Which Standards Should I Follow When I Prepare Financial Statements and Perform a Compilation, Review or an Audit?

Untangling a Confusing Part of SSARS 21

SSARS 21 added a new section to the prior compilation and review standards (SSARS 19) called Preparation of Financial Statements. I’ve received several questions about how this new service–preparation of financial statements–works when a compilation, review, or audit is performed. Those questions include:

Can an accountant perform a compilation and not prepare the financial statements?

Are the preparation of financial statements and the performance of a compilation engagement two separate services?

If an auditor prepares financial statements and audits a company, what is the relevant standard for preparing the financial statements? Is the preparation of financial statements a nonattest service though the audit is an attest service?

Picture is courtesy of Dollarphoto.com

Picture is courtesy of Dollarphoto.com

Below I provide: (1) a summary of how compilations are changing and (2) a summary of how the preparation of financial statements service interplays with compilations, reviews, and audits.

The Old Compilation Standard

In the past, the performance of a compilation involved one service which encompassed:

  • Preparing financial statements,
  • Performing compilation procedures (e.g., reading the financials), and
  • Issuing a report

How Compilation Engagements are Changing

If an accountant prepares the financial statements and performs a compilation engagement using SSARS 21, she is performing two services (not one). In this case, the performance of the preparation of financial statements is not subject to any formal standard (including SSARS 21).

When an accountant performs both the preparation of financial statements and a related compilation engagement, is AR-C 70, Preparation of Financial Statements, applicable?

No.

“Wait…you’re saying that a new standard called Preparation of Financial Statements was added to SSARS 21, but when the accountant prepares financial statements and performs a compilation engagement, the new preparation standard is not applicable?”

Yes.

AR-C 70, Preparation of Financial Statements, states that the standard is not applicable “when an accountant prepares financial statements and is engaged to perform an audit, review, or compilation of those financial statements.” So if an accountant prepares financial statements as a part of a compilation engagement, AR-C 70 does not apply.

Why?

If AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements, were both in play, they would conflict. AR-C 70 requires the accountant to state on each financial statement page that “no assurance is provided” or to issue a disclaimer. AR-C 80 requires the issuance of a compilation report and does not allow the accountant to state that “no assurance is provided” on each financial statement page or to issue a disclaimer.

Meaning?

When the accountant prepares financial statements and performs a related compilation, the creation of the financial statements is a nonattest service with no guidance–not even from SSARS 21.

When a compilation engagement (an attest service) is performed and financial statements are prepared (a nonattest service), two separate services are being performed by the same accounting firm.

The Interplay of Financial Statement Preparation and Other Services

The table summarizes which standard is applicable when:
1. A preparation engagement is performed (alone)
2. Preparation and compilation engagements are performed for the same time period
3. Preparation and review engagements are performed for the same time period
4. Preparation and audit engagements are performed for the same time period

Preparation of Financial StatementsCompilation EngagementReview EngagementAudit EngagementStandard to Follow
YesAR-C 70 Preparation
YesYesAR-C 80 Compilation
YesYesAR-C 90 Review
YesYesAU-C Audit Sections

AR-C 70, Preparation of Financial Statements, applies only in the first example above. When the accountant performs a preparation service and a compilation, review, or audit service for the same time period, AR-C 70 is not applicable–that is, no formal standard applies to the preparation service.

In all the examples listed above, the preparation of financial statements is a nonattest service.

In examples 2, 3 and 4 (where a preparation service and an attest service are provided), your engagement letter should include language about performing nonattest services and how the client will assign someone with suitable skill, knowledge, and experience to oversee the preparation of financial statements service. Such language is only required when a nonattest and an attest service is provided.

SSARS 21 is applicable for periods ending on or after December 15, 2015 and can be early implemented.

New SSARS 21 Book

My new SSARS 21 book is now available on Amazon.com. Click here to see the book: Preparation of Financial Statements & Compilation Engagements.

There are those in our lives that shape us and encourage us to be who we are, those who give countless hours to care for us. For me, one of those people was my grandmother, Lee King. Here we are on my wedding day (long ago now).

Preparation of Financial Statements Prior to Another Accountant’s Audit

Does your firm prepare financial statements that are provided to another firm that performs an audit or a review? If yes, what are the new requirements under SSARS 21?

AR-C 70, Preparation of Financial Statements, is applicable.

What are the main implications?

  • Your firm should obtain a signed engagement letter that covers the preparation service; the letter should be signed by your firm and your client
  • Each page of the financial statements should contain the language “no assurance is provided” or a disclaimer paragraph should be provided
  • If the notes are omitted, the omission should be disclosed on the face of the financial statements or in a selected note
  • Known departures from the applicable reporting framework should be disclosed on the face of the financial statements or in a note
  • If your firm is subject to peer review, this engagement could potentially be selected for review during the peer review
  • Any other requirements of AR-C 70 are in play

The effective date for AR-C 70 is for years ending on or after December 15, 2015. The standard can be early implemented.

Of course your firm could prepare financial statements under the compilation standards, AR-C 80; then you would follow the requirements for compilations. Usually, however, firms that prepare financial statements to be provided to other accountants prior to an audit or review will prepare the financials using AR-C 70.

The One Thing

Like the book Essentialism, The One Thing reminds me again that focusing on too many projects, ideas, etc. only leads to decreasing productivity and less success. Why do these types of books appeal to me so much? Because I try to do too many different things–all at the same time.  Focusing on one thing allows us to dial down our stress and to achieve greater results in less time. Great read!

Tech Tip #2: How to Select Several Pages of Text or Data

Suppose you want to select text starting on page 2 of a Word document and ending on page 7, what’s the easiest way to do so?

  1. Double-click the first word (e.g., This) that you desire to include; the word “This” will be highlighted
  2. Scroll down to the last word you desire to include on page 7 (e.g., “project”), press the shift key and click that word once; the full expanse of the text starting with “This” and ending with “project” will be highlighted

Now you can perform actions on or with the selected text (e.g., copy or delete)–depending upon your desired result.

This same selection technique works on web pages, Excel spreadsheets, or email.

Note: This selection technique does not work on a smartphone or a tablet.

Tech Tip #1: Tap Space Bar Twice at End of Sentence

When typing on a smartphone, end each sentence by tapping the space bar twice.

image

 

Why?

Doing so causes three things to occur:

  • a period is added
  • a space is added after the period
  • your next character will be capitalized

Disclosing the Use of Third-Party Service Providers: AICPA Code of Conduct

Did you know that the AICPA Code of Professional Conduct requires members to “inform the client…that the member may use a third-party service provider”?

The rule is designed to prevent members from “disclosing confidential client information to a third-party service provider” without the client’s knowledge. It is preferable to make this communication in writing.

If the client objects to the member’s use of the third-party service provider, he or she should:

  • Not use the third-party service provider, or
  • Decline to perform the engagement

Here’s the rule [I bolded certain words below]:

ET Section 1.150.040

Use of a Third-Party Service Provider

.01 When a member uses a third- party service provider to assist the member in providing professional services, threats to compliance with the “Integrity and Objectivity Rule” [1.100.001] may exist.

.02 Clients might not have an expectation that a member would use a third- party service provider to assist the member in providing the professional services. Therefore, before disclosing confidential client information to a third-party service provider, the member should inform the client, preferably in writing, that the member may use a third-party service provider. If the client objects to the member’s use of a third-party service provider, the member either should not use the third-party service provider to perform the professional services or should decline to perform the engagement.

.03 A member is not required to inform the client when he or she uses a third- party service provider to provide administrative support services to the member (for example, record storage, software application hosting, or authorized e-file tax transmittal services).

Slow-Time Idea: Update December 31, 2015 Compilation and Review Report Language

Most of you just completed another busy season. You may now be in a slower part of the year. If you’re not busy, you may want to update your December 31, 2015 compilation and review reports. SSARS 21 is effective for December 31, 2015 year-end financial statements and requires new compilation and review report language. So, if your staff is looking for something to do, updating your December 31, 2015 compilation and review reports now will ease your pain at year-end.

For a comparison of the old and new report language, click here.

 

Single Audits under the Uniform Guidance

Recently I listened to the AICPA Governmental Audit Quality Center (GAQC) webcast titled: Uniform Guidance for Federal Awards: Auditor Planning Considerations for the New Single Audit Rules.

The presenters, Diane Edelstein, Mandy Nelson, and Mary Foelster, did a great job in providing helpful information. I made a few summary notes that are presented below; the notes are not intended to be comprehensive. The GAQC archived the presentation on their website.

Single Audit under the Uniform Guidance

Applicability of Uniform Guidance

Here’s a summary of when the new guidance is applicable.

Type of EntityEffective Date
Federal AgenciesMust implement policies and procedures by issuing regulations to be effective December 26, 2014 (accomplished with the issuance of the Joint Interim Final Rule)
Non-federal EntitiesImplement the new administrative requirements and cost principles for all new Federal awards made after December 26, 2014, and to additional funding related to existing awards ("increments") made after that date
AuditorsAudit requirements are effective for fiscal years beginning on or after December 26, 2014 (early implementation not permitted)