Tag Archives for " Preparation of Financial Statements "

Mar 31

Preparation of Financial Statements: Questions and Answers

By Charles Hall | Preparation, Compilation & Review

Do you desire to issue financial statements without a compilation report? Maybe you want a simpler method of providing financial statements to your clients, one that takes less time and has fewer restrictions? If yes, then get familiar with the new Preparation of Financial Statements option offered in SSARS 21. Here are a few questions and answers to help get you up to speed on the provisions of this new standard.

Preparation of Financial Statements

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General Issues

When is the preparation of financial statements guidance applicable?

  1. When the accountant is in public accounting
  2. When the accountant is engaged to prepare financial statements and
  3. When there is no corresponding compilation, review, or audit engagement on the prepared financial statements for the same period

Who can receive financial statements issued under Section 70 of SSARS 21?

The client and third parties.

When is the new preparation of financial statement guidance applicable?

The guidance is applicable for periods ending on or after December 15, 2015, but can be early implemented–so it can be used now.

If my firm only issues financial statements using Section 70 of SSARS 21, is it subject to peer review?

The AICPA Peer Review Board has stated that firms performing only preparation services are not required to enroll in the AICPA Peer Review program. Check with your state board to see if it requires enrollment (since a state board may require peer review, even though the AICPA does not).

What bases of accounting can be used to prepare financial statements under Section 70 of SSARS 21?

  1. GAAP
  2. Cash
  3. Tax
  4. Contractual
  5. Regulatory
  6. Other (e.g., the AICPA’s financial reporting framework for small- and medium-sized entities)

What is the responsibility of the accountant when an obvious significant error is detected while performing a preparation of financial statement engagement?

She should bring the error to the attention of management and request a correction and/or additional information.

Can an accountant perform a preparation of financial statements engagement on a prescribed form?

SSARS 21 does not preclude the accountant from performing a preparation of financial statements engagement on a bank’s prescribed form. The accountant, however, must comply with the rules specified in Section 70 of SSARS 21 such as including a disclaimer or including “no assurance is provided” on each page.

Can Section 70 of SSARS 21 be applied to the following?

  • Specified accounts (e.g., accounts receivable or a schedule of rentals),
  • Supplementary information,
  • Required supplementary information (e.g., management, discussion, and analysis of a government),
  • Pro forma financial statements, and
  • Prospective financial information

Yes, as long as all relevant preparation of financial statement guidance is followed. (See .A1 of Section 70.)

Work Paper Issues

Is an engagement letter required for the preparation service?

Yes and it must be signed by both the accountant and management or those charged with governance.

What’s the minimum work paper requirement?

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

Report Issues

How does the accountant communicate his or her responsibility for the financial statements?

  1. The accountant can include on each page the words “no assurance is provided” or
  2. A disclaimer can be issued.

Can supplementary information be included?

Yes. Click here for more information.

Is the “no assurance” wording required on the supplementary information?

No. However, consider doing so anyway.

How should the accountant communicate a departure from the applicable basis of accounting?

  1. On the face of the financial statements or
  2. In the notes to the financial statements

Can a departure from the applicable basis of accounting be communicated in the disclaimer?

No. Departures must be communicated on the face of the financial statements or in a note.

Is it okay to title the disclaimer report?

I checked with the AICPA. It is okay to title the report with wording such as:

  • Accountant’s Disclaimer or
  • Accountant’s Disclaimer Report.

It may be best to use Accountant’s Disclaimer. Why? Some accountants believe the disclaimer is not a report; compilation, review, and audit engagements result in reports.

Also, .A20 of Section 70 of SSARS 21 includes a sample preparation of financial statements engagement letter that states “The financial statements will not be accompanied by a report.” So if you do call the disclaimer a “report,” make sure you amend your engagement letter accordingly.

When the accountant provides a disclaimer that precedes the financial statements, can she include a reference on each page of the financial statements to the disclaimer (e.g., See Accountant’s Disclaimer)?

SSARS 21 is silent on this issue. I checked with the AICPA, and they said it is permissible to include “See Accountant’s Disclaimer” on each page of the financial statements.

Should the disclaimer include a salutation?

The example in SSARS 21 does not include a salutation (addressee). I checked with the AICPA, and they stated that a salutation can be included in the disclaimer.

If substantially all disclosures are omitted, where should the accountant communicate the omission?

Either on the face of the financial statements or in a selected note to the financial statements.

Example wording is as follows:

Substantially all disclosures ordinarily included in financial statements prepared on the tax basis of accounting are not included.

Can selected disclosures be included in a preparation of financial statements engagement?

Yes. Use a label such as the following:

Selected Information–Substantially All Disclosures

Required by [the applicable financial reporting framework] Are Not Included

If financial statements are prepared in accordance with GAAP using Section 70 (Preparation of Financial Statements) and the cash flow statement and disclosures are omitted, how might the legend on each page read?

No assurance is provided on these financial statements.

The financial statements do not include a statement of cash flows.

Substantially all disclosures required by accounting principles generally accepted in the United States are not included.

Free Slide Deck

To access my free SSARS 21 Preparation of Financial Statements slide deck, click here.

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