» Frequently Asked Questions

Q: What's the difference between compiled, reviewed and audited financial statements?

A: Generally there are three types of of financial statement engagements. The most basic type is a compilation engagement. In this type of engagement the accountant receives the client's financial information and "compiles" it into a financial statement format. While the accountant is not required to verify the accuracy or completeness of the information presented, he must be satisfied that it is not false or misleading. A statement, called a Notice to Reader, is attached to the financial statements cautioning readers about the accountant's limited involvement.

Audit and review engagements are assurance engagements.

An audit provides a high level of assurance that the financial statements are free from material misstatement and that the financial statement format is in accordance with an accepted form of reporting criteria. The auditor performs sufficient work to allow a positive statement that the financial statements are presented fairly.

A review engagement provides only a moderate level of assurance. The accountant performs sufficient work to determine whether the financial statements are plausible. A review engagement report provides "negative assurance," stating that nothing has come to the accountant's attention which suggests that the financial statements are not materially in accordance with generally accepted accounting principles.

Q: I'm a waiter/hairdresser/cabdriver. How much of my tips do I have to declare on my income tax return?

A: All of them.

Every year someone working in the service industry asks me this question. There seems to be a common misconception that reported tips should be some percentage of the gross wages on the employee's T4 slip. In fact, an employee is required to keep track of all the tips received and report them as income for the year in which they are received.

Q: Should I incorporate my business?

A: There are several advantages to incorporating. Perhaps the most attractive reason is the opportunity to defer taxes. In many cases, taxes on business earnings are substantially lower when taxed within a corporation as opposed to being taxed as a proprietorship or partnership.

Of course, there are disadvantages to incorporating as well. In addition to initial incorporation costs, there are annual fees and legal costs to keep the corporation current. And then there is the annual costs associated with preparation of a corporation income tax return.

Deferring income taxes is contingent on being able to leave some of the profits within the company. If the shareholder intends to withdraw all of the profits for his or her own use, then the tax deferral benefit evaporates.