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.

Bookkeeping, Preparations, Compilations, and Review Engagements: Questions and Answers

This Q&A covers common questions about bookkeeping and SSARS 21 engagements

Today, we’ll answer various questions regarding bookkeeping, preparations, compilations, and review engagement.

Bookkeeping, preparations, compilations

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Q: Should I issue management letters for preparation, compilation, or review engagements?

A: While not required, it is advisable to provide management letters when performing SSARS 21 services. Why? Two reasons: (1) It’s a way to add value to the engagement, and (2) it’s a way to protect yourself from potential litigation. Clients do–sometimes–sue CPAs in these so-called “lower risk” engagements. If we see control weaknesses (while performing a compilation for example), we should communicate those–even though standards don’t require it. Then, if theft occurs in that area and you are later sued regarding the fraud, you have a defense. If you don’t issue a management letter, at least send an email regarding the issues noted and retain a copy.

Q: Why obtain an engagement letter for nonattest services such as bookkeeping and tax (standards don’t require it)?

A: In all engagements, we want to state exactly what we are doing. Why? So, it is obvious what the client has hired us to do–and what they have not hired us to do. If a client says, “I told you to do my monthly bookkeeping and to file my property tax returns,” but you have no recollection of being asked to perform the latter, you need an engagement letter that specifies monthly bookkeeping (and nothing else).

Q: Should I say–in a bookkeeping engagement letter–the service is not designed to prevent fraud?

A: We should obtain a signed engagement letter for bookkeeping services, even though not required by standards. And yes, by all means, include a statement that the bookkeeping service is not designed to detect or prevent fraud.

Q: If I note fraud while performing a bookkeeping, preparation, compilation, or review engagement, should I report it to the appropriate levels of management?

A: Standards require this communication for review engagements. I would do likewise for the other services (though not required in SSARS 21).

Q: Am I required to be independent if I perform bookkeeping and preparation services?

A: No, since both are nonattest services.

Q: If I create financial statements as a byproduct of an 1120 tax return, am I subject to AR-C 70 Preparation of Financial Statements?

A: No, you are only subject to AR-C 70 if you are engaged to prepare financial statements.

Q: If I perform bookkeeping services in a cloud-based accounting package such as QuickBooks, am I subject to AR-C 70 (SSARS 21)?

A: It depends. Yes, if you are engaged to prepare financial statements. No, if you were not engaged to prepare financial statements. Who “pushes the button” to print the financial statements has no bearing on the applicability of AR-C 70.

Q: Am I required to have a signed engagement letter for all preparation, compilation and review engagements?

A: Yes.

Q: Can I act as a controller-for-hire and perform a compilation engagement?

A: Yes, but you need to state that you are not independent in the compilation report.

Q: Can I act as the controller-for-hire and perform a review engagement?

A: No. Independence is required for review engagements.

Q: If I prepare financial statements and perform a compilation, am I performing one service (as I did under SSARS 19) or are these considered two separate services?

A: They are two separate services. The preparation is a nonattest service, and the compilation is an attest engagement. Both can be specified in one engagement letter.

SSARS 23: Parts are Effective Immediately

SSARS 23 affects compilation and review reports

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services–2016, was issued in late October 2016, but parts of the standard are applicable immediately.

SSARS 23 Changes Effective Now

The two key changes effective immediately are:

  1. An update of compilation and review report language regarding supplementary information
  2. You must now report departures from the applicable financial reporting framework in the compilation report
SSARS 23

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1. Update of Compilation and Review Report Language for Supplementary Information

The compilation and review report language regarding supplementary information changed with the issuance of SSARS 23.

Compilation Report Supplementary Information Language

The compilation report language regarding supplementary language is as follows:

Compilation Report Language for Supplementary Information Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was subject to our compilation engagement. We have not audited or reviewed the supplementary information and do not express an opinion, a conclusion, nor provide any assurance on such information.

Compilation Report Language for Supplementary Information Not Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was not subject to our compilation engagement. We do not express an opinion, a conclusion, nor provide any assurance on such information.

Review Report Supplementary Information Language

The review report language regarding supplementary language is as follows:

Review Report Language for Supplementary Information Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The supplementary information has been subjected to the review procedures applied in our review of the basic financial statements. We are not aware of any material modifications that should be made to the supplementary information. We have not audited the supplementary information and do not express an opinion on such information.

Review Report Language for Supplementary Information Not Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. We have not audited or reviewed such information and we do not express an opinion, a conclusion, nor provide any assurance on it.

2. Disclose Departures in the Compilation Report

SSARS 21 allowed CPAs to report departures from the applicable financial reporting framework either in the notes or in the compilation report. SSARS 23 requires that such departures be reported “in a separate paragraph” in the compilation report. In other words, you can no longer just disclose the departure in the notes to the financial statements.

Impact on Peer Reviews

So, what happens if a firm fails to make the revisions to the supplementary information paragraphs as discussed in 1. above?

The February 2017 AICPA Reviewer Alert (the newsletter that peer reviewers receive) says the following:

If a firm failed to update the language in the additional paragraph for review and compilation reports, it would generally not result in a deficiency or significant deficiency. The changes made by SSARS No. 23 in relation to supplementary information are considered further clarifications to existing requirements. Therefore, the following guidance is applicable; PRP Section 6200 Appendix E Areas of Common Noncompliance With Applicable Professional Standards;

List of Matters and Findings That Generally Would Not Result in a Deficiency
Reports
• Omission of phrases or use of phrases not in conformity with the appropriate standards for the report issued

Failing to make the revisions will not result in a deficiency or a significant deficiency in a peer review.

SSARS 21 Book

To see my SSARS 21 book on Amazon, click here.

 

Preparation of Financial Statements, Compilations, Reviews: A Comparison

Have you been wondering how the three services covered in SSARS 21–(1) preparation of financial statements, (2) compilations and (3) reviews–compare to one another? This video provides a brief overview of the three services and what the CPA is required to do for each.

Table Comparing Preparation of Financial Statements, Compilations and Reviews

QuestionPreparing Financial StatementsCompilationsReviews
Can notes to the financial statements be
omitted?
YesYesNo
Can the financial statements go to users other than
management?
YesYesYes
Considered an assurance service?
NoNoYes; limited assurance
Considered an attest service?
NoYesYes
Does the engagement require a report?
No - required wording stating “no assurance is provided” or a disclaimer
Yes - compilation reportYes - review report
Effective for periods ending on or after December
15, 2015 (early implementation permitted)?
YesYesYes
If the accountant is
not independent, is that fact required
to be disclosed?
NoYesMust be independent
Is a signed engagement letter required?
YesYesYes
Is the accountant required to determine if he or
she is independent of the client?
NoYesYes
Is the accountant required to make inquiries or
perform other
procedures to
verify, corroborate,
or review
information supplied?
NoNoIf results of analytics are questionable, inquire of management. Not required to corroborate management's responses with other evidence.
Management is responsible for financial
statements?
YesYesYes
Minimum documentation
1. Engagement letter
2. Copy of financial statements
1. Engagement letter
2. Copy of financial statements
3. Copy of report
1. Engagement letter
2. Copy of financial
statements
3. Copy of report
4. Nature, timing and extent of procedures
5. Results of procedures
6. Significant findings or issues and conclusions reached (including judgments)
7. Communications of fraud or noncompliance with laws or regulations
8. Communications concerning the inclusion of emphasis-of-matter paragraph or other-matter paragraph
9. Representation letter
10. Communications with other firms regarding audited or reviewed components

Procedures1. Prepare the financial statements based on the information provided
2. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
1. Read the financial statements
2. Consider whether the financial statements appear appropriate
3. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
4. If the accountant becomes aware that revisions to the financial statements are necessary, request that corrections be made
1. Read the financial statements
2. Consider
whether the financial statements conform to applicable reporting framework
3. If the accountant becomes aware that supplied information is incorrect or incomplete, request management's consideration of effect on statements; request response to the accountant; consider effect on limited assurance determination
4. If the accountant believes statements are materially misstated, perform additional procedures to support limited assurance
5. Understand the industry; obtain knowledge of the entity
6. Perform Analytics
7. Make inquiries
8. Reconcile financial statements to underlying information
Subject to Peer ReviewNot known at this timeYesYes
When does the standard apply?
Accountant engaged to prepare financial statements
Accountant engaged to compile financial statements
Accountant engaged to review financial statements

Independence and Preparation of Financial Statements

For many years, preparation of financial statements was considered a part of an attest engagement (audits, reviews compilations). No longer.

The Professional Executive Ethics Committee (PEEC) recently added guidance to the “Nonattest Services” interpretation as follows:

activities such as preparation of financial statements…are considered outside the scope of the attest engagement, and, therefore, are considered a nonattest service

Consequently, if an accountant prepares financial statements (a nonattest service) and performs an attest service (e.g., audit, review, compilation), then consideration should be given as to whether: 

  • the client makes all management decisions,
  • the client properly oversees the service,
  • the client evaluates the adequacy and results of the service, and
  • the client accepts responsibility for the service

We have, for some time now, included the aforementioned language in engagement letters when we have performed both attest services and nonattest services. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be listed as another nonattest service and the requisite language concerning client responsibilities (in the previous paragraph) applies to the preparation-of-financial-statements engagement.

The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014. If you, for example, perform a compilation engagement for January 2015 (i.e., a monthly financial statement), the new guidance is applicable. Of course, with regard to compilations, you can lack independence if it is noted in the compilation report. Not true for reviews and audits. CPAs are precluded from performing reviews and audits if their independence is impaired.

Here is the sample relevant paragraph from Illustration 1 of the compilation engagement letters in Section 80 of SSARS 21:

You are also responsible for all management decisions and responsibilities and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

If other nonattest services are to be provided (e.g., tax return), they are to be listed alongside preparation of financial statements.

The client must accept responsibility for financial statements prepared as a part of an audit or a review for periods beginning after December 15, 2014. So, for example, if a client desires for you to perform a review engagement for the first quarter of 2015, the client must be able to oversee your preparation and accept responsibility for the financial statements. If the client is unable to accept that responsibility, then the accountant is not independent and would be precluded from performing the review engagement.

Simply including the standard language in the engagement letter (that management assumes responsibility) is not the same as management actually accepting responsibility.

Obviously, the determination of whether the client can (or has the ability to) accept responsibility is a subjective one. I anticipate additional guidance to be forthcoming from the AICPA to assist CPAs in making this decision.