Performing a compilation under AR-C 80

In this lesson you will

List the acceptance conditions and engagement terms for a compilation
Perform the AR-C 80 reading of the financial statements
Decide when to propose revisions and when to withdraw
Assemble the minimum AR-C 80 documentation

What a compilation is

AR-C 80 states the objective: apply accounting and financial reporting expertise to assist management in presenting financial statements, and report under AR-C 80, without undertaking to obtain or provide any assurance. AR-C 80 says a compilation does not require you to verify management's information or gather evidence. What distinguishes it from a preparation engagement is the compilation report and the independence determination: AR-C 80 says you must determine whether you are independent.

AR-C 80 extends the section to prospective financial information, pro forma financial information and other historical financial information.

Acceptance and the engagement letter

On top of the AR-C 60 preconditions, AR-C 80 requires management's agreement that it is responsible for:

preparing and fairly presenting the statements under the applicable framework with all informative disclosures appropriate to that framework (with added items for special purpose frameworks)
including your compilation report in any document containing the statements that says you compiled them, unless a different understanding is reached

If the conditions are not met and cannot be fixed, AR-C 80 says you should not accept.

AR-C 80 lists the engagement letter terms: objectives, management's responsibilities, your responsibilities, the limitations of a compilation, the framework, and the expected form and content of your report with a statement that the report may differ. AR-C 80 requires signatures from both sides. The compilation engagement letter template has the clauses.

Compilation procedures

AR-C 80 requires an understanding of the framework and significant accounting policies. Then:

Read. AR-C 80 requires you to read the statements in light of that understanding and consider whether they appear appropriate in form and free from obvious material misstatements. Tie the statements to the trial balance, scan for missing statements, check classification, and compare to prior year.
Ask for better information. If records or explanations are incomplete, inaccurate or unsatisfactory, bring it to management and ask for corrected information.
Propose revisions. If the statements do not adequately describe the framework, need revisions to conform with it, or are otherwise misleading, propose the revisions.

When to withdraw

AR-C 80 says you should withdraw and tell management why if management fails to provide requested records or explanations so you cannot finish, or if management will not make your proposed revisions, does not disclose the departures in the statements, and you decide not to disclose them in your report. AR-C 80 adds a second trigger: if modifying the report is not adequate to describe the deficiencies in the statements as a whole, withdraw and provide no further services on those statements.

Documentation

AR-C 80 sets the minimum: the engagement letter or other written documentation, a copy of the financial statements, and a copy of your report. Peer reviewers expect more than the minimum when you proposed entries or departures were discussed, so keep the adjusting entry list and a short memo on significant matters.

Findings that recur

Compilation reports issued with no signed engagement letter.
Statements that plainly fail the AR-C 80 reading: balance sheet not balancing to the trial balance, negative cash with no reclass, missing statement of cash flows when GAAP disclosures are included.
An independence impairment from bookkeeping services not disclosed.
Report dated before the procedures were complete. AR-C 80 ties the date to completion of the required procedures.

The compilation checklist follows AR-C 80 paragraph by paragraph, and the AR-C 80 guide covers practice points.

Worked example

Reading the statements at Brookside Auto Repair, Inc.

You are compiling Brookside Auto Repair, Inc.'s December 31, 2026 GAAP financial statements, full disclosure. During your AR-C 80 reading you note three items.

The balance sheet shows cash of negative $18,500. The bank statement shows outstanding checks of $41,200 against a bank balance of $22,700 ($22,700 - $41,200 = -$18,500). A book overdraft is a liability, not negative cash.
A $250,000 term loan is shown entirely as long-term. The amortization schedule shows $52,000 due in 2027.
The notes say the company "follows generally accepted accounting principles" but do not describe revenue recognition for repair contracts.

Under AR-C 80 you propose three revisions: reclassify $18,500 to a current liability for checks issued in excess of bank balance; reclassify $52,000 of the loan to current; and add a revenue recognition policy note.

Management records items 1 and 3 but refuses item 2. After the recorded revisions, current assets are $400,000 and current liabilities $310,000. The $52,000 misclassification changes current liabilities from $310,000 to $362,000 and the current ratio from 1.29 to 1.10. You judge it material. Because the departure is not disclosed in the statements, you either disclose it in a separate paragraph of your report or withdraw. You elect disclosure, quantify the $52,000, and date the report when the procedures are complete.

Self-check

Answer each question before you open the answer.

What does AR-C 80 require you to do with the financial statements?
Show answer
Read them in light of your understanding of the framework and the entity’s significant accounting policies and consider whether they appear appropriate in form and free from obvious material misstatements. It is a reading, not an evidence-gathering procedure.
Management will not provide the depreciation schedule you requested and you cannot finish the statements. What does AR-C 80 require?
Show answer
AR-C 80 requires you to withdraw and inform management of the reasons, because you cannot complete the engagement without records management failed to provide.
What three items does AR-C 80 require at minimum in a compilation file?
Show answer
The engagement letter or other suitable written documentation with management, a copy of the financial statements, and a copy of the accountant’s report.

Sources

AICPA, AR-C sections (SSARSs currently effective, Professional Standards)

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error