance with generally accepted accounting principles, or if they are prepared solely for income tax purposes, then capital cost allowance (CCA) may be claimed one year and not the next. This is often done to manipulate income for tax purposes, and is permitted under the tax legislation. While CCA on real estate is eliminated for Guideline purposes in accordance with Schedule III regardless, changes to other CCA claims may result in unreasonable fluctuations in income.

  5. Other questions to ask

    Sample questions possibly arising on a review of financal statements include:

    • Why has inventory increased so much? (Was spouse going to argue a need for cash under the Schedule III provisions for capitalization of income?)
    • Where did the shareholder obtain the cash to lend to the company (where there is an increase in advances from shareholders)?
    • Why did the gross profit margin on the income statement decrease significantly? (Is spouse understating sales or overstating purchases?)
    • Why did administrative wages increase? (Were there related party wages?)
    • Why did office supplies (or other expenses) rise? (Could it be that some expenses were prepaid or capital assets purchased which should not be expensed?).
    • Why is there a large cash balance on the balance sheet? (Does the cash represent underutilized assets?).
    • Why are prepaid expenses so high? (If the spouse is arguing a shortage of cash, maybe expenses were paid early.)
    • Why are there significant changes in the intercompany loans; what is the degree of trading between related companies; and, are such sales at fair prices?(Do you have the financial reports for all related companies?).
    • To whom were any management fees paid? (If to a related company, this may artifically reduce this company’s income).
    • Are there significant increases in bad debts and wages, which may imply some manipulation of discretionary expenses?
    • What are the reasons for significant changes in sales volume?

2. How much reliance can we place on financial statements?

Financial statements may be prepared by the business owner, his or her employees, or possibly even by a friend of the owner. In these cases, no overall assessment of reliability is possible unless you know the capabilities and ethics of the preparer. Where accountants with a professional degree (e.g. CA, CMA, CGA) prepare financial statements, one of three reports should be attached to those financial statements (sample reports are in Appendix 1):

  • Notice to Reader

    This report is attached to financial statements that are compiled by the accountant, but may not be checked for completeness and accuracy. These reports need not be prepared in accordance with generally accepted accounting principles, and are typically prepared for income tax purposes only.

  • Review Engagement Report

    These financial statements are reviewed, but not audited, by the professional accountant and the financial statements are supposed to be prepared in accordance with the generally accepted accounting principles, as set out by the Chartered Professional Accountants Canada. Normally, these financial statements will include a balance sheet, statement of income and a statement of changes in financial position (cash flow).

  • Audit Report

    These financial statements are audited, and will be prepared in accordance with generally accepted accounting principles as well. An audit is still not a 100% guarantee of accuracy and completeness, although much more reliable than a review or compilation.

With respect to the above types of reports, the audit is the most reliable, followed by the review. You should exercise the most care when you see a Notice to Reader report. These are not necessarily prepared according to generally accepted accounting principles and may not provide adequate disclosure for you to identify certain important issues. For example, generally accepted accounting principles require that transactions with related parties (except for wages) be reported separately from those with other parties. You should read the financial statements (together with the attached notes) to identify and assess the reasonableness of all transactions.

3. What special issues arise when evaluating farming or fishing income statements?

First of all, these two industries are particularly prone to major fluctuations in income from year to year, and the pattern of income considerations of Section 17 of the Child Support Guidelines should be reviewed. In addition, farming and fishing businesses are eligible to use either the cash method or accrual method of accounting. All other businesses are required to use the accrual method (with certain administrative exceptions where either method would result in practically the same results).

When the cash method is used, income is reported in the fiscal period that the business actually receives the cash, and expenses are deducted in the year that they are paid. In contrast, under the accrual method, income must be reported in the fiscal period that it is earned, regardless of when it is received. In other words, sales on credit terms are recorded as income and taxed, even though the cash has not yet been received. Similarly, expenses are deducted in the fiscal period that they are incurred, whether or not they are paid in that same period.

For example, let us assume that a sale for $10,000 is made on December 15, 1997, with the cash collection occurring on January 15, 1998; the business uses a fiscal year end of December 31. Under the cash basis, the sale would not be reported until 1998 whereas under the accrual method it would be included in income in 1997.

When reviewing financial statements for farmers and fishermen, you will need to identify which method is used. The method may or may not be noted, so you may need to enquire.

Under the cash basis, inventory is not included when calculating income. For example, if $10,000 is paid for livestock purchases during the year, and these livestock are still on hand at the end of the year, no adjustment need be added back to income. The full cost of the livestock purchases is deductible (subject to one exception noted later). Under the accrual method, the cost of this livestock would be removed as an expense because it still represents an asset to the business; the cost cannot be deducted until the inventory’s eventual disposition.

As you can see, two farming or fishing businesses operating with identical results but using different reporting methods could show substantially different income figures. Over many years, these year to year fluctuations should average out. However, the numbers can be manipulated significantly for planning purposes over two or three years and must be examined carefully to determine fair Guideline income.

Typical things to watch for will include the following:

  1. Inventory adjustments

    Even on a cash basis, farmers and fishermen have the option of reporting inventory if they desire. Fishermen may inventory nets and traps, but if they do so, must do so consistently from year to year. On the other hand, farmers have both an optional inventory election and a mandatory inventory adjustment that they may consider, which need not be used consistently.

    When a cash basis farmer experiences a loss for the year, the value of purchased inventory must be added back to income until this loss is reduced to nil. In addition, a farmer may include an inventory amount in income on a voluntary basis up to the fair market value of all inventory. This may be done for various tax planning reasons. These inventory additions to income become automatic deductions in the following year.

    The purpose of this article is not to explain these detailed income tax rules, and further information on the related calculations can be obtained from the Canada Revenue Agency publications. However, you should be aware that these inventory adjustments may be made, and when they are used to increase farming income in one year, they have the opposite effect in the following year.

    When evaluating Guideline income, unrealistic fluctuations may occur because:

    • Inventory inclusions were made this year, and not in prior years, thereby increasing the income above a fair amount;
    • Inventory adjustments were used in the prior year, but were not used or were lower this year. As a result, the current year’s income is lower than would be an appropriate amount for Guideline purposes.

    Your objective will be to review the farming statement to identify whether these adjustments have been made, determine the effect over the three year period which you are examining, and adjust them appropriately. Unfortunately, the appropriate adjustment may not be determinable without knowing the full value of inventory on hand for each year. Not only is this information not required disclosure for Guideline purposes, many farmers would have difficulty establishing a fair inventory estimate on an after-the-fact basis. However, be aware that farmers who participate in certain agricultural insurance programs are required to report their inventory (as well as accounts receivable and accounts payable) on an annual basis to the insuring agencies.

    An increase in purchased inventory on hand at the end of each year will require the farmer to use additional cash. It would seem appropriate to take this into consideration when determining Guideline income. On the other hand, if the size of the farming operation remains relatively consistent from year-to-year with respect to inventory, these inventory adjustments should not be allowed to affect Guideline income.

  2. Income and expense fluctuations

    As noted above, cash basis businesses do not report sales proceeds until actually received. It is a common farming practice to defer sales proceeds until the following fiscal year in order to postpone income taxes. If this is done consistently for the same proportion of income each year, it should not significantly effect Guideline income when looking at a three year time frame. However, an examination of income fluctuations by product line will need to be considered, together with explanations for any changes. Obviously, in farming and fishing, sales will fluctuate dramatically from year-to-year depending upon crop quality, weather conditions, fishing quota changes, pricing fluctuations, crop rotation, etc.

    Changes in expenses from one year to the next should be examined and explanations rationalized. In a farming situation, purchase of livestock, fertilizer, feed and supplies may increase or decrease for several reasons:

    • Changes in inventory on hand as discussed above;
    • Change in size of the farming operation;
    • Change in focus of the farming business, eg. an increase in livestock farming compared to field crops.

    The other change that may occur is capital cost allowance as discussed earlier. CCA may be reported on line 9936 on the farming statement, but you should look at the supporting schedule to determine whether CCA was claimed on all or only some of the assets, and to identify CCA on real estate to be eliminated for Guideline purposes in accordance with Schedule III.

  3. Allocation of personal and business expenses

    Particularly within the farming industry, and to a lesser extent for fishing businesses, certain expenses may be shared between personal and business uses. The most common for both businesses will be motor vehicle expenses, where a vehicle is used for business as well as for personal purposes. However, property tax, electricity, heating fuel, and telephone bills may also be received by the farmer or fisherman as one invoice, requiring an allocation between personal and business uses. There appears to be a natural tendency to omit or understate the personal use portion, and these items should be carefully reviewed. Section 21(d)(ii) of the Guidelines will allow you to request details of this information. Such personal allocations would be covered by the clause, “other payments or benefits paid to, or on behalf of, persons or corporations with whom the spouse does not deal at arm’s length;”. Payment of a personal utility bill would certainly be of benefit if paid by the business on behalf of the spouse.

  4. Other farming and fishing issues

    Other farming and fishing issues will be similar to most other businesses and are covered elsewhere in this paper.

4. What payments or personal benefits may be made to spouses and where are they on the financial statements?

Section 21(d) and (e) of the Guidelines oblige the spouse to provide details of all of this information. Most of these items are required to be reported on the Canada Revenue Agency information slips for tax purposes (T4 or T4A Supplementaries) although they are often omitted. A review of business financial statements may or may not provide clues to these benefits. Typical benefits include the following:

  • Personal use of company automobile;
  • Company paid group life insurance premiums;
  • Company paid personal tax return preparation or financial counselling fees;
  • Interest-free or low interest loans;
  • Gifts, prizes and scholarships;
  • Personal use of company-owned accommodations, such as a house, condominium or apartment;
  • Acquisition of company inventory or supplies.

If these benefits are reported as required by Canada Customs and Revenue Agency, they would already be included in taxable income and in Guideline income. If they are not reported, their fair value should be determined and added to Guideline income. Some guidance on the valuation and taxation of these benefits can be obtained from the Canada Revenue Agency “Employer’s Guide to Payroll Deductions – Taxable Benefits” and Interpretation Bulletin IT-470 Employee Fringe Benefits.

The availability of a company automobile to an individual for personal use is quite common. The Canada Revenue Agency has a number of complex rules to determine its value for tax purposes. You should review the aforementioned guide to determine the actual calculation, but briefly, the general rule for most people (as of 1998) is as follows:

  • Leased vehicles – 2/3 of the cost of the lease plus an annual prescribed rate per personal kilometre driven
  • Owned vehicles – 2% per month of the original cost of the automobile, plus the annual prescribed rate per kilometre for personal driving

Instead of using the prescribed rate per kilometre, 1/3 of the cost of the lease or 1% per month of the original cost may be used if the driver so elects and if business or employment use exceeds 50%.

These rates are changed under various circumstances, such as with lump sum lease payments, if the automobile is used at least 50% of the time for business purposes, or for automobile salespersons. If you agree that the Canada Revenue Agency rules are the best determination of fair value for Guideline purposes, you should study the tax rules further.

In certain cases, a spouse is aware that a business is paying certain personal payments, such as mortgage payments, or that business supplies and inventory are being used for personal purposes. Prior to making an adjustment to Guideline income, it is important to determine whether such payments have already been charged against the owner. For example, certain personal payments might be paid through the business but deducted from the individual’s pay cheque. In other cases, business owners may have loaned money to their company, and personal payments and expenses are used to repay that loan to the shareholder. In these cases, no adjustment to Guideline income would be appropriate. On the other hand, if something like personal mortgage payments are being paid and expensed as a tax deduction by the business, adjustments are certainly required.

In some cases, travel expenses charged to the business may include expenses related to family members who are not required to accompany the owner on the trip for business purposes. These amounts represent personal expenses and should not be deducted as an expense to the company. If they are deducted, they should be reported by the individual as income for tax purposes, or an adjustment should be made for determination of Guideline income.

5. Paragraphs 9 and 12 relate to payments or benefits to related parties and capitalization of income. What additional comments may be appropriate in these areas to ensure fair calculation of income?

  • Paragraph 12 of Schedule III states the following:”Where the spouse earns income through a partnership or sole proprietorship, deduct any amount included in income that is properly required by the partnership or sole proprietorship for purposes of capitalization.”Capitalization of a business can be defined as the cash required to establish and operate the business. “Working capital” is required to provide the company with resources to operate on a day-today basis, and this capital can come from several sources. It may be borrowed, contributed by the owner, or retained from operating profits. In a new business, or in a growing business, you will typically see purchase of new equipment, increasing accounts receivable balances owing from customers, and rising inventory. All of these situations create a need for cash, which must come from the aforementioned sources. When a business reports a profit for income tax purposes, this profit may not be available as cash flow to the owner because of these needs. For example, a business that makes $10,000 profit may not have any cash because they have not collected their sales proceeds from a customer yet.A review of the balance sheet and statement of changes in financial position (cash flow statement) will be useful in evaluating this situation. Looking at the balance sheet, an increase in assets does not necessarily mean that profits were required to further capitalize the business. If liabilities increased by a similar amount, the additional cash required was generated by taking on additional debt. If the cash flow statement is produced, it will demonstrate the sources and uses of cash through the year and will greatly assist in making this evaluation.It is normal business practice to obtain a line of credit from a bank to finance increases in accounts receivable and inventory and to borrow using term loans to finance purchases of capital assets (up to certain limits, as dictated by the lenders). An individual could use cash to buy capital assets or to finance increases in other assets deliberately, allowing him or her to use paragraph 12 to reduce Guideline income. You must consider whether loan facilities were available prior to making an adjustment under paragraph 12. The key issue here is to deduct any amount included in income that is properly required for purposes of capitalization.
  • Paragraph 9 states the following:”Where the spouse’s net self-employment income is determined by deducting an amount for salaries, benefits, wages or management fees, or other payments, paid to or on behalf of persons with whom
    the spouse does not deal at arm’s length, include that amount, unless the spouse establishes that the payments were necessary to earn the self-employment income and were reasonable in the
    circumstances.”You must be careful to interpret the phrases “on behalf of” and “does not deal at arm’s length” correctly. This paragraph indicates that all payments to or on behalf of related persons will be added back to Guideline income unless the amounts can be established as necessary and reasonable. The words “on behalf of” are important words. Payments made to relatives, friends, children, or other corporations may be made for the benefit of the parent. Your request for information should be clear that you are requesting any details in this respect.The definition of terms in Section 15 – 21 of the Guidelines are the same as in the Income Tax Act [per Guideline Section 2(2)]. “Not at arm’s length” and “related” have the same meaning, and include the following:

    1. Individuals connected by blood relationship, marriage or adoption.
      • Blood relationship includes a child or other direct line descendent (e.g., a grandchild), or brother or sister. A cousin, niece, nephew, aunt or uncle are not normally included. However, the definition may include a person of whom the taxpayer is a natural parent, as well as a person who is wholly dependent on the individual for support and is under the individual’s custody and control, in law or in fact (or, if not now, was so immediately before such person reached the age of 19). Not included are a foster child in respect of whom the foster parents receive support payments from an agency responsible for the child’s care. However, a stepchild, an adopted child, a son-in-law or daughter-in-law and a step son-in-law or a step daughter-in-law are related.
      • Two persons are connected by marriage if one person is the spouse of the other person or is a brother-in-law or sister-in-law. This connection exists even after death of the spouse. Spouse includes a common law partner. A common law partner is basically defined as a person who cohabits with the individual in a conjugal relationship and either
        • has done so for a full 12 month time period, or
        • the couple has a natural or adopted child
      • Adoption means legal adoption in law or in fact and may be an adopted child, grandchild, parent, etc. of the other person.
    2. a member of a related group that controls the corporation, plus any person related to these persons or corporations.

These definitions of relationships are defined in Section 251 of the Income Tax Act and related Interpretation Bulletins (Interpretation Bulletins IT-419 and IT-513 in particular). You will also note that unrelated persons may be deemed to be dealing with each other at arm’s length based on the facts of a given situation.

With such an extensive list included in this definition, you will want to be sure you obtain the appropriate interpretation. Without proper disclosures, a deliberate reduction in Guideline income by allocations of income to related parties may go unchallenged.

One could argue that some payments to related employees are reasonable for the work done, but that an additional person would not be hired to replace this person if they left. If an existing employee could accomplish the same work, but a related person is hired to justify income splitting for tax purposes, this may not meet the “necessary” requirement. The other focus will be whether the payment is reasonable for the amount of work performed, and this is a judgement based on industry averages for similar work under similar circumstances. However, a key issue here is the fact that these amounts are added back to income unless the spouse establishes their necessity and reasonableness, which puts the onus on the spouse to justify those amounts.

SAMPLE ACCOUNTANTS’ REPORTS

AUDITOR’S REPORT

To the Shareholders of ____________________________

I have audited the balance sheet of ____________________________ as at ____________________________, 20____ and the statements of income, retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the company’s management. My responsibility is to express an opinion on these financial statements based on my audit.

I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In my opinion, these financial statements present fairly, in all material respects, the financial position of the company as at ____________________________, 20____ and the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting principles.

REVIEW ENGAGEMENT REPORT

To [person engaging the public accountant]:

I have reviewed the balance sheet of Client Limited as at ____________________________, 20____ and the statements of income, retained earnings and cash flows for the year then ended. My review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to me by the company.

A review does not constitute an audit and, consequently, I do not express an audit opinion on these financial statements.

Based on my review, nothing has come to my attention that causes me to believe that these financial statements are not, in all material respects, in accordance with generally accepted accounting
principles.

NOTICE TO READER

On the basis of information provided by management, we have compiled the balance sheet of [Client Limited] as at ____________________________, 20_____ and the statement of income and retained earnings for the year then ended. We have not performed an audit or a review engagement in respect of these financial statements and, accordingly, we express no assurance thereon. Readers are cautioned that these statements may not be appropriate for their purposes.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum