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

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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.

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18 thoughts on “Preparation of Financial Statements: Questions and Answers

  1. I have the same fear Armando-that people will ignore the “No assurance” phrase. Only time will tell. Thanks for your comment.

  2. Charles, I like very much the information in your article. Clear, comprehensive. Thank you. I dislike the SSARS 21. I think it will damage the business community and the CPA professional reputation. How can we prepare a financial statement without having a reasonable assurance that the numbers are right? I believe that many people will ignore the disclaimer, as they would never expect a CPA preparing a set of financial statements, not having a reasonable assurance of how good the numbers are.

  3. Charles, this is really helpful! I’m confused about one thing, though: how can we “prepare financial statements” without “compiling” financial statements?

    • Chris, good question–one I received just last week from one of our staff members. The standards delineate the difference saying that a compilation involves reading the statements for appropriateness (in addition to preparing the statements), but I think it’s hard to “prepare” without “reading.” So your question has much merit. Of course, a compilation will involve the issuance of a compilation report while the Preparation service will not.

      I think this whole new Preparation standard is simply the AICPA’s way of stating clearly that the preparation of financial statements is a nonattest service (a compilation is an attest service, but it is a nonassurance service–though honestly I have never understood why a compilation is considered an attest service).

  4. Armando,

    You make me laugh (in a good way); I like how direct the WARNING communication is.

    The code of conduct does still prohibit a CPA from being associated with financial statements that are knowingly incorrect (even when using the Preparation standard)–so that’s good thing.

  5. Charles, I am glad to know that I am not the only one with this concern.
    In addition to the litigation exposure, which I think it is significant, I do not believe that a CPA should put his/her name in a set of financial statements unless he/she believes that they are materially right. Period.
    What if the wording of the disclaimer in the SSARS 21 was rephrased to something like this:
    “WARNING. I only typed and the computer processed the numbers in these financial statements, which is all I did. Therefore, I cannot even guess how wrong these numbers are”
    I suppose that someone would say, “Armando, this language is not too professional”, which I could not argue; however, it would be more honest and ethical.

  6. Hi
    Can I prepare a compilation report on Financial Statements following GAAP (as my books are prepared under accrual basis of accounting)? The company files taxes on cash basis.

    • Tejas, yes, you can prepare a compilation report using GAAP (even though the tax return uses the cash basis). As long as the financial statements are in accordance with GAAP, you can issue a compilation report and reference GAAP.

  7. Charles – I am a self-employed CPA. I go into clients’ offices & do accounting, payroll, bank recs, etc. I guess you could say I’m a glorified bookkeeper that makes their tax accountants’ jobs easier b/c all of my clients’ info is pretty much exactly how it needs to be at the end of the year for the tax accountant w/just a few adjustments for depreciation/amortization/etc. For the clients that I take care of all printing of checks (I merely print them – I am not an authorized signer on their checking accounts), setting up customers & vendors, making deposits, online pmts to company credit cards, etc, I prepare their 1099s, W-2s, etc at the end of the year b/c I make sure I have W-9s from everyone I should have them from. However, I have a few clients that write all kinds of checks themselves, never getting the required info from sole proprietors that they pay for services, not following what I tell them they are required to do & I of course don’t want to be held responsible for any issues that might ever arise b/c they didn’t get W-9s & in turn 1099s weren’t issued to all parties they should have been issued to. I cannot find an engagement letter anywhere that seems like the correct one I need to use for the services I provide for my clients. I enter transactions in quickbooks for them, I print financial statements for them, etc but I do not provide any kind of opinion or assurance on the statements. For some clients I provide more specific services than I do for others so I want to be able to specify the things that are the clients’ responsibility b/c I can’t force them to do the things that I tell them are required by the IRS & whatnot. I have searched the AICPA’s site, googled, etc, etc & I just can’t find a sample engagement letter that sounds appropriate for what I do… Do you have any idea where I could find one & any suggestions/comments on things I should make sure I do & don’t specifically mention in the engagement letters? Thanks & sorry for the rambling message – it’s just hard to describe everything I do for each client b/c it varies from client to client….

    • Michelle,

      I am not aware of such a letter from the AICPA or any of the form providers (e.g., PPC).

      For each client, I would create an engagement letter from scratch. In each letter, I would, at a minimum, list each service you provide (I would use a bullet list after saying something like “These are the services my firm will provide:”). After the list, I would say, “I am available to provide other services, but I am not responsible for any services not listed. If you request additional services, we will amend this contract in writing.” I would sign the letter and ask the client to sign the same. I have seen many CPA firms sued for NOT performing services that the client asserted they had requested, so an engagement letter would provide you with much more protection (than none at all).

  8. I own a bookkeeping business and I am a CPA, but none of the rest of my staff is. We don’t prepare tax returns, but work with outside CPAs to take care of that part. It doesn’t seem I would be considered in ‘public accounting,’ or would I? Would I be required to issue this engagement letter with financials or can I issue financials to clients without the accompanying requirements? We email financials after taking care of basic bookkeeping needs on a monthly basis. I want to make sure I am in compliance with what I need to be. I recently acquired the business after working for a non-CPA for a couple years, so he didn’t meet any typical CPA requirements. Thank you for your response.

    • Melissa, are you registered with your state board of accountancy? If yes, then you are an accountant in public practice. Since you are a CPA, I believe your state board would require you to register with them, so you may want to contact them. My short answer: since you are a CPA, I believe you are an accountant in public practice and subject to SSARS 21. Hope this helps.

  9. If I record a client’s activity (from the check register) on a monthly basis into
    Quickbooks or Peachtree and print off a balance sheet and income statement, am I subject to ARC 70 of SSARS 21? Of course I will put the disclaimer at the bottom of each page or issue an accountant;s disclaimer.

    Thanks,

    Bill

    • Bill,

      You are only subject to SSARS 21 if you are engaged to create financial statements. If the client does not request that you provide financial statements and you just key transactions into Quickbooks, then you are not subject to SSARS 21 (even though you or someone else actually prints financials from the package) and you are not required to provide the disclaimer.

      If the client requests that you provide financial statements (you have been engaged), then the disclaimer along with the other SSARS 21 requirements (e.g., engagement letter) are required.

      This video also explains the issue: http://cpa-scribo.com/ssars-21-and-printing-financial-statements-from-quickbooks/

      Hope this helps.

  10. Charles,

    With preparation engagement, do we issue accountant’s report like we issue for compilation engagement ? If so what are the wording we need to use ?
    Thanks

    Ash

    • Ash, the disclaimer language follows:

      The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

      [Signature of accounting firm or accountant, as appropriate]
      [Accountant’s city and state]
      [Date]

      Also check out this post: http://cpa-scribo.com/?s=Lowdown&submit=Search for additional details.