Compilation, Review and Accounting Service Update

Are you equipped to apply current professional standards in the 2008 engagement environment? This course covers the current year’s Compilation and Review Alert as well as developments in independence, engagement and representation letters, field work, disclosure, reporting, documentation, changes in services or in accountants, and specialty engagements. Anyone managing compilation or review engagements will benefit from this course.

Highlights include what you need to know to plan, review and report on these engagements in 2008; current practice developments; the deficiencies most commonly found by peer reviewers; and the proposed standards and other developments on the horizon that you should be monitoring.

Objectives:

Identify the professional standards and risk factors relevant to the planning of compilation, review and accounting service engagements

Value Aid! AICPA’s Compilation and Review Alert

Prerequisite: Experience managing accounting, compilation and review engagements

Chapter 1 - Current Engagement Environment

Learning Objectives

Upon completion of this chapter, you should be able to

• Identify standard setters for compilation and review engagements
• Understand the performance requirements for compilation and review
• Understand the scope of compilation and review reporting
• Understand the current year economic outlook

Introduction

In this chapter, we discuss the following:

• The nature of compilation and review engagements
• The specific performance requirements for compilation and review
• Standard compilation and review report
• Common modifications of compilation and review reports
• Compiling specified accounts, elements or items of financial statements
• Compiling pro forma financial information
• The outlook for the U.S. business economy
• Small business confidence

Resources

• Appendix A, Statements on Standards for Accounting and Review Services - Updated March 2007
• Appendix B, Questions and Answers (Nonauthoritative) - Updated March 2007
• Appendix C, AICPA Compilation and Review Alert - 2006/07

Standards for Compilation and Review Engagements

Statements on Standards for Accounting and Review Services (SSARS) are established by the Accounting and Review Services Committee (ARSC). There are currently 14 SSARS and 29 Interpretations of SSARS, all of which are included in the codified standards in Appendix A. There are also some 15 Technical Questions and Answers currently in effect and included in Appendix B. These represent nonauthoritative responses to inquiries addressed to the Technical Information Service.

The hierarchy of literature related to compilation and review engagements is as follows:

• Statements on Standards for Accounting and Review Services - The accountant should be prepared to justify departures from the SSARS.
• Interpretative Publications - These include appendices to the SSARS, Interpretations of the SSARS, guidance included in AICPA Audit and Accounting Guides that addresses compilation and review engagements, and guidance included in AICPA Statements of Position that addresses compilation and review engagements. The accountant should be prepared to explain how he or she complied with the SSARS provisions that are addressed in interpretative publications.
• Other Compilation and Review Publications - These publications do not have authoritative status, but they may be useful in helping the accountant to apply the SSARS. Examples of such publications include the AICPA's annual Compilation and Review Alert, articles in the Journal of Accountancy and the CPA Letter, and this CPE course. The accountant is not obligated by Rule 202 of the AICPA's Code of Professional Conduct to be aware of these publications.

Each year the ARSC, in conjunction with the AICPA's Accounting and Auditing Publications Team, publishes the Compilation and Review Alert. The purpose of the Compilation and Review Alert is to help accountants as they plan and perform their upcoming compilation and review engagements. Much of this course has been developed based on the SSARS developments, current practice issues, and other issues identified in the current Compilation and Review Alert.

This introductory chapter is organized to first provide a broad review of the standards and guidance affecting compilation and review engagements. The second part of the chapter addresses the current business environment and its anticipated effect on the provision of compilation and review services.

Overview of Guidance on Compilation Engagements

In a compilation engagement, the accountant presents in the form of financial statements information that is the representation of management (owners) without undertaking to express any assurance on the statements. Compiled financial statements provide the reader no assurance regarding the statements. Professional Standards require that financial statements presented by the accountant to the client or third parties must at least be compiled.

Compilation engagements may only be provided to entities that have not registered securities.¹ Accountants may not perform compilations for entities that have listed securities, filings with a regulatory agency in preparation for a public sale of securities or a subsidiary, or are joint ventures or controlled enterprises of a public entity.

Financial Statement Compilations for Financial Statements

When it comes to reporting on compilation engagements, there are two options available to the accountant. The first option is a traditional compilation engagement that results in the issuance of a compilation report by the accountant. This option should be chosen when the accountant is engaged to report on compiled financial statements that are or might reasonably be expected to be used by a third party. Third parties are all parties except for members of management who are knowledgeable enough about the business to be able to put the information in the proper context.

The second option is a management-use-only compilation engagement. In this situation, the accountant submits financial statements that are not reasonably expected to be used by a third party (hence management-use-only). Here, the accountant has two communication options. The accountant may always choose to issue a standard compilation report at the end of the engagement. Another option, though, is to communicate the results of the engagement through the use of an engagement letter, negating the need for a compilation report at the end of the engagement.

In considering whether a management-use-only compilation is appropriate, accountants should consider each of the following:

• Needs of third parties - Does a third party need compiled financial statements on a regular basis?
• Information that might bear on the integrity of management - Has information come to the practitioner's attention that gives him/her reason to doubt the integrity of management?

¹ Special rules exempt from SSARS the compilation of personal financial statements to be included in written personal financial plans.

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