Preparation, Compilation and Review of F/S

For small accounting firms, unaudited financials

Levels of Service
1. Preparation: no assurance, independence NOT require
a. Does not perform audit or review procedures
b. Non attest service
2. Compilation: no assurance, it's okay to lack independence but you gotta disclose that
a. Does not perform audit or review procedures
b. Present f/s without undertaking to express any assurance on financials
3. Review: independence required
a. Express limited (negative) assurance on f/s that there are no material modifications
b. Inquiry and analytical procedures
c. Assurance engagement AND attest engagement
4. If CPA did more than one, report the HIGHER level of service
Professional Standards

SSARS Statements on Standards for Accounting and Review Services

Accounting and Review Services Committee of AICPA
According to SSARS, the CPA should
o Have sufficient knowledge, exercise judgment, justify departures
SSARS: for nonissuers
SSARS doesn't apply when CPA does other services like
o Tax returns
o Correcting entries
o Bookkeeping
o Processing data

Elements of Preparation, Compilation and Review

A. Three Party Relationship: Management, Accountant, Users
a. Management:
i. Identify applicable financial reporting framework
ii. Preparation and fair presentation of financials
iii. DIM
iv. Prevent and detect fraud
v. Complies with laws and regulations
vi. Accuracy and completeness
vii. Provide accountant with access to all info
b. Accountant
i. Know your shit
c. Users
i. Understands limitations of engagement of F/S
B. FInancial Reporting Framework
a. If using Special Purpose Framework OCBOA
i. Description of this framework
ii. Disclosure
C. Understanding with Client: Engagement letter REQUIRED

D. Sufficient Appropriate Evidence (REVIEW ONLY)

a. CPA has NO responsibility to obtain evidence about accuracy of completeness of
financial statements in a preparation or compilation
b. Review- get enough evidence for obtaining LIMITED assurance that there are no
material modifications that should be mae
c. Professional judgment to determine nature extent timing
E. Put on Each page or Report
a. Prepare: disclaimer OR indicate no assurance is provided on f/s on each page on f/s
b. Compilation or review: written report required
PREPARATION
1. Lowest level of service, no assurance
2. Get engagement letter
a. Understanding with management should say:
i. Objectives of engagement
ii. Management responsibility
1. Prevention/detection of fraud
2. Complies with laws
3. Accuracy and completeness
4. Provide with documentation, additional info, and unrestricted
access
iii. No assurance provided on F/S
iv. Accountant's responsibilities
v. Framework applied
3. Requirements
a. Know the company
b. Prepare financials: no assurance provided
c. Unable to include statement then make a disclaimer or perform compilation
i. Disclaimer: do not express opinion
4. Framework OCBOA
a. In face of financials or note
5. Inaccurate or Incomplete = withdraw
a. If it contains known departures disclose misstatements
6. F/S Omit all Disclosures
a. CPA can prepare these F?S if
i. CPA discloses omissions in F/S
1. "selected info- substantially all disclosures required by...are not
included"
ii. Omission is not intended to mislead anyone
7. Documentation
a. Engagement letter
b. Findings or issues
c. Oral or written communication
d. Copy of f/s
e. Justification of departure

COMPILATION
1. No assurance
2. Get engagement letter
a. Understanding of management should say
i. Objectives of management
ii. Management responsibilities
1. Preparation and fair presentation
2. DIM
3. Prevent/detect fraud
4. Laws and regulations
5. Accuracy and completeness
iii. Accountant's responsibilities
iv. Limitations of engagement
v. Applicable framework
vi. Accountant's compilation report
b. "we are not required to, and will not, verify the accuracy or completeness of
information you will provide to us for engagement..."
3. Requirements
a. Know your shit
b. Understand Client's business
i. Staff qualification
ii. Transaction type and frequency
iii. Accounting basis
iv. Form of records
v. Financial statement form
c. Reading F/S
i. Appropriate in form and free from obvious material errors
ii. Never associated with false, fraud, etc
iii. Noncompliance with laws and stuff
1. Request mgmt to consider effects on f/s
4. Financial Statements inaccurate or incomplete
a. No audit work
b. Refuse to provide = withdraw
5. Documentation
a. Engagement letter
b. Significant findings or issues
i. Material misstatements and resolutions
ii. Oral/written communication
iii. Copy of f/s
iv. Copy of accountant report
6. Reporting Compilation: independence NOT required, no assurance (must disclose lack of
independence in report doe)
a. Accountant's report
i. Management is responsible for F/S
ii. Identify f/s
iii. Identify entity
iv. Date or period

7.
8.

9.
10.

v. SSARS
vi. Did not audit or review, does not express opinion
vii. Signature, city, date (ok if on letterhead)
b. Other requirements
i. Each page should say: see accountants compilation report
ii. A separate paragraph might be needed to emphasize matter like going
concern or subsequent events
c. Sample report:
i. Management Responsibility
ii. Statements Accordance with accounting principles Generally accepted
iii. Compilation Engagements SSSARS
iv. Not Audit or review f/s
v. Not required to perform any procedures to verify Accuracy, Completeness of
info do not Express opinion
vi. NO separate paragraph, no separate heading, no assurance
Special purpose framework
i. Additional paragraph: is acceptable, refers to note
F/S omit a lot of disclosures
i. Compilation with omission of all disclosures= OK but disclose
1. Additional paragraph warns the user
2. Must not be intended to mislead
3. f/s are otherwise in conformity with GAAP
4. Restricted use NOT required
ii. Compilation with Limited Disclosure
1. You can't issue an opinion because you're not auditing it
Departure from Applicable framework: disclosure or withdraw
Reporting when not independent: disclosure

REVIEW: limited assurance, not aware of material modification

1. Procedures
a. Nature and materiality of f/s
b. Likelihood of misstatement
c. Knowledge of current/previous engagements
d. Qualifications of accounting ppl
e. Effected by mgmt judgment
f. Entity's underllying financial data
2. Review Requirements (SAME for public)
a. Understanding with Client
i. Objectives, MR, AR, limitations, framework, form and content
b. Learn business
i. Know your shit
ii. NOT required:
1. Internal test control, audit test, fraud risk, talk with predecessor CPA
(judgment)
c. Inquiry
i. Ask members of mgmt INSIDE company not outside

d.

e.
f.

g.

h.

1. Principles, procedures, stuff is fairly presented, changes, subsequent

events, unusual events, uncorrected stuff, fraud, journal entries,
law, corruption, related party txn
Analytical procedures
i. Ratios and comparisons
1. Cy and py
2. Budget and forecast
3. Financial with nonfinancial
4. Ratios and relationships
Review- looking for predictable, if they're inconsistent, investigate!!
Client rep letter
i. Contents:
1. Fulfilled responsibility
2. DIM
3. Provided all relevant info
4. Told the truth
5. Transactions recorded
6. Disclosed any fraud stuff and allegations and noncompliance and
incorrect material misstatements: SUMMARY of adjustments past
7. Related party stuff
8. Events subsequent to date
Professional judgment
i. Incomplete review, no rep letter= no report
ii. NOT included in documentation: test of internal control and audit test work
iii. Documentation SHOULD include:
1. Engagement letter
2. Significant findings
3. Inquiry and responses
4. Analytical procedures performed
5. Communications with management
6. Fraud stuff
7. Talking with other CPAs
8. Management Rep Letter
9. Copy of reviewed F/S
Accountant communicate results
i. Title, addressee,
ii. Intro
1. Analytical and inquiry procedures
2. Less in scope than audit
3. Does not express opinion
iii. MGMT responsibility: DIM
iv. AR: SSARS, limited assurance
v. Accountant Conclusion- not aware of material modification
vi. Sign, date
vii. Special framework
1. OK to review
2. Refer to MR
3. Emphasis of matter going concern and subsequent events

4. Description of purpose
5. Other matter paragraph- after conclusion
Review
Analytical
Make Inquiry
MR DIM
AR
SSARS
AICPA
Limited Assurance
AC
Not
Aware of
Material modifications

Report Modification not adequate- Withdraw, DO NOT issue an adverse or except for opinion
Oops found out more stuff too late at date of compilation or review report. Accountant should

Advise client to issue revised f/s, make disclosures, if can't be done ontime, f/s should not be
relied upon
If client refuses to do so
o Tell client that the CPA report can't be associated with F/S
o Tell regulatory agencies
o Tell people who might be relying on F/S

Supplementary Info

For compilation- did not audit or review

For review- not aware of material modifications, has not audit
If compiled and reviewed the F/S but NOT supplementary info,
o Additional analysis but not required part of F/S
o Reppin management
o Compilation- does not express opinion
o Review- has not audited or reviewed or provide assurance
If required, put in the other matter paragraph

Change in engagement

from audit to compilation or review or from review to compilation

o Change must be justified
o Acceptable reasons for change:

Change in client requirements and misunderstanding of service

UNacceptable reasons
Fraud/error/deceptive/misleading
Withdraw if: refuses to allow talking to legal ppl, refuses to give signed rep
letter