Category Archives for "Preparation, Compilation & Review"

Lacking Independence in a Compilation

By Charles Hall | Preparation, Compilation & Review

Do you lack independence in a compilation engagement? If yes, then here’s how to disclose the impairment in the compilation report.

An accountant can issue a compilation report even though independence is lacking. When independence is impaired, the Statement on Standards for Accounting and Review Services requires that the CPA modify the compilation report. The cause of the impairment (e.g., you own a portion of the business) can be disclosed in the compilation report but is not required. You can, if you prefer, simply say you are not independent; this is what most CPAs do.

Lacking Independence in a Compilation – Current Year

The accountant’s compilation report can disclose a lack of independence as follows:

We are not independent with respect to ABC Company.

Just add this sentence separately at the bottom of the compilation report.

Lacking Independence in a Compilation –  Prior Year

If you were not independent in 2020 but you are independent in 2021 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2020, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2020, we were not independent with respect to ABC Company. We are currently independent with respect to ABC Company.

Independence in Review Engagements and Audits

CPAs must be independent to perform review engagements or audits. There are no exceptions. See the AICPA Code of Professional Conduct for guidance on independence issues. Independence rules are found in section 1.200.

Independence in Preparation of Financial Statement Engagements

CPAs can perform a Preparation of Financial Statement engagement without being independent. No independence disclosure is required since this service is a nonattest service. 

Issue Financial Statements in the Most Efficient Way

By Charles Hall | Preparation, Compilation & Review

What is the most efficient way to issue financial statements?

Tax basis financial statements without disclosure, using the Preparation of Financial Statements option (AR-C 70).

This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.

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Special Purpose Reporting Frameworks

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

In this article, I provide information about various special purpose reporting frameworks (e.g., cash basis, modified-cash basis, and income tax basis) and how you can use them to create financial statements for your clients. 

Suppose you’ve been contacted by your client to prepare their financial statements and issue a compilation report. At first, you think, I’ll create the financials in accordance with GAAP, but then you remember there are special purpose reporting frameworks. Maybe the cash basis or income tax basis is a better option.

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AR-C 80: Definitive Guide to Compilations

By Charles Hall | Preparation, Compilation & Review

Selected Disclosures in SSARS Engagements

By Charles Hall | Preparation, Compilation & Review

Do you ever want to include just one disclosure in your financial statements without providing all the notes? Selected disclosures can be included in certain situations, including when you omit substantially all disclosures. 

Do professional standards allow this? Yes. But only if you use AR-C 70 (the preparation guidance) or AR-C 80 (the compilation guidance).

Selected Disclosures in Compilations

As you probably already know, a CPA can issue compiled financial statements without disclosures as long as the compilation report discloses the omission. An example follows.

Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the United States of America. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the Company’s financial position, results of operations and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters.

If the financial statements include one or two notes, then the financial statements still omit substantially all of the disclosures, so the accountant (still) uses the wording in the preceding paragraph.

Sample Selected Disclosure

An example of a selected disclosure follows:

ABC Company

Selected Information –

Substantially All Disclosures Required by Accounting Principles

Generally Accepted in the United States of America are Not Included

December 31, 2020

Note 1. Long-Term Debt.

ABC Company borrowed $450,000 on July 15, 2020, from XYZ Bank. The rate of interest is 5%, and the loan is collateralized by equipment of the Company. Payments are $10,000 per month plus interest for two years with a balloon payment for the balance of the amount owed.

Additionally, you can omit substantially all disclosures in a preparation engagement.

Preparation Engagements

AR-C 70 says:

The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled “Selected Information—Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included.”

So, the selected-disclosure option is available in a Preparation of Financial Statements engagement. Include the required disclaimer at the bottom of the page such as “No assurance is provided on these financial statements.” 

Other Considerations

The accountant should consider whether management’s election to include only selected disclosures causes the financial statements to be misleading (for example, by omitting the disclosures that contain negative information). If so, the accountant should request that the financial statements be revised to include the omitted disclosures.

The selected-disclosure option is not available for financial statements subject to a review engagement. Such financial statements must be full disclosure.

What About You?

Do you ever use this selected-disclosure option? Any reservations about doing so?