Category Archives for "Preparation, Compilation & Review"

Lacking Independence
May 16

Compilations: Lacking Independence

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, SSARS 21 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

Lacking Independence in 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 the Prior Year

If you were not independent in 2016 but you are independent in 2017 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2016, 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 engagement. 

 

AICPA Code of Conduct
Apr 17

AICPA Code of Conduct

By Charles Hall | Auditing , Preparation, Compilation & Review

In this post, I provide information about accessing the AICPA Code of Conduct and the Plain English Guide to Independence.

AICPA Code of Conduct

Are you a CPA looking for answers to independence or other ethical questions? Below, you’ll see two handy AICPA resources:

  • AICPA Code of Professional Conduct
  • Plain English Guide to Independence

AICPA Code of Professional Conduct

The AICPA provides online access to the Code of Conduct. You can also download a PDF copy here (this PDF covers all standards issued through August 31, 2016).

Online access is free, and users are able to save searches and bookmark content.

The Code is organized into three parts:

  1. Public practice
  2. Members in Business
  3. All other members (including those who are in between jobs or retired)

The Code includes a threats and safeguards framework. CPAs should identify threats and then consider safeguards to mitigate those threats. The CPAs can proceed with the engagement if threats–after considering safeguards–are at an acceptance level.

Plain English Guide to Independence

As the Quality Control partner for our firm, I receive quite a few questions about ethical issues (mainly about independence). Nine out of ten times I find the answers to those questions in the AICPA’s Plain English Guide to Independence. I download this guide and keep it handy. When I need to research an issue, I open the document and perform word searches. If you aren’t already using this resource, I highly recommend it. 

See my article CPA’s Ethics: Four Questions for Better Decisions.

supplementary information compilations and preparations
Mar 08

Supplementary Information: SSARS

By Charles Hall | Preparation, Compilation & Review

Are you wondering how to present supplementary information in compilation and preparation engagements? What supplementary information (SI) should be included? How does the accountant define his or her responsibility for SI?

Often accountants, at the request of their clients, add supplementary information to the financial statements. Such information is never required (to be in compliance with a reporting framework) but may be useful.

supplementary information compilations and preparations

You can think of financials with supplementary information in this manner:

Financial statements – Required – The jeep in the picture above

Supplementary Information – Not required – The camper

You’re not going anywhere without a vehicle (it’s required). And your camper (not required) is no good without an automobile to pull it. Kind of a silly analogy, I know, but maybe it will help you remember.

I normally add a divider page between the financial statements and supplementary information (though such as page is not required); the divider page simply says “Supplementary Information” and nothing else.

SSARS 21 defines supplementary information as follows:

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework.

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Preparation Enagement
Jan 12

Bookkeeping, Preparations, Compilations, and Reviews

By Charles Hall | Preparation, Compilation & Review

Today, we’ll answer various questions regarding bookkeeping, preparations, compilations, and review engagement.

Compilation Enagement

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 separate 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.

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