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Compilation and review engagements include the following five elements.
A. Three-party Relationship
Compilation and review engagements involve three parties: management (the responsible party), an accountant in the practice of public accounting, and the intended users of the financial statements or financial information:
1 . Management
Management-and when appropriate, those charged with governance-are responsible for:
a. the identification of an applicable financial reporting framework and individual accounting policies when alternatives are provided by the financial reporting framework;
b. the preparation and fair presentation of the financial statements in accordance with that framework; and
c. the design, implementation, and maintenance of internal control.
The accountant cannot issue an unmodified compilation or review report when management is unwilling to accept these responsibilities. The accountant may make suggestions about the form or content of the financial statements, or may prepare them based on information that is the representation of management.
2. Accountant in the Practice of Public Accounting
The accountant should possess knowledge of the accounting principles and practices of the industry in which the entity operates that will enable the accountant to compile or review the financial statements. An accountant should not accept an engagement if preliminary understanding of the engagement circumstances indicates that ethical requirements regarding quality control cannot be satisfied. In some cases, this requirement can be satisfied through the use of experts. When an expert is used , the accountant must be satisfied that the expert has the required skills and knowledge and that the accountant has adequate involvement in the engagement and an
understanding of the work for which the expert is used.
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3. Intended Users
The intended users are the person(s) or class of persons who understand the limitations of the compilation or review engagement and the financial statements.
Management and the intended users may be the same. Intended users may be from the same entity or from different entities. The accountant has no responsibility to
identify the intended users.
B. Financial Reporting Framework
A financial reporting framework is the financial accounting standards established by an authorized or recognized standards setting body. Examples of financial reporting frameworks include U.S. GAAP as established by the Financial Accounting Standards Board, the
Governmental Accounting Standards Board, or the Federal Accounting Standards Advisory Board; IFRS issued by the International Accounting Standards Board; and OCBOA.
1 . OCBOA
Financial statements prepared in accordance with an OCBOA are not considered appropriate in form unless the financial statements include:
a. A description of the OCBOA, including a summary of significant accounting policies and a description of the primary differences from GAAP.
b. Disclosures similar to those required by GAAP if the financial statements contain items that are similar to those included in financial statements prepared in accordance with GAAP.
C. Financial Statements or Financial Information
The financial reporting framework determines what constitutes a complete set of financial statements. An accountant may be engaged to compile or review a complete set of financial statements or an individual financial statement. Financial statements may be for an annual period, or for a shorter or longer period.
D. Sufficient Appropriate Evidence (review only)
The accountant has no responsibility to obtain evidence about the accuracy or completeness of the financial statements in a compilation engagement. When performing a review
engagement, the accountant should perform procedures to accumulate evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. The accountant should use professional judgment to determine the nature, timing and extent of review procedures, which are limited
relative to audit procedures. Review evidence is generally obtained through inquiry and analytical procedures.
E. Written Communication or Report
If an accountant performs a compilation, a report or written communication is required, unless the accountant withdraws from the engagement. If an accountant performs a review, a written review report is required .
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IV. MATERIALITY
The accountant's determination of materiality is based on professional judgment and is affected by the needs of the users of the financial statements. Misstatements should be considered material if, individually or in aggregate, they could be reasonably expected to influence the economic decisions made by financial statement users, Judgments about materiality are based on circumstances and are impacted by the size and/or nature of the misstatement.
V. COMPILATION OF FINANCIAL STATEMENTS (nonissuers only)
A compilation of financial statements is a service, the objective of which is to present in the form of financial statements information that is the representation of management without undertaking to express any assurance on the financial statements.
A. Establishing an Understanding with the Client (engagement letter is presumptively mandatory) The accountant should establish an understanding with management and, when appropriate, those charged with governance, regarding the services to be performed for the compilation engagement and should document the understanding in an engagement letter.
The understanding with management should include:
1 . The objectives of the engagement.
2. Management's responsibilities.
3. The accountant's responsibilities.
4. The limitations of the engagement, including statements that:
a. the engagement cannot be relied upon to disclose errors, fraud , or illegal acts; and
b. the entity will be informed of any information indicating that fraud or an illegal act may have occurred.
5. A description of other accounting services, if any, to be performed.
6. When the financial statements are not expected to be used by a third party and the accountant does not expect to issue a compilation report, the engagement letter should contain an acknowledgment of management's representation and an agreement that the financial statements are not to be used by a third party. When applicable, the following matters should also be addressed:
a. Material departures from the applicable financial reporting framework may exist, and the effects of those departures, if any, on the financial statements may not be disclosed.
b. Substantially all disclosures (and statement of cash flows, if applicable) required by the applicable financial reporting framework may be omitted .
c. Reference to supplementary information.
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7. Sample-Compilation Engagement Letter (financial statements may be used by third parties)
[Appropriate Salutation)
This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide.
We will perform the following services:
compile, from information you provide, the financial statements of XYZ Company December 31, and accountant's report thereon in accordance with for
Review issued American Institute Public (AICPA).
a in presenting financial in the financial
will iAformation that is your representation obtain or provide any assurance there are no that should be made to the financial in order for the to be in conformity
with accounting (for example, principles in the United
You are responsible for:
a . The preparation a n d fair presentation of the financial statements in accordance with [the applicable financial reporting fromework (for example, accounting principles generolly accepted in the United States of America)).
b. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
c. Preventing and detecting fraud.
d. Identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.
e. Making all financial records and related information available to us.
We are responsible for conducting the engagement in accordance with SSARSs issued by the AICPA.
Qr an
procedures in a review. a does not
contemplate an understanding of the internal control; assessing fraud tests accounting records
audit evidence inspection, of
example, or bank image_s); in an
Accordingly, we will not an opinion the financial being
Our engagement cannot be relied u pon to disclose errors, fraud, or illegal acts that may exist. However, we will inform the appropriate level of management of any material errors, and of any evidence or information that comes to our attention during the performance of our compilation procedures, that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention d uring the performance of our compilation procedures regarding illegal acts that may have occurred, unless they are clearly inconsequential.
If, during the period covered by the engagement letter, the accountant's independence is or will be impaired, insert the following:
We are not independent with respect to XYZ Company. We will disc/ose that we are not independent in our compilation report.
(continued)
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(continued)
If, for any reason, we are unable to complete the compilation of your financial statements, we will not issue a report on such statements as a result of this engagement.
Our fees for these services . . . .
We will be pleased to discuss this letter with you at any time. If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to us.
Sincerely yours,
[Signature of accountant)
Acknowledged:
XYZ Company President Date
B. Compilation Requirements
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The following performance requirements are applicable to a compilation.
1 . Knowledge of Industry Accounting Principles and Practices
Accountants should possess adequate knowledge of the accounting principles and practices of the client's industry to enable them to compile financial statements in an appropriate form . This does not prevent accountants from accepting engagements in an industry in which the accountants have no previous experience. However, the accountants are responsible for gaining the required level of knowledge.
2. Understanding of Client's Business
An accountant performing a compilation is required to have a general understanding of the client's business and the accounting principles and practices used by the client, including:
a. �taff qualifications.
b. Iransaction types and frequency.
c. Accounting basis used to prepare the financial statements.
d . form of the accounting records.
e. financial statements' form and content.
3. Reading the Financial Statements
Before issuing a report, accountants should read the compiled financial statements and consider whether they are appropriate in form and free from obvious material errors.
The term error refers to arithmetical and clerical mistakes, as well as to mistakes related to the applicable financial reporting framework.
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4. Fraud and Illegal Acts, Going Concern, and Subsequent Events
If an accountant becomes aware that fraud or an illegal act may have occurred, that there is a going concern uncertainty, or that a subsequent event has occurred, he or she should request management to consider the effect on the financial statements, evaluate management conclusions, and consider the effect of the matter on the compilation report.
C. Financial Statements that May be Inaccurate or Incomplete
Accountants are not required to, but may, make inquiries or perform other procedures to verify, corroborate, or review the information supplied by the client. However, if they discover the information is incorrect, incomplete, or unsatisfactory, they should obtain additional or revised information from the client. If the client refuses to provide such information, the accountants should withdraw from the compilation engagement.
D. Documentation in a Compilation Engagement
Documentation provides the support that the accountant complied with SSARS when performing the compilation engagement. Documentation should provide clear detail of the work performed . The form and content of the documentation depends on the engagement, the methodology and tools, and the accountant's professional judgment. Documentation should include:
1 . The engagement letter.
2. Any significant findings or issues, including the following:
a. Results of compilation procedures indicating that the financial statements could be materially misstated and the actions taken to address these findings.
b. The resolution of questions and concerns raised during compilation procedures.
3. Oral or written communications with management regarding fraud or illegal acts that came to the accountant's attention.
E. Reporting on a Compilation 1 . Overview
The report is the method by which the accountant communicates the extent of the responsibility assumed for the financial statements. An accountant may not issue any reports on unaudited financial statements of a non issuer, or may not submit such financial statements to the client or others, unless the accountant has complied with the standards for a compilation.
The accountant's report in a compilation engagement should include the following:
a. Title
An appropriate title, such as ''Accountant's Compilation Report" or "Independent Accountant's Compilation Report. "
b. Addressee
The report should be addressed as appropriate.
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o o o o o
o o o o o
c. Introductory Paragraph
d.
e.
The introductory paragraph should:
(1 ) Identify the entity.
(2) State that the financial statements have been (3) Identify the financial statements.
(4) Specify the date or period covered by the financial statements.
(5) State that the accountant has not reviewed or audited the financial statements and does not express an opinion or provide any assurance about whether the financial statements are in accordance with the applicable financial reporting framework.
This paragraph should state that management is responsible for the preparation and fair presentation of the financial statements in accordance with the
applicable financial reporting framework, and for designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
Accountant's Paragraph
This paragraph should:
( 1 ) state that the accountant's responsibility i s to conduct the compilation in accordance with SSARS issued the and
(2) state that the of a compilation is to assist in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
f. Signature of Accountant
g. Date of the Accountant's Report
This should be the date of the completion of the compilation.
2. Additional Requirements
a . Each page of the statements should b e marked "See Accountant's Compilation Report" or "See Independent Accountant's Compilation Report. "
b. SSARS does not require that the compilation report be printed on the accountant's letterhead .
c. At the accountant's discretion, a separate paragraph of the report may be used to emphasize any matter already disclosed in the financial statements, such as going concern issues or subsequent events.
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3. Sample Report-Standard Compilation Report
§ o o §
8
4.
A C C O U N T A N T ' S C O M P I L AT I O N R E P O R T
I have the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express a n opinion or provide any assurance about whether the financial statements are i n accordance with [the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)).
is for the preparation and fair presentation of the financial statements in accordance with [the applicable financial reporting framework) and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
is to conduct the compilation in accordance with Statements on Standards for and Review Services issued by the American Institute of Certified Public Accountants. The of a compilation is to assist in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
[Signature of accounting firm or accountant) [Date)
Prescribed Forms that Call for a Departure from the Applicable Financial Reporting Framework
If an accountant is asked to compile financial statements included in a prescribed form that calls for a departure from the applicable financial reporting framework, an
alternative form of standard report is used. An additional paragraph is added stating that the financial statements are presented in accordance with requirements not consistent with the applicable financial reporting framework, and that the financial statements are not designed for those who a re uninformed about the resulting . differences.
5. Reporting on Financial Statements that Omit Substantially All Disclosures a. Compilation with Omission of All Disclosures
If requested by the client, an accountant may compile financial statements that omit substantially all disclosures required by the applicable financial reporting framework (but are otherwise in conformity with the financial reporting framework). The accountant may compile these statements provided :
( 1 ) The accountant's report clearly indicates the omission by including a fourth paragraph disclosing such omissions. This paragraph should state that if the disclosures were included, they might influence the user's conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and
(2) To the accountant's knowledge, the omission is not intended to mislead any person who might be expected to use such financial statements.
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E X A M P L E
Jones Retailing, a non public entity, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles (but are otherwise in conformity with GAAP). Winters may compile such financial statements provided the omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant's report.
P A S S K E Y
Compiled financial statements that omit GAAP disclosures a re acceptable if the:
• Financial statements a re otherwise in conformity with GAAP.
• Reason for omission was not to deceive the user.
• Compilation report warns the user of missing disclosures.
b. Example- Compilation Report with Additional Paragraph when the Financial Statements Omit Substantially All Disclosures
A C C O U NTA N T ' S C O M P I LAT I O N R E P O RT
I have compiled the accompanying balance sheet of XYZ Company as of December 3 1, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with [the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)].
Management is responsible for the preparation and fair presentation of the financial statements in accordance with [the applicable financial reporting framework] and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.
My responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.
Management has elected to omit substantially all the disclosures required by [the applicable financial reporting framework]. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the company's financial position, results of operations, and cash flows. Accordingly, these financial statements are not designed for those who are not informed about such matters.
[Signature of accounting firm or accountant]
[Date]
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