Tag Archives for " Independence "

Jan 04

Comparison of Compilations and Financial Statement Preparation

By Charles Hall | Accounting and Auditing

This post provides a comparison of compilations and financial statement preparation services.

Recently, the Accounting and Review Services Committee of the AICPA issued SSARS 21.

Under SSARS 21, a CPA can use Section 70 — Preparation of Financial Statements or Section 80 — Compilation Engagements. The Preparation option offers some economies of effort, one being that no compilation report is required. But some CPAs have wondered, “What are the difference in the two types of services?”

Here’s a summary.

QuestionPreparing Financial StatementsCompilations
Can notes to the financial statements be omitted?
YesYes
Can the financial statements go to users other management?
YesYes
Considered an assurance service?
NoNo
Considered an attest service?
No Yes
Does the engagement require a report?
No - required wording stating “no assurance is provided” or a disclaimer
Yes - compilation report
Effective for periods ending on or after December 15, 2015 (early implementation permitted)?
YesYes
If the accountant is not independent, is that fact required to be disclosed?
No Yes
Is a signed engagement letter required?
YesYes
Is the accountant required to determine if he or she is independent of the client?
NoYes
Management is responsible for financial statements?YesYes
Minimum documentation
1. Engagement letter
2. Copy of financial statements
1. Engagement letter
2. Copy of financial statements
3. Copy of report
Procedures1. Prepare the financial statements based on the information provided
2. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
1. Read the financial statements
2. Consider whether the financial statements appear appropriate
3. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
4. If the accountant becomes aware that revisions to the financial statements are necessary, request that corrections be made
Is the accountant required to make inquiries or perform other procedures to verify, corroborate, or review information supplied?NoNo
Subject to Peer ReviewNot known at this timeYes
When does the standard apply?
Accountant engaged to prepare financial statements
Accountant engaged to compile financial statements

For additional information about Preparation of Financial Statement engagements, click here.

Dec 06

The New Preparation of Financial Statements Standard

By Charles Hall | Preparation, Compilation & Review

The art of life is a constant readjustment to our surroundings. –Kakuzo Okakaura

Significant change has occurred in the compilation world.

  • The Accounting and Review Services Committee recently added a new twist to the standards that govern the preparation of financial statements. Now CPAs can issue financial statements without a compilation report. To do so, you need to follow the guidance in Section 70 (Preparation of Financial Statements) of SSARS 21. So let’s unwrap this package and see what’s inside.

First, when is the Preparation standard applicable?

Section 70 states it is not applicable when the accountant prepares financial statements:

  • and is engaged to perform an audit, review, or compilation of financial statements
  • solely for submission to taxing authorities
  • for inclusion in written personal financial plans
  • in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
  • in conjunction with business valuation services

In other words, the standard applies when you create financial statements that are not for any of the above purposes.

If you create financial statements that will, for example, be used for litigation purposes, then Section 70 does not apply. If you create a balance sheet that is a part of a tax return, Section 70 is not applicable. If you are engaged to create financial statements as a part of a compilation, then, again, Section 70 doesn’t apply. (You will only issue a compilation report when you are engaged to do so. Under Section 70, no compilation report is issued. See my prior SSARS 21 post for more information.)

Difference in Preparation and Merely Assisting

The Preparation standard also makes a distinction between preparing financial statements and merely assisting in the preparation of financial statements.

Preparing refers to the creation of financial statements.

Merely assisting refers to bookkeeping services. Here are examples of accounting services that are not covered by Section 70:

  • Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation, or leases
  • Drafting financial statement notes
  • Entering general ledger transactions or processing payments in accounting software

Independence Not Required

Bear in mind that the preparation of financial statements and related bookkeeping services (e.g., entering transactions into a general ledger) are both considered nonattest services. So you can do either without considering whether you are independent.

What does this mean? Well, I can process payments for a client (even sign checks or have custody of a client’s assets) and prepare financial statements. Am I independent? No. Does it matter? No, not if I am just preparing financial statements under the guidance of Section 70 (and not issuing a compilation report). Do I need to disclose my lack of independence? No. (If you do issue a compilation report, you need to disclose your lack of independence–as you have in the past.)

Must the accountant verify the accuracy or completeness of the information? No. Remember, however, that AICPA ethics rules prohibit a CPA from issuing financial statements that are intentionally misleading.

Required Wording or Disclaimer?

Each page of the financial statements should include, at a minimum, the words “no assurance is provided” or issue a disclaimer that makes clear that no assurance is provided.

The example disclaimer provided in .A12 of Section 70 reads as follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

Can the financial statements omit disclosures?

Yes.

The disclosure of the omission of substantially all disclosures may be made on the face of the financial statements or in a selected note to the financial statements. (Selected disclosure is permissible under Section 70.)

If disclosures are omitted and a special purpose framework is used, then the accountant should include a description of the financial reporting framework on the face of the financial statements.

Engagement Letter Required

An engagement letter is required by Section 70. Both the accountant and the client must sign the letter.

Documentation Requirements

The accountant should retain:

  • A copy of the financial statements
  • The signed engagement letter

That’s it: Nothing else is required.

The documentation may also include any significant consultations or professional judgments.

Subject to Peer Review?

My February 2015 AICPA Peer Review Update (newsletter) states the following:

On November 18, 2014, the Peer Review Board (PRB) issued an exposure draft, which proposed that firms that only perform preparation engagements under AR-C Section 70 – Preparation of Financial Statements (issued as part of Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification) would not be required to enroll in the AICPA peer review program (Program). However, it also proposed that a firm’s preparation engagements would be included in the scope of a peer review when the firm either elects to enroll in the program (e.g. to comply with licensing or other requirements) or is already enrolled due to other engagements it performs. This proposal was issued in order to address the effect of these engagements on the scope of the Program.

The PRB considered comments raised by the peer review community about the proposal and elected to adopt the proposed guidance changes. The changes are effective for peer reviews commencing on or after February 1, 2015.

The key points of this communication are:

  • Firms that only perform the Preparation of Financial Statement service under section 70 of SSARS 21 are not required to enroll in the AICPA peer review program.
  • Firms that are enrolled in the peer review program will have the Preparation of Financial Statements service included in the scope of their peer reviews.

Note that these are the AICPA rules. Peer review requirements may be more stringent in your state, possibly requiring a peer review–even if you only perform Preparation of Financial Statement engagements. Check with your state board of accountancy.

When can I apply Section 70 of SSARS 21?

Now, if early implemented.

When am I required to apply SSARS 21?

For periods ending on or after December 15, 2015.

 

Yellow Book Independence
Sep 30

Does Your Yellow Book Client Have Sufficient SKE?

By Charles Hall | Auditing

Are you a CPA that prepares city or county financial statements for an audit client? If yes, are you independent under the Yellow Book independence standards?

sufficient SKE

Picture from AdobeStock.com

Yellow Book Independence

The 2011 Yellow Book (effective for periods ending after December 15, 2012; http://www.gao.gov/yellowbook) requires that the external auditor document the CPA firm’s independence when the firm also provides nonaudit services (such as preparation of financial statements).  Many small governments have their external auditors prepare their financial statements.

When such a service is provided by the audit firm, the audit client has to have someone with sufficient skill, knowledge and experience to oversee the nonattest service.

If the government has no one with sufficient SKE, then the external auditor is not independent and can’t ethically perform the audit.

Examples of SKE

Consider the following potential reviewer scenarios:

1. A 15 year mayor who is a businessman, no accounting education, no formal training in reading governmental financial statements, he understands the fund level statements but can’t grasp the reconciliation between the government-wide financial statements and the fund level financial statements.

2. Second year finance director with no prior accounting experience, graduated from a two year college with a degree in general business.

3. Finance director with 25 years experience and is a CPA, member of GFOA, trains others in governmental accounting.

4. Finance director with a high school education but has extensive governmental accounting training from the Carl Vinson Institute, could if he liked, create the financial statements from scratch.

As you can see, the independence assessment will sometimes be black and white, but sometimes there will be shades of gray.

An Alternative

If the auditor can’t get comfortable with the SKE of the government’s financial statement reviewer, there is one alternative: the local government can hire someone outside the government with sufficient SKE to be the reviewer (for example a CPA not affiliated with the external audit firm).

At the end of the day, the local government must have a designated person (either internally or externally) with sufficient SKE for the audit firm to be independent.

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