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.

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.

SSARS 21 Reports – Preparation, Compilation and Review

Here are sample compilation and review reports

In this post, I provide comparisons of SSARS 19 (old standard) and SSARS 21 (new standard) compilation and review reports.

But first I provide the new SSARS 21 preparation (of financial statements) disclaimer–SSARS 19 had no such disclaimer. (If the accountant chooses not to use the disclaimer, he can put “no assurance is provided” on each page of the financial statements.) For more information about preparation of financial statements, as provided in SSARS 21, click here.

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

Courtesy of DollarPhoto.com

Courtesy of DollarPhoto.com

Preparation Disclaimer

Using SSARS 21, a disclaimer can be provided by an accountant that prepares financial statements and is not engaged to perform a compilation.

The preparation disclaimer 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]

Compilation Reports

The SSARS 19 compilation report follows:

Accountant’s Compilation Report

[Appropriate Salutation]

I (we) have compiled the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The SSARS 21 compilation report follows:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

For more information about compilation engagements, based on SSARS 21, click here.

Review Reports

The SSARS 19 review report follows:

Independent Accountant’s Review Report

[Appropriate Salutation]

I (We) have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require me (us) to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. I (We) believe that the results of my (our) procedures provide a reasonable basis for our report.

Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The SSARS 21 review report follows:

Independent Accountant’s Review Report

[Appropriate Addressee]

I (We) have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management’s Responsibility for the Financial Statements 

Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountant’s Responsibility 

My (Our) responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for our conclusion.

Accountant’s Conclusion 

Based on my (our) reviews, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date of the accountant’s review report]

Observations

The Accounting and Review Services Committee (ARSC) intentionally reformatted the compilation report in SSARS 21 to distinguish it from assurance service reports (a compilation is a nonassurance service). Compare the SSARS 21 compilation report above to the SSARS 21 review report (a review is an assurance service).

Notice the sample SSARS 21 compilation report has no:

  1. Report title (e.g., Independent Accountant’s Compilation Report) or
  2. Addressee/salutation
  3. Paragraph headers (and even no separate paragraphs)

I checked with the AICPA, and they advised that a compilation report title and salutation, while not required, is permissible.

Notice the SSARS 21 review report has section headers, as audit reports do. Both reviews and audits are, of course, assurance services–so the reports are formatted similarly.

Other Blog Posts

Here’s some additional SSARS 21 information:

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).