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