Compilation, Review and Accounting Service Update

• Chapter 1 - Current Engagement Environment
  • Learning Objectives
  • Introduction
  • Resources
  • Standards for Compilation and Review Engagements
  • Overview of Guidance on Compilation Engagements
    • Financial Statement Compilations for Financial Statements
    • Performance Requirements
    • Standard Compilation Reports
    • Common Modifications to Compilation Reports
    • Compilations of Specified Accounts, Elements, or Items of Financial Statements
    • Compilations of Pro Forma Financial Information
  • Overview of Guidance on Review Engagements
    • Performance Requirements
    • Standard Review Report
    • Common Modifications to Review Reports
  • The U.S. Business Environment
    • Small Business Confidence
    • Implications of the Current Economy
  • Summary
• Chapter 2 - Recent SSARS Developments
  • Learning Objectives
  • Introduction
  • Resources
  • New Standards
    • AR Section 20 (SSARS No. 16) – Defining Professional Requirements in Statements on Standards for Accounting and Review Services
    • Omnibus SSARS
  • Interpretations Related to International Accounting and Reporting
    • Interpretation No. 24
    • Interpretation No. 30
  • Interpretation No. 31
  • Proposed SSARS
  • Summary
  • Question 1
  • Question 2
• Chapter 3 - Current Practice Issues
  • Learning Objectives
  • Introduction
  • Resources
  • Bookkeeping Engagements
    • OCBOA Task Force
  • Accountants Engaged to Prepare Financial Statements
  • SQCS No. 7 (Codified as QC Section 10) – A Firm’s System of Quality Control
    • Overview
    • Engagement Quality Control Review
    • Degree of Responsibility Imposed
    • Documentation and Communication
    • Elements of a System of Quality Control
  • Summary
  • Questions
• Chapter 4 - Current Accounting and Reporting Issues
  • Learning Objectives
  • Introduction
  • Resources
  • Common Deficiencies in Peer Reviews
    • Financial Reporting
    • SSARS Procedures and Documentation
  • New Accounting Guidelines
    • FASB Statement No. 160
    • FASB Statement No. 161
    • FASB Statement No. 162
    • FASB Interpretation No. 48
  • Summary
  • Questions
• Chapter 5 - On the Horizon
  • Learning Objectives
  • Introduction
  • Resources
  • Adopting International Financial Reporting Standards
  • SSARS Pipeline
    • The ARSC Clarity Project
    • Reliability
    • Requirement to Obtain Engagement Letters
    • Recodification
  • FASB Pipeline
    • FASB Accounting Standards Codification
    • Fair Value
    • Transfers of Financial Assets
    • Income Tax Convergence Project
    • Contingencies Project
  • International Review and Compilation Standards
  • Summary
• Chapter 6 - 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 - AICPA Compilation and Review Alert – 2008/09
• Appendix H - QC Section – Statements on Quality Control Standards

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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.
• Consider fraud and going concern issues in the current economy.

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
• Fraud and going concern issues in compilation and review 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
• Appendix G, AICPA Compilation and Review Alert – 2008/09

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). The SSARS and their related interpretations have been codified into AR Sections 20 through 600 and are included in Appendix B. AR Appendix A (included as Appendix D of this course) provides a cross reference of SSARS to AR Sections. There are also 15 Technical Questions and Answers currently in effect and included in Appendix F. 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?

• Past experience with management – Have past experiences on other engagements been positive?

• Independence considerations – Practitioners may have to consider carefully the independence implications of being closely involved with management-use-only financial statements.

• Cost/benefit considerations – Can the accountant perform the engagement at a reasonable cost to the client versus the benefit of a traditional engagement?

• Risk management consideration – Some practitioners may perceive this engagement as more risky than a traditional compilation which offers the additional protection of a standard compilation report.

Performance Requirements

There are six performance standards for a compilation engagement.

They include the following:

• Establish an understanding with the entity

• Have appropriate knowledge of the industry

• Have appropriate knowledge of the client

• Obtain additional information if the information supplied is incorrect, incomplete, or otherwise unsatisfactory

• Read the financial statements

• Communicate suspected fraud and illegal acts

Standard Compilation Reports

The standard compilation report is addressed to the appropriate level of management or the board of directors and contains two paragraphs. The first paragraph identifies the financial statements compiled and the entity to which the engagement applies. In addition, this paragraph notes that the compilation has been performed in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.

The second paragraph of the standard compilation report defines the compilation as presenting management's (owner's) representations in the form of financial statements. In addition, this paragraph makes explicit that the financial statements have not been audited or reviewed, so the accountant is not expressing an opinion or any other form of assurance on the financial statements.

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

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