Compilation and Review Engagement Essentials

• Chapter 1 - Introduction to Compilation Engagements
  • Learning Objectives
  • Introduction
  • Resources
  • Defining a Compilation
    • Definition
    • Comparison to an Audit
    • Comparison to a Review
  • Independence
    • Importance
    • Unpaid Fees
    • Specific Services That Impair Independence
    • Provision of Nonattest Services
    • Public Accountant with an Ownership, Governance, or Employee Relationships with the Client
    • Accountants Not in Public Accounting
  • Types of Compilation Engagements
    • Two Options
    • “Traditional” Compilation Engagement
    • “Management-use-only” Compilation Engagement
    • Choosing the Type of Engagement
    • Communication Options in a Management-use-only Engagement
    • Advantages of Communicating Results in an Engagement Letter
    • Levels of Service Does Not Differ
  • Scope of Compilation Services
    • Importance
    • Financial Statements Require Compilation
    • Certain Financial Presentations May Be Compiled
    • Specific Financial Presentations that Do Not Require Compilation
    • Working Trial Balances Do Not Require Compilation
    • Litigation Support Services Do Not Require Compilation
    • Other Cases Where a Compilation Is Not Required
    • Draft Financial Statements – A Special Case
  • Standards for Compilation Engagements
    • Overview
    • The Code of Professional Conduct
    • Performance Standards and Assurance Levels
    • Caveat
  • Summary
  • Questions
• Chapter 2 - Performing a Compilation
  • Learning Objectives
  • Introduction
  • Resources
  • Compilation Performance Standards
    • Comparison to Audit and Review Performance Standards
    • Standard 1: Establish an Understanding
    • Standard 2: Knowledge of the Industry
    • Standard 3: Knowledge of the Client
    • Standard 4: Obtain Additional Information
    • Standard 5: Read the Financial Statements
    • Standard 6: Communicate Suspected Fraud and Illegal Acts
  • Documentation for Compilation Engagements
    • Engagement Letters
    • Documentation of Knowledge of Industry and Business
    • Compilation Procedures Workprogram
    • Bridging Documents
    • Disclosure Checklist
    • Support for Financial Statement Notes
  • Summary
  • Questions and Case
    • Case 2-1 – Compliance with Professional Standards
• Chapter 3 - Reporting on Compilation Engagements
  • Learning Objectives
  • Introduction
  • Resources
  • Standard Compilation Reports
    • Form and Contents
    • Nondisclosure of Additional Procedures
  • Common Modifications to Standard Compilation Reports
    • Lack of Independence
    • Public Accountant with an Ownership, Governance, or Employee Relationships with the Client
    • Financial Statements That Omit Substantially All Disclosure
    • Financial Statements That Include Some, but Not All Disclosures
    • Departures from GAAP
    • Supplementary Information
    • Reference to the Country of Origin
    • Emphasis Paragraphs
    • Compliance with International Financial Reporting Standards
    • Other Modifications
  • OCBOA Financial Statements
    • Importance
    • Titles of Financial Statements
    • Footnote Disclosures
  • Restricting the Use of Compilation Reports
    • Importance
    • When to Restrict
  • Alternative Reporting Options for Management-Use-Only Financials
  • Summary
  • Case 3-1
    • Evaluating Accountant’s Report and Compiled Financial Statements
• Chapter 4 - Other Compilation Engagements
  • Learning Objectives
  • Introduction
  • Resources
  • Compiling Accounts, Elements or Items of Financial Statements
    • Description
    • Compilation Not Required, But Is Allowed
    • Choosing Whether to Present Accounts, Elements, or Items of Financial Statements as Compiled
    • Performance Requirements
    • Reporting
  • Compiling Pro Forma Financial Information
    • Definition of Pro Forma Financial Information
    • Source of Information
    • Compilation Not Required, But Is Allowed
    • Choosing Whether to Present Pro Forma Information as Compiled
    • Performance Requirements
    • Reporting on Pro Forma Information
  • Compiling Interim Financial Statements
    • Description
    • Financial Statement Considerations
    • Reporting Requirements
  • Compiling Special Purpose Financial Statements
    • Incomplete Presentations that are Otherwise in Conformity with GAAP or OCBOA
    • Basis of Accounting is not in Conformity with GAAP or OCBOA
  • Summary
  • Case 4-1
    • Required
• Chapter 5 - Introduction to Review Engagements
  • Learning Objectives
  • Introduction
  • Resources
  • Defining a Review
  • Independence
  • Standards that Apply to Review Engagements
    • The Code of Professional Conduct
    • The Starting Place for a Review
    • Performance Standards and Assurance Levels
  • Summary
• Chapter 6 - Performing a Review
  • Learning Objectives
  • Introduction
  • Resources
  • Review Performance Standards
    • Establish an Understanding
    • Knowledge of the Industry
    • Knowledge of the Client
    • Perform Inquiry and Analytical Procedures
    • Obtain a Management Representation Letter
    • Obtain Additional Information
    • Read the Financial Statements
    • Communicate Suspected Fraud and Illegal Acts
  • Documentation for Review Engagements
    • Engagement Letters
    • Documentation of Knowledge of Industry and Business
    • Review Engagement Program
    • Inquiry and Analysis
    • Disclosure Checklist
    • Support for Financial Statement Notes
  • Summary
  • Questions and Case
    • Case 6-1
• Chapter 7 - Inquiry and Analytical Review Procedures
  • Learning Objectives
  • Introduction
  • Resources
  • Overview
  • Inquiry Procedures
    • Typical Inquiries
    • Documentation of Inquiries
  • Analytical Procedures
    • Defining Analytical Procedures
    • Selecting Analytical Procedures
    • Developing Expectations
    • Evaluating the Results of Analytical Procedures
    • Documenting Analytical Procedures
    • Limitations of Analytical Procedures
  • Summary
  • Cases
    • Case 7-1 – Documenting Expectations
    • Case 7-2 – Analytical Procedures and Management Inquiry
• Chapter 8 - Reporting on Review Engagements
  • Learning Objectives
  • Introduction
  • Resources
  • Standard Review Reports
  • Some Major Differences from Compilation Engagements
    • Lack of Independence
    • Omitting Substantially All Disclosures
  • Common Modifications to Standard Review Reports
    • Departures from GAAP
    • Scope Limitations
    • Supplementary Information
    • Reference to the Country of Origin
    • Emphasis Paragraphs
    • Compliance with International Financial Reporting Standards
    • Other Modifications
  • OCBOA Financial Statements
    • OCBOA Financial Statements
    • Footnote Disclosures
  • Restricting the Use of Review Reports
  • Reviewing Special Purpose Financial Statements
    • Incomplete Presentations that are Otherwise in Conformity with GAAP or OCBOA
    • Basis of Accounting Is Not in Conformity with GAAP or OCBOA
  • Summary
  • Cases
    • Case 8-1 – Financial Statement Disclosures
    • Case 8-2 – Review Report
• Chapter 9 - Latest Developments
• Appendix A - SSARS 17, Omnibus Statement on Standards for Accounting and Review Services – 2008
• Appendix B - Codification of Statements on Standards for Accounting and Review Services as of February 2008
• Appendix C - Accounting and Review Exhibits
• Appendix D - Accounting and Review Appendixes
• Appendix E - Accounting and Review Topical Index
• Appendix F - Technical Inquiries: Compilation and Review Engagements as of February 2008
• Appendix G - ET Section 101-3 – Independence
• Appendix H - Client Acceptance Form
• Appendix I - Compilation Engagement Program
• Appendix J - Management-use-only Compilation Engagement Checklist
• Appendix K - Review Engagement Program
• Appendix L - Financial Statements and Notes Checklists
• Appendix M - Sample Compilation Reports
  • 1 – Compilation Report – Standard Report
  • 2 – Compilation Report – Lack of Independence
  • 3 – Compilation Report – Substantially All Disclosures Omitted
  • 4 – Compilation Report – Departure from GAAP and Effect Is Determined
  • 5 – Compilation Report – Substantially All Disclosures Omitted, and Statement of Cash Flows Omitted
  • 6 – Compilation Report – Supplementary Information
  • 7 – Compilation Report – Going Concern
  • 8 – Compilation Report – Comparative Financial Statements with Changed Reference to a Departure from GAAP in Prior Year Report
  • 9 – Compilation Report – Tax Basis Statement of Assets, Liabilities, and Equity Only, Substantially All Disclosures Omitted
  • 10 – Compilation Report – Compilation of Accounts, Elements, or Items
  • 11 – Compilation Report – Compilation of Pro Forma Financial Information
• Appendix N - Sample Review Reports
  • N-1: Standard Report
  • N-2: Departure from GAAP
  • N-3: Statement of Cash Flows Omitted
  • N-4: Supplementary Information
  • N-5: Emphasis Paragraph
  • N-6: Balance Sheet Only
  • N-7: Comparative Statements
  • N-8: Cash Basis Plus Supplementary Information
  • N-9: Tax Basis Departure from Tax Basis
• Appendix O - Checklist for Accountant’s Reports on Compiled or Reviewed Financial Statements

733679

Chapter 1 - Introduction to Compilation Engagements

Learning Objectives

Upon completion of this chapter, you should be able to

• Understand compilation engagements and their scope.

• Understand traditional and management-use-only compilation engagements.

• Identify financial statements subject to compilation.

• Identify the standards from the Code of Conduct that apply to compilations.

• Understand the performance requirements and level of assurance for compilations.

Introduction

In this chapter, we discuss the following:

• The definition of a compilation engagement

• Independence

• Traditional compilation engagements and those not intended for third party use

• What constitutes financial statements

• Professional standards that apply to compilation engagements

• Levels of assurance provided by different engagements

Resources

• Appendix A, SSARS 17, Omnibus Statement on Standards for Accounting and Review Services - 2008

• Appendix B, Codification of Statements on Standards for Accounting and Review Services as of February 2008

• Appendix C, Accounting and Review Exhibits

• Appendix D, Accounting and Review Appendixes

• Appendix E, Accounting and Review Topical Index

• Appendix F, Technical Inquiries: Compilation and Review Engagements as of February 2008

Defining a Compilation

Definition

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. In other words, using management's records, the accountant creates financial statements without gathering evidence or opining about the validity of those underlying records. Because compiled financial statements provide the reader no assurance regarding the statements, they represent the lowest level of financial statement service accountants can provide to their clients. Accordingly, standards governing compilation engagements 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 nonpublic entities, referred to in the literature as nonissuers. 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.

Comparison to an Audit

By providing no assurance on the associated financial statements, compilations are significantly different from audit engagements. An audit engagement, for example, begins with a set of financial statements provided by management. In these financial statements, management asserts that the transactions and accounts underlying the financial statements: 1) exist or occurred, 2) are complete, 3) represent rights and obligations of the company, 4) are valued and allocated correctly, and 5) are presented and provide disclosure in accordance with generally accepted accounting principles. The auditor's objective is to provide reasonable assurance on the financial statements. In order to provide reasonable assurance, the auditor must obtain evidence - through such procedures as inquiry, analytical procedures, confirmations, vouching, management representation letters, and others - to corroborate management's assertions about the financial statements. Since reasonable assurance is the highest level of assurance provided by accountants, the audit requires the highest level of rigor.

Comparison to a Review

Compilation engagements are also significantly different from review engagements. A review engagement provides limited assurance on the financial statements. While limited assurance is significantly lower that the reasonable assurance provided by an audit, it is a higher level of assurance than the compilation which provides no assurance about the financial statements. Like an audit, a review engagement begins with a set of financial statements and the associated management assertions. Because the accountant's objective is to provide limited assurance on the financial statements, the accountant must obtain limited evidence, through inquiry, analytical procedures and management's representation letter, to corroborate management's assertions about the financial statements.

Independence

Importance

Because compilation engagements provide no assurance on the financial statements being compiled, accountants are not required to be independent of their clients on these engagements. The accountant must, however, note their lack of independence on the compilation report or, if the compilation is for management-use-only, in the engagement letter. It is also important to note that the reason for the lack of independence is not disclosed in the compilation report or, for management-use-only engagements, in the engagement letter.

Since disclosure is required when the accountant lacks independence on a compilation engagement, it is important to examine some of the items that more typically cause the accountant to lose (impair) independence.

Unpaid Fees

An accountant's independence is impaired when fees for professional services rendered more than one year prior to the date of the accountant's report remain unpaid when the current year's report is released. These fees include both billed and unbilled amounts.

Specific Services That Impair Independence

There are also some specific services that impair the accountant's independence. These services include

• Exercising authority on behalf of the client, such as authorizing, executing or consummating a transaction, or having the authority to do so.

• Preparing source documents, in electronic or other form, that evidence the occurrence of a transaction.

• Having custody of client assets.

• Supervising client employees performing their normal recurring activities.

• Determining which of the auditor's recommendations should be implemented.

• Reporting to the board of directors on behalf of management.

• Serving as a client's stock transfer or escrow agent, registrar, or general counsel.

• Designing a client's financial information system.

733679