Preparation of Financial Statements: Questions and Answers

SSARS 21 Section 70 answers

Do you desire to issue financial statements without a compilation report? Maybe you want a simpler method of providing financial statements to your clients, one that takes less time and has fewer restrictions? If yes, then get familiar with the new Preparation of Financial Statements option offered in SSARS 21. Here are a few questions and answers to help get you up to speed on the provisions of this new standard.

Preparation of Financial Statements

An image of a road to the horizon with text answers

General Issues

When is the preparation of financial statements guidance applicable?

  1. When the accountant is in public accounting
  2. When the accountant is engaged to prepare financial statements and
  3. When there is no corresponding compilation, review, or audit engagement on the prepared financial statements for the same period

Who can receive financial statements issued under Section 70 of SSARS 21?

The client and third parties.

When is the new preparation of financial statement guidance applicable?

The guidance is applicable for periods ending on or after December 15, 2015, but can be early implemented–so it can be used now.

If my firm only issues financial statements using Section 70 of SSARS 21, is it subject to peer review?

The AICPA Peer Review Board has stated that firms performing only preparation services are not required to enroll in the AICPA Peer Review program. Check with your state board to see if it requires enrollment (since a state board may require peer review, even though the AICPA does not).

What bases of accounting can be used to prepare financial statements under Section 70 of SSARS 21?

  1. GAAP
  2. Cash
  3. Tax
  4. Contractual
  5. Regulatory
  6. Other (e.g., the AICPA’s financial reporting framework for small- and medium-sized entities)

What is the responsibility of the accountant when an obvious significant error is detected while performing a preparation of financial statement engagement?

She should bring the error to the attention of management and request a correction and/or additional information.

Can an accountant perform a preparation of financial statements engagement on a prescribed form?

SSARS 21 does not preclude the accountant from performing a preparation of financial statements engagement on a bank’s prescribed form. The accountant, however, must comply with the rules specified in Section 70 of SSARS 21 such as including a disclaimer or including “no assurance is provided” on each page.

Can Section 70 of SSARS 21 be applied to the following?

  • Specified accounts (e.g., accounts receivable or a schedule of rentals),
  • Supplementary information,
  • Required supplementary information (e.g., management, discussion, and analysis of a government),
  • Pro forma financial statements, and
  • Prospective financial information

Yes, as long as all relevant preparation of financial statement guidance is followed. (See .A1 of Section 70.)

Work Paper Issues

Is an engagement letter required for the preparation service?

Yes and it must be signed by both the accountant and management or those charged with governance.

What’s the minimum work paper requirement?

  • A copy of the financial statements
  • A copy of the engagement letter

Report Issues

How does the accountant communicate his or her responsibility for the financial statements?

  1. The accountant can include on each page the words “no assurance is provided” or
  2. A disclaimer can be issued.

Can supplementary information be included?

Yes. Click here for more information.

Is the “no assurance” wording required on the supplementary information?

No. However, consider doing so anyway.

How should the accountant communicate a departure from the applicable basis of accounting?

  1. On the face of the financial statements or
  2. In the notes to the financial statements

Can a departure from the applicable basis of accounting be communicated in the disclaimer?

No. Departures must be communicated on the face of the financial statements or in a note.

Is it okay to title the disclaimer report?

I checked with the AICPA. It is okay to title the report with wording such as:

  • Accountant’s Disclaimer or
  • Accountant’s Disclaimer Report.

It may be best to use Accountant’s Disclaimer. Why? Some accountants believe the disclaimer is not a report; compilation, review, and audit engagements result in reports.

Also, .A20 of Section 70 of SSARS 21 includes a sample preparation of financial statements engagement letter that states “The financial statements will not be accompanied by a report.” So if you do call the disclaimer a “report,” make sure you amend your engagement letter accordingly.

When the accountant provides a disclaimer that precedes the financial statements, can she include a reference on each page of the financial statements to the disclaimer (e.g., See Accountant’s Disclaimer)?

SSARS 21 is silent on this issue. I checked with the AICPA, and they said it is permissible to include “See Accountant’s Disclaimer” on each page of the financial statements.

Should the disclaimer include a salutation?

The example in SSARS 21 does not include a salutation (addressee). I checked with the AICPA, and they stated that a salutation can be included in the disclaimer.

If substantially all disclosures are omitted, where should the accountant communicate the omission?

Either on the face of the financial statements or in a selected note to the financial statements.

Example wording is as follows:

Substantially all disclosures ordinarily included in financial statements prepared on the tax basis of accounting are not included.

Can selected disclosures be included in a preparation of financial statements engagement?

Yes. Use a label such as the following:

Selected Information–Substantially All Disclosures

Required by [the applicable financial reporting framework] Are Not Included

If financial statements are prepared in accordance with GAAP using Section 70 (Preparation of Financial Statements) and the cash flow statement and disclosures are omitted, how might the legend on each page read?

No assurance is provided on these financial statements.

The financial statements do not include a statement of cash flows.

Substantially all disclosures required by accounting principles generally accepted in the United States are not included.

SSARS 21 Book Available on Amazon.com

Are you looking for more information about SSARS 21? My new SSARS 21 book (ranked #1) is now available on Amazon.com. The book focuses on Section 70 of SSARS 21, Preparation of Financial Statements, and Section 80, Compilation Engagements. Click here to see the book on Amazon.com, and use the “Look Inside” feature to see excerpts (including the table of contents).

Available on Amazon.com

 

Free Slide Deck

To access my free SSARS 21 Preparation of Financial Statements slide deck, click here.

Writing Clear Audit Journal Entry Descriptions

Some audit journal entry descriptions leave me confused. They are sometimes vague, sometimes too wordy, and sometimes nonexistent.

image

Here are a few examples:

  • To adjust to actual
  • To correct the balance
  • To adjust
  • To cause the balance to coordinate with accounts receivable for all subsidiaries, excluding amounts billed in the second week of March plus amounts not billed by Bill Johnson

And my favorite:

*

Meaning: No description was provided.

As you can see, some journal entries (JEs) are too brief, and some are too lengthy. But most importantly, many do not communicate clearly.

A good journal entry description is concise but understandable. In writing JE descriptions, we should ask ourselves, “will someone else understand the reason given?” and “will I understand the description six months from now?

It’s important that we don’t try to accomplish too much with one entry. It may be prudent to break a journal entry into two or three. We are not just making corrections. We are communicating. And when we try to say three things at the same time, it sounds like “to adj%#}+ to Ac/-:]~”. It’s gibberish.

As your English teacher used to say, “short, simple sentences communicate more clearly.” Breaking down a complicated JE into smaller parts may enable you to communicate more clearly.

Exclude the name of the person who made the error from the JE description. Consider who will see the journal entries–owners and management, not just accountants. Since it’s easy to offend the person who made the error, consider the tone and wording of the description.

The picture above is courtesy of Canva.com.

How to Increase Profits and Happiness in Public Accounting

Having worked in public accounting for thirty years, I have noticed that successful CPAs do certain things. Do these, and I can just about guarantee that you’ll be more profitable and happy.

Picture courtesy of DollarPhoto.com

Picture courtesy of DollarPhoto.com

First, surround yourself with smart people.

Smart people make you look smart. Surround yourself with the best folks you can, even if it costs you more money. The premium you incur will return–and then some. Most CPAs are extremely cost conscious–many times, too much so. If you hire sub-par people, you will get sub-par work. Pay the premium and get staff that excel. They will impress your clients and–more times than not–will be more pleasant for you to work with. Want quality work? Hire quality people.

Second, create an excellent book of business.

Not every client is a good customer. Understand that the Pareto Principle applies here as well as the rest of life. The Principle says that 80% of your success will come from 20% of your effort (or clients). Conversely, 80% of your headaches will come from 20% of your clients. Build a book of business that is worthy of your best efforts. They will love you, and you will love them.

So what are the characteristics of great clients?

  • They do as they say they will (providing information on a timely basis)
  • They listen and learn (allowing you to make real contributions)
  • They are pleasant (no one is perfect, but good clients make work so much more enjoyable)
  • They pay (no profit, no mission)

Creating an excellent book of business may mean you don’t accept every potential paying client. If a customer pays well but creates constant tension, is it worth it? Could you better invest that time in a customer who appreciates what you do?

Third, work in a good firm.

Some places are fun to work. You want to be there. You want to contribute. Others–not so. Find a place of work where people get along. I will never forget walking down the hallway of a firm I worked for in the 80s and hearing the partners yelling at each other. I was embarrassed just to hear the conversation. I thought to myself, “How can CPAs scream at each other?” and “Why would you be in a partnership with people you can’t get along with?”

Life is too short to work in places where tension is the order of each day. Move on and find a firm where folks get along. Firms of excellence have good leaders that create harmony, places where you want to be.

Finally, find a niche.

Aim at too many targets, and you will hit none. No one person can be great at everything. Find an area of interest and determine that you will be the best in that niche. Sustained focus over many years will significantly increase your probability of success.

Other Ideas

What other ideas would you add to the list?

Peer Review to Focus More on Internal Controls, Risk Assessment, Sampling, Nonattest Services to Attest Clients

Today I received the May 2015 AICPA Peer Review newsletter (Reviewer Focus). You can see evolving changes in the focus of peer reviews by paying attention to changes in peer review forms.

The AICPA is changing the peer review forms to increase focus upon the following areas:

  • Sampling
  • Risk assessment
  • Internal controls
  • Nonattest services provided to attest clients

How to Make Your Training Useful

It is 3:32 p.m. on a Friday afternoon and you are thinking, “When will this ever end?” Your golf swing, a late tax return, your daughter’s college tuition cost–each float through your mind. Tick, tock, tick, tock. “So much to do and I sit here wasting another day in a worthless CPE class. Why can’t this be more interesting?” Tired. Bored. Numb. You want to be anywhere but where you are. You feel trapped. Your mind continues, “Please let me out of here!”

Picture Courtesy of DollarPhoto.com

Picture Courtesy of DollarPhoto.com

Why does this happen? It seems many CPAs view this pain as a requirement of the profession. They seem resigned to death-by-CPE, as though “no pain, no gain” is eternally right.

But then there are other classes where the synapses are firing, you’re laughing and learning and even wanting more. Time flies. The day ends quickly, and you walk away satisfied.

What can you do to increase these positive learning experiences and decrease those that are not?

Create One to Three Year Learning Goals

Ten years ago I decided to become a Certified Fraud Examiner. I thought, “Why not use my CPE hours to move me in that direction?” Over the next year, I purchased the training material from the Association of Certified Fraud Examiners and trained. In September 2004, I reached that goal. Without the goal, the idea would still be just that–an idea. 

What training goal can you set that will make your dream a reality?

Many years ago I taught an archery class. I would say, “Fix your eyes on the particular part of the target you desire to hit. The greater the focus, the greater the results.”

But do we do this with our training goals? Many CPAs see training as something to be avoided rather than an opportunity to achieve particular objectives (like becoming a certified fraud examiner).

In your career, you will spend thousands of hours in training. Why not use those precious hours as a tool to elevate your game?

Seek Out the Best Trainers

Will excellent trainers cost more money? Yes, but what’s the alternative? Seek out poor cheap trainers. Do we really want that?

Warning: “Getting our (CPE) hours” may not equate to learning. Signing up for any old class for convenience’s sake or for lower cost may lead to that “terrible, horrible, no good, very bad day” that we spoke of earlier. And I do think this is the culprit: not giving our training appropriate focus.

Great trainers make for excellent learning experiences. Seek them out. Ask your friends who they learn the most from.

Plan Your Classes for Each Year

Planning your CPE calendar will allow you to spread out the learning load (I do not recommend taking 40 hours of CPE the last week of December). The human mind is not designed to absorb large quantities of complex information in a short period. Space out your classes. The separation will allow your mind to digest and retain what you learn. Also repetition enhances retention.

Repeat the Core Information

For each one-day class, write a one-page summary. Do this the day after you attend the class. Simply writing the summary will drive the learning deeper into your mind. Then revisit the summary page for the following intervals and time spans:

* One week later – review for 10 minutes
* Two weeks later – review for 10 minutes
* Three weeks later – review for 5 minutes

There’s nothing sacred about the intervals or time spans. The method is what is important.

Once you are done with your one-page summary, archive it in Evernote for future reference.

Use Livescribe Pen

For about $100, you can own the magic pen. No, it will not allow you to remember everything you hear. However, it will record the full audio as you write. Then, later, you can touch a particular word in your notes with the tip of the pen and “voilà,” you hear–from the pen–what was said at that moment. You can upload the written notes and audio to your computer. Don’t ask me how it does this, but it works. Amazing! Now you can have a full recording of your training with shortcuts (notes) to find the audio you need to hear. The pen holds up to 200 hours of audio. Click here for my Livescribe blog post.

In terms of learning, writing your notes is more effective than typing (and I might add, less distracting to those around you). Science has proven that writing has a greater positive effect on learning and retention than typing.

I leave you with one last learning tip: Read the table of contents before the class starts.

Read the Table of Contents

The human mind likes to anticipate, to know what’s coming. If you can access your CPE material before the class, I encourage you to scan the table of contents and highlight the areas you are most interested in (do take a highlighter with you to class). Highlighting the table of contents will prepare you for what’s coming.

Oh yeah, one last thing, I promise. Sit up front. The farther back you sit, the more distractions you will see (like the guy cruising the ESPN site or the couple that talks throughout the whole day).

What are your suggestions for making training more effective?

AICPA Updates Plain English Guide to Independence

You can now access the most recent (March 1, 2015) Plain English Guide to Independence from the AICPA here.

I use the Plain English Guide to Independence often. You can download a copy to your computer, and I recommend that you do so.

Also, remember–in 2014–the AICPA codified the Code of Professional Conduct; for more information on that resource, click here. (After clicking the link, you’ll see how to access the online codification; you can also download a PDF copy.)

Armed with the Plain English Guide to Independence and the Code of Professional Conduct, you’ll be able to answer most independence questions.

For the thorny independence issues, the AICPA has an ethics hotline that you can email at ethics@aicpa.org; their phone number is 888-777-7077. I have found them to be responsive and helpful. Additional resources are available at the AICPA Professional Ethics Division webpage.

Tax Returns, Audits, Tickmarks: Why a CPA Needs a Good Dog

Every CPA needs a good dog, especially when life is stressful. And if you haven’t noticed, it’s stressful right now.

When work gets crazy-busy, I am reminded of how important my little one-eyed beagle is. We picked Chester up at a rescue shelter about two years ago, and he has been a delight.

Things my dog never asks for:

  • A completed audit, compilation, or tax return — yesterday
  • Tickmark definitions
  • Responses to 75 emails
  • Attendance of a CPE class (unless it’s one about how to feed dogs gourmet food)
  • Work without a break
  • The review of a 120 page financial statement
  • The learning of a new software package
  • The reading of a detachable warrant and convertible debt agreement

Things my dog requires:

  • Laughter
  • A long leisurely walk
  • A great big welcome (with jumping) as I come into our home — that’s the dog jumping, though I guess it could be me
  • To sit with me on the couch, face nuzzled upon my lap
  • Laughter (did I already say that?)
  • Scratches on the head
  • A ride in my truck
  • Love

I enjoy my work and our profession, but I’m thankful for a wonderful dog.

What relieves your stress?

Should Audit Representation Letter Cover Multiple Years?

Should an audit representation letter cover both years when comparative financial statements are presented?

It depends.

AU-C section 580, Written Representations, requires that written representations be obtained for all financial statements and periods referred to in the auditor’s report. AU-C section 700, Forming an Opinion and Reporting on Financial Statements, states that “as required by section 580, Written Representations, the auditor should request written representations for all periods referred to in the auditor’s opinion.”

Predecessor Auditor

What if the prior year audit was performed by a predecessor auditor, should the current year auditor obtain a representation letter covering the prior year financial statements?

No.

The current year auditor will express an opinion only on the current period’s financial statements and will include an other-matter paragraph stating that the prior year was audited by other auditors. Therefore, the current year auditor is only opining on the current year financial statements and the representation letter will cover only the current year.

Auditor for Two Years

If an auditor audits both the current and prior year financial statements and comparative statements are presented, then the representation letter should cover both years.

 

How to Lessen Segregation of Duties Problems in Two Easy Steps

Fraud prevention in two easy steps

Darkness is the environment of wrongdoing.

Why?

No one will see us–or so we think.

As you’ve seen many times, fraud occurs in darkness.

Segregation of duties

Picture courtesy of DollarPhoto.com

In J.R.R. Tolkien’s Hobbit stories, Sméagol, a young man murders another to possess a golden ring, beautiful in appearance but destructive in nature. The possession of the ring and Sméagol’s hiding of self and his precious (the ring) transforms him into a hideous creature–Gollum. I know of no better or graphic portrayal of how that which is alluring in the beginning, is destructive in the end.

Fraud opportunities have those same properties: they are alluring and harmful. And, yes, darkness is the environment of theft. What’s the solution? Transparency. It protects businesses, governments, and nonprofits. And while we desire open and understandable processes, often businesses have just a few employees that operate the accounting system. And many times they alone understand how it works.

It is desirable to divide accounting duties among various employees, so no one person controls the entire process. This division of responsibility creates transparency since multiple eyes see the accounting processes–but this is not always possible.

Lacking Segregation of Duties

Many small organizations lack appropriate segregation of duties and believe that solutions do not exist or that fixing the problem is too costly. But is this true? Can we create greater transparency and safety with simple procedures and without significant cost?

Yes.

Below I propose two processes to reduce fraud:

  1. Bank account transparency and
  2. Surprise audits.

1. Bank Account Transparency

Here’s a simple and economical control: Provide all bank statements to someone other than the bookkeeper. Allow this second person to receive the bank statements before the bookkeeper. While no silver bullet, it has power.

Persons who might receive the bank statements first (before the bookkeeper) include the following:

  • A nonprofit board member
  • The mayor of a small city
  • The owner of a small business
  • The library director
  • A church leader

What is the receiver of the bank statements to do? Merely open the bank statements and review the contents for appropriateness (mainly cleared checks).

In many small entities, accounting processes are a mystery to board members or owners since only one person (the bookkeeper) understands the disbursement process, the recording of journal entries, billing and collections, and payroll.

One set of eyes on an accounting process is not a good thing. So how can we shine the light?

Fraud Prevention

Picture courtesy of DollarPhoto.com

Second Person Sees the Bank Statements

Allow a second person to see the bank statements.

Fraud decreases when the bookkeeper knows someone is watching. Suppose the bookkeeper desires to write a check to himself but realizes that a board member will see the cleared check. Is this a deterrent? You bet.

Don’t want to send the bank statements to a second person? Request that the bank provide read-only online access to the second person, and let the bookkeeper know that the other person will review bank activity.

Even the appearance of transparency creates (some) safety.

Suppose the second person reviewer opens the bank statements (before providing them to the bookkeeper) and does nothing else. The perception of reviews enhances safety. I am not recommending that you don’t perform the review, but if the bookkeeper even thinks someone is watching, fraud will lessen.

2. Surprise Audits

Another way to create small-entity transparency is to perform surprise audits. These reviews are not opinion audits (such as those issued by CPAs) but involve random inspections of various areas such as viewing all checks clearing the May bank statement. Such a review can be contracted out to a CPA or performed by someone other than the bookkeeper–such as a board member.

Segregation of Duties

Picture courtesy of DollarPhoto.com

Adopt a written policy stating that the surprise inspections will occur once or twice a year.

The policy could be as simple as the following:

Twice a year a board member (or designee other than the bookkeeper) will inspect the accounting system and related documents. The scope and details of the inspection will be at the judgment of the board member (or designee). An inspection report will be provided to the board.

Why word the policy this way? You want to make the system general enough that the bookkeeper has no idea what will be inspected but distinct enough that an actual review occurs with regularity (thus the need to specify the minimum number of times the review will be performed).

Sample Inspection Ideas

Here are some sample inspection ideas:

  • Inspect all cleared checks that clear a particular month for appropriate payees and signatures and endorsements
  • Agree all receipts to the deposit slip for three different time periods
  • Review all journal entries made in a two week period and request an explanation for each
  • Review two bank reconciliations for appropriateness
  • Review one monthly budget to actual report (to see that the report was appropriately created)
  • Request a report of all new vendors added in the last six months and review for appropriateness

The reviewer may not perform all of the procedures and can perform just one. What is done is not as important as the fact that something is done. In other words, the primary purpose of the surprise audit is to make the bookkeeper think twice about whether he or she can steal and not be caught.

Again multiple people seeing the accounting processes reduces the threat of fraud.

Shine the Light

The beauty of these two procedures (bank account transparency and surprise audits) is they are straightforward and cheap to implement but nevertheless powerful. So shine the light.

What other procedures do you recommend for small entities?

For more information about preventing fraud, check out my book: The Little Book of Local Government Fraud Prevention.