Compiled Financial Statements without a Statement of Retained Earnings

Are you required to include a statement of retained earnings in compiled financial statements?

Compiled financial statements that omit substantially all disclosures may not include a statement of changes in retained earnings and may not disclose the changes in retained earnings on the face of the financial statements.

GAAP Departure?

Some accountants have questioned whether this lack of information should be considered a departure from GAAP. According to FASB ASC 505-10-50-2, the changes in equity accounts is considered a required disclosure, but not a required statement. Therefore, such information is not required to be disclosed in compiled financial statements that omit substantially all disclosures.

Recommendation

Even when disclosures are omitted, consider adding the changes in retained earnings (though not required) to the bottom of the income statement; for example:

Net Income                                                                    $52,520

Retained Earnings, Beginning of Period                   $125,980

Retained Earnings, End of Period                             $178,500

If you do add the changes in retained earnings, remember to change the title of the statement accordingly (e.g., statement of income and changes in retained earnings).

SAS 125 – Restricting the Use of the Auditor’s Written Communication

SAS 125 addresses the auditor’s responsibility when required or when the auditor decides to include in (1) the auditor’s report or (2) other written communication, language that restricts the use of the auditor’s written communication.

Language that restricts the use of the auditor’s written communication is referred to in SAS 125 as an alert.

Objective

SAS 125 states, “The objective of the auditor is to restrict the use of the auditor’s written communication by including an alert when the potential exists for the auditor’s written communication to be misunderstood if taken out of the context in which the auditor’s written communication is intended to be used.”

When to Include an Alert

SAS 125 indicates that the auditor’s written communication should include an alert, in a separate paragraph, that restricts the written communications use when the subject matter of the written communication is based on:

  • Measurement or disclosure criteria that are determined by the auditor to be suitable only for a limited number of users who can be presumed to have an adequate understanding of the criteria
  • Measurement or disclosure criteria that are available only to the specified parties
  • Matters identified by the auditor during the course of the audit engagement (such as significant deficiencies or material weaknesses) when identification of such matters is not the primary objective of the audit engagement

Wording the Alert

The alert should include the following:

  • State that the auditor’s written communication is intended solely for the information and use of specified parties
  • Identify the specified parties
  • State that the auditor’s written communications is not intended to be and should not be used by anyone other than the specified parties

Sample Alert

This report is intended for the information and use of Flagstaff, Inc. and Ginning, Inc. and is not intended to be and should not be used by anyone other than these specified parties.

Alert for Government Auditing Standards (GAS) Engagement

The alert language shown above should not be used when:

  1. the engagement is performed in accordance with Government Auditing Standards, and
  2. the auditor’s written communication pursuant to that engagement is issued in accordance with:
    • AU-C section 265, Communicating Internal Control Related Matters Identified in an Audit (AICPA, Professional Standards);
    • AU-C section 806, Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements (AICPA, Professional Standards); or
    • AU-C section 935, Compliance Audits (AICPA, Professional Standards).

Instead, the alert should:

  1. describe the purpose of the auditor’s written communication and
  2. state that the auditor’s written communication is not suitable for any other purpose

Sample GAS Alert

A11 of SAS 125 offers the following sample language:

The purpose of this [report, letter, presentation, or communication] is solely to [describe the purpose of the auditor’s written communication, such as to describe the scope of our testing of internal control over financial reporting and compliance, and the result of that testing, and not to provide an opinion on the effectiveness of the entity ‘s internal control over financial reporting or on compliance]. This [report, letter, presentation, or communication] is an integral part of an audit performed in accordance with Government Auditing Standards in considering [describe the results that are being assessed, such as the entity ‘s internal control over financial reporting and compliance]. Accordingly, this [report, letter, presentation, or communication] is not suitable for any other purpose.

Potential AU Topics Impacted

Appendix A of SAS 125 provides example reports of the AU-C Sections that might be impacted by this Standard as follows:

  • AU-C 260 – The Auditor’s Communication With Those Charged With Governance
  • AU-C 265 – Communicating Internal Control Related Matters Identified in an Audit
  • AU-C 725 – Supplementary Information in Relation to the Financial Statements as a Whole
  • AU-C 800 – Special considerations-Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
  • AU-C 806 – Reporting on Compliance With Aspects of Contractual Agreements or Regulatory Requirements in Connection With Audited Financial Statements
  • AU-C 915 – Reports on Application of Requirements of an Applicable Financial Reporting Framework
  • AU-C 920 – Letters for Underwriters and Certain Other Requesting Parties
  • AU-C 935 – Compliance Audits

Effective Date

This SAS is effective for auditor’s written communications related to audits of financial statements for periods ending on or after December 15, 2012. For all other engagements conducted in accordance with GAAS, this SAS is effective for the auditor’s written communications issued on or after December 15, 2012.

Dating CPA Reports

One issue that CPAs often deal with is the dating of reports. What date should you use on your compilation, review, audit, and agreed-upon procedures reports?

Here’s a summary.

Compilations 

The date of completion of the compilation should be used as the date of the accountant’s report.

Source of information: AR 80.17.

Reviews

The accountant’s review report should not be dated earlier than the date on which the accountant has accumulated review evidence sufficient to provide a reasonable basis for concluding that the accountant has obtained 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.

Source of information: AR 90.28.

Audits

The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:

a. the audit documentation has been reviewed;

b. all the statements that the financial statements comprise, including the related notes, have been prepared; and

c. management has asserted that they have taken responsibility for those financial statements.

Source of information: AU-C 700.41.

Agreed-Upon Procedures

The date of completion of the agreed-upon procedures should be used as the date of the practitioner’s report.

Source of information: AT 201.34.

Summary

When I’m asked about dating reports, my response is usually, “don’t date the report until all reviews (engagement partner, quality control and client) have been performed.” A peer reviewer may find fault with engagement files reflecting report issuance dates prior to review dates. The lack of review (prior to issuance of the financial statements) may be construed as a lack of evidence (especially for audits).

You will need to get a representation letter from clients for all audits and reviews (and usually for agreed-upon procedures), and the representation letter date should be the same as the report date.

Coordinating the completion of reviews and the signing of the representation letter is tricky and can feel like herding cats. It is best to get all reviews (including the engagement partner and quality control) performed prior to getting the representation letter signed.

Safest rule: Have all reviews of work paper files (including the financial statements) performed prior to the signing of the representation letter and make sure the report date agrees with the representation letter date.

Why?

The CPA firm may find a material error in the financial statements upon its final review. If this happens after you’ve given your client a draft of the financial statements and they’ve signed the representation letter, you will have egg on your face – and more work to do.

Transaction Guarantee Program (TAG) Continuation Uncertain

A December 2, 2012 Wall Street Journal article reported the following:

On Jan. 1, a program that insures an unlimited amount of money in non-interest-bearing accounts will expire unless Washington moves to extend it. Without the Transaction Account Guarantee program, or TAG, an insurance cap resets to $250,000, affecting about $1.6 trillion in deposits.

And without insurance protection, depositors may be compelled to move amounts above $250,000 to other venues deemed safer, leaving the banks with less business.

The uncertainty surrounding TAG accounts is making it difficult for small banks to deal with year-end planning and is causing banks to slow lending until Congress resolves these issues.

Senator Harry Reid did propose legislation last week to extend the TAG program another two years.