A compilation is the lowest level of SSARS service that results in an accountant's report. The accountant uses accounting and financial reporting expertise to help management present financial information in the form of financial statements, without obtaining or providing any assurance. The requirements are in AR-C section 80, Compilation Engagements, with the general principles in AR-C section 60.
This guide covers the engagement from acceptance to the report. For the comparison with preparation, review and audit, see SSARS explained.
When a compilation is the right service
A compilation fits when the client needs financial statements with a CPA's report attached, for example for a bank, a bonding company, an investor or a landlord, but the user does not require assurance. It also fits when the firm is not independent of the client, because AR-C 80 allows a compilation in that case with the right report wording.
If nobody requires a report and the statements are for management's use, a preparation engagement under AR-C 70 may be lighter. See preparation engagements under AR-C 70. If a lender or surety asks for assurance, the client needs a review or an audit.
Step 1: Accept and document the engagement
The engagement letter
AR-C 80 requires the accountant and management to agree on the terms in writing. The letter should identify the financial statements, the financial reporting framework, management's responsibilities, the accountant's responsibilities, the fact that a compilation provides no assurance, and the expected form of the report, including any statement about independence or omitted disclosures. Both parties sign. A starting point is the compilation engagement letter template.
Management's responsibilities
The accountant should confirm that management accepts responsibility for the financial statements and the information provided to the accountant, and for the completeness and accuracy of that information. This matters in compilations because the accountant does not verify it. If the client's books are poor, the letter and the file should say that the accountant relied on management's information.
Independence decision
Independence is not required for a compilation. Decide at acceptance, document it, and carry the answer into the report. If the firm is not independent, the report must say so. If the firm is independent, the report does not need a statement either way.
Step 2: Perform the required procedures
AR-C 80 is intentionally light. The accountant must:
- obtain an understanding of the financial reporting framework and the significant accounting policies the entity uses, to the extent needed to compile
- obtain an understanding of the entity's accounting records and basis of accounting well enough to perform the work
- read the compiled financial statements and consider whether they appear free from obvious material misstatement
- discuss with management any information that is incorrect, incomplete or otherwise unsatisfactory, and ask management to consider revising
There is no requirement to perform inquiries or analytical procedures to test the information, and none to verify records. That does not remove professional judgment. If the trial balance shows a negative cash balance, an accounts receivable balance with no revenue, or a loan with no interest expense, the accountant must follow up.
What if management will not fix the problem
If management does not provide additional or corrected information, or does not revise the statements, the accountant considers the effect on the engagement, including withdrawing from it. If the problem is a material departure from the framework that management will not correct, the report must describe the departure, and withdrawal is the alternative when management's response is not acceptable.
Common compilation work
Most of the time on a small compilation goes into the trial balance. Typical steps are:
- Tie the trial balance to the general ledger and to bank statements for cash.
- Map accounts to financial statement captions.
- Prepare the statements in the agreed framework, with a statement of cash flows if the framework requires one.
- Draft the notes or decide with management whether to omit them.
- Read the result for completeness and obvious problems.
The trial balance guide helps with the first two steps.
Step 3: Disclosures, or not
Management can elect to omit substantially all of the disclosures that the framework would require, as long as the omission is not intended to mislead users. This election is available in a compilation but not in a review or audit. The compilation report must state that management has elected to omit substantially all disclosures, that if the omitted disclosures were included they might influence a user's conclusions, and that the statements are therefore not designed for those who are not informed about such matters.
If the statements include some but not all disclosures, check whether departures from the framework are material and consider whether they should be described in the report.
For special purpose frameworks such as cash, modified cash or tax basis, the statements need a description of the framework and how it differs from US GAAP, as the standard requires.
Step 4: The compilation report
Shell wording for the report and for the management letter is in the compilation report shells.
The report has a recognizable shape. It includes a title, an addressee, a paragraph stating that management is responsible for the statements and that the accountant performed the compilation in accordance with SSARS promulgated by the AICPA's Accounting and Review Services Committee, a statement that the accountant did not audit or review the statements and is not required to perform any procedures to verify accuracy or completeness, and a statement that the accountant therefore does not express an opinion, a conclusion or any form of assurance.
Then come the additional elements as needed:
- the omitted disclosures paragraph, if applicable
- the independence statement, if the firm is not independent
- a paragraph on a departure from the framework, when one is not corrected
- the signature of the firm, the city and state, and the date
Independence statement
If the accountant is not independent, the report includes a statement that the accountant is not independent with respect to the entity. The accountant may add the reasons. If any reason is given, the standard calls for describing all of them, so do not give a partial explanation. In practice many firms state only the lack of independence.
Report date
AR-C 80 dates the report as of the date the accountant completed the compilation, meaning the date the required procedures were finished. As a matter of practice, wait until management has approved the final statements before dating the report, so the date matches the version delivered.
Documentation
AR-C 80 requires the compilation documentation to include the engagement letter, any significant matters that arose and how they were handled, and any other communication with management on problems. Add, as good practice (the compilation engagement checklist can track these):
- the trial balance and the mapping to the statements
- the draft statements and the final statements delivered
- notes on questions asked of management and the answers
- the independence conclusion
- evidence of partner or reviewer review under the firm's quality management policies
The firm's quality management system under SQMS No. 1 covers compilations as part of the firm's accounting and auditing practice.
Common mistakes
- Using a compilation report where the client or a user expected assurance. Lenders and sureties may ask for "CPA statements" without specifying the level of service.
- No signed engagement letter, or a letter written for a different level of service.
- A report that does not mention omitted disclosures when the notes were left out.
- A missing independence statement when the firm also does the client's payroll or bookkeeping and has not worked through the safeguards in the AICPA Code.
- Old report wording that predates the current standard.
- No evidence that the accountant read the statements or followed up on obvious errors.
Frequently asked questions
Does a compilation require the CPA to be independent?
No. If the CPA is not independent, the compilation report must say so. The CPA may give the reasons, but if any reason is given, all reasons must be described.
Can a compilation omit all disclosures?
It can omit substantially all disclosures if management elects to and the omission is not intended to mislead users. The report must disclose the election. This option does not exist for reviews or audits.
What procedures does a compilation require?
The accountant must understand the framework and the entity's accounting basis, read the statements for obvious material misstatement, and follow up on information that appears incorrect, incomplete or unsatisfactory. Inquiry, analytical procedures and verification of records are not required.
Does a compilation provide any assurance?
No. The report says the accountant does not express an opinion, a conclusion or any form of assurance on the statements.
Is a compilation the same as preparing financial statements?
Not quite. Both provide no assurance, but a compilation always results in a report. A preparation engagement under AR-C 70 produces no report and instead requires a legend on the financial statements, or a disclaimer.
Sources
- AICPA, AR-C Section 80, Compilation Engagements
- AICPA, AR-C Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services
- AICPA, AR-C Section 70, Preparation of Financial Statements
- AICPA, SQMS No. 1, A Firm's System of Quality Management
- AICPA Code of Professional Conduct, Independence Rule (ET 1.200.001) and Nonattest Services interpretation (ET 1.295)
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
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