Category Archives for "Preparation, Compilation & Review"

10 Steps to Make Work Papers Sparkle
May 22

10 Steps to Make Work Papers Sparkle

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

In this post, I provide ten steps to make work papers sparkle.

Have you ever been insulted by a work paper review note?

Your tickmarks look like something created by my child.

Rather than providing guidance, the comment feels like an assault.

Or maybe you are the reviewer–you stare at a work paper for several minutes–and you’re thinking, “what the heck is this?” Your stomach tightens and you say out loud, “I don’t have time for this.”

There are ways to create greater clarity.

Make Work Papers Sparkle

Make Work Papers Sparkle

Here are ten steps to make your work papers sparkle.

  1. Timely review. The longer the in-charge waits to review work papers, the harder it is for the staff person to remember what they did and, if needed, to make corrections. Also, consider that the staff person may be reassigned to another job. Therefore, he may not be available to clear the review notes.
  2. Communicate the purpose.

a.  An unclear work paper is like a stone wall. It blocks communication.

b.  State the purpose; for example:

Purpose of Work Paper – To search for unrecorded liabilities as of December 31, 2018. Payments greater than $30,000 made from January 1, 2019, through March 5, 2019, were examined for potential inclusion in accounts payable.

Or:

Purpose of Work Paper – To provide a detail of accounts receivable that agrees with the trial balance; all amounts greater than $20,000 agreed to subsequent receipt.

If the person creating the work paper can’t state the purpose, then maybe there is none. It’s possible that the staff person is trying to copy prior year work that (also) had no purpose.

c.  All work papers should satisfy a part of the audit program (plan). No corresponding audit program step? Then the audit program should be updated to include the step—or maybe the work paper isn’t needed at all.

3.  The preparer should sign off on each workpaper  (so it’s clear who created it).

4. Audit program steps should be signed off as the work is performed (not at the end of the audit–just before review). The audit program should drive the audit process—not the prior year workpapers.

5.  Define tickmarks.

6.  Reference work papers. (If you are paperless, use electronic links.)

7.  Communicate the reason for each journal entry.

The following explanation would not be appropriate:

To adjust to actual.

A better explanation:

To reverse client-prepared journal entry 63 that was made to accrue the September 10, 2018, Carter Hardware invoice for $10,233.

8.   When in doubt, leave it out.

Far too many documents are placed in the audit file simply because the client provided them. Moreover, once the work paper makes its way into the file, auditors get “remove-a-phobia“–that dreaded sense that if the auditor removes the work paper, he may need it later.

If you place those unneeded documents in your audit file and do nothing with them, they may create potential legal issues. I can hear the attorney saying, “Mr. Hall, here is an invoice from your audit file that reflects fraud.”

Again, does the work paper have a purpose?

My suggestion for those in limbo: Place them in a “file 13” stack until you are completely done. Then–once done–destroy them. I place these documents in a recycle bin at the bottom of my file.

9.  Complete forms. Blanks should not appear in completed forms (use N/A where necessary).

10. Always be respectful in providing feedback to staff. It’s too easy to get frustrated and say or write things we shouldn’t. For instance, your audit team is more receptive to:

Consider providing additional detail for your tickmark: For instance–Agreed invoice to cleared check payee and dollar amount.

This goes over better than:

You failed to define your tickmark–again?

Last Remarks

What other ways do you make your work sparkle? Comment below.

You may also be interested in a related post: 7 Steps to Effectively Review Financial Statements. Also, see If It’s Not Documented, It’s Not Done.

Preparing financial statements
Feb 27

Preparing Financial Statements: Which Standards Apply?

By Charles Hall | Preparation, Compilation & Review

Which standards apply when you prepare financial statements?

The AICPA Accounting and Review Services Committee added a section to the compilation and review standards called Preparation of Financial Statements. Since then, I’ve received several questions about which standards apply when financial statements are prepared–especially if you concurrently provide another service such as a compilation, review, or audit.

Those questions include:

  • Can an accountant perform a compilation and not prepare the financial statements?
  • Are the preparation of financial statements and the performance of a compilation engagement two separate services?
  • If an auditor prepares financial statements and audits a company, what is the relevant standard for preparing the financial statements?
  • Is the preparation of financial statements a nonattest service, though the audit is an attest service?

Preparing financial statements
Below I provide: (1) a summary of how compilations changed with the issuance of SSARS 21 and (2) a summary of how the preparation of financial statements service interplays with compilations, reviews, and audits.

The Old Compilation Standard 

Using SSARS 19, the performance of a compilation involved one service which encompassed:

  • Preparing financial statements,
  • Performing compilation procedures (e.g., reading the financials), and
  • Issuing a report

How Compilation Engagements Changed 

So, how did SSARS 21 change compilations?

If an accountant prepares the financial statements and performs a compilation engagement using SSARS 21, she is performing two services (not one). In this case, the performance of the preparation of financial statements is not subject to any formal standard (including SSARS 21).

When an accountant performs both the preparation of financial statements and a related compilation engagement, is AR-C 70, Preparation of Financial Statements, applicable?

No.

“Wait…you’re saying that a new standard called Preparation of Financial Statements was added with SSARS 21, but when the accountant prepares financial statements and performs a compilation engagement, the (SSARS 21) preparation standard is not applicable?”

Yes.

AR-C 70, Preparation of Financial Statements, states that the standard is not applicable “when an accountant prepares financial statements and is engaged to perform an audit, review, or compilation of those financial statements.” So if an accountant prepares financial statements as a part of a compilation engagement, AR-C 70 does not apply.

Why?

If AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements, were both in play, they would conflict. AR-C 70 requires the accountant to state on each financial statement page that “no assurance is provided” or to issue a disclaimer. AR-C 80 requires the issuance of a compilation report and does not allow the accountant to state that “no assurance is provided” on each financial statement page or for the accountant to issue a disclaimer.

Meaning?

When the accountant prepares financial statements and performs a related compilation, the creation of the financial statements is a nonattest service with no particular guidance–not even from SSARS 21. (Of course, the AICPA Code of Professional Conduct applies to all services.)

When a compilation engagement (an attest service) is performed and financial statements are prepared (a nonattest service), two separate services are being performed by the same accounting firm.

Financial Statement Preparation and Other Services

The table summarizes which standard is applicable when:
1. A preparation engagement is performed (alone)
2. Preparation and compilation engagements are performed for the same time period
3. Preparation and review engagements are performed for the same time period
4. Preparation and audit engagements are performed for the same time period

Preparation of Financial StatementsCompilation EngagementReview EngagementAudit EngagementStandard to Follow
YesAR-C 70 Preparation
YesYesAR-C 80 Compilation
YesYesAR-C 90 Review
YesYesAU-C Audit Sections

AR-C 70, Preparation of Financial Statements, applies only in the first example above. When the accountant performs a preparation service and a compilation, review, or audit service for the same time period, AR-C 70 is not applicable–that is, no formal standard applies to the preparation service.

In all the examples listed above, the preparation of financial statements is a nonattest service.

In examples 2, 3 and 4 (where a preparation service and an attest service are provided), your engagement letter should include language about performing nonattest services and how the client will assign someone with suitable skill, knowledge, and experience to oversee the preparation of financial statements service. Such language is only required when a nonattest and an attest service is provided.

SSARS 22 and 23

Since the above information deals with SSARS 21, you may be wondering what additional SSARS have been issued–and how those newer standards affect compilations. 

SSARS 22, Compilation of Pro Forma Financial Information was effective for compilation reports dated on or after May 1, 2017. So, what is pro forma information? It is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services, was issued in late October 2016. That standard changed supplementary information wording in compilation and review reports

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

While portions of SSARS 23 were effective upon issuance (the supplementary language change), the remainder of the standard was effective for prospective financial information prepared on or after May 1, 2017, and for compilation reports dated on or after May 1, 2017, respectively.

SSARS 22
Oct 17

SSARS 22 Pro Forma Information

By Charles Hall | Preparation, Compilation & Review

The Accounting and Review Services Committee (ARSC) issued SSARS 22 Compilation of Pro Forma Financial Information. You may remember that ARSC did not address pro forma information in SSARS 21. SSARS 22 clarifies AR 120 Compilation of Pro Forma Information and codifies it as AR-C 120.

Pro Forma Information

So what is pro forma information? It is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

SSARS 22

To understand SSARS 22, let’s answer a few questions.

Examples of Pro Forma Information

Examples of pro forma information include presenting financial statements for the following:

  • Business combinations
  • The selling of a significant part of a business
  • A change in the capitalization of an entity

Again we are providing financial information as though the transaction or event has–already–occurred.

Required Disclosures

In pro forma financial information, what should be disclosed?

  • A description of the transaction (or event) that is reflected in the presentation
  • The date on which the transaction (or event) is assumed to occur
  • The financial reporting framework
  • The source of the financial information
  • The significant assumptions used
  • Any significant uncertainties about those assumptions
  • A statement that the pro forma information should be read in conjunction with the related historical information and that the pro forma information is not necessarily indicative of the results that would have been attained had the transaction (or event) actually taken place

Independence

Must the accountant consider his or her independence? Yes, since this is a compilation engagement. (Note: The preparation of the pro forma information is considered a nonattest service.)

Acceptance and Continuance

Should the accountant perform acceptance and continuance procedures? Yes.

Engagement Letter

Is an engagement letter required? Yes, and it must be signed by the accountant’s firm and management or those charged with governance.

Compilation Procedures

What compilation procedures should be performed?

  • Read the pro forma financial information to determine if it is appropriate in form and free from obvious material misstatement
  • Obtain an understanding of the underlying transaction or event (that the pro forma information is based upon)
  • Determine that management includes:
    • Complete financial statements for the most recent year (or from the preceding year if financial statements for the most recent year are not yet available) or make such financial statements readily available (e.g., post on a public website)
    • If pro forma financial information is presented for an interim period, either historical interim financial information for that period (which may be in condensed form) or make such interim information readily available
    • For business combinations, the relevant financial information for the significant parts of the combined entity
  • Determine that the information in the preceding bullet has been subjected to a compilation, review or an audit
  • Determine that the compilation, review or audit report on the historical information is included in any document containing the  pro forma financial information (or made readily available such as on a public website)
  • Determine whether the significant assumptions and uncertainties are disclosed
  • Determine whether the source of the historical financial information on which the pro forma information is based is appropriately identified

Pro Forma in Conjunction with Other Services

Can the pro forma engagement be performed in conjunction with a compilation, review or an audit? Yes. Alternatively, the pro forma engagement can be performed separately.

Required Documentation

What documentation is to be retained in the file?

  • Engagement letter
  • The results of procedures performed
  • Copy of the pro forma financial information
  • Copy of the accountant’s compilation report

Compilation Report Required

Is a compilation report to be issued? Yes. (See sample report below.)

Is the accountant offering any assurance regarding the pro forma information? No.

Can the pro forma compilation report be added to the accountant’s report on historical financial statements? Yes. Alternatively, the pro forma compilation report can be presented separately.

Effective Date of SSARS 22

What’s the effective date of SSARS 22? The standard is effective for compilation reports on pro forma financial information dated on or after May 1, 2017.

Potential New Service for Your Clients

If you are not already providing pro forma information to clients, consider suggesting this service when appropriate. Clients may find pro forma information helpful in evaluating the potential sale of stock, the borrowing of funds for a project, or the sale of a part of the business.

Sample SSARS 22 Compilation Report

Exhibit B of SSARS 22 provides the following sample compilation report on pro forma financial information:

Management is responsible for the accompanying pro forma condensed balance sheet of XYZ Company as of December 31, 20X1, and the related pro forma condensed statement of income for the year then ended (pro forma financial information), based on the criteria in Note 1. The historical condensed financial statements are derived from the financial statements of XYZ Company, on which I (we) performed a compilation engagement, and of ABC Company, on which other accountants performed a compilation engagement. The pro forma adjustments are based on management’s assumptions described in Note 1. (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not examine or review the pro forma financial information nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on the pro forma financial information.

The objective of this pro forma financial information is to show what the significant effects on the historical financial information might have been had the underlying transaction (or event) occurred at an earlier date. However, the pro forma condensed financial statements are not necessarily indicative of the results of operations or related effects on financial position that would have been attained had the above mentioned transaction (or event) actually occurred at such earlier date.

[Additional paragraph(s) may be added to emphasize certain matters relating to the compilation engagement or the subject matter.]

[Signature of accounting firm or accountant, as appropriate] [Accountant’s city and state]
[Date of the accountant’s report]

SSARS 21
Sep 05

SSARS 21: What Have We Learned?

By Charles Hall | Preparation, Compilation & Review

SSARS 21 has been in existence since October 2014. What have we learned about this standard? 

(SSARS 22 and SSARS 23 were subsequently added, but most of the SSARS 21 guidance remains as originally issued.)

SSARS 21

Preparation of Financial Statements or Compilation Reports

Before SSARS 21, if an accountant created financial statements and submitted them to a client, he had to issue a compilation report. Now, using the Preparation of Financial Statements part of SSARS 21 (AR-C 70), an accountant can create and provide financial statements without a compilation report. Such financial statements can be provided to third parties such as banks–again with no compilation report. So, how have accountants responded to the option to provide financial statements to clients without a compilation report?

It has been my observation that many accountants continue to perform compilation engagements (rather than use the preparation option). Why? I think we are creatures of habit. We have issued compilation reports for so long that we’re comfortable doing so–and we continue to do the same. Also, as we’ll see in a minute, performing a compilation doesn’t take much additional time.

Some accountants, however, are using AR-C 70. They are issuing financial statements without a compilation report and stating that “no assurance is provided” on each page–or, as the standard allows, placing a disclaimer page in front of the financial statements.

Who Should Use the Preparation Standard?

So, who uses AR-C 70? Accountants with limited time. 

Suppose, for example, that a client wants a balance sheet and nothing else. You can create the balance sheet in Excel and put “no assurance is provided” at the bottom of the page. And you’re done–with the exception of obtaining a signed engagement letter. (Accountants should document any significant consultations or professional judgments, but usually, there are none.)

Can I Avoid the Engagement Letter?

You may be thinking, “Charles, I’m not sure I’m saving much time if I have to create an engagement letter.  Getting a signed engagement letter might even take more time than preparing the balance sheet.” Yes, that is true. So, is there a situation where the engagement letter is not required? Yes, sometimes.

Financial Statements as a Byproduct

You can provide the balance sheet to a client without obtaining an engagement letter if the statement preparation is a byproduct of another service (as long as you have not been engaged to prepare the financial statement). For example, if you’re preparing a tax return and create the balance sheet as a byproduct of the tax service, you are not required to obtain a SSARS engagement letter? Why? Because you have not been engaged to prepare the financial statement. The trigger for AR-C 70 is whether you have been engaged to prepare financial statements. 

QuickBooks Bookkeeping

The same is true if you provide bookkeeping services using QuickBooks in the Cloud. If you have not been engaged to prepare financial statements and the online software allows you to print the financial statements, you are not in the soup. That is, you are not following AR-C 70–because you have not been engaged to prepare financial statements. If your client asks you to perform bookkeeping service in a cloud-based accounting package (such as QuickBooks) and to prepare financial statements, you are engaged. Then you must follow AR-C 70 and obtain an engagement letter–and follow the other requirements of the standard.

Regardless, we need to be clear about the intended service.

Compilation Engagements

In most compilations, the accountant prepares the financial statements and performs the compilation engagement. Notice these are two different services: (1) preparing the financial statements and (2) performing the compilation. It is possible for your client to create the financial statement and for you (the accountant) to perform the compilation, though this is rare. If you do both, the preparation of financial statements is not performed using AR-C 70. So what standard should you follow for the preparation of the financial statements. There is none. You are just performing a nonattest service. Then you’ll perform the compilation engagement using AR-C 80.

So, the question at this point is whether you should prepare financial statements using AR-C 70 or create the financial statements and perform a compilation using AR-C 80. (Technically, the choice is the clients, but you are explaining the differences to them.)

Additional Time for Compilations

How much extra time does it take to perform a compilation engagement after the financial statements are created? Not much. You are only placing a compilation report on your letterhead (rather than stating that “no assurance is provided” on each page or providing a disclaimer that precedes the financial statements). 

What other procedures are required for a compilation (versus providing the financial statements under AR-C 70)? You are reading the financial statements to see if they are appropriate. And since you just created the statements, that shouldn’t take much time. 

Regardless, both AR-C 70 and AR-C 80 require signed engagement letters. So if you’ve been engaged to prepare financial statements or perform a compilation, there is no getting around the requirement for an engagement letter.

Is a Preparation or a Compilation Service Best?

So which is better? Using AR-C 70 (Preparation of Financial Statements) or AR-C 80 (Compilation Engagements)? It depends. 

Some banks desire a compilation report, so in that case, of course, you are going to–at the request of the client–perform a compilation engagement.

Also, some CPAs feel safer issuing a compilation report that spells out (in greater detail than a preparation disclaimer) what is done and what is not done. We don’t know yet whether a preparation service creates greater legal exposure than a compilation. But we will with time. After a few years of using SSARS 21, I think our insurance companies will tell us whether one service creates more exposure than another. So far, I have not seen any such studies. Why? SSARS 21 has been in use only a couple of years.

Another factor to consider is peer review. The AICPA standards do not require a peer review if you only provide financial statements using AR-C 70. But check with your state board of accountancy; some states require peer review, regardless.

For the most efficient way to issue financial statements, click here.

SSARS 23 changes preparation and compilation standards
May 17

SSARS 23 Preparations and Compilations

By Charles Hall | Preparation, Compilation & Review

SSARS 23 changes preparation and compilation engagements. The article summarizes the effects of the new standard.

The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately. Other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.

SSARS 23 changes preparation and compilation engagements

You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

How Preparation of Financial Statements (AR-C 70) Changed

The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. SSARS 23 requires the inclusion of significant assumptions since they are essential to understanding prospective information. Therefore, accountants should not prepare prospective financial information without including a summary of significant assumptions in the notes. Also, a financial projection should not be created unless it includes:

  • an identification of the hypothetical assumptions, or 
  • a description of the limitations on the usefulness of the presentation

One other change to AR-C 70 is the slight change to the preparation disclaimer. SSARS 23 deletes the word “accordingly.” See below:

How Compilation Engagements (AR-C 80) Changed

AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21). 

Another change is that accountants should report known departures from the applicable financial reporting framework in the compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.

Prospective Financial Information Guidance

Additionally, AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.

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