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Audit and Review Engagement Requirements for CNCA Corporations

The Canada Not-for-profit Corporations Act divides corporations into soliciting and non-soliciting corporations, depending on whether they receive more than $10,000 in funding from public sources in the corporation's current fiscal year or its two previous fiscal years. The default rule for both soliciting and non-soliciting corporations is that they must appoint a public accountant and audit their annual financial statements each fiscal year. However, in recognition that, for smaller not-for-profit corporations, the costs of appointing a public accountant and auditing its financial statements may outweigh the incremental benefits, the Act and regulations provide for various exemptions. These exemptions depend on the type of corporation (soliciting or non-soliciting), the aggregate revenue of the corporation in its most recent fiscal periods and annual membership approval.

Also, the Director appointed under the Act has the discretion to, in effect, increase the applicable revenue thresholds to a particular soliciting corporation, so that the corporation qualifies to (a) waive the appointment of a public accountant and (b) opt for (i) a compilation rather than a review engagement or (ii) a review engagement rather than an audit, despite its annual revenues exceeding the thresholds set forth below.

Here is a summary of the rules applicable to non-soliciting and soliciting corporations, respectively.

A. Non-Soliciting Corporations

1. Annual Revenues ("AR") for the Previous Fiscal Year ("FY") less than $1 million

A Public Accountant ("PA") is not required if the members entitled to vote at the annual meeting unanimously consent. To be effective, this waiver must be made annually. If a PA is appointed, the corporation must have a review engagement unless the members pass a special resolution (i.e., requiring not less than two-thirds of the votes cast in favour) requiring an audit.

An auditor expresses its professional opinion on the accuracy and completeness of the financial statements and that they were prepared in accordance with generally accepted accounting principles. A review engagement involves a lesser level of review than an audit but more than in a compilation. Accordingly, an audit of a corporation's financial statements is typically more expensive for the corporation than a review engagement.

If the members waive the appointment of a PA, the corporation would only have a compilation of its financial statements. In a compilation, no PA expresses an opinion on the financial statements and, if an external accounting firm prepares the financial statements, they are accompanied by a notice-to-reader warning of the firm's limited engagement. Accordingly, a compilation is generally less expensive for the corporation than engaging a PA for an audit or review engagement.

2. AR for the Previous Fiscal Year greater than $1 million

Appointment of a PA and an audit are mandatory.

B. Soliciting Corporations

1. AR for the Previous Fiscal Year less than $50,000

PA is not required if the members entitled to vote at the annual meeting unanimously consent. To be effective, this waiver must be made annually. If a PA is appointed, the corporation must have a review engagement unless the members pass an ordinary resolution (i.e., requiring not less than a simple majority in favour) requiring an audit. If the members waive the appointment of a PA, the corporation would only have a compilation of its financial statements. In a compilation, no PA expresses an opinion on the financial statements and, if an external accounting firm prepares the financial statements, they are accompanied by a notice-to-reader warning of the firm's limited engagement. Accordingly, a compilation is generally less expensive for the corporation than engaging a PA for an audit or review engagement.

2. AR for the Previous Fiscal Year greater than $50,000 but less than $250,000

Appointment of PA is mandatory (unless Director deems that AR is $50,000 or less). An audit may be waived in favour of a review engagement by special resolution of the members (i.e., not less than 2/3rds voting in favour). An auditor expresses its professional opinion on the accuracy and completeness of the financial statements and that they were prepared in accordance with generally accepted accounting principles. A review engagement involves a lesser level of review than an audit but more than in a compilation. Accordingly, an audit of a corporation's financial statements is typically more expensive for the corporation than a review engagement.

3. AR for the Previous Fiscal Year greater than $250,000

Appointment of PA is mandatory (unless Director deems that AR is $50,000 or less). An audit is mandatory.

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