Compilation and Review Developments - Risk Alert

How This Alert Helps You

.01    This Compilation and Review Alert (alert) is a crucial tool, designed to help you as you plan and perform your compilation and review engagements. This alert discusses recent Standards for Accounting and Review Services (SSARSs) developments, addresses emerging practice issues, points out pitfalls that frequently occur in compilation and review engagements, and provides valuable information regarding current
accounting developments.

Economic Developments
The State of the Economy

.02    When compiling or reviewing financial statements, you should possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates that will enable you to compile or review the financial statements for an entity operating in that industry. Furthermore, to compile or review financial statements, you should possess a general understanding of the nature of the entity's business transactions. Such understanding may include an understanding of the economic conditions facing the industry in which your client operates. Economic activities relating to factors such as interest rates, consumer confidence, overall economic expansion or contraction, inflation, and labor market conditions are likely to have an effect on your client.

.03    The U.S. real gross domestic product (GDP), the broadest measure of economic activity, measures output of goods and services by labor and property within the United States and increases as the economy grows. According to the Bureau of Economic Analysis, real GDP increased at an annual rate of 2.2 percent in 2007. According to 2008 second quarter advance estimates, real GDP increased at an annual rate of 1.9 percent, which is up slightly from the 1.0 percent rate in the first quarter of 2008.

.04    The unemployment rate remained relatively unchanged during 2007, holding between 4.4 percent and 5.0 percent, with an annual average rate of 4.6 percent. However, during 2008, the unemployment rate has risen. As of July 2008, the unemployment ratewas 5.7 percent, representing approximately 8.8 million people.

.05    The target for the federal funds rate remained stable at 5.25 percent from June 2006 to September 2007 when the Federal Reserve began decreasing rates. Since the first rate decrease in September 2007, the Federal Reserve has decreased rates a total of 3.25 percentage points to 2.00 percent as of the end of July 2008. The Federal Reserve noted in its July press release that overall economic activity continues to expand. However, labor markets have softened further, and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters. Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Federal Open Market Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

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