A quality of earnings report is not an audit, a review, or any other engagement type defined by a Canadian assurance standard. That has a direct, useful consequence: firm size is not the constraint people assume it is.
Key takeaways
Treadstone Law’s explainer describes a quality of earnings report as “an independent analysis — typically performed by an accounting firm” — not a specific accounting firm of a specific size, and not a specific regulated engagement type. (treadstonelaw.ca) The same source is explicit about what it is not: distinct from an audit’s compliance focus and an internal review’s basic-accuracy check, “forward-looking in orientation” and tailored to one specific transaction rather than a general reporting obligation.
That distinction is the whole answer to the large-firm question. An audit is a defined engagement under Canadian auditing standards, with defined procedures and a defined opinion at the end. A quality of earnings report is not any of that — there is no Canadian assurance standard that names “quality of earnings” as an engagement type, which means there is no standard that requires a particular firm size, headcount, or internal review structure to perform one. What is actually required is a chartered professional accountant competent to test the specific claims in front of them.
Canada does have formal, size-linked rules for graduated assurance levels — they simply live in a different corner of the law than QoE work. The federal Not-for-profit Corporations Act ties the required engagement level directly to revenue: a soliciting corporation with revenues over $250,000 requires a full audit, one between $50,000 and $250,000 can pass a special resolution to require a review engagement instead of an audit, and one under $50,000 needs only “a compilation” if no public accountant is appointed at all. (ised-isde.canada.ca) Non-soliciting corporations follow the same logic at higher thresholds: a review engagement up to $1 million in revenue, an audit above it.
That grid exists because audits, reviews and compilations are formally defined engagement types under Canadian auditing and assurance standards, each with its own required procedures. A quality of earnings report sits outside that grid entirely — it is closer in shape to a scoped consulting or agreed-upon-procedures engagement, built around the specific questions a buyer or lender needs answered, than to any of the three tiers the NFP Act legislates. That is precisely why a QoE engagement can be scaled up or down to fit the deal, in a way an audit cannot.
A useful parallel, even though it comes from a different profession, is how CBV Institute structures its own practice standards for business valuators. Alongside the full Valuation Practice Standards (100/110/120/130) that govern a complete, credible conclusion of value, the same framework recognizes several narrower report types — Advisory Reports (210/220/230), Expert Reports (310/320/330, for “the quantum of financial gain/loss”), and Limited Critique Reports (410/420/430) — each scoped to a specific, narrower purpose rather than a full valuation. (cbvinstitute.com) The principle those tiers embody applies just as well to financial diligence generally: the depth of the engagement should match the specific question being answered, not default to the broadest, most expensive version because that is what a large firm happens to sell.
Scale of firm has no bearing on the substance treadstonelaw describes: normalizing earnings for one-time items and owner-specific expenses, testing revenue sustainability and customer concentration, reviewing working capital trends over time, and testing whatever adjustments the seller has proposed to profit. (treadstonelaw.ca) Every one of those tests is a documented procedure an individually qualified CPA can run — pulling twelve-to-thirty-six months of bank deposits against reported revenue, aging receivables, tracing add-backs to invoices — none of which requires a large firm’s headcount, only access to the underlying records and the time to work through them.
What does matter, regardless of firm size, is what the report is used for downstream. A separate treadstonelaw explainer on lender financing notes that positive findings can expand what a lender is willing to advance, while “significant adjustments or red flags” typically bring stricter conditions or reduced amounts, and that “commissioning this kind of report early in the diligence process can meaningfully affect financing outcomes.” (treadstonelaw.ca) A lender is reacting to what the report actually found, not to the size of the letterhead it arrived on — which is exactly why a scoped engagement from a smaller, independently qualified practitioner can carry the same weight as one from a national firm, provided it answers the same questions to the same standard.
A buyer evaluating a $2,900,000 acquisition is quoted a six-figure fee for a full-scope quality of earnings engagement from a national firm, with a four-week turnaround. Instead, the buyer engages a sole-practitioner CPA and scopes the work to the three questions that actually matter for this specific deal: normalizing the seller’s add-backs against underlying invoices, reconciling twenty-four months of bank deposits against reported revenue, and testing the working capital trend over the same period. That scoped engagement is smaller in every dimension — fee, timeline, headcount — than the national-firm proposal, but it tests exactly the claims treadstonelaw’s description of a QoE report identifies as the substance of the exercise. (treadstonelaw.ca) Because there is no Canadian standard requiring a specific engagement format or firm size for this kind of work, nothing about that scoping decision is a compromise on rigour — it is a scoping decision, no different from choosing a Limited Critique Report over a full valuation when the question in front of the practitioner does not require the broader one.
Related: the specific red flags a quality of earnings review is built to catch, what a notice-to-reader compilation does and does not prove, testing a seller’s forecast against its own track record
No. treadstonelaw’s explainer is explicit that it is distinct from an audit’s compliance focus, “forward-looking in orientation” and built around one transaction rather than a general reporting obligation. (treadstonelaw.ca) It also is not a formally defined engagement type under Canadian assurance standards the way an audit, review or compilation is — which is exactly why it can be scoped freely.
Either party can commission one, and treadstonelaw notes there is no fixed rule about who bears the cost — the primary audiences are lenders and buyers assessing a specific transaction. (treadstonelaw.ca)
Not necessarily. A scoped engagement answers fewer questions than a full-scope one, but the questions it does answer can be tested to the same rigour. The comparison is closer to CBV Institute’s own distinction between a full valuation and a narrower Limited Critique Report — each is fit for a different purpose, not a lesser version of the other. (cbvinstitute.com)
A short call is enough to work out what a right-sized quality of earnings review should actually cover.
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