SSARS 23 Changes Preparation and Compilation Standards

SSARS 23 amends SSARS 21 to encompass prospective information

The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately, while other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.

SSARS 23 changes preparation and compilation standards

You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

How Preparation of Financial Statements (AR-C 70) Changed

The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. Since significant assumptions are essential to understanding prospective information, SSARS 23 requires their inclusion. The accountant should not prepare prospective financial information without including the disclosure of the summary of significant assumptions. Also, a financial projection should not be created unless it includes:

  • an identification of the hypothetical assumptions, or 
  • a description of the limitations on the usefulness of the presentation

SSARS 23 deletes the word “accordingly” from the AR-C 70 disclaimer; the change is shown below:

How Compilation Engagements (AR-C 80) Changed

AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21). 

SSARS 23 also clarifies that accountants must disclose known departures from the applicable financial reporting framework in the accountant’s compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.

Prospective Financial Information Guidance

Both AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.

Clarification Projects Complete

The AICPA has clarified the audit standards (AU-C), the attestation standards (AT-C), and the SSARS (AR-C).

Short SSARS 23 Video

If you desire additional information about SSARS 23, check out my video:

SSARS 21 Book

If you need SSARS 21 guidance, see my book on Amazon.

Compilations: Lacking Independence in the Current or Prior Period

CPAs must disclose independence impairments in compilation reports

Do you lack independence in a compilation engagement? If yes, then here’s how to disclose the impairment in the compilation report.

An accountant can issue a compilation report even though independence is lacking. When independence is impaired, SSARS 21 requires that the CPA modify the compilation report. The cause of the impairment (e.g., you own a portion of the business) can be disclosed in the compilation report but is not required. You can–if you prefer–simply say you are not independent; this is what most CPAs do.

Lacking Independence

Lacking Independence in Current Year

The accountant’s compilation report can disclose a lack of independence as follows:

We are not independent with respect to ABC Company.

Just add this sentence separately at the bottom of the compilation report.

Lacking Independence in the Prior Year

If you were not independent in 2016 but you are independent in 2017 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company. We are currently independent with respect to ABC Company.

Independence in Review Engagements and Audits

CPAs must be independent to perform review engagements or audits. There are no exceptions. See the AICPA Code of Professional Conduct for guidance on independence issues. Independence rules are found in section 1.200.

Independence in Preparation of Financial Statement Engagements

CPAs can perform a Preparation of Financial Statement engagement without being independent. No independence disclosure is required since this service is a nonattest engagement. 

My SSARS 21 Book

If you are looking for SSARS 21 guidance regarding Preparation of Financial Statements and Compilation Engagements, check out my book on Amazon.

CPA Scribo Facebook Group: Join Now

If you are interested in some dialog about accounting and auditing issues, I invite you to join my new Facebook group: CPA Scribo.

Why the group? I believe this will give you a community where you can engage with other CPAs and accountants on a one-on-one basis. The communication will be more free-flowing than my blog.

So join and share a thought, a pain, a victory, a challenge, a question. I look forward to getting to know you better.

It’s a closed group, so you will need to ask to join.

The link to join is: https://www.facebook.com/groups/1260820653952216/?ref=bookmarks

Financial Statement References (at the Bottom of the Page)

What financial statement page references are required?

What wording is required at the bottom of financial statement pages? Is there a difference in the references in audited statements and those in compilations or reviews? What wording should be placed at the bottom of supplementary pages? Below I’ll answer these questions.

financial statement references

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Audited Financial Statements and Supplementary Information

First, let’s look at financial statement references in audit reports.

While generally accepted accounting principles do not require financial page references to the notes, it is a common practice to do so. Here are examples:

  • See notes to the financial statements.
  • The accompanying notes are an integral part of these financial statements.
  • See accompanying notes.

Accountants can also–though not required–reference specific disclosures on a financial statement page. For example, See Note 6 (next to the Inventory line on a balance sheet). It is my preference to use general references such as See accompanying notes.

Audit standards do not require financial statement page references to the audit opinion.

Supplementary pages attached to audited financial statements should not include a reference to the notes or the opinion.

Preparation, Compilation, and Review Engagements

Now, let’s discuss references in preparation, compilation, and review engagements. 

Compilation and Review Engagements

SSARS 21 does not require a reference (on financial statement pages) to the compilation or review report; however, it is permissible to do so. What do I do? I do not refer to the accountant’s report. I just put See accompanying notes at the bottom of each financial statement page.

You are not required to include a reference to the accountant’s report on the supplementary information pages. SSARS 21 does suggest that such references be included in case the financial statements or supplementary information are separated from the compilation or review report. Examples include:

  • See Accountant’s Compilation Report.
  • See Independent Accountant’s Review Report.

What do I do? I include a reference to the accountant’s report on each supplementary page.

Preparation of Financial Statement Engagements

SSARS 21 provides an option (to compilations) called the preparation of financial statements (AR-C 70), a nonattest service. AR-C 70 requires that the accountant either state on each page that “no assurance is provided” or provide a disclaimer which precedes the financial statements. AR-C 70 does not require that the financial statement pages refer to the disclaimer (if provided), but it is permissible to do so. Such a reference can read See Accountant’s Disclaimer.

If your AR-C 70 work product has supplementary information, consider including this same reference (See Accountant’s Disclaimer) on the supplementary pages.

Selected Disclosures in Preparation and Compilation Engagements

You can include one or two notes rather than all

Do you ever want to include just one disclosure in your financial statements without providing all the notes? Selected disclosures can be included in certain situations.

Do professional standards allow this? Yes. But only if you use AR-C 70 (the preparation guidance) or AR-C 80 (the compilation guidance).

selected disclosures

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Selected Disclosures in Compilations

As you probably already know, a CPA can issue compiled financial statements without disclosures as long as the compilation report discloses the omission. An example follows.

Management has elected to omit substantially all of the disclosures required by accounting principles generally accepted in the United States of America. 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, the financial statements are not designed for those who are not informed about such matters.

If the financial statements include one or two notes, then the financial statements still omit substantially all of the disclosures, so the accountant (still) uses the wording in the preceding paragraph.

Sample Selected Disclosure

An example of a selected disclosure follows:

ABC Company

Selected Information –

Substantially All Disclosures Required by Accounting Principles

Generally Accepted in the United States of America are Not Included

December 31, 2017

Note 1. Long-Term Debt.

ABC Company borrowed $450,000 on July 15, 2017, from XYZ Bank. The rate of interest is 5%, and the loan is collateralized by equipment of the Company. Payments are $10,000 per month plus interest for two years with a balloon payment for the balance of the amount owed.

Preparation Engagements

AR-C 70 says:

The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled “Selected Information—Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included.”

So, the selected-disclosure option is available in a Preparation of Financial Statements engagement. Include the required disclaimer at the bottom of the page such as “No assurance is provided on these financial statements.” 

Other Considerations

The accountant should consider whether management’s election to include only selected disclosures causes the financial statements to be misleading (for example, by omitting the disclosures that contain negative information). If so, the accountant should request that the financial statements be revised to include the omitted disclosures.

The selected-disclosure option is not available for financial statements subject to a review engagement. Such financial statements must be full disclosure.

What About You?

Do you ever use this selected-disclosure option? Any reservations about doing so?

SSAE 18: The Clarified Attestation Standards

Effective May 1, 2017

SSAE 18 is effective on May 1, 2017, and changes the Attestation Standards.

Do you issue any attestation reports such as agreed upon procedures? If yes, then be aware of the recent changes from the Auditing Standards Board (ASB). The ASB has clarified the Attestation Standards. The ASB did the same with the audit standards a few years ago; that change resulted in the AU-C (clarity) designations for audit standards.

SSAE 18

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The re-write of the Attestation Standards culminated in the April 2016 issuance of SSAE 18.

SSAE 18 supersedes all Attestation Standards other than:

  • AT section 701, Management’s Discussion and Analysis (MD&A). AT section 701 will not be clarified because practitioners rarely perform attestation engagements to report on MD&A; it will be retained in the attestation standards in its current form. AT section 701 has been renumbered as AT-C section 395.

Also be aware that AT section 501 An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements was moved to the auditing standards as Statement on Auditing Standards (SAS) No. 130, as An Audit of Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements.

Just as the ASB did with the audit clarity standards, a “-C” is added to the clarified Attestation Standards. So the clarified attestation standards are identified as AT-C. The clarified standards are written using ASB’s clarity conventions, including:

  • Objectives for each chapter
  • Definitions in each chapter
  • Separating requirements from application and explanatory material
  • Using various formatting techniques such as bulleted lists to enhance readability
  • When applicable, including additional considerations for governmental entities or smaller less complex entities

Attestation Levels of Service

The clarified standards provide for the following types of attestation services:

ServiceAT-C SectionReport Type
Examination205Opinion
Review210Conclusion
Agreed Upon Procedures215Findings

Sample report excerpts follow:

Examination Report on Subject Matter; Unmodified Opinion

In our opinion, the schedule of investment returns of ABC Company for the year ended December 31, 2020, is presented in accordance with the ABC criteria set forth in Note 1 in all material respects.

Review Report on Subject Matter; Unmodified Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying schedule of investment returns of ABC Company for the year ended December 31, 2020, in order for it to be in accordance with XYZ criteria set forth in Note 1.

Agreed-Upon Procedures Report

We obtained the accounts receivable subsidiary ledger as of June 30, 2017, from Topaz, Inc. We compared all customer account balances in the aged trial balance (exhibit B) as of June 30, 2017, to the balances shown in the accounts receivable subsidiary ledger.

We found no exceptions as a result of the procedure.

New SSAE 18 Requirements

In addition to clarifying (restructuring) the attestation standards, SSAE 18 also:

  • Separates the review engagement procedures and reporting requirements from those of examination engagements (and highlights the similarities of reviews performed under the SSAEs and those performed under Statements on Standards for Accounting and Review Services [SSARS])
  • Requires the practitioner to request a written representation letter in all attestation engagements (the pre-clarity standards only required representation letters for certain engagements)
  • Changes the existing requirements related to scope limitations, indicating that based on the practitioner’s assessment of the effect of the scope limitation, the practitioner should express a qualified opinion, disclaim an opinion, or withdraw from the engagement
  • Eliminated compilations of prospective financial information from the attestation standards (the Accounting and Review Services Committee issued SSARS 23 to cover this service)

Effective Date

The guidance in SSAE No. 18 is effective for practitioners’ reports dated on or after May 1, 2017.

For a full copy of SSAE No. 18, click here.

How to Review Financial Statements Efficiently and Effectively

Tips to quickly review financial statements and to ensure effectiveness

Most CPA firms create financial statements for their clients. This blog post tells you how to create and review financial statements efficiently and effectively.

Review Financial Statements

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How to Create Financial Statements

First, staff members create the original financial statements. Where possible, electronically link the trial balance to the financial statements. Doing so will expedite the financial statement process and enhance the integrity of the numbers. Ask the staff member to do the following:

  • Prepare the initial draft of the statements
  • Create clear disclosures
  • Complete a current financial statement disclosure checklist 
  • Research any nonstandard opinion or report language (place sample reports from PPC or other sources in the file) — later the partner will compare this supporting document to the opinion or report
  • Research any additional reports (e.g., Yellow Book, Single Audit); place copy of such reports in the file — the partner or manager will have such reports available for their review
  • The staff person should review the partner’s planning document to see if any new standards are to be incorporated into this to year’s financial statements

How to Proof the Financial Statements

Second, proof your financial statements. The proofer usually does the following before the partner or managers’ review:

  • Add (foot the numbers for) all statements, notes, schedules
  • Tick and tie numbers such as:
    • Total assets equal total liabilities and equity
    • Ending cash on the cash flow statement agrees with the balance sheet
    • Net income on the income statement agrees with the beginning number of an indirect method cash flow statement
    • Numbers in the notes agree with the financial statements
    • Numbers in the supplementary schedules agree with the financial statements
  • Review financial statements for compliance with firm formatting standard 
  • Read financial statements for appropriate grammar and punctuation (consider using Grammarly)
  • Compare the table of contents to all pages in the report
  • Review page numbers

Partner or Manager Review

Finally, the partner or manager reviews the financial statements. Having the proofer do their part will minimize the review time for this final-stage review.

Here are tips for the final review:

  • Scan the complete set of financials to get a general feel for the composition of the report (e.g., Yellow Book report, supplementary information, the industry, etc.) — this is a cursory review taking three or four seconds per page
  • Read the beginning part of the summary of significant accounting policies taking note of the reporting framework (e.g., GAAP), type of entity (e.g., nonprofit), and whether the statements are consolidated or combined — doing so early provides context for the remaining review of the financials
  • Read the opinion or report noting any nonstandard language (e.g., going concern paragraph)
    • Agree named financial statement titles in the opinion or report to the financial statements
    • Agree the dates (e.g., year-end) in the opinion or report and compare to the statements
    • Compare supporting sample report (as provided by your staff member and noted above) to the opinion or report
    • Compare representation letter date to the opinion or review report date
  • Review the balance sheet making mental notes of line items that should have related notes (retain those thoughts for review of the notes)
  • Review the income statement
  • Review the statement of changes in equity (if applicable)
  • Review the cash flow statement
  • Review the notes (making mental notes regarding sensitive or important disclosures so you can later see if the communication with those charged with governance appropriately contains references to these notes)
  • Return to the balance sheet to see if there are additional disclosures needed (since you just read the notes, you will be more aware of omissions — e.g., intangibles are not disclosed)
  • Review supplementary information (and related opinion for this information if applicable)
  • Review other reports such as Yellow Book and Single Audit (the staff member preparing the financial statements should have placed supporting examples in the file; refer to the examples as necessary)
  • If the review is performed with a printed copy of the statements, use yellow highlighter to mark reviewed sections and numbers
  • If the review is done on paper, pencil in corrections and provide corrected pages to the staff member for amendments to be made
  • If the review is performed on the computer, take screenshots of pages needing corrections and provide to the staff member
  • Alternatively, make corrections using Track Changes if the financial statements are in a Word document; these changes will appear in a different color so you can visually see what was changed; Word also provides a different color for each person who makes a change, so you can see who changed what

Last Step

Destroy all drafts–or at a minimum, don’t leave them in the file. Once the financial statements are complete, there is no reason to retain drafts.

Your Suggestions

What other review procedures do you use?

AICPA Code of Professional Conduct: Answers to Your Ethical Questions

Check out this post for two helpful AICPA resources

Are you a CPA looking for answers to independence or other ethical questions? Below, you’ll see two handy AICPA resources:

  • AICPA Code of Professional Conduct
  • Plain English Guide to Independence
AICPA Code of Conduct

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AICPA Code of Professional Conduct

The AICPA provides online access to the Code of Conduct. You can also download a PDF copy here (this PDF covers all standards issued through August 31, 2016).

Online access is free, and users are able to save searches and bookmark content.

The Code is organized into three parts:

  1. Public practice
  2. Members in Business
  3. All other members (including those who are in between jobs or retired)

The Code includes a threats and safeguards framework. CPAs should identify threats and then consider safeguards to mitigate those threats. The CPAs can proceed with the engagement if threats–after considering safeguards–are at an acceptance level.

Plain English Guide to Independence

As the Quality Control partner for our firm, I receive quite a few questions about ethical issues (mainly about independence). Nine out of ten times I find the answers to those questions in the AICPA’s Plain English Guide to Independence. I download this guide and keep it handy. When I need to research an issue, I open the document and perform word searches. If you aren’t already using this resource, I highly recommend it. 

The AICPA Consulting Standards: Another Arrow in Your Quiver

Many CPAs don't know that these standards exist, but they can be quite helpful

I find that many CPAs aren’t aware of the AICPA Consulting Standards. So, here’s a post about them.

Are you ever asked to perform an atypical engagement (e.g., creating a schedule of water losses for a city)–and then you wonder “what professional standards should I follow?”

Audit standards? No, you’re not opining on anything.

Maybe the compilation and review standards? No, a schedule is not a financial statement.

How about agreed upon procedures? Well, no again–AUPs normally include tests and conclusions.

We need another arrow in our quiver!

AICPA Consulting Standards

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Most CPAs are familiar with compilation and review standards (Statement on Standards for Accounting and Review Services – SSARS) and audit standards (Statement on Auditing Standards – SAS) and even attestation standards (Statement on Standards for Attestation Engagements – SSAEs – commonly used for agreed upon procedures), but many are not familiar with the consulting standards (Statement on Standards for Consulting Services – SSCS).

Why?

I’m not really sure. But I seldom see consulting standard CPE classes. Yet many services are subject to this guidance.

AICPA Consulting Standards Primer

You might call the AICPA Consulting Standards the CPA’s swiss army knife.

AICPA Consulting Standards

What services fall under the consulting standards?

The consulting standards specifically address six areas:

  1. Consultations – e.g., reviewing a business plan
  2. Advisory services – e.g., assistance with strategic planning
  3. Implementation services – e.g., assistance with a merger
  4. Transaction services – e.g., litigation services
  5. Staff and other support services – e.g., controllership services
  6. Product services – e.g., providing packaged training services

CPAs often provide consulting services such as the following:

  • Consultations with regard to complex transactions
  • Fraud investigation services
  • Internal control services
  • Bankruptcy services
  • Divorce settlement services
  • Controllership services
  • Business plan preparation
  • Cash management
  • Software selection
  • Business disposition planning

When can I use the consulting standards?

Usually when the information will not be provided to a third party.

When performing work under the consulting standards, you are not attesting (providing comfort) on the work performed. Usually, you need to follow the SASs, SSARS, or SSAEs if you are attesting (providing comfort to an outside party).

Characteristics of a Consulting Engagement

  • Generally nonrecurring
  • Requires a CPA with specialized knowledge and skills
  • More interaction with client
  • Generally performed for the client (usually, no third party sees the information)

Consulting Work Paper Requirements

Consulting work paper requirements are minimal. Nevertheless, documentation is always wise.

The understanding with the client can be oral or in writing (I recommend the latter).

The consulting standards do not require the CPA to prepare work papers, but you should do so anyway – the work papers are the link between your work and your report. Also the general standards of the profession, contained in the AICPA Code of Professional Conduct, apply to all services performed by members. The general standards state:

Sufficient Relevant Data. Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

Consulting Reports

The report content and format are up to you and your client.

No Opinion or Accountant’s Report

For consulting engagements, the CPA does not issue an opinion or any other attestation report (e.g., accountant’s report on agreed-upon procedures ).

Subject to Peer Review?

Are products created using the Consulting Standards subject to peer review? No.

Where Can I Find the AICPA Consulting Standards?

You can see the consulting standards here.

Photos above are courtesy of iStockphoto.com.

How to Present Supplementary Information in Compilation and Preparation Engagements

Supplementary information can be added to basic financial statements

Are you wondering how to present supplementary information in compilation and preparation engagements? What supplementary information (SI) should be included? How does the accountant define his or her responsibility for SI?

Often accountants, at the request of their clients, add supplementary information to the financial statements. Such information is never required (to be in compliance with a reporting framework) but may be useful.

supplementary information: compilation and preparation engagements

Picture is courtesy of Dollar Photo

You can think of financials with supplementary information in this manner:

Financial statements – Required – The jeep in the picture above

Supplementary Information – Not required – The camper

You’re not going anywhere without a vehicle (it’s required). And your camper (not required) is no good without an automobile to pull it. Kind of a silly analogy, I know, but maybe it will help you remember.

I normally add a divider page between the financial statements and supplementary information (though such as page is not required); the divider page simply says “Supplementary Information” and nothing else.

SSARS 21 defines supplementary information as follows:

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework.