Category Archives for "SSARS"

Perform compilation engagement
Oct 29

How to Perform Compilation Engagements

By Charles Hall | SSARS

Knowing how to perform compilation engagements is important for CPAs. Below I provide an overview of the salient points of AR-C 80, Compilation Engagements.

Perform compilation engagement

Guidance

The guidance for compilations is located in AR-C 80, Compilation Engagements.

Applicability

The accountant should perform a compilation engagement when he is engaged to do so.

A compilation engagement letter should be prepared and signed by the accountant or the accountant’s firm and management or those charged with governance. An engagement letter to only prepare financial statements is not a trigger for the performance of a compilation engagement.

Previously (in the SSARS 19 days), the preparation and submission of financial statements to a client triggered the performance of a compilation engagement. Now, compilation engagement guidance is applicable only when the accountant is engaged to (requested to) perform a compilation. 

Objectives

The objectives of the accountant in a compilation engagement are to:

  • Assist management in the presentation of financial statements 
  • Report on the financial statements in accordance with the compilation engagement section of the SSARSs

Reports

In a compilation engagement, a compilation report is always required. A compilation engagement is an attest, nonassurance service. Nonassurance means the accountant is not required to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements.

The compilation report looks distinctly different from audit or review reports (which include paragraph titles such as Management Responsibility and Accountant’s Responsibility). The standard compilation report is one paragraph with no paragraph titles. (See the Sample Compilation Report section below.)

Financial Statements

The accountant prepares financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework including any of the following:

  • Cash basis
  • Tax basis
  • Regulatory basis
  • Contractual basis
  • Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items) 
  • Generally accepted accounting principles (GAAP)

All of the above bases of accounting, with the exception of GAAP, are referred to as special purpose frameworks. The description of special purpose frameworks may be included in:

  • The financial statement titles
  • The notes to the financial statements, or
  • Otherwise on the face of the financial statements

Management specifies the financial statements to be prepared. The most common financial statements created include:

  • Balance sheet
  • Income statement
  • Cash flow statement

The accountant can, if directed by management, create and issue just one financial statement (e.g., income statement). 

Some bases of accounting (e.g., tax-basis) do not require the issuance of a cash flow statement.

The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.

Should a reference to the compilation report be included at the bottom of each financial statement page (including supplementary information)? While not required, it is acceptable to add a reference such as:

  • See Accountant’s Report
  • See Accountant’s Compilation Report, or
  • See Independent Accountant’s Compilation Report

Why add such references? The accountant’s report may become detached from the financial statements. The reference notifies the reader of the financial statement that a compilation report exists.

Documentation Requirements

The accountant should prepare and retain the following documentation:

  • The engagement letter
  • The financial statements, and 
  • The accountant’s compilation report

The accountant should document any significant consultations or judgments.

If the accountant departs from a presumptively mandatory requirement, it is necessary to document the justification for the departure and how the alternative procedures performed are sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)

Engagement Letter

compilation engagements

While it is possible for the accountant to perform only a compilation and not prepare the financial statements, most compilation engagement letters will state that the following will be performed by the accountant:

  1. Preparation of the financial statements (a nonattest service)
  2. A compilation service (an attest service)

Since a nonattest service and an attest service are being provided, the accountant will add language to the engagement letter describing the client’s responsibility for the nonattest service. 

AICPA independence standards require the accountant to consider whether he is independent when he performs an attest service (e.g., compilation) and a nonattest service (e.g., preparation of financial statements) for the same client. If management does not possess the requisite skill, knowledge, and experience to oversee the preparation of the financial statements and accept responsibility, the accountant may not be independent.

Procedures

The accountant should:

  • Read the financial statements in light of the accountant’s understanding of the selected financial reporting framework and the significant accounting policies adopted by management
  • Consider whether the financial statements appear appropriate in form and free from obvious material misstatements

Here are examples of inappropriate form and obvious material misstatements:

  • An equity account is shown in the liability section of the balance sheet
  • The balance sheet does not reflect the accrual of receivables though the financial statements were supposedly prepared in accordance with GAAP
  • Total assets as reflected on the balance sheet do not equal the individual items on the statement (an addition error)
  • The financial statements omit a material debt disclosure, though the statements were prepared in accordance with GAAP and substantially all disclosures were to be included

Given that the focus of a compilation is the reading of the financial statements to determine if they are appropriate in form and free from obvious material misstatements, what are some procedures that are not required?

  • Confirmation of cash 
  • Testing of subsequent receipts
  • Analytical comparisons with the prior year
  • Substantive analytics
  • Confirmation of debt
  • A search for unrecorded liabilities 

Is it permissible to perform audit or review procedures while conducting a compilation engagement? While not required to do so, such procedures are allowed. If you perform audit or review procedures, be careful not to imply to the client or other parties that you are performing a service other than a compilation.

The accountant is not required to perform procedures to ensure the completeness of the client-supplied information, but what if the client provides information that is obviously not complete or contains material errors? If management-supplied information is not complete or appears incorrect, the accountant should request corrections. 

Also, the accountant should request corrections if:

  • The financial statements do not appropriately refer to the applicable financial reporting framework
  • Revisions are necessary to comply with the selected reporting framework, or 
  • The financial statements are otherwise misleading

If requested or corrected information is not received or if the financial statements are not corrected, the accountant should consider withdrawing from the engagement and may wish to consult with legal counsel. 

If the accountant decides not to withdraw and a material departure from the reporting framework exists, he should modify the compilation report to disclose the departure. See the example below in Reporting Known Departures from the Applicable Financial Reporting Framework.

Sample Compilation Report

The following is a sample compilation report:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed compilation engagementa 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 audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Report Date]

Minimum Compilation Report Elements

The compilation report should:

  • Include a statement that management (owners) is (are) responsible for the financial statements
  • Identify the financial statements
  • Identify the entity
  • Specify the date or period covered
  • Include a statement that the compilation was performed in accordance with SSARS
  • Include a statement that the accountant did not audit or review the financial statements nor was the accountant required to perform any procedures to verify the accuracy or completeness of the information provided by management, and does not express an opinion, a conclusion, nor provide any assurance on the financial statements
  • Include the signature of the accountant or the accountant’s firm
  • Include the city and state where the accountant practices and
  • Include the date of the report (which should be the date the accountant completes the compilation procedures)

You may have noticed that a compilation title and salutation are not required. Can they be included? While AR-C 80 does not require a report title or a salutation, it is permissible to add them. Here’s a sample report title and salutation:

                        Accountant’s Compilation Report

To the Board of Directors and Management

XYZ Company

The signature on the compilation report can be manual, printed, or digital. 

If the accountant’s letterhead includes the city and state where the accountant practices, then the city and state can be omitted from the bottom of the compilation report.

The date of the compilation report should be the date the accountant completes the compilation procedures.

Omission of Substantially All Disclosures

Can the accountant omit all disclosures (notes to the financial statements) in a compilation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:

The compilation report should disclose the omission of substantially all disclosures with language such as the following:

Management has elected to omit substantially all the disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenue, and expenses. Accordingly, the financial statements are not designed for those who are not informed about such matters.

The engagement letter should describe the level of disclosure to be included in the financial statements. 

Reporting Known Departures from the Applicable Financial Reporting Framework

If the accountant becomes aware of a material departure from the basis of accounting that is not corrected, he should modify the compilation report to disclose the departure. For example:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed compilation engagements 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 audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

Accounting principles generally accepted in the United States of America require that material impairments in the fair value of owned property be recognized in the balance sheet. Management has informed us that a recent appraisal of its Fumbleton office reflected a fair value of $2.25 million less than carrying value. If accounting principles generally accepted in the United States of America were followed, the buildings and equity accounts would have decreased by $2.25 million. 

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Report Date]


The effects of the departure, if known, should be disclosed in a separate paragraph of the compilation report. If the effects of the departure are not known and cannot be readily determined with the accountant’s procedures, the compilation report should include a statement that the determination has not been made by management.

The accountant may not issue a compilation report that states the financial statements (as a whole) are not presented in accordance with the applicable financial reporting framework. Doing so is considered, in effect, an adverse opinion. An adverse opinion can only be expressed in an audit engagement.

Reporting When There are Other Accountants

Other accountants might perform a compilation of a subsidiary. What is your reporting responsibility if you are performing a compilation of a consolidated entity that includes the subsidiary? The compilation report for the consolidated entity is not altered to make a reference to the other accountant. AR-C 80 is silent in regard to whether you are required to obtain a copy of the other accountant’s compilation report.

Going Concern

If the accountant becomes aware of uncertainties with regard to an entity’s ability to continue as a going concern, he may suggest additional disclosures. Without the additional going concern disclosures, it is possible that the financial statements could be misleading.

If substantially all disclosures are omitted from the financial statements, disclosure of the going concern uncertainty is not required. Even so, the accountant should be careful not to issue financial statements that are misleading. If needed, ask management to include the requisite going concern disclosures.

If the necessary going concern disclosures are not added and the financial statements are misleading, the accountant should consider withdrawing from the engagement.

Is it permissible to include an emphasis-of-a-matter paragraph in a compilation report? Yes.

The following is an example of a going concern uncertainty paragraph that could be added to a compilation report:

Going Concern

As discussed in Note H, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Independence

Where should an accountant’s lack of independence be noted in the compilation report? The accountant can disclose his lack of independence in the last paragraph of the compilation report with wording such as: 

I am (We are) not independent with respect to XYZ Company.

The reason for the lack of independence need not be included, but if the accountant includes one reason for a lack of independence, then all such reasons should be included. 

If independence is impaired and the accountant desires to provide the reason independence is impaired, the compilation report may include wording such as:

We are not independent with respect to XYZ Company as of and for the year ended June 30, 2019, because an engagement team member made management decisions on behalf of XYZ Company.

Compilation Reports - Special Purpose Frameworks

compilation engagements

The compilation report should highlight the use of a special purpose framework when one is used. 

If a special purpose framework is used and disclosures are included, then the compilation report should include a separate paragraph such as the following:

We draw attention to Note X in the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

If disclosures are omitted, the separate paragraph could read as follows:

The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

Unless the entity elects to omit substantially all disclosures, the compilation report should be modified to describe departures when the financial statements do not contain:

  1. A description of the special purpose framework
  2. A summary of significant accounting policies 
  3. A description of how the special purpose framework differs from GAAP
  4. Disclosures similar to those of GAAP 

The description of the special purpose framework can be included in the titles of the financial statements or the notes. If the financial statements omit notes, the financial statement titles should include the special purpose framework; for example, Statement of Revenues and Expenses—Tax Basis.

If substantially all disclosures are omitted, then 2, 3, and 4 above are not necessary. However, the accountant should include a separate paragraph in the accountant’s compilation report stating that management elected to omit substantially all disclosures. (See the preceding section titled Omission of Substantially All Disclosures.)

Click here for more information about which special purpose framework you should use.

Other Historical Information

In addition to historical financial statements, AR-C 80 may be applied to the following:

  • Specified elements, accounts, or items of a financial statement, including schedules of:
    • Rents
    • Royalties
    • Profit participation, or
    • Income tax provisions
  • Supplementary information
  • Required supplementary information
  • Pro forma financial information

Prospective Information

AR-C 80 can be applied to prospective information.

Prospective financial information is defined as any financial information about the future. 

Prospective financial information can be presented as:

  • A complete set of financial statements, or
  • One or more elements, items, or accounts

If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information.

If you prepare a financial projection, you should not exclude:

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

The compilation report should include statements that:

  • The forecasted or projected results may not be achieved and
  • The accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report

AR-C 80 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.

Prescribed Forms

Is it permissible to perform a compilation engagement with regard to prescribed forms?

Yes. There is nothing in the SSARSs that prohibits the accountant from performing a compilation engagement with regard to prescribed forms (e.g., bank personal financial statement).

When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form, and no departure from the applicable reporting framework exists. In effect, the form and its related directions are treated as though they are the applicable reporting framework. The accountant must report departures from the prescribed form and related instructions as a departure from the applicable financial reporting framework. Include any significant departures in the compilation report. (See the preceding section titled Reporting Known Departures from the Applicable Financial Reporting Framework.)

If the prescribed form includes a compilation report not in conformity with AR-C 80, the report should not be signed. Append an appropriate compilation report to the prescribed form.

Conclusion

There you have it. Now you know how to perform a compilation engagement.

The main things to remember are (1) you need a signed engagement letter, (2) always include a compilation report with the financial statements, and (3) read the financial statements to determine if they are appropriate.

If you desire to issue financial statements without a compilation report, consider the use of AR-C 70, Preparation of Financial Statements.

For my free compilation course, click here.

10 Steps to Make Work Papers Sparkle
May 22

10 Steps to Make Work Papers Sparkle

By Charles Hall | Accounting and Auditing , SSARS

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 in your work papers.

Make Work Papers Sparkle

Make Work Papers Sparkle

Here are ten steps to make your work papers sparkle.

  1. Timely review work papers. 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 work paper’s purpose.

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

b.  State the purpose of the work paper; 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 a work paper from the prior year that (also) had no purpose.

Click Purpose Notation Explanation for brief audio comment.

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 work paper  (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 work papers.

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 work papers: Place them in a “file 13” stack until you are completely done. Then–once done–destroy them. I place these work papers in a recycle bin at the bottom of my work paper tree. 

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 papers 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.

Feb 27

Preparing Financial Statements: Which Standards Apply?

By Charles Hall | SSARS

SSARS 21 added a new 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?
Picture is courtesy of Dollarphoto.com

Picture is courtesy of Dollarphoto.com

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.

The Interplay of 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 21: What Have We Learned
Sep 05

SSARS 21: What Have We Learned?

By Charles Hall | SSARS

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: What Have We Learned

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.

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