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Today, we’ll answer various questions regarding bookkeeping, preparations, compilations, and review engagement.
Q: Should I issue management letters for preparation, compilation, or review engagements?
A: While not required, it is advisable to provide management letters when performing SSARS services. Why? Two reasons: (1) It’s a way to add value to the engagement, and (2) it’s a way to protect yourself from potential litigation. Clients do sometimes sue CPAs in these so-called “lower risk” engagements. If we see control weaknesses (while performing a compilation for example), we should communicate those, even though standards don’t require it. Then, if theft occurs in that area and you are later sued regarding the fraud, you have a defense. If you don’t issue a management letter, at least send an email regarding the issues noted and retain a copy.
Q: Why obtain an engagement letter for nonattest services such as bookkeeping and tax (standards don’t require it)?
A: In all engagements, we want to state exactly what we are doing. Why? So, it is obvious what the client has hired us to do–and what they have not hired us to do. If a client says, “I told you to do my monthly bookkeeping and to file my property tax returns,” but you have no recollection of being asked to perform the latter, you need an engagement letter that specifies monthly bookkeeping (and nothing else).
Q: Should I say–in a bookkeeping engagement letter–the service is not designed to prevent fraud?
A: We should obtain a signed engagement letter for bookkeeping services, even though not required by standards. And yes, by all means, include a statement that the bookkeeping service is not designed to detect or prevent fraud.
Q: If I note fraud while performing a bookkeeping, preparation, compilation, or review engagement, should I report it to the appropriate levels of management?
A: Standards require this communication for review engagements. I would do likewise for the other services.
Q: Am I required to be independent if I perform bookkeeping and preparation services?
A: No, since both are nonattest services.
Q: If I create financial statements as a byproduct of an 1120 tax return, am I subject to AR-C 70 Preparation of Financial Statements?
A: No, you are only subject to AR-C 70 if you are engaged to prepare financial statements.
Q: If I perform bookkeeping services in a cloud-based accounting package such as QuickBooks, am I subject to AR-C 70?
A: It depends. Yes, if you are engaged to prepare financial statements. No, if you were not engaged to prepare financial statements. Who “pushes the button” to print the financial statements has no bearing on the applicability of AR-C 70.
Q: Am I required to have a signed engagement letter for all preparation, compilation, and review engagements?
A: Yes.
Q: Can I act as a controller-for-hire and perform a compilation engagement?
A: Yes, but you need to state that you are not independent in the compilation report.
Q: Can I act as the controller-for-hire and perform a review engagement?
A: No. Independence is required for review engagements.
Q: If I prepare financial statements and perform a compilation, am I performing one service or are these considered two separate services?
A: They are two services. The preparation is a nonattest service, and the compilation is an attest engagement. Both can be specified in one engagement letter.
Here’s a video explaining the differences in preparation and compilation services.
Comparison of Preparing Financial Statements and Compilations
Consideration Preparing Financial Statements Compilations
When does the standard apply?
Accountant engaged to prepare financial statements
Accountant engaged to perform a compilation of financial statements
Is a compilation report issued? No Yes
Can notes to the financial statements be omitted?
Yes Yes
Where is the omission of notes disclosed? On each financial statement page In the compilation report
Can the financial statements go to users other management?
Yes Yes
Considered an assurance service?
No No
Considered an attest service?
No Yes
Is the accountant required to determine if he or she is independent of the client?
No Yes
If the accountant is not independent, is that fact required to be disclosed?
No Yes, in the compilation report
Is a signed engagement letter required?
Yes Yes
Management is responsible for financial statements? Yes Yes
Minimum documentation
1. Engagement letter
2. Financial statements
1. Engagement letter
2.Financial statements
3. Compilation report
Procedures 1. Prepare the financial statements based on the information provided
2. Deficiencies in the information provided to the accountant should be communicated to management, and the inaccuracy or incompleteness of such information should be corrected1. Read the financial statements
2. Consider whether the financial statements appear appropriate in form and free from obvious material misstatements
3. If management-supplied information is not complete or appears incorrect, the accountant should request additional or corrected information
4. If requested or corrected information is not received or if the financial statements are not corrected, the accountant should consider withdrawing
Is the accountant required to make inquiries or perform other procedures to verify, corroborate, or review information supplied? No No
Subject to Peer Review? Only if firm is required to have a peer review Yes
Where are material departures from the financial reporting framework disclosed? Face of the financial statements or in notes to financial statements Compilation report
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.
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