AR-C section 70, Preparation of Financial Statements, covers an engagement where the accountant prepares financial statements for a client and is not engaged to compile, review or audit them. It is a nonattest service. There is no accountant's report and no assurance. What the standard does require is a written engagement letter, a clear signal to anyone who reads the statements, and a financial reporting framework that is acceptable and disclosed.
Before SSARS 21, "plain paper" statements with no framework and no warning to readers were a common deliverable; AR-C 70 gives that service a defined structure. This guide covers when AR-C 70 applies, what the file must show, and when the right answer is a compilation.
When AR-C 70 applies
AR-C 70 applies when you are engaged to prepare financial statements and no standard or agreement requires a compilation, review or audit. Typical cases are an owner-managed business that wants statements for internal use, a client whose lender accepts management-prepared statements, or a month-end package prepared as part of a larger accounting services engagement.
It does not apply to every task that touches financial statements. A firm that only gives advice on a presentation, or keeps the books without preparing statements, is generally in nonattest services territory without AR-C 70. When the firm both keeps the books and generates statements from them for delivery to the client, AR-C 70 is often the standard that governs the statements, but whether it applies depends on what the client engaged the firm to do, so decide that at acceptance and document it.
When to use a compilation instead
Use AR-C 80 when the client or a user of the statements asks for a CPA's report, or when the accountant cannot comply with the preparation requirements, such as the legend. The AR-C 70 text also gives the option of a disclaimer in place of the legend. For the compilation steps, see compilation engagements under AR-C 80.
What the engagement must include
A written engagement letter
AR-C 70 calls for the terms of the engagement to be agreed with management and documented in writing. Firms typically have the letter signed by both the firm and management. The letter should cover the financial statements to be prepared, the framework, the responsibilities of each side, and the fact that the accountant will provide no assurance and no report. See the preparation engagement letter template.
Spell out what the firm is not doing. Clients often assume that "statements prepared by a CPA firm" means the numbers were checked. A sentence in the letter that the firm does not verify the information, and that readers should not treat the statements as reviewed, helps.
An acceptable framework
The statements are prepared under a financial reporting framework that is acceptable in the circumstances. That can be US GAAP or a special purpose framework such as the cash basis, modified cash basis or income tax basis. The accountant should determine that the statements identify the framework and describe it, if it is a special purpose framework, in a way that lets a user understand it.
If the accountant becomes aware of a material departure from the framework, including omitted disclosures, it should be raised with management before the statements are delivered, so that the statements do not mislead readers.
The legend or the disclaimer
A preparation engagement produces no report, so the statements themselves carry the warning. The accountant includes a statement that no assurance is provided on each page of the financial statements. Many firms use a header or footer that reads "No assurance is provided" or similar wording. If the legend cannot be placed on the statements, AR-C 70 provides alternatives: a disclaimer that makes clear no assurance is provided, or a change to a compilation or withdrawal from the engagement. Make the legend part of the firm's standard output template so it is not forgotten.
Independence and the AICPA Code
Independence is not required for a preparation engagement. That does not mean the Code is irrelevant. Preparing statements for an attest client is a nonattest service under the Code, and the firm needs to apply the safeguards in the nonattest services interpretation: management takes responsibility for the statements, designates an individual with suitable skill, knowledge and experience to oversee the service, and the firm does not make management decisions.
If the firm is a Yellow Book auditor, GAGAS has its own more restrictive requirements on nonaudit services. See Yellow Book (GAGAS).
A related issue is the mixed engagement. If the firm also performs an audit, review or compilation for the same client in the same period, document how the statements the firm prepared fit with the other service. For a review, in particular, the firm must be independent, so the safeguards for preparing the statements need to hold.
What goes in the file
AR-C 70 is a light standard, but a file is still needed. At a minimum:
- the signed engagement letter
- the framework used and how it was determined
- the trial balance or other information provided by management and its source
- the statements delivered, with the legend visible
- notes on any question that came up in preparing the statements and how management resolved it
- any communication with management on problems with the information
If management supplied information the accountant believed was wrong, the file should show that the accountant raised it. Whether the engagement can continue after that depends on management's response.
Example (illustrative)
A client with a single restaurant location wants quarterly statements for the owners. The firm exports the trial balance from the accounting system, maps the accounts, and prepares a balance sheet and income statement on the modified cash basis. The statements carry a note describing the basis and the legend on every page. The engagement letter says the firm will not verify the information and issues no report.
Six months later the client's bank asks for "CPA-prepared statements" for a line renewal. The firm confirms that the bank will accept statements with a compilation report, and the client agrees to move up a level. The earlier preparation work is not wasted, but the firm now needs a new letter, the compilation procedures and a report. If the bank had asked for a review, independence would also have to be assessed, including the effect of the firm having prepared the statements.
The point is that the service level is set by who relies on the statements, not by how much work the firm did. Ask early.
Communicating the limits to the client
The legend protects readers, but the client is the first reader. Walk through the statements with the owner and say plainly what the firm did and did not do: the firm organized management's numbers into statements, it did not test them, and anyone relying on them should know that. Clients are often surprised that a lender wants more, so raise it before the statements are delivered, not after.
Keep the conversation short and put it in the file in a sentence or two. If a client asks the firm to remove the legend, the answer is that the standard requires it or the firm must change the engagement to a compilation. Do not agree to remove it quietly.
Mistakes to avoid
- Delivering statements with no legend, usually because they were exported from the accounting system.
- Using the same letter for preparation and compilation. The two have different reporting outcomes.
- Failing to describe the framework when the statements are on the tax basis or cash basis.
- Treating preparation as a way to avoid questions. The accountant remains subject to the AICPA Code, including the integrity and objectivity rule, which prohibits knowingly misrepresenting facts.
- Not telling the client that a lender or surety may later ask for a compilation, review or audit, which can mean redoing the work at a higher level.
Frequently asked questions
Does a preparation engagement need an accountant's report?
No. AR-C 70 does not call for a report. Instead, the accountant includes a statement on the financial statements that no assurance is provided, or issues a disclaimer, or performs a compilation instead (or withdraws).
Do I need to be independent to prepare financial statements?
Independence is not required for a preparation engagement. If the firm also does attest work for the client, though, the nonattest service safeguards in the AICPA Code apply, and the combination must not impair independence for the attest engagement.
Can the statements be on the cash basis or tax basis?
Yes. A preparation engagement can use US GAAP or a special purpose framework. For a special purpose framework, the statements should describe the basis of accounting.
What is the difference between preparation and compilation?
A compilation results in a compilation report. A preparation engagement results in no report, but the statements carry a no-assurance legend. A compilation also has the accountant read the statements and follow up on obvious problems, with specific report wording about independence and omitted disclosures.
Can a lender accept statements from a preparation engagement?
Some do, but many require a compilation, review or audit. Ask what the lender or surety will accept before choosing the service level, and put the answer in the engagement file.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- AICPA, AR-C Section 70, Preparation of Financial Statements (SSARS No. 21, as amended)
- AICPA, AR-C Section 80, Compilation Engagements; AR-C Section 90, Review of Financial Statements; AR-C Section 60, General Principles for Engagements Performed in Accordance With SSARS
- AICPA Code of Professional Conduct: ET 1.295 (nonattest services), ET 1.100.001 (integrity and objectivity)
- GAO, Government Auditing Standards (2024 Revision), nonaudit services requirements: https://www.gao.gov/yellowbook
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error