compilation & review standards (updated for ssars...

Compilation & Review Standards

(Updated for SSARS 21)

Authored by:

David W. Holt, CPA, CFE

www.holtcpe.com

[email protected]

830-486-5222

Fort Worth Chapter TSCPA Compilation, Review and SSARS 21 July 13, 2015

http://www.holtcpe.com/

mailto:[email protected]

COMPILATION & REVIEW STANDARDS

This seminar has the following learning objectives:

Update participants regarding the primary changes to Compilation & Review standards (AICPA) subsequent to SSARS 21

Discuss implementation issues & significant changes

Consider the necessary changes to client communications, engagement performance & engagement documentation

Discuss proposed changes to SSARS (if any)

The method of presentation is group-live instruction and the program level is

intermediate. There are no prerequisites of this course nor is there any advanced

preparation required.

This seminar is offered on the dates and locations listed at our website:

(www.holtcpe.com)

David Holt Seminars is the marketing company that represents:

H. Garland Granger, CPA, CIA

David W. Holt, CPA, CFE

Professional Accounting Seminars, Inc.(NASBA CPE Sponsor # 107952)

Professional Accounting Seminars, Inc. is registered with the National Association of

State Boards of Accountancy as a sponsor of continuing professional education on the

National Registry of CPE Sponsors. State boards of accountancy have final authority

on the acceptance of individual courses for CPE credit. Complaints regarding

registered sponsors may be addressed to the National Registry of CPA sponsors, 150

Fourth Avenue North, Nashville, Tennessee 37219-2417. Website: www.nasba.org

Florida CPE Sponsor # 0003246 (Provider # 423)

Illinois CPE Sponsor – Public Accountancy Act Section 1420.70

North Carolina CPE Sponsor – recognized sponsor listed on the NASBA Registry

Texas CPE Sponsor # 007467 (David Holt Seminars)


http://www.holtcpe.com/

http://www.nasba.org/

TABLE OF CONTENTS

Page

What is a SSARS Engagement? (prior to implementing SSARS 21) 1

Primary “Problems” with the “Old” SSARS Engagements 3

Significant Changes by SSARS 19 6

The Compilation & Review Standards (created / revised by SSARS 19)

Framework for Performing & Reporting on Compilation & Review

Engagements (AR 60) 8

Compilation of Financial Statements (AR 80) 20

Interpretations of AR 80 (AR 9080) 33

Review of Financial Statements (AR 90) 37

Sections Not Significantly Changed by SSARS 19 (updated, as necessary)

Compilation of Specified Elements, Accounts or Items (AR 110) 46

Compilation of Pro Forma Financial Information (AR 120) 47

Reporting on Comparative Financial Statements (AR 200) 49

Compilation Reports on Financial Statements Included in Certain

Prescribed Forms (AR 300) 50

Communications Between Predecessor & Successor Accountants

(AR 400) 51

Reporting on Personal Financial Statements Included in Written

Personal Financial Plans (AR 600) 53

Implementation of SSARS 19 Changes 55

Final Examination 57

Appendix Sections:

Alternative Accounting Frameworks (American Reporting Entities) 59

IFRS for SMEs (Private Company GAAP Reporting) 60

FRF for SMEs (AICPA OCBOA Alternative) 62

Comparing FRF for SMEs to Other Accounting Alternatives 65

SSARS 21 “Recodification” 69


1

WHAT IS A SSARS ENGAGEMENT?

SSARS Engagements (prior to implementing SSARS 21)

1. Statements on Standards for Accounting and Review Services (SSARS) are issued

by the AICPA Accounting and Review Services Committee (ARSC), the senior

technical committee of the AICPA designated to issue pronouncements in

connection with the unaudited financial statements or other unaudited financial

information of a nonpublic entity. Council has designated ARSC as a body to

establish technical standards under Rule 202 of the AICPA’s Code of Professional

Conduct (ET sec. 202 par. 01).

2. Interpretations are issued to provide guidance on the application of SSARS.

Interpretations are issued after all members of ARSC have been provided an

opportunity to consider and comment on whether the proposed interpretation is

consistent with SSARS. An interpretation is not as authoritative as a SSARS, but

members should be aware that they may have to justify a departure from an

interpretation if the quality of their work is questioned.

Guidance Applicable to SSARS Engagements

1. Performance and reporting

SSARS (Accounting & Review (AR) section of AICPA Professional Standards)

SSARS Interpretations, included in AR section; four digit reference number,

starting with a nine (9)

AICPA Guide to Compilation & Review Engagements

AICPA Code of Professional Conduct (“ethics” rules), especially sections on

professional competence, due professional care, planning and supervision, and

sufficient relevant data

2. Accounting framework (basis of accounting) and financial statements,

depending on the appropriate accounting method of the specific engagement

FASB Codification (for GAAP) for for-profit and non-profit entities

GASB Statements for governmental entities (GAAP)


2

WHAT IS A SSARS ENGAGEMENT?

IRS guidance for the applicable tax return (Income tax basis)

AICPA (non-authoritative) practice aids (cash, modified cash, or tax basis

reporting)

Regulatory guidance of a specific industry, if reporting on the “regulatory basis”

of accounting

Identifying the Service and Relevant Professional Standards

1. SSARS engagements – preparing and submitting (to or for management) the

unaudited financial statements (or financial information) of a non-public entity (non-

issuer)

Compilation (attest service, but no assurance)

Review (assurance service)

Preparation (after SSARS 21 is implemented, nonattest & no assurance)

2. Not SSARS engagements, include:

A. Nonattest services (does not prepare or create a financial statement)

Bookkeeping, accounting , data processing

Payroll processing

Tax returns

B. Agreed upon procedures (attest service) - AICPA SSAE (attestation standards)

C. Audits (assurance service) – AICPA SAS (audit standards)


3

PRIMARY PROBLEMS WITH “OLD” SSARS ENGAGEMENTS

Common “Problems” for Former SSARS Engagements

1. Lack of understanding of the nature and limitations of financial statement

engagements and nonattest services provided by CPAs to:

Clients (management and governance)

Third parties (intended users)

2. Lack of independence and the effect on the accountant’s services, reports and

perceptions by users

3. Improper or incorrect services provided relative to the needs or expectations of

clients and intended users

4. Failure to employ the “risk assessment” approach (required by SSARS 10) in the

performance of review engagements

As stated in the AICPA Guide (paragraph 3.07):

The previous standards did not provide a framework for the level of assurance that

the accountant was seeking to obtain or conceptually explain how the accountant

should tailor review procedures to accomplish the objective of a review. As a

result, some review engagements were performed by mechanically using an

illustrative checklist rather than applying professional judgment to tailor the nature

and extent of review procedures to the client’s situation. When this was done, the

review engagement was more akin to an agreed-upon procedures engagement

than an assurance engagement.

AICPA Response to Former Problems

1. SSARS 19 was issued to correct and improve the circumstances and “problems”

noted (above)

2. SSARS 19 “represents the biggest change to SSARS since 1978” (AICPA)


4


Discussing Questions

1. What percentage of clients know the nature (extent of services performed) and

limitations (level of assurance) of the three primary financial statement services

provided by CPAs? Estimate an answer for:

Compilations

Reviews

Audits

2. In what percentage of compilation engagements does the CPA know (or “strongly

suspect”) who the intended user(s) of the compiled financial statements will be?

Estimate an answer.

3. What percentage of intended users (usually a lender) know the nature (extent of

services performed) and limitations (level of assurance) of the three primary

financial statement services? Estimate an answer for:

Compilations

Reviews

Audits

4. How could we “increase the percentages” (improve communications) in questions 1

and 3 for most SSARS engagements? Describe the necessary process.


5


5. What are the primary differences in the performance of a review engagement

using the “old” mechanical checklist approach compared to the “risk assessment”

approach prescribed by SSARS 10? List key issues or differences.


6

SIGNIFICANT CHANGES BY SSARS 19

Overview

1. “Represents the biggest changes to SSARS since 1978” (AICPA)

2. Sections of codified Accounting & Review (AR) services guidance (SSARS) that are

superseded by SSARS 19: (over 80% of SSARS guidance)

AR 20, Defining Professional Requirements

AR 50, Standards for Accounting & Review Services

AR 100, Compilation & Review of Financial Statements

3. Effective for compilations & reviews:

A. For financial statement periods ending on or after December 15, 2010

B. Early application was only permitted for paragraph 2.21 (reporting on

compilations, when the accountant is not independent)

4. Copies are available from the AICPA (www.aicpa.org or 888-777-7077)

Significant Changes

1. Includes a requirement that an accountant document the establishment of an

understanding with management through a written communication (that is, an

engagement letter) regarding the services to be performed for all SSARSs

engagements

2. Enhances the documentation requirements for compilation and review

engagements

3. Removes the prohibition against allowing an accountant to include a description in

the accountant’s compilation report regarding the reason(s) for an independence

impairment

4. Re-codifies the SSARS literature into separate sections for compilation and review

engagements (plus an introductory section that applies to both)


http://www.aicpa.org/

7

SIGNIFICANT CHANGES BY SSARS 19

5. Introduces the term review evidence to the review literature by clarifying that a

review requires the accumulation of review evidence that will provide a reasonable

basis for obtaining limited assurance that there are no material modifications that

should be made to the financial statements in order for the statements to be in

accordance with the applicable financial reporting framework. The standard states

analytical procedures and inquiries will ordinarily provide the appropriate

evidence but that the accountant should use professional judgment in determining

the specific procedures.

6. Includes a discussion of materiality


8

FRAMEWORK FOR PERFORMING & REPORTING ON

COMPILATION & REVIEW ENGAGEMENTS (AR 60)

Performing & Reporting on Compilations & Reviews (AR 60)

1. Relevant definitions

2. Objectives & limitations of compilation & review engagements (identifies

differences between each engagement)

3. Professional requirements

4. Hierarchy of compilation & review standards & guidance

5. Five (5) elements of a compilation or review:

A three (3) party relationship

An applicable (appropriate) financial reporting framework (basis of accounting)

Financial statements

Evidence

A written communication or report

6. Materiality – in the context of the preparation and presentation of financial

statements

Relevant Definitions

1. Applicable financial reporting framework. The financial reporting framework

adopted by management and, when appropriate, those charged with governance in

the preparation of the financial statements that is acceptable in view of the nature of

the entity and the objective of the financial statements, or that is required by law or

regulation.

2. Assurance engagement. An engagement in which an accountant issues a report

designed to enhance the degree of confidence of third parties and management

about the outcome of an evaluation or measurement of financial statements

(subject matter) against an applicable financial reporting framework (criteria).


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FRAMEWORK FOR COMPILATIONS & REVIEWS (AR 60)

3. Attest engagement. An engagement that requires independence, as defined in

AICPA Professional Standards.

4. Financial reporting framework. A set of criteria used to determine measurement,

recognition, presentation, and disclosure of all material items appearing in the

financial statements.

5. Financial statements. A structured representation of historical financial

information, including related notes, intended to communicate an entity’s

economic resources and obligations at a point in time or the changes therein for a

period of time in accordance with a financial reporting framework. The related

notes ordinarily comprise a summary of significant accounting policies and other

explanatory information. The term financial statements ordinarily refers to a

complete set of financial statements as determined by the requirements of the

applicable financial reporting framework, but can also refer to a single financial

statement or financial statements without notes.

6. Management. The person(s) with executive responsibility for the conduct of the

entity’s operations. For some entities, management includes some or all of those

charged with governance (for example, executive members of a governance board

or an owner-manager).

7. Non-issuer. All entities except for those defined in Section 3 of the Securities

Exchange Act of 1934 [15 U.S.C. 78c], the securities of which are registered under

Section 12 of that Act, or that is required to file reports under Section 15(d), or that

files or has filed a registration statement that has not yet become effective under

the Securities Act of 1933, and that it has not withdrawn.

8. Other comprehensive basis of accounting (OCBOA). A definite set of criteria,

other than accounting principles generally accepted in the United States of America

or International Financial Reporting Standards (IFRSs), having substantial support

underlying the preparation of financial statements prepared pursuant to that basis.


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Examples of an OCBOA are as follows:

A. A basis of accounting that the reporting entity uses to comply with the

requirements or financial reporting provisions of a governmental regulatory

agency to whose jurisdiction the entity is subject (for example, a basis of

accounting that insurance companies use pursuant to the rules of a state

insurance commission).

B. A basis of accounting that the reporting entity uses or expects to use to file its

income tax return for the period covered by the financial statements.

C. Cash or modified cash basis having substantial support. Ordinarily, a

modification would have substantial support if the method is equivalent to the

accrual basis of accounting for that item and if the method is not illogical.

9. Review evidence. Information used by the accountant to provide a reasonable

basis for the obtaining of limited assurance.

10. Submission of financial statements. Presenting to management financial

statements that an accountant has prepared.

11. Third party. All persons, including those charged with governance, except for

members of management.

12. Those charged with governance. The person(s) with responsibility for overseeing

the strategic direction of the entity and obligations related to the accountability of

the entity. This includes overseeing the financial reporting process. Those charged

with governance are specifically excluded from management, unless they perform

management functions.


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Objectives & Limitations of Compilations & Reviews

1. A compilation is a service, the objective of which is to assist management in

presenting financial information in the form of financial statements without

undertaking to obtain or provide any assurance that there are no material

modifications that should be made to the financial statements in order for the

statements to be in conformity with the applicable financial reporting framework.

Although a compilation is not an assurance engagement, it is an attest

engagement.

2. A compilation differs significantly from a review or an audit of financial

statements. A compilation does not contemplate performing inquiry, analytical

procedures, or other procedures performed in a review. Additionally, a compilation

does not contemplate obtaining an understanding of the entity’s internal control;

assessing fraud risk; testing accounting records by obtaining sufficient

appropriate audit evidence through inspection, observation, confirmation, or the

examination of source documents (for example, cancelled checks or bank images);

or other procedures ordinarily performed in an audit. Therefore, a compilation does

not provide a basis for obtaining or providing any assurance regarding the

financial statements.

3. A review is a service, the objective of which is to obtain limited assurance that

there are no material modifications that should be made to the financial statements

in order for the statements to be in conformity with the applicable financial reporting

framework. In a review engagement, the accountant should accumulate review

evidence to obtain a limited level of assurance. A review engagement is an

assurance engagement as well as an attest engagement.

4. A review differs significantly from an audit of financial statements in which the

auditor obtains a high level of assurance (expressed in the auditor’s report as

obtaining reasonable assurance) that the financial statements are free of material

misstatement. A review does not contemplate obtaining an understanding of the

entity’s internal control; assessing fraud risk; testing accounting records by

obtaining sufficient appropriate audit evidence through inspection, observation,

confirmation, or the examination of source documents (for example, cancelled

checks or bank images); or other procedures ordinarily performed in an audit.


12


Accordingly, in a review, the accountant does not obtain assurance that he or she

will become aware of all significant matters that would be disclosed in an audit.

Therefore, a review is designed to obtain only limited assurance that there are no

material modifications that should be made to the financial statements in order for

the statements to be in conformity with the applicable financial reporting framework.

Requirements, Explanations & Other Publications

1. SSARSs contain professional requirements, together with related guidance, in the

form of explanatory material. Accountants performing a compilation or review

have a responsibility to consider the entire text of SSARS in carrying out their work

on an engagement and in understanding and applying the professional

requirements of the relevant SSARSs.

2. Not every paragraph of a SSARS carries a professional requirement that the

accountant is expected to fulfill. Rather, the professional requirements are

communicated by the language and the meaning of the words used in SSARSs.

3. SSARSs use two categories of professional requirements indentified by specific

terms to describe the degree of responsibility they impose on accountants. They

are as follows:

Unconditional requirements. The accountant is required to comply with an

unconditional requirement in all cases in which the circumstances exist to which

the unconditional requirement applies. SSARS use the words must or is

required to indicate an unconditional requirement.

Presumptively mandatory requirements. The accountant also is required to

comply with a presumptively mandatory requirement in all cases in which the

circumstances exist to which the presumptively mandatory requirement applies;

however, in rare circumstances, the accountant may depart from a

presumptively mandatory requirement provided that the accountant documents

his or her justification for the departure and how the alternative procedures

performed in the circumstances were sufficient to achieve the objectives of the

presumptively mandatory requirement. SSARSs use the word should to

indicate a presumptively mandatory requirement.


13


4. If SSARS provides that a procedure or action is one that the accountant “should

consider,” the consideration of the procedure or action is presumptively required,

whereas carrying out the procedure or action is not. The professional requirements

of a SSARS are to be understood and applied in the context of the explanatory

material that provides guidance for their application. The specific terms used to

define professional requirements are not intended to apply to interpretative

publications issued under the authority of the ARSC because interpretative

publications are not SSARSs.

5. Explanatory material that provides further explanation and guidance on the

professional requirements is intended to be descriptive rather than imperative.

That is, it explains the objective of the professional requirements (when not

otherwise self-evident); it explains why the accountant might consider or employ

particular procedures, depending on the circumstances; and it provides additional

information for the accountant to consider in exercising professional judgment in

performing the engagement. The words may, might, and could are used to

describe these actions and procedures.

Hierarchy of Compilation & Review Standards & Guidance

1. Must perform compilations & reviews of a nonissuer (nonpublic entity) in

accordance with SSARS, except for certain reviews of interim financial information

(required for issuers) discussed at AR 90.01 (per SSARS 20).

2. AICPA ethics (ET Rule 202), Compliance with Standards, requires AICPA members

to perform compilations & reviews in accordance with standards (SSARS +

Interpretations) promulgated by the ARSC.

3. The nature of SSARS requires an accountant to exercise professional judgment

in applying them (SSARS + Interpretive material).

4. Interpretative publications are recommendations that should be considered in a

compilation or review. An accountant should be able to explain how he or she

complied with SSARS, if the accountant does not apply guidance in an applicable

interpretation, including:


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SSARS Interpretations

Appendixes to SSARS

AICPA Accounting & Audit Guides (relevant to SSARS)

AICPA Statements of Position (if relevant to Compilations or Reviews)

5. Other publications have no authoritative status (not required to be considered, but

may be helpful), including:

AICPA Risk Alert (for Compilations & Reviews)

Articles in the Journal of Accountancy

The CPA Letter

CPE material, non-AICPA guides to preparing compilations & reviews, etc.

Five (5) Elements of a Compilation or Review (discussed in AR 60)

A three (3) party relationship, involving management, an accountant, and

intended users

An applicable financial reporting framework (basis of accounting)

Financial statements or financial information

In a review, sufficient appropriate review evidence

A written communication or report

Three Party Relationships

1. A compilation or review involves three parties:

Management (the responsible party)

An accountant in the practice of public accounting (defined by AICPA)

Intended users of the financial statements

2. In some cases management and intended users may be the same.

3. Intended users may be from different entities (for example, a banker and a potential

investor).


15


Management (The Responsible Party)

1. Responsibilities:

Preparation and fair presentation of the financial statements in accordance with

the applicable reporting framework (GAAP, IFRS, or OCBOA)

Designing, implementing and maintaining internal control (the process

designed to provide reasonable assurance about the achievement of

safeguarding assets; accurate accumulation and reporting of financial

information; compliance with applicable laws and regulations; and operating

effectiveness)

2. A basic premise underlying the performance of a compilation or review is that the

accountant is performing an attest service on subject matter that is the

responsibility of the client’s management. Therefore, an accountant is

precluded from issuing an unmodified compilation or review report, when

management is unwilling (or unable) to accept their required responsibilities.

3. The accountant may make suggestions about the form or content of the financial

statements or prepare them, in whole or in part, based on information that is the

representation of management. (and still be independent, if management can fulfill

their two responsibilities).

Accountant (for compilations and reviews)

The accountant should possess a level of knowledge of the accounting principles and

practices of the industry in which the entity operates that will enable him or her to

compile or review financial statements that are appropriate in form for an entity

operating in that industry. As addressed in the firm’s quality control system, an

accountant should not accept an engagement if preliminary knowledge of the

engagement circumstances indicates that ethical requirements regarding professional

competence will not be satisfied.


16


Intended Users (of the statements or information)

1. The intended users are the person(s) or class of persons who understand the

limitations of the compilation or review engagement and financial statements. The

accountant has no responsibility to identify the intended users. (but management

does)

2. In some cases, intended users (for example, bankers and regulators) may impose a

requirement on or request the client to arrange for additional procedures to be

performed for a specific purpose. For example, a banker may request that certain

agreed-upon procedures be performed with respect to the entity’s accounts

receivable in addition to the financial statements being compiled. An accountant

may perform additional services in conjunction with the compilation or review, as

long as he or she adheres to professional standards with respect to those additional

services.

Applicable Financial Reporting Framework

Management and, when applicable, those charged with governance are responsible

for the selection of the entity’s applicable financial reporting framework, as well as

individual accounting policies when the financial reporting framework contains

acceptable alternatives. The financial reporting framework encompasses financial

accounting standards established by an authorized or recognized standards setting

organization, which in the USA are:

Financial Accounting Standards Board (FASB)

Governmental Accounting Standards Board (GASB)

Federal Accounting Standards Advisory Board (FASAB)

International Accounting Standards Board (IASB and their IFRS)

OCBOA (AICPA & IRS)


17


Evidence

1. When performing a compilation engagement, the accountant has no

responsibility to obtain any evidence about the accuracy or completeness of the

financial statements. As a result, a compilation does not provide a basis for

obtaining any level of assurance on the financial statements being compiled.

2. When performing a review engagement, the accountant should perform procedures

designed to accumulate review evidence that will provide a reasonable basis for

obtaining limited assurance that there are no material modifications that should be

made to the financial statements in order for the statements to be in conformity with

the applicable financial reporting framework. The accountant should apply

professional judgment in determining the specific nature, timing and extent of

review procedures.

3. Review evidence obtained through the performance of analytical procedures and

inquiries ordinarily will provide the accountant with a reasonable basis for

obtaining limited assurance.

Compilation & Review Reports

1. If the accountant performs a compilation or a review, a written report is required,

unless the accountant withdraws from the engagement.

2. If the accountant is not independent, he or she may issue a compilation report,

provided that the accountant complies with SSARS.

Materiality

1. Although financial reporting frameworks may discuss materiality in different terms,

they generally explain that:

Misstatements, including omissions, are considered to be material if they,

individually or in the aggregate, could reasonably be expected to influence the

economic decisions of users taken on the basis of the financial statements;

Judgments about materiality are made in light of surrounding circumstances and

are affected by the size or nature of a misstatement or a combination of both;


18


Judgments about matters that are material to users of the financial statements

are based on a consideration of the common financial information needs of

users as a group. The possible effect of misstatements on specific individual

users, whose needs may vary widely, is not considered.

2. The accountant’s determination of materiality is a matter of professional judgment

and is affected by the accountant’s perception of the financial information needs of

users of the financial statements.

Discussion Questions (AR 60)

Determine if statements (# 1 – 5) are “True” or “False”: (Questions 6 & 7 – next page)

1. SSARS 19 replaced / revised most of the previous standards for compilations &

reviews, effective for financial statement periods ending on or after December 15,

2010.

2. If a CPA had existing engagement letters with clients that were executed prior to

December, 2010, the CPA may elect to defer implementation of the new SSARS

standards until after the existing agreements expire.

3. To comply with SSARS, your clients may need to understand and acknowledge

(in writing) numerous new terminologies and concepts.

4. Compilations and reviews are both assurance services.

5. A CPA firm can still reconcile bank balances, review and correct expense account

codes, and search for unrecorded liabilities as part of a monthly compilation

service.


19


6. How would a CPA (engaged by a new client for a compilation service) know if

intended users of the financial statements have adequate (or accurate)

understanding of the limitations of a compilation? (see p.16) Explain the process

for the following:

A. A majority shareholder who is not part of management

B. A significant lender (bank)

C. A prospective new vendor to the reporting entity

7. Should a prospective client and known intended users be informed about the

SSARS “evidence” requirements for a compilation (see p. 17)? Why or why not?

If “yes”, how?


20

COMPILATION OF FINANCIAL STATEMENTS (AR 80)

Compilation of Financial Statements (AR 80)

Required compliance when the accountant:

Is engaged to report on compiled financial statements, or

Submits financial statements to a client or to a third party

Establishing an Understanding

1. Required to establish an understanding with management (see definition, p. 9)

regarding the services to be performed

2. Must document through a written communication with management

3. Should reduce the risks that either party will misinterpret the needs or

expectations of the other party

Reduces risk that management may inappropriately rely on the accountant to

protect the entity against certain risks (e.g. fraud)

Clarifies that the accountant will not (or will) perform certain functions that are

management’s responsibility

4. Understanding may be established with governance, in some cases

The Written Understanding Shall Include

1. Objectives and limitations of a compilation service and the accountant’s

responsibilities (AR 80.03):

The objective of a compilation is to assist management in presenting financial

information in the form of financial statements.

The accountant utilizes information that is the representation of management

(owners) without undertaking to obtain or provide any assurance that there are

no material modifications that should be made to the financial statements in

order for the statements to be in conformity with the applicable financial

reporting framework.


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The accountant is responsible for conducting the engagement in accordance

with SSARS issued by the AICPA.

2. A compilation differs significantly from a review or an audit of financial statements.

A compilation does not contemplate performing inquiry, analytical procedures, or

other procedures performed in a review. Additionally, a compilation does not

contemplate obtaining an understanding of the entity’s internal control; assessing

fraud risk; testing accounting records by obtaining sufficient appropriate audit

evidence through inspection, observation, confirmation, or the examination of

source documents (for example, cancelled checks or bank images); or other

procedures ordinarily performed in an audit. Accordingly, the accountant will not

express an opinion or provide any assurance regarding the financial statements.

3. Management’s responsibilities:

Preparing and fairly presenting the financial statement in accordance with the

applicable (appropriate) financial reporting framework

Designing, implementing, and maintaining internal control relevant to the

preparation and fair presentation of the financial statements

To prevent and detect fraud

Identifying and ensuring that the entity complies with the laws and regulations

applicable to its activities

Making all financial records and related information available to the accountant

4. The engagement cannot be relied upon to disclose errors, fraud, or illegal acts.

5. The accountant will inform the appropriate level of management of any material

errors and of any evidence or information that comes to the accountant’s attention

during the performance of compilation procedures that fraud or an illegal act may

have occurred. The accountant need not report any matters regarding illegal acts

that may have occurred that are clearly inconsequential and may reach agreement

in advance with the entity on the nature of any such matters to be communicated.

6. The effect of any independence impairments on the expected form of the

accountant’s compilation report, if applicable.


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7. If the compiled financial statements are not expected to be used by a third party

and the accountant does not expect to issue a compilation report on the financial

statements, the accountant should include in the engagement letter an

acknowledgment of management’s representation and agreement that the financial

statements are not to be used by a third party. (SSARS 19 did not significantly

change the wording of SSARS 8)

8. The written understanding may (not required) also include matters, such as:

Fees and billings

Additional services to be provided (accounting, bookkeeping, internal controls,

etc.)

Indemnification clause or similar limitations

9. Exhibit A (AR 80.63) Illustrates:

Standard Engagement Letter for a Compilation

Engagement Letter for a Compilation Not Intended for Third Party Use (formerly

called SSARS 8)

Performance Requirements (Compilation)

1. Understanding of the industry – sufficient to compile statements in proper format

for the relevant accounting principles

2. Knowledge of the client – must understand the business and accounting practices,

such as:

Client’s organization and operating characteristics

Nature of assets, liabilities, revenues and expenses

The accountant’s understanding of the entity’s business is ordinarily obtained

through experience with the entity or its industry and inquiry of the entity’s

personnel.


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3. Reading the financial statements – to determine if they appear to be:

Appropriate in form

Free from obvious, material errors (such as incorrect application of the

accounting framework, clerical or math errors, or inadequate disclosures)

4. Other compilation procedures:

A. Not required to make inquiries or perform procedures to verify, corroborate, or

review information supplied by the entity.

B. However, the accountant may make inquiries or perform other procedures, if

necessary, because information supplied (appears to be) is incorrect,

incomplete, or otherwise unsatisfactory or because fraud or illegal acts may

have occurred.

Documentation in a Compilation

1. The accountant should prepare documentation in connection with each compilation

engagement in sufficient detail to provide a clear understanding of the work

performed. Documentation provides the principal support for the representation in

the accountant’s compilation report that the accountant performed the compilation

in accordance with SSARSs.

2. The accountant is not precluded from supporting the compilation report by other

means in addition to the compilation documentation. Such other means might

include written documentation contained in other engagement files or quality control

files (for example, consultation files) and, in limited situations, oral explanations.

3. The form, content, and extent of documentation depend on the circumstances of

the engagement, the methodology and tools use, and the accountant’s professional

judgment. The accountant’s documentation should include the following:

A. The engagement letter documenting the understanding with the client


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B. Any findings or issues that, in the accountant’s judgment, are significant (for

example, the results of compilation procedures that indicate that the financial

statements could be materially misstated, including actions taken to address

such findings and, to the extent that the accountant had any questions or

concerns as a result of his or her compilation procedures, how those issues

were resolved)

C. Communications, whether oral or written, to the appropriate level of

management regarding fraud or illegal acts that come to the accountant’s

attention

Reporting on Financial Statements (Compilations)

1. AR 80.17 prescribes the basic elements (7) that should be included in a compilation

report that is “reasonably expected to be used by a third party” (see p. 30 for an

illustrative compilation report):

Title

Addressee

Introductory paragraph, which identifies the entity, date/period & financial

statements, states that a compilation has been performed, that a review or audit

has not been performed, and that no opinion or assurance is provided

Management’s responsibility for the financial statements & internal controls

Accountant’s responsibility for SSARS compliance

Signature of accountant (manual or printed)

Date of compilation report

2. Compilation Exhibit B (AR 80.64) contains illustrative reports (or report

modifications) for:

Standard report - FASB GAAP

Standard report - cash basis (included in this outline at p. 30)

Omitting substantially all disclosures, FASB GAAP

Omitting substantially all disclosures, tax basis


25


Independence impaired, but reason for impairment is not disclosed – FASB

GAAP

Independence impaired and reason for impairment is disclosed – FASB GAAP

GAAP departure

3. Procedures that the accountant might have performed as part of the compilation

engagement should not be described in the report.

4. Each page of the financial statement compiled by the accountant should include a

reference, such as “See accountant’s compilation report” or “See independent

accountant’s compilation report.

Omitting Disclosures

1. An entity may request the accountant to compile financial statements that omit

substantially all the disclosures required by an applicable financial reporting

framework, including disclosures that might appear in the body of the financial

statements. The accountant may compile such financial statements, provided that

the omission of substantially all disclosures is not, to his or her knowledge,

undertaken with the intention of misleading those who might reasonably be

expected to use such financial statements.

2. When the entity wishes to include disclosures about only a few matters in the

form of notes to such financial statements, such disclosures should be labeled

“Selected Information – Substantially All Disclosures Required by [identify the

applicable financial reporting framework (for example, “Accepted Accounting

Principles Generally accepted in the United States of America”)] Are Not Included.”

3. See Compilation Exhibit B (AR 80.64) for illustrations of reporting requirements,

when substantially all disclosures are omitted


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Reporting When the Accountant Is Not Independent

1. When the accountant is issuing a report with respect to a compilation of financial

statements for an entity, with respect to which the accountant is not independent,

the accountant’s report should be modified. The accountant should indicate his or

her lack of independence in a final paragraph of the accountant’s compilation

report. An example of such a disclosure would be:

I am (We are) not independent with respect to XYZ Company.

2. The accountant is not precluded from disclosing a description about the reason(s)

that his or her independence is impaired. The following are examples of

descriptions the accountant may use:

A. I am (We are) not independent with respect to XYZ Company as of and for the

year ended December 31, 20XX, because I (a member of the engagement

team) had a direct financial interest in XYZ Company;

B. I am (We are) not independent with respect to XYZ Company as of and for the

year ended December 31, 20XX, because an individual of my immediate

family (an immediate family member of one of the members of the engagement

team) was employed by XYZ Company; or

C. I am (We are) not independent with respect to XYZ Company as of and for the

year ended December 31, 20XX, because I (we) performed certain

accounting services (the accountant may include a specific description of

those services) that impaired my (our) independence.

3. If the accountant elects to disclose a description about the reasons his or her

independence is impaired, the accountant should ensure that all reasons are

included in the description.

Emphasis of a Matter (Compilation Report)

1. The accountant may emphasize, in any report on financial statements, a matter

disclosed in the financial statements. Such explanatory information should be

presented in a separate paragraph of the accountant’s report. Emphasis

paragraphs are never required; they may be added solely at the accountant’s

discretion.


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2. Examples of matters that the accountant may wish to emphasize:

Uncertainties

That the entity is a component of a larger business enterprise

That the entity has had significant transactions with related parties

Unusually important subsequent events

Accounting matters, other than those involving a change or changes in

accounting principles, affecting the comparability of the financial statements with

those of the preceding period

3. Because an emphasis of matter paragraph should not be used in lieu of

management disclosures, the accountant should not include an emphasis

paragraph in a compilation report on financial statements that omit substantially

all disclosures unless the matter is disclosed in the financial statements.

An Entity’s Ability to Continue as a Going Concern

1. During the performance of compilation procedures, evidence or information may

come to the accountant’s attention indicating that an uncertainty may exist about

the entity’s ability to continue as a going concern for a reasonable period of time,

not to exceed one year beyond the date of the financial statements being compiled

(hereinafter referred to as a reasonable period of time). In those circumstances, the

accountant should request that management consider the possible effects of the

going concern uncertainty on the financial statements, including the need for

related disclosure.

2. After management communicates to the accountant the results of its consideration

of the possible effects on the financial statements, the accountant should consider

the reasonableness of management’s conclusions, including the adequacy of the

related disclosures, if applicable.

3. If the accountant determines that management’s conclusions are unreasonable or

the disclosure of the uncertainty regarding the entity’s ability to continue as a going

concern is not adequate, he or she should follow the guidance in paragraphs AR

80.27-.29 with respect to departures from an applicable financial reporting

framework. (either modify report or withdraw)


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4. The accountant may emphasize an uncertainty about an entity’s ability to continue

as a going concern, provided that the uncertainty is disclosed in the financial

statements. In such circumstances, the accountant should follow the guidance in

paragraphs AR 80.25-.26. (emphasis of a matter)

Subsequent Events

Similar Guidance to “going concern” (see above)

Additional Compilation Guidance (AR 80 paragraphs) – (not included in this outline)

1. Accountant’s Communications With the Client When the Compiled Financial

Statements Are Not Expected to Be Used by a Third Party (.22 – .24)

2. Departures From the Applicable Financial Reporting Framework (.27 – .29)

3. Restricting the Use of an Accountant’s Compilation Report

A. General Use and Restricted Use Reports (.30 – .32)

B. Reporting on Subject Matter or Presentations Based on Measurement or

Disclosure Criteria Contained in Contractual Agreements or Regulatory

Provisions (.33)

C. Combined Reports Covering Both Restricted Use and General Use Subject

Matter or Presentations (.34)

D. Inclusion of Separate Restricted Use Report in the Same Document With a

General Use Report (.35)

E. Adding Other Specified Parties (.36 – .37)

F. Limiting the Distribution of Reports (.38)

4. Subsequent Discovery of Facts Existing at the Date of the Report (.47 – .52)

5. Supplementary Information (.53)

6. Change in Engagement From Audit or Review to Compilation (.56 – .61)

Report Language – Restricted Use (AR 80.39)

An Accountant’s Report that is restricted should contain a separate paragraph at the

end of the report that includes the following elements: (all 3)

1. A statement indicating that the report is intended solely for the information and use

of the specified parties, and


29


2. An identification of the specified parties to whom use is restricted. The report may

list the specified parties or refer the reader to the specified parties listed elsewhere

in the report, and

3. A statement that the report is not intended to be and should not be used by

anyone other than the specified parties.

Communicating to Management and Others

1. When evidence or information comes to the accountant’s attention during the

performance of compilation procedures that fraud or an illegal act may have

occurred, that matter should be brought to the attention of the appropriate level of

management. The accountant need not report matters regarding illegal acts that

are clearly inconsequential and may reach agreement in advance with the entity

on the nature of such items to be communicated.

2. When matters regarding fraud or an illegal act involve senior management, the

accountant should report the matter to an individual or group at a higher level within

the entity, such as the manager (owner) or those charged with governance.

3. The communication may be oral or written. If the communication is oral, the

accountant should document it.

4. When matters regarding fraud or an illegal act involve an owner of the business, the

accountant should consider resigning from the engagement.

5. Additionally, the accountant should consider consulting with his or her legal

counsel whenever any evidence or information comes to his or her attention during

the performance of compilation procedures that fraud or an illegal act may have

occurred, unless such illegal act is clearly inconsequential.

6. Because potential conflicts between the accountant’s ethical and legal

obligations for confidentiality of client matters may be complex the accountant may

wish to consult with legal counsel before discussing matters covered by paragraph

AR 80.54 with parties outside the client.


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Illustrative Compilation Report – Cash Basis (Exhibit B, AR 80.64)

[Appropriate Salutation]

I (we) have compiled the accompanying statement of assets and liabilities arising from

cash transactions of XYZ Company as of December 31, 20XX, and the related

statement of revenue collected and expenses paid for the year then ended. I (we) have

not audited or reviewed the accompanying financial statements and, accordingly, do

not express an opinion or provide any assurance about whether the financial

statements are in accordance with the cash basis of accounting.

Management (owners) is (are) responsible for the preparation and fair presentation of

the financial statements in accordance with the cash basis of accounting and for

designing, implementing, and maintaining internal control relevant to the preparation

and fair presentation of the financial statements.

My (our) responsibility is to conduct the compilation in accordance with Statements on

Standards for Accounting and Review Services issued by the American Institute of

Certified Public Accountants. The objective of a compilation is to assist management

in presenting financial information in the form of financial statements without

undertaking to obtain or provide any assurance that there are no material modifications

that should be made to the financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Date]

Additional Paragraph – Omitting Disclosures – Tax Basis

Management has elected to omit substantially all of the disclosures ordinarily included

in the financial statements prepared in accordance with the income tax basis of

accounting. It the omitted disclosures were included in the financial statements, they

might influence the user’s conclusions about the company’s assets, liabilities, equity,

revenue, and expenses. Accordingly, the financial statements are not designed for

those who are not informed about such matters.

Independence Impaired, Reason Not Disclosed

I am (we are) not independent with respect to XYZ Company.


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Discussion Questions

1. When considering the omission of substantially all disclosures by a client

(management):

A. How would the accountant know if the intended user was “informed about such

matters”, in order to be an appropriate recipient of such statements, without

notes? Explain the process or procedures. See report wording, p. 30.

B. How would the accountant know if omitted disclosures would “intentionally

mislead” an intended user? Describe the process. See p. 25.

C. If most small business owners and managers have very little (if any) knowledge

about “disclosures”, how could anyone ever suggest that omitting disclosures

(by an uninformed manager) was ever “intentional”? See p. 25.


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2. Determine if the following statements are “True” or “False”, regarding a

compilation service, with expected third party users:

A. If management is unable or unwilling to perform all of its “responsibilities”

specified by SSARS, the accountant’s independence will usually be impaired.

B. The accountant is precluded from performing verification of information or

testing of accounting records in a compilation service.

C. The AICPA recommends American GAAP (FASB Codification) for most

compilations intended for third party use.

D. The accountant should not include an emphasis paragraph in the report, if all

disclosures are omitted.

E. The accountant has no responsibility to look for or communicate potential fraud

risks.

3. A primary purpose of the written engagement letter is to reduce potential

misinterpretations of the “needs or expectations” of all parties (see p. 20). How

does a CPA know that management or an intended user does not need or expect

“an audit”? Explain a professional process to sufficiently address this issue.


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AICPA INTERPRETATIONS OF AR 80

Compilation of Financial Statements (AR 9080)

Compilation Interpretations by the AICPA (AR 9080)

1. As stated at AR 60.19, an accountant “should be aware of & consider interpretive

publications applicable to his or her compilation or review. If the accountant does

not apply the guidance…the accountant should be prepared to explain how he or

she complied with the provisions of SSARS addressed by such guidance.”

2. AR 9080 contains 16 Interpretations (updated for SSARS 19) that cover a variety

of compilation topics. The accountant should be aware of all such issues, if relevant

to the circumstances of an engagement. A few of these AICPA Interpretations are

included (below) to illustrate the nature and content of AR 9080.

Selected Interpretations from AR 9080

1. Reporting When There Are Significant Departures From the Applicable

Financial Reporting Framework (AR 9080.01-.04)

Question – When the financial statements include significant departures from the

applicable financial reporting framework, may the accountant modify his or her

standard report in accordance with paragraphs .27-.29 of AR 80, to include a

statement that the financial statements are not in conformity with the applicable

financial reporting framework?

Interpretation – No. Including such a statement in the accountant’s compilation

report would be tantamount to expressing an adverse opinion on the financial

statements as a whole. Such an opinion can be expressed only in the context of an

audit engagement.

However, paragraph .25 of section 80 states that an accountant may emphasize, in

any report on financial statements, a matter disclosed in the financial statements.

The accountant may wish, therefore, to emphasize the limitations of the financial

statements in a separate paragraph of his or her compilation report, depending on

his or her assessment of the possible dollar magnitude of the effects of the

departures, the significance of the affected items to the entity, the pervasiveness

and overall impact of the misstatements, and whether disclosure has been made of


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COMPILATION INTERPRETATIONS (AR 9080)

the effects of the departures. Such separate paragraph, which would follow the

other modifications of his or her report might read as follows:

Because the significance and pervasiveness of the matters previously discussed

makes it difficult to assess their impact on the financial statements as a whole,

users of these financial statements should recognize that they might reach

different conclusions about the company’s financial position, results of

operations, and cash flows if they had access to revised financial statements

prepared in conformity with accounting principles generally accepted in the

United States of America.

Interpretation – Inclusion of such a separate paragraph in the accountant’s

compilation report is not a substitute for disclosure of the specific departures or the

effects of such departures when they have been determined by management or are

known as a result of the accountant’s procedures.

2. Additional Procedures Performed in a Compilation Engagement (AR 9080.07-

.08)

Question – If an accountant performs procedures customarily performed in a

review or audit but not in a compilation, is the accountant required to change the

engagement to a review or an audit?

Interpretation – No. AR 80.13 states that in a compilation engagement the

accountant is not required to make inquires or perform other procedures to verity,

corroborate, or review information supplied by the entity. However, the accountant

is not precluded from making inquiries or performing additional procedures.

3. Applicability of Statements on Standards for Accounting and Review Services

When Performing Controllership or Other Management Services (AR 9080.21)

Question – If the accountant is in the practice of public accounting and provides an

entity with controllership or other management services that entail the submission

of financial statements, is the accountant required to follow the requirements of

AR80?


35


Interpretation – If the accountant is in the practice of public accounting as defined

by the AICPA’s Code of Conduct (ET 92.25) and is not a stockholder, partner,

director, officer, or employee of the entity, the accountant is required to follow the

performance and communication requirements of AR 80 including any requirement

to disclose a lack of independence.

If the accountant is in the practice of public accounting and is also a stockholder,

partner, director, officer, or employee of the entity, the accountant may either (a)

comply with the requirements of AR 80, or (b) communicate, preferably in writing,

the accountant’s relationship to the entity (for example, stockholder, partner,

director, officer, or employee). The following is an example of the type of

communication that may be used by the accountant:

The accompanying balance sheet of Company X as of December 31, 20XX, and

the related statements of income and cash flows for the year then ended have

been prepared by [name of accountant], CPA. I have prepared such financial

statements in my capacity [describe capacity, for example, as a director] of

Company X.

If an accountant is not in the practice of public accounting, the issuance of a report

under SSARS would be inappropriate; however, the previously mentioned

communication may be used.

4. Use of the Label “Selected Information-Substantially All Disclosures Required

by [the applicable financial reporting framework] Are Not Included” in

Complied Financial Statements (AR 9080.25-.27)

Question – Can an accountant label notes to the financial statements “Selected

Information-Substantially All Disclosures Are Not Included” when the client includes

more than a few required disclosures?

Interpretation – No. As discussed in AR 80.20 when the entity wishes to include

disclosures about only a few matters in the form of notes to the financial

statements, such disclosures should be labeled “Selected Information-Substantially

All Disclosures Required by [identify the applicable financial reporting framework]

Are Not Included”


36


When the financial statements include more than a few disclosures, this guidance is

not appropriate. The omission of one or more notes, when substantially all other

disclosures are presented, should be treated in a compilation report like any other

departure from the applicable financial reporting framework, and the nature of the

departure and its effects, if known, should be disclosed in accordance with AR

80.27-.29. The label “Selected Information-Substantially All Disclosures Required

by [identify the applicable financial reporting framework] Are Not Included” is not

intended to be used for the omission of (intentionally or unintentionally) one or more

specific disclosures. In determining whether use of the label is appropriate, the

accountant needs to apply professional judgment to all the facts and circumstances.


37

REVIEW OF FINANCIAL STATEMENTS (AR 90)

Review of Financial Statements (AR 90)

1. The accountant is required to comply with the provisions of this section whenever

he or she has been engaged to review financial statements, except for reviews of

interim financial information if the following are true:

A. The entity’s latest annual financial statements have been audited by the

accountant or a predecessor

B. The accountant has been engaged to audit the entity’s current year financial

statements, or the accountant audited the entity’s latest annual financial

statements and expects to be engaged to audit the current year financial

statements

C. The client prepares its interim financial information in accordance with the same

financial reporting framework as that used to prepare the annual financial

statements

2. Accountants engaged to perform reviews of interim financial information when the

conditions in (A)-(C) are met should perform such reviews in accordance with SAS

121, Interim Financial Information (AICPA, Professional Standards, vol. 1, AU sec.

722).

3. The accountant is precluded from performing a review engagement if the

accountant’s independence is impaired for any reason.

Requirements for Reviews that Are the Same as Compilations

Numerous requirements for review services are the same as (or virtually the same as)

for compilations. These similar (same) requirements will not be repeated in this

outline and include:

Establishing an understanding (with the client, in writing)

Understanding of the industry

Knowledge of the client

Reporting on the financial statements (except for wording in the report)


38


Emphasis of a matter

Departures from the applicable financial reporting framework

Restricting the use of the review report (and all related guidance)

Going concern issues

Subsequent events

Subsequent discovery of facts existing at the report date

Supplementary information

Communicating to management and others

Review Performance Requirements

1. The performance of a review engagement requires that the accountant perform

procedures designed to accumulate review evidence that will provide a

reasonable basis for obtaining limited assurance that there are no material

modifications that should be made to the financial statements in order for the

statements to be in conformity with the applicable financial reporting framework.

The accountant should apply professional judgment in determining the specific

nature, timing, and extent of review procedures. Such procedures should be

tailored based on the accountant’s understanding of the industry in which the client

operates and the accountant’s knowledge of the entity.

2. Review evidence obtained through the performance of analytical procedures and

inquiry will ordinarily provide the accountant with a reasonable basis for obtaining

limited assurance. However, the accountant should perform additional

procedures if the accountant determines such procedures to be necessary to

obtain limited assurance that the financial statements are not materially misstated.

Designing and Performing Review Procedures

1. The accountant should design and perform analytical procedures and make

inquiries and perform other procedures, as appropriate, based on: (all 3)

The accountant’s understanding of the industry

His or her knowledge of the client, and

His or her awareness of the risk that he or she may unknowingly fail to modify

the accountant’s review report on financial statements that are materially

misstated


39


2. The accountant should focus the analytical procedures and inquiries in those areas

where the accountant believes there are increased risks of misstatements. The

results of the accountant’s analytical procedures & inquiries may modify the

accountant’s risk awareness. For example, response to an inquiry that “cash has

not been reconciled for several months” may revise the risks relative to the cash

account.

Analytical Procedures

1. Understanding financial and nonfinancial relationships is essential in evaluating the

results of analytical procedures and generally requires knowledge of the client and

the industry in which the client operates. Accordingly, the identification of the

relationships and types of data used, as well as conclusions reached when

recorded amounts are compared to expectations, requires judgment by the

accountant.

2. Analytical procedures involve comparisons of expectations developed by the

accountant to recorded amounts or ratios developed from recorded amounts. The

accountant develops such expectations by indentifying and using plausible

relationships that are reasonably expected to exist based on the accountant’s

understanding of the industry in which the client operates and knowledge of the

client.

3. Following are examples of sources of information for developing expectations:

A. Financial information for comparable prior period(s), giving consideration to

known changes

B. Anticipated results (for example, budgets or forecasts, including extrapolations

from interim or annual data)

C. Relationship among elements of financial information within the period

D. Information regarding the industry in which the client operates (for example,

gross margin information)

E. Relationships of financial information with relevant nonfinancial information (for

example, payroll costs to number of employees)


40


4. If analytical procedures performed indentify fluctuations or relationships that are

inconsistent with other relevant information or that differ from expected values

by a significant amount, the accountant should investigate these differences by

inquiring of management and performing other procedures as necessary in the

circumstances.

5. Although the accountant is not required to corroborate management’s responses

with other evidence, the accountant may need to perform other procedures when,

for example, managements is unable to provide an explanation, or the explanation,

together with review evidence obtained relevant to management’s response, is not

considered adequate.

Inquiries and Other Review Procedures

The accountant should consider performing the following:

1. Inquire of members of management who have responsibility for financial and

accounting matters concerning the following:

A. Whether the financial statements have been prepared in conformity with the

applicable financial reporting framework

B. The entity’s accounting principles and practices and the methods followed in

applying them and the entity’s procedure for recording, classifying, and

summarizing transactions and accumulating information for disclosure in the

financial statements

C. Unusual or complex situations that may have an effect on the financial

statements

D. Significant transactions occurring or recognized near the end of the reporting

period

E. The status of uncorrected misstatements indentified during the previous

engagement

F. Questions that have arisen in the course of applying the review procedures

G. Events subsequent to the date of the financial statements that could have a

material effect on the financial statements


41


H. Their knowledge of any fraud or suspected fraud affecting the entity involving

management or others where the fraud could have a material effect on the

financial statements (for example, communications received from employees,

former employees, or others)

I. Significant journal entries and other adjustments

J. Communications from regulatory agencies

2. In addition to members of management who have responsibility for financial and

accounting matters, the accountant may determine to direct inquiries to others

within the entity and those charged with governance, if appropriate.

3. Inquire concerning actions taken at meetings of stockholders, the board of

directors, committees of the board of directors, or comparable meetings that may

affect the financial statements

4. Read the financial statements to consider, on the basis of information coming to

the accountant’s attention, whether the financial statements appear to conform with

the applicable financial reporting framework

5. The accountant ordinarily is not required to corroborate management’s responses

with other evidence; however, the accountant should consider the reasonableness

and consistency of management’s responses in light of the results of other review

procedures and the accountant’s knowledge of the client’s business and the

industry in which it operates.

Incorrect, Incomplete or Unsatisfactory Information

1. During the performance of review procedures, the accountant may become aware

that information coming to his or her attention is incorrect, incomplete, or otherwise

unsatisfactory. In such instances, the accountant should request that management

consider the effect of these matters on the financial statements and communicate

the results of its consideration to the accountant. The accountant should consider

the results communicated to the accountant by management and the effect, if any,

on the accountant’s review report.


42


2. If the accountant believes the financial statements may be materially misstated,

the accountant should perform additional procedures deemed necessary to

obtain limited assurance that there are no material modifications that should be

made to the financial statements in order for the statements to be in conformity with

the applicable financial reporting framework. If the accountant concludes that the

financial statements are materially misstated, the accountant should follow the

guidance in paragraphs AR 90.34-.36 with respect to departures from the

applicable financial reporting framework, which normally requires (either):

Modifying the report, or

Withdrawing from the engagement

Management Representations

1. Written representations are required from management for all financial statements

and periods covered by the accountant’s review report. If current management was

not present during all periods covered by the accountant’s report, the accountant

should nevertheless obtain written representations from current management for all

such periods.

2. The specific written representations obtained by the accountant will depend on the

circumstances of the engagement and the nature and basis of presentation of the

financial statements. Written representations from management ordinarily confirm

representations explicitly given to the accountant, indicate and document the

continuing appropriateness of such representations, and reduce the possibility of

misunderstanding concerning the matters that are the subject of the

representations.

3. The accountant should request that management provide a written representation

related to the following matters:

A. Management’s acknowledgment of its responsibility for the preparation and fair

presentation of the financial statements in accordance with the applicable

financial reporting framework

B. Management’s belief that the financial statements are fairly presented in

accordance with the applicable financial reporting framework


43


C. Management’s acknowledgement of its responsibility for designing,

implementing, and maintaining internal control relevant to the preparation and

fair presentation of the financial statements

D. Management’s acknowledgement of its responsibility to prevent and detect

fraud

E. Knowledge of any fraud or suspected fraud affecting the entity involving

management or others where the fraud could have a material effect on the

financial statements, including any communications received from employees,

former employees, or others

F. Management’s full and truthful response to all inquires

G. Completeness of information

H. Information concerning subsequent events

4. The representation letter ordinarily should be tailored to include additional

appropriate representations from management relating to matters specific to the

entity’s business or industry. An illustrative representation letter is presented in

Review Exhibit B, “Illustrative Representation Letter.” (AR 90.71)

Documentation in a Review Engagement

1. The accountant should prepare documentation in connection with each review

engagement in sufficient detail to provide a clear understanding of the work

performed (including the nature, timing, extent, and results of review procedures

performed); the review evidence obtained and its source; and the conclusions

reached.

2. The form, content, and extent of documentation depend on the circumstances of

the engagement, the methodology and tools used, and the accountant’s

professional judgment. The accountant’s documentation should include the

following:

The engagement letter documenting the understanding with the client.


44


The analytical procedures performed, including the following:

(1) The expectations, when the expectations are not otherwise readily

determinable from the documentation of the work performed, and the factors

considered in the development of the expectations

(2) Results of the comparison of the expectations to the recorded amounts or

ratios developed from recorded amounts

(3) Management’s responses to the accountant’s inquiries regarding fluctuations

or relationships that are inconsistent with other relevant information or that

differ from expected values by a significant amount

Any additional review procedures performed in response to significant

unexpected differences arising from analytical procedures and the results of

such additional procedures.

The significant matters covered in the accountant’s inquiry procedures and

the responses thereto. The accountant may document the matters covered by

the accountant’s inquiry procedures and the responses thereto through a

memorandum, checklist, or other means. (An illustrative “checklist” of inquiries is

no longer included in SSARS)

Any findings or issues that, in the accountant’s judgment, are significant (for

example, the results of review procedures that indicate the financial statements

could be materially misstated, including actions taken to address such findings,

and the basis for the final conclusions reached).

Significant unusual matters that the accountant considered during the

performance of the review procedures, including their disposition.

Communications, whether oral or written, to the appropriate level of

management regarding fraud or illegal acts that come to the accountant’s

attention.

The representation letter.

3. The accountant is not precluded from supporting the review report by other means

in addition to the review documentation. Such other means might include written

documentation contained in other engagement files (for example, compilation or

nonattest services) or quality control files (for example, consultation files) and, in

limited situations, oral explanations. Oral explanations on their own do not

represent sufficient support for the work the accountant performed or

conclusions the accountant reached, but may be used by the accountant to clarify

or explain information contained in the documentation.


45


Reporting on the Financial Statements

1. The requirements are generally stated at AR 90.27 - .32.

2. Illustrative Review Reports (AR 90.73 Exhibit D), including:

Independent Accountant’s Review Report

[Appropriate Salutation]

I (We) have reviewed the accompanying balance sheet of XYZ Company as of

December 31, 20XX, and the related statements of income, retained earnings, and

cash flows for the year then ended. A review includes primarily applying analytical

procedures to management’s (owners’) financial data and making inquires of company

management (owners). A review is substantially less in scope than an audit, the

objective of which is the expression of an opinion regarding the financial statements as

a whole. Accordingly, I (we) do not express such an opinion.

Management (owners) is (are) responsible for the preparation and fair presentation of

the financial statements in accordance with accounting principles generally accepted in

the United States of America and for designing, implementing, and maintaining internal

control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the review in accordance with Statements on

Standards for Accounting and Review Services issued by the American Institute of

Certified Public Accountants. Those standards require me (us) to perform procedures

to obtain limited assurance that there are no material modifications that should be

made to the financial statements. I (We) believe that the results of my (our)

procedures provide a reasonable basis for our report.

Based on my (our) review, I am (we are) not aware of any material modifications that

should be made to the accompanying financial statements in order for them to be in

conformity with accounting principles generally accepted in the United States of

America.

[Signature of accounting firm or accountant, as appropriate, and date]


46

COMPILATION OF SPECIFIED ELEMENTS (AR 110)

Compilation of Specified Elements, Accounts or Items of a Financial Statement

1. A compilation of one or more specified elements, accounts, or items of a financial

statement is limited to assisting management (owners) in presenting financial

information without undertaking to obtain or provide any assurance that there are

no material modifications that should be made to that information.

2. Examples:

Schedule of Rents (or Royalties)

Schedule of Profit Participation

Schedule of Provision for Income Tax

3. Since such presentations are not financial statements, the AICPA illustrates using

the title “Schedule” to reduce confusion.

4. The engagement letter (understanding with the client), reporting, performance, and

documentation requirements are similar to or the same as AR 80.

5. AR 110 includes:

Illustrative Engagement Letter (AR 110.16)

Illustrative Compilation Reports (AR 110.17) for a Schedule of Accounts

Receivable and a Schedule of Depreciation Prepared in Accordance With the

Income Tax Basis of Accounting

.


47

COMPILATION OF PRO FORMA FINANCIAL INFORMATION (AR 120)

Compilation of Pro Forma Financial Information (AR 120)

1. A compilation of pro forma financial information is limited to assisting management

(owners) in presenting financial information without undertaking to obtain or provide

any assurance that there are no material modifications that should be made to that

information. It is not a financial statement engagement.

2. The objective of pro forma financial information is to show what the significant

effects on historical financial information might have been had a consummated or

proposed transaction (or event) occurred at an earlier date. Pro forma financial

information is commonly used to show the effects of transactions such as the

following:

Business combination

Change in capitalization

Disposition of a significant portion of the business

Change in the form of business organization or status as an autonomous entity

Proposed sale of securities and the application of the proceeds

3. This objective is achieved primarily by applying pro forma adjustments to historical

financial information. Pro forma adjustments should be based on management’s

assumptions and give effect to all significant effects directly attributable to the

transaction (or event).

4. Pro forma financial information should be labeled as such to distinguish it from

historical financial information. This presentation should describe the

transaction (or event) that is reflected in the pro forma financial information, the

source of the historical financial information on which it is based, the significant

assumptions used in developing the pro forma adjustments, and any significant

uncertainties about those assumptions. The presentation should also indicate that

the pro forma financial information should be read in conjunction with the

related historical financial information and that the pro forma financial

information is not necessarily indicative of the results (such as financial position

and results of operations, as applicable) that would have been attained had the

transaction (or event) actually taken place earlier.


48

COMPILATION OF PRO FORMA FINANCIAL INFORMATION (AR 120)

5. Additionally, the historical financial statements of the entity (or, in the case of a

business combination, of each significant constituent part of the combined entity) on

which the pro forma financial information is based must have been compiled,

reviewed, or audited. The accountant’s compilation or review report or the

auditor’s report on the historical financial statements should be included (or

incorporated by reference) in the document containing the pro forma financial

information.

6. The remainder of the engagement letter, performance, documentation, and

reporting requirements of AR 120 are similar to or the same as AR 80.

7. AR 120 includes:

Illustrative Engagement Letter (AR 120.19)

Illustrative Compilation Report (AR 120.20) for a pro forma business

combination


49

COMPARATIVE FINANCIAL STATEMENTS (AR 200)

Reporting on Comparative Financial Statements (AR 200)

1. Should comply with the reporting requirements of AR 80 (compilations) or AR 90

(reviews) for each period presented.

2. Client-prepared financial statements of some periods that have not been audited,

reviewed, or compiled may be presented on separate pages of a document that

also contains financial statements of other periods on which the accountant has

reported if they are accompanied by an indication by the client that the

accountant has not audited, reviewed, or compiled those financial statements and

that the accountant assumes no responsibility for them.

3. An accountant may modify his or her report with respect to one or more financial

statements for one or more periods while issuing an unmodified report on the other

financial statements presented.

4. Compiled financial statements that omit substantially all of the disclosures required

by an applicable financial reporting framework are not comparable to financial

statements that include such disclosures. Accordingly, the accountant should not

issue a report on comparative financial statements when statements for one or

more, but not all, of the periods presented omit substantially all of the disclosures

required by an applicable financial reporting framework.

5. AR 200 has many illustrations of comparative reports, including:

Continuing accountant’s report that includes a changed reference to a departure

from applicable financial reporting framework

Predecessor’s compilation or review report

Reporting when one period is audited

Reporting on financial statements that previously did not omit substantially all

disclosures


50

COMPILATIONS INCLUDED IN PRESCRIBED FORMS (AR 300)

Compilation Reports on Financial Statements Included in Certain Prescribed Forms

1. AR 80 and AR 200 apply to prescribed form compilations.

2. AR 300 provides reporting guidance when the accountant is engaged to compile

financial statements included in a prescribed form and the prescribed form or

related instructions call for departure from the applicable financial reporting

framework by specifying a measurement principle not in conformity with the

applicable financial reporting framework or by failing to request the disclosures or

presentation required by applicable financial reporting framework.

3. For purposes of this section, a prescribed form is any standard preprinted form

designed or adopted by the body to which it is to be submitted, for example:

Banks

Trade associations

Credit agencies

Governmental or regulatory bodies

4. There is a presumption that the information required by a prescribed form is

sufficient to meet the needs of the body that designed or adopted the form and that

there is no need for that body to be advised of departures from the applicable

financial reporting framework required by the prescribed form or related

instructions.

5. The accountant should not sign a preprinted report form that does not conform to

the guidance in AR 300 or AR 80 whichever is applicable. In such circumstances,

the accountant should append an appropriate report to the prescribed form.

6. Illustrative reports (AR 300.06)


51

COMMUNICATIONS BETWEEN PREDECESSOR & SUCCESSOR (AR 400)

Communications Between Predecessor and Successor Accountants (AR 400)

1. Not a communication that is “required” by the AICPA for compilations or reviews

2. Definitions (AR 400.02)

Successor accountant - An accountant who has been invited to make a proposal

for an engagement to compile or review financial statements and is considering

accepting the engagement or an accountant who has accepted such an

engagement.

Predecessor accountant - An accountant who (a) has reported on the most

recent compiled or reviewed financial statements or was engaged to perform, but

did not complete, a compilation or review of the financial statements, and (b) has

resigned, declined to stand for reappointment, or been notified that his or her

services have been or may be terminated.

3. AR 400 applies if successor decides to communicate with predecessor:

Provides guidance on inquiries a successor accountant may wish to make of a

predecessor, and the predecessor’s responses, to facilitate the conduct of the

successor’s compilation or review engagement.

It also requires a successor accountant who becomes aware of information that

leads him or her to believe the financial statements reported on by the

predecessor accountant may require revision to request that the client

communicate this information to the predecessor accountant.

Such inquiries may be written or oral.

4. The successor accountant should request permission from the prospective client to

make any inquiries of the predecessor accountant. Except as permitted by the

AICPA Code of Professional Conduct, an accountant is precluded from disclosing

any confidential information obtained in the course of an engagement unless the

client specifically consents. Accordingly, if the successor accountant decides to

communicate with the predecessor, the successor accountant should request the

client to (a) permit the successor accountant to make inquiries of the predecessor

accountant and (b) authorize the predecessor accountant to respond fully to those

inquiries.


52

COMMUNICATIONS BETWEEN PREDECESSOR & SUCCESSOR (AR 400)

5. If the prospective client refuses to permit the predecessor accountant to respond or

limits the response, the successor accountant should inquire about the reasons and

consider the implications of that refusal in connection with acceptance of the

engagement.

6. The successor accountant also may wish to review the predecessor’s engagement

documentation. In these circumstances, the successor accountant should request

the client to authorize the predecessor accountant to allow access.

7. Ordinarily, the predecessor accountant should provide the successor accountant

access to documentation relating to matters of continuing accounting significance

and those relating to contingencies. Valid business reasons (including but not

limited to unpaid fees), however, may lead the predecessor to decide not to allow

access to the documentation.

8. Illustrative Successor Accountant Acknowledgement Letter (AR 400.12)


53

PERSONAL FINANCIAL STATEMENTS INCLUDED IN

FINANCIAL PLANS (AR 600)

Reporting on Personal Financial Statements Included in Written Personal Financial

Plans (AR 600)

1. AR 600 provides an exemption from AR 80 for personal financial statements that

are included in written personal financial plans prepared by an accountant, and

specifies the form of written report required under the exemption. However, this

statement does not preclude an accountant from complying with AR 80 in such

engagements.

2. Because the purpose of such financial statements is solely to assist in developing

the client’s personal financial plan, they frequently omit disclosures required by an

applicable financial reporting framework.

3. An accountant may submit a written personal financial plan containing unaudited

personal financial statements to a client without complying with the requirements of

AR 80 when all of the following conditions exist:

A. The accountant establishes an understanding with the client and documents the

understanding through a written communication with the client that the financial

statements:

will be used solely to assist the client and the client’s advisers to develop the

client’s personal financial goals and objectives

will not be used to obtain credit or for any purposes other than developing

these goals and objectives.

B. Nothing comes to the accountant’s attention during the engagement that would

cause the accountant to believe that the financial statements will be used to

obtain credit or for any purposes other than developing the client’s financial

goals and objectives.


54

PERSONAL FINANCIAL STATEMENTS INCLUDED IN

FINANCIAL PLANS (AR 600)

4. An accountant using the exemption provided by this section should issue a

written report stating that the unaudited financial statements:

are designed solely to help develop the financial plan.

may be incomplete or contain other departures from the applicable financial

reporting framework and should not be used to obtain credit or for any purposes

other than developing the personal financial plan.

have not been audited, reviewed, or compiled.

5. Illustrative report (AR 600.08)

Accountant’s Report

The accompanying Statement of Financial Condition of X, as of December 31, 20XX,

was prepared solely to help you develop your personal financial plan. Accordingly, it

may be incomplete or contain other departures from accounting principles generally

accepted in the United States of America and should not be used to obtain credit or for

any purposes other than developing your financial plan. We have not audited,

reviewed, compiled the statement.


55

KEY IMPLEMENTATION ISSUES FOR THE PRIMARY

SSARS 19 CHANGES (AR 60, AR 80 & AR 90)

Key Implementation Issues

1. It is an unconditional requirement (AR 60.11) that the accountant (not

management or intended users) must comply with applicable AICPA standards

(SSARS + Interpretations).

2. “The nature of SSARS requires an accountant to exercise professional judgment

in applying them.” (AR 60.17) Similar to most AICPA guidance, SSARS tell us what

to do, but the CPA must determine how to do it, based on facts & circumstances.

3. One of the primary objectives of SSARS 19 was to improve understanding &

reduce misunderstanding relative to compilation & review engagements.

Accordingly, the CPA must take the initiative in embracing & communicating the

intent of SSARS 19 (the biggest change in the history of SSARS) to management

and intended users (in certain circumstances, based on facts & professional

judgment).

4. “Intended users are the person(s) or class of persons who understand the

limitations of the compilation or review engagement and financial statements.” (AR

60.35) By definition, the CPA should not allow clients to distribute such

statements to parties who probably do not understand such limitations.

5. The understanding with management (& related communications & written

engagement letter) should reduce “the risk that either the accountant or

management (or intended users that “require” management to prepare the

statements, by implication, because of the “three party relationship”) may

misunderstand the needs or expectations of the other party.” (AR 80.02)


56

IMPLEMENTATION ISSUES FOR SSARS 19

Key Communication Issues (That should be understood by management & significant

intended users, prior to performing a SSARS engagement) – (AR 60.35 & 80.02):

(Some of these issues may not be clearly communicated by the illustrated AICPA

Engagement Letter for a compilation (AR 80.63) and may require special consideration

& communication (by the CPA) to insure proper understanding by all parties.)

1. If a CPA wants to meet the “needs or expectations” of management or intended

users, such information (expectations) must be solicited or obtained from those

parties, through a variety of communication channels (depending on the

circumstances), including:

Conference or phone calls

Face-to-face meetings

Email or fax

Written letter

2. Not knowing or not attempting to determine the (honest) needs or expectations of

users will often result in not achieving a primary objective of SSARS 19.

3. A compilation is not an assurance engagement. If parties need or expect

assurance from a CPA firm, the engagement should be a review or audit. The CPA

should obtain sufficient information from all parties (as practical) to perform the

proper professional service.

4. A compilation does not require any testing of accounting records and does not

require the attainment of any “evidence” about balances or amounts.

Communicating these facts should help all parties better understand the related

limitations.

5. Many (most) small businesses will not have sufficient ability (personnel) to

perform their “responsibilities” (AR 60.30-.32). Therefore, the CPA will not be

“independent” to perform reviews or audits (for many clients). Accordingly, such

facts & related implications should be communicated & clearly understood by all

parties, prior to performing the engagement & related nonattest services.


57

FINAL EXAMINATION


1. To perform a compilation or review, a CPA must “consider the entire text of

SSARS” (see p. 12, # 1). What does this mean? Must it be done on every

engagement? By whom (paraprofessional, staff, partner, etc.)?

2. Commonly, a CPA (firm) will simply “complete a checklist” as the primary means

of performing a compilation (or review). However, the AICPA says “the nature of

SSARS requires an accountant to exercise professional judgment in applying

them” (see p. 13, # 3). Give examples or explain the difference between a

“checklist mindset” and “exercising professional judgment”. How does a

paraprofessional or inexperienced accountant exercise professional judgment?

(with little knowledge of SSARS and/or very limited professional experience)


58

FINAL EXAMINATION

3. SSARS says that “material” amounts or disclosures are: “expected to influence

decisions of users”; “based on surrounding circumstances”; and “considered

material by users” (see pp. 17-18). Describe the process that should be used to

determine if the following are “material” to intended users.

Assume the users will be a 100% shareholder of a “C” corporation (who is not

involved in daily management) and a significant lender (bank). Also, describe how

and to whom should these be reported (communicated), if necessary:

A. More than half of the full-time employees are given a 1099, rather than a W-2

(see p. 21, # 5).

B. The company gets about 25% of its revenue from sales to another company

owned by the shareholder’s former spouse.

C. The year-end bank reconciliation (prepared by the bookkeeper) includes

numerous very large checks to vendors that have been outstanding (not clearing

the bank) for more than 3 months.

D. Many of the “advertising & promotion” expenses (per your viewing of the

detailed ledgers / journals) are large amounts that appear to be personal

recreation, such as trips and meals & beverages.


59

AUTHORIZED ACCOUNTING FRAMEWORKS (Basis of Accounting) For American (USA) Reporting Entities

Public Companies (must use)

1. FASB Codification + SEC Rules

Fair value (FV) accounting = subjective (rather than historic cost = objective)

Qualitative (level 1, 2 & 3 estimates of FV) & quantitative information

Rules based (8500 pages) vs. IFRS / IAS (principles based)

2. IFRS / IAS not permitted currently by SEC

Private Companies (for profit, may use any appropriate accounting framework)

1. FASB Codification (8500 pages) GAAP (aka American GAAP) 2. IFRS (2500 pages) GAAP (aka International Public Company GAAP)

3. IFRS for SMEs (230 pages) GAAP (aka International Private Company GAAP)

Little or no FVA (objective, not as subjective)

Principles based

Focus is on historic amounts (not projected future value)

4. Income tax basis (AICPA + IRS guidance = OCBOA)

5. Cash or modified cash (AICPA = OCBOA)

6. Regulatory basis, if a regulated industry (OCBOA)

7. The AICPA has issued (June, 2013) another (non-authoritative) OCBOA (206 pp.) called Financial Reporting Framework for Small and Medium-sized Entities (FRF-SME), which is described as “a blend of accrual income tax methods and traditional accounting methods…that would be more relevant , less complex and cost beneficial to prepare” (compared to FASB / American GAAP). See pp. 65 - 68 for “Comparing FRF for SMEs to Other Accounting Alternatives”.


60

IFRS for SMEs REPORTING IN THE USA

AICPA Position on IFRS for SMEs

1. AICPA governing Council recognized the IASB as an accounting standard setting

body (2008).

2. Therefore, AICPA members may report on financial statements (audit, review, or

compilation) prepared in conformity with either IFRS or IFRS for SMEs.

3. However, some state accountancy rules may not yet recognize the IASB as a

standard setter. In those states, IFRS or the SME version may be treated as an

OCBOA rather than as an alternative GAAP presentation.

AICPA Compilation / SSARS Interpretations # 13, 14 & 15 (AR 9080.49-.60)

1. Compilation Report Illustration for IFRS Presentations (AR 9080.50)

I (we) have compiled the accompanying balance sheets of XYZ Company as of

December 31, 20X2 and 20X1, and the related statements of income, retained

earnings, and cash flows for the years then ended. I (we) have not audited or

reviewed the accompanying financial statements and, accordingly, do not express

an opinion or provide any assurance about whether the financial statements are in

accordance with International Financial Reporting Standards (for SMEs) as

issued by the International Accounting Standards Board.

Management (owners) is (are) responsible for the preparation and fair presentation

of the financial statements in accordance with International Financial Reporting

Standards (for SMEs) as issued by the International Accounting Standards

Board and for designing, implementing, and maintaining internal controls relevant

to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the compilation in accordance with Statements

on Standards for Accounting and Review Services issued by the American Institute

of Certified Public Accountants. The objective of a compilation is to assist

management in presenting financial information in the form of financial statements

without undertaking to obtain or provide any assurance that there are no material

modifications that should be made to the financial statements.


61

IFRS for SMEs REPORTING IN THE USA

2. IFRS for SMEs Compilation Reports that Omit Disclosures (AR 9080.50)

When the accountant compiles financial statements that omit substantially all

disclosures but are otherwise in conformity with IFRS as issued by the IASB, the

accountant may wish to modify the third paragraph of the standard report as

follows:

Management has elected to omit substantially all disclosures (and the statement of

cash flows) required by the International Financial Reporting Standards (for

SMEs) as issued by the International Accounting Standards Board. If the

omitted disclosures and statement were included in the financial statements, they

might influence the user’s conclusions about the company’s financial position,

results of operations, and cash flows. Accordingly, these financial statements are

not designed for those who are not informed about such matters.

AICPA Review / SSARS Interpretation # 8 (AR 9090.29 - .30) provides review report

illustrative wording for statements prepared under IFRS for SMEs.

AICPA Audit Interpretations # 14 & 19 (AU 9508.56 - .59 and .93 - .97) provide

similar guidance for audit reports on statements prepared under IFRS for SMEs.


1. The FASB Codification says it is “the only source of GAAP” in the USA. However,

the AICPA permits CPAs to report on (audited, reviewed or compiled) financial

statements under IFRS (including the SME version), but does not require IFRS to

be identified as an OCBOA (because IFRS is GAAP, not an OCBOA).

Could this be confusing to users of such financial statements? Why or why not?

2. Could the AICPA “FRF for SMEs” (an OCBOA) be confused with IFRS for SMEs

(GAAP)? How could potential confusion be reduced or remedied?


62

OVERVIEW OF THE AICPA FRAMEWORK (FRF for SMEs)

Summary of Key Facts & Issues (FRF for SMEs)

1. Not an “authoritative” basis of accounting:

Written by AICPA staff and a task force, but not approved by a senior technical

committee of the AICPA or by FASB

Authoritative accounting frameworks (of the seven “choices” listed at p. 59),

would include FASB (GAAP), IASB/IFRS (including IFRS for SMEs) and the

federal income tax basis (based on IRS rules and regulations)

2. It is an OCBOA, non-GAAP accounting framework that is not appropriate, if

GAAP is required or expected by intended users.

3. Described by the AICPA as a blend of traditional (GAAP) accounting principles and

accrual income tax methods. (FASB + IRS = FRF for SMEs)

4. Primary measurement basis = historical cost (rather than “fair value” often

required by GAAP or “tax basis” required by IRS)

5. Includes some “degree of optionality when choosing accounting policies to better

meet the needs of the end users”, such as:

Several inventory valuation choices (FIFO, LIFO or average cost)

Estimated useful lives of property and equipment and related depreciation

methods

6. “The framework eschews prescriptive, detailed standards and voluminous

disclosure requirements” (AICPA)

Eschew means “to shun”, which means to “keep away from or avoid” (Webster’s

College Dictionary)

7. “The framework lays out principles (principle-based, rather than rules-based) that

encourage the use of professional judgment in particular circumstances of a

transaction or event.” ( AICPA)


63

OVERVIEW OF THE AICPA FRAMEWORK

8. The framework can be used by entities in many industry groups and (both)

incorporated and unincorporated entities.

9. A standard definition of an SME does not exist. The AICPA “deliberately did not

develop quantified size criteria for determining what an SME is.” See the following

chart for “Characteristics of SME Entities Utilizing the Framework” (p. 64).

10. Since the framework is optional and non-authoritative, there is no effective date

for its implementation.


64

CHARACTERISTICS OF SME ENTITIES UTILIZING FRF FOR SMEs (AICPA)

This list presents certain characteristics of typical entities that may utilize the FRF

for SMEs accounting framework. These characteristics are not all-inclusive and not

presented as a list of required characteristics an entity must possess in order to

utilize it:

The entity does not have regulatory reporting requirements that essentially

require it to use GAAP-based financial statements.

A majority of the owners and management of the entity have no intention of

going public.

The entity is for-profit. (not a nonprofit or governmental entity)

The entity may be owner-managed, which is a closely held company in which

the people who own a controlling ownership interest in the entity are

substantially the same set of people who run the company.

Management and owners of the entity rely on a set of financial statements to

confirm their assessments of performance, cash flows, and of what they own

and what they owe.

The entity does not operate in an industry in which the entity is involved in

transactions that require highly-specialized accounting guidance, such as

financial institutions and governmental entities.

The entity does not engage in overly complicated transactions.

The entity does not have significant foreign operations.

Key users of the entity’s financial statements have direct access to the

entity’s management.

Users of the entity’s financial statements may have greater interest in cash

flows, liquidity, statement of financial position strength, and interest coverage.

The entity’s financial statements support applications for bank financing when

the banker does not base a lending decision solely on the financial statements

but also on available collateral or other evaluation mechanisms not directly

related to the financial statements.


65

FRF COMPARED TO OTHER ACCOUNTING FRAMEWORKS

FRF Comparison to Other Alternatives

1. Since the FRF for SMEs is designed for privately-owned, for-profit companies,

the following comparisons are generalizations applicable to small businesses (not

appropriate for public entities, nonprofit organizations or governments).

2. In the comparisons to the tax basis, we will not consider or address additional

differences that may be applicable to partnerships, “S” corporations, or

proprietorships. Our general comparisons will contemplate a “C” corporation.

3. Unique or unusual tax situations, industry - specific practices, or unusual or very

complex GAAP situations will not be contemplated or addressed.

4. The legend used for comparing the four (4) primary alternatives for small business

accounting and financial reporting is:

FRF – The non-authoritative AICPA (non-GAAP) framework

TAX – The method used by a small business (C corporation) for reporting its

federal income tax

GAAP – Generally Accepted Accounting Principles included in the FASB

Codification for American entities (public companies, private companies and

nonprofit organizations)

IFRS – International Financial Reporting Standards for SMEs (also known as

private company international GAAP)

Primary Similarities and Differences

1. Reporting entity

FRF & IFRS – privately owned, for profit

GAAP & Tax – public and private entities

2. Materiality = all are substantially the same


66


3. Accounting framework

FRF & IFRS – principles based (206 & 230 pages, respectively)

GAAP & Tax – rules based (8,500 & thousands? of pages, disrespectfully)

4. Transaction recognition

FRF, IFRS, GAAP – accrual basis

Tax – cash or accrual basis, depending on size and type of entity and

accounting method election

5. Transaction measurement

FRF, IFRS, Tax – primarily historical cost

GAAP – historical cost and fair value

6. Notes to financial statements – required for material items – all frameworks

7. Deferred income taxes

FRF (optional, but not required)

IFRS (simplified, but required)

GAAP (complex, fair value accounting)

Tax (not applicable, not required)

8. Allowance for bad debt (trade receivables)

FRF, IFRS, GAAP (required)

Tax (direct charge off required, allowance is not permitted)

9. Inventory valuations – similar for all frameworks, except Tax does not require

inventory for certain small entities


67

FRF COMPARED TO OTHER ACCOUNTING FREMEWORKS

10. Inventory cost flow assumptions (methods allowed)

IFRS – does not permit LIFO

All other frameworks generally permit any reasonable method (FIFO, LIFO,

average cost or specific identification)

11. Long-term contracts

FRF & IFRS – percentage of completion or completed contract (if permitted for

tax reporting or if information is not readily available to use percentage

completion)

GAAP – percentage completion

Tax – percentage completion or completed contract (may be elected by small

entities, with less than $10 million in gross receipts)

12. Investments (equity and debt instruments)

FRF, IFRS, GAAP – market or fair value, except “equity method” is used for

investments with “significant influence” (20-50% ownership)

Tax – cost basis

13. Depreciation – similar for all frameworks, except Tax allows section 179 and

MACRS

14. Intangible assets and goodwill (no finite life)

FRF & IFRS – best estimate of useful life; goodwill is amortized over 15 years

(FRF) or 10 years (IFRS)

GAAP – no amortization, but make annual fair value assessment (of potential

impairment) if management feels that it is “probable” that asset is impaired

Tax – generally, 15 years amortization


68


15. Consolidation

FRF & IFRS – over 50% ownership

GAAP – may have control / consolidation with little or no ownership, under VIE

reporting

Tax – 80% ownership

16. Industry – specific guidance

FRF & IFRS – none

GAAP – a lot

Tax – a little

17. Comparative financial statements

FRF & GAAP – recommended, but not required

IFRS – required

Tax – balance sheet only is reported for beginning and ending of the year

18. Income taxes

FRF – Policy choice using either the “taxes payable” method or the deferred tax

method. No evaluation or accrual is required for uncertain tax positions.

IFRS & GAAP – must use deferred tax method and consider uncertain tax

positions (if applicable)

Tax – just book what you owe for the current year (assuming prior years have

been settled)


69

ACCOUNTING AND REVIEW (AR) SERVICES

SSARS 21 CLARIFICATION & RECODIFICATION

SSARS 21 (Clarification & Recodification of SSARS)

1. Issued by the AICPA in October, 2014

2. Effective for preparations, compilations and reviews for financial statement periods

ending on or after December 15, 2015.

3. Early implementation is permitted (beginning October, 2014)

4. When implemented, SSARS 21 will recodify & supersede all outstanding

SSARS through SSARS 20, except for SSARS 14 (AR 120, Compilation of Pro

Forma Financial Information), which is in process of being revised.

Clarity & Convergence Projects (by the AICPA)

1. AICPA “Clarity and Convergence” project for audit engagements (SAS) was

completed by SAS 122, which changed the format for most audit standards (and

converged most standards with international audit standards).

2. SSARS 21 changes will adopt the same (or very similar) conventions (as the

“Clarified” audit standards).

3. Accordingly, the SSARS will be easier to read, understand and apply.

4. SSARS 21 has been drafted in accordance with clarity drafting conventions,

which include the following:

Establishing objectives for each clarified AR section

Including a “Definitions” section, when relevant, in each clarified AR section

Separating requirements (authoritative) from application and other

explanatory material (non-authoritative)

Numbering application and other explanatory material paragraphs using an A –

prefix (meaning “Appendix”) and presenting them in a separate section that

follows the “Requirements” section

Using formatting techniques, such as bullet lists, to enhance readability


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5. Because international standards are primarily “principles based” compared to

traditional American standards (FASB, AICPA, GASB and even the IRS), which are

“rules based”, several significant, fundamental changes will occur in order to

converge with international standards (for Accounting & Review Services –

SSARS), including:

There will be far greater emphasis on the accountant’s (CPA firm’s)

professional judgment, because there will be “fewer rules” to comply with

and “much less detailed guidance” than previously provided by the AICPA,

relative to performing SSARS engagements.

The recodified guidance provided by SSARS 19 (since 2010) included

approximately 190 pages.

The recodified guidance provided by SSARS 21 (when implemented) is

approximately 138 pages, but if you deduct the new section AR 70 (for

preparations), the net replacement guidance is approximately 126 pages, or 64

pages (34%) less than the SSARS 19 recodification.

Primary Changes by SSARS 21

1. A CPA will now be permitted to perform a “preparation” of financial statements in

lieu of higher levels of professional accounting services, such as compilation,

review or audit.

2. A “preparation” is similar to a non-attest, no assurance “bookkeeping” service,

except that it will be performed in accordance with AICPA guidance included in

SSARS section AR 60 and the new section AR 70, “Preparation of Financial

Statements”.

3. A preparation is also similar to a compilation, except that an accountant’s

report is normally not required, if certain other requirements are met.

4. The status of (AICPA) peer review of preparation services is still evolving and may

also be affected by each State’s accountancy laws (discussed further in this

outline).


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5. All SSARS 21 services (preparation – AR 70.11, compilation – AR 80.11, & review

– AR 90.12) will require a written engagement letter (agreement or contract) that is

signed by (both):

The accountant or CPA firm, and

Management or those charged with governance

6. Sections of the existing (SSARS 19) codification that will be deleted or replaced by

SSARS 21 include:

AR 110 Compilation of Specified Elements, Accounts or Items

AR 200 Reporting on Comparative Financial Statements

AR 300 Compilation Reports on Prescribed Forms

AR 400 Communications Between Predecessor & Successor Accountants

AR 600 Reporting on Personal Financial Statements Included in Written

Personal Financial Plans

7. AR 60 (under SSARS 19) was called “Framework for Performing & Reporting On

Compilations & Reviews” will be greatly modified & will include “preparation

services”.

8. The revised AR 60 is called “General Principles for Engagements Performed in

Accordance With SSARS”. It applies to all preparations, compilations & reviews.

The guidance will be “principles based” and will be much less detailed than the

previous AR 60. Certain terms & definitions that were benchmarks of the SSARS 19

changes (in 2010) will now be deleted / omitted from AR 60, including:

SSARS engagements are no longer described as a “three party relationship”

The term / definition of an “intended user” of the financial statements is

omitted. Former guidance stated that to be a recipient of a SSARS financial

statement, the intended user(s) is a person or class of persons who

understand the limitations of the compilation or review.


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Key Issues for “Compiling” or “Preparing” Financial Statements

The following “questions & answers” compare and contrast the key attributes of

SSARS 21 Preparation of Financial Statements and Compilation of Financial

Statements:

1. Which AR Section applies?

When engaged to compile financial statements = compilation (AR 80)

When only engaged to prepare (but not compile) = preparation (AR 70)

Compilation Preparation Compilation Preparation

2. Is an engagement letter required? Yes Yes

3. Is the accountant required to determine independence

relevant to the client? Yes No

4. Is lack of independence required to be disclosed? Yes N/A

5. Does the engagement require a report? Yes No (*)

6. May financial statements go to users outside of

management? Yes Yes

7. May the financial statements omit notes? Yes Yes

(*) When an accountant is engaged to prepare financial statements, the accountant is

required to include an adequate statement on each page of the statements that

no CPA provides any assurance on the financial statements. If the accountant

is unable to include an adequate statement on each page of the statements, the

accountant is required to issue a disclaimer (report) on the financial statements.


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Submission of Financial Statements (The Problems and Proposed Solutions)

1. Under previous SSARS (19), an accountant was required to comply with the

provisions of AR 80, Compilation of Financial Statements, whenever the accountant

was engaged to report on compiled financial statements or submitted (defined in

paragraph .04 of AR 60 as “presenting to management financial statements that the

accountant has prepared”) financial statements to a client or third parties.

2. The applicability of the compilation standards when the accountant submitted

financial statements worked satisfactorily when SSARS was issued in December

1978, and for many years thereafter, because it was fairly easy to determine

whether the accountant had prepared financial statements. However, in the current

practice environment, including cloud computing and other applications, it has

become increasingly difficult to determine whether the accountant,

management, or both prepared the financial statements. This difficulty has created

inconsistency in practice, which is not in the public interest. In order to address

this issue, ARSC has determined to revise the applicability of the compilation

standards, so the standards apply only when the accountant is engaged to

perform a compilation engagement.

3. Additionally, the AICPA Professional Ethics Executive Committee has revised

Interpretation No. 101-3, “Nonattest Services,” under Rule 101, Independence

(AICPA, Professional Standards, ET section 101, paragraph .05). Among the

revisions is a clarification that financial statement preparation is considered

outside the scope of the attest engagement and, therefore, constitutes a

nonattest service. ARSC is supportive of this clarification because it is in harmony

with how the 2011 edition of Government Auditing Standards (the Yellow Book)

treats the preparation of financial statements. The clarification is consistent with the

views of practitioners who believe that the preparation of financial statements is a

responsibility of management and an essential part of an entity’s system of

internal control. The clarification is effective for engagements covering periods

beginning on or after December 15, 2014.


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4. The result is that the accountant need not be concerned with issues such as who

prepared the financial statements because the standards would only apply when

the accountant is engaged to perform either the preparation or the compilation

service. The accountant also would not need to be concerned with whether the

financial statements are intended to be used by third parties because the

accountant would issue a compilation report only when engaged to do so.

General Principles for Engagements Performed in Accordance With SSARS (AR 60)

1. Applies to preparations, compilations & reviews performed when SSARS 21 is

implemented.

2. Additional sections prescribe more specific performance & reporting

requirements, depending on the nature of the engagement:

Preparations (AR 70)

Compilations (AR 80)

Reviews (AR 90)

3. SSARS use two categories of professional requirements indentified by specific

terms to describe the degree of responsibility they impose on accountants: (AR

60.15 - 60.16)

Unconditional requirements. The accountant is required to comply with an

unconditional requirement in all cases in which the requirement is relevant.

SSARS use the word must to indicate an unconditional requirement.

Presumptively mandatory requirements. The accountant must comply with a

presumptively mandatory requirement in all cases in which the requirement is

relevant; except, in rare circumstances, the accountant may depart from a

presumptively mandatory requirement provided that the accountant documents

his or her justification for the departure and how the alternative procedures

performed in the circumstances were sufficient to achieve the objectives of the

presumptively mandatory requirement. SSARS use the word should to indicate

a presumptively mandatory requirement.


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4. Engagement Level Quality Control (AR 60.19 – 60.23)

Engagement partner must possess competence & capabilities for performing

& reporting on the engagement.

Engagement partner is responsible for quality of the engagement, supervision,

planning, performance, reporting & compliance with the firm’s Quality Control

policies & procedures

Engagement partner must be alert throughout the engagement, by

observation and making inquiries, for evidence of noncompliance with ethical

requirements (AICPA & state) by engagement team members.

The firm must have an adequate monitoring process to provide reasonable

assurance that the firm’s system of quality control is relevant, adequate &

operating effectively (for all SSARS engagements).

5. Acceptance & Continuation of Client Relationships (AR 60.24 – 60.25)

Should not accept a SSARS engagement if: relevant ethical requirements

cannot be satisfied, information needed to perform the engagement is likely to

be unavailable or unreliable, or the accountant has cause to doubt

management’s integrity.

Conditions for accepting a SSARS engagement include (all of the following):

Preliminary knowledge that requirements for competence will be satisfied

Financial reporting framework (selected by management) is acceptable

Management acknowledges & understands its responsibility for:

Selecting the reporting framework

Internal controls that yield statements - free from material misstatement

Preventing & detecting fraud

Complying with applicable laws & regulations

Accuracy & completeness of records & information - to prepare statements

Providing accountants with all records & information for the engagement


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6. The Appendix section AR 60.A1 – 60.A50 contains “Application & Other

Explanatory Material” related to the General Principles

Discussion Questions (AR 60 “General Principles”)

1. For existing (ongoing) clients, list several “causes to doubt management’s

integrity’’ (AR 60.24) that commonly occur for SSARS clients:

2. Describe how you (engagement partner) might identify the potential integrity

issues (listed above).

3. For many SSARS engagements, staff members who may not be experienced CPAs

perform most of the work & may even have substantial client interaction. How would

an engagement partner train staff personnel to identify & communicate potential

integrity issues listed in Questions 1 & 2? Also include “client confidentiality”

issues in this discussion.


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4. How do you address the integrity issues (Questions 1 – 3) for a potential new

client that you have never worked for? List common inquiries & procedures.

5. Page 59 in this outline lists the (AICPA) authorized accounting frameworks that

American companies may use for financial reporting. AR 60.25 says that you may

only perform a SSARS engagement for an entity where “management has

selected an acceptable framework”.

How does a CPA determine that the client has picked an acceptable

framework? Describe the process for a potential new client.

Acceptable to whom? If the client or potential new client needs a financial

statement “because the bank wants it”, how do you determine that the

“framework” and the level of service (preparation, compilation, review or audit)

are acceptable to the intended user(s)? Describe the process & related

significant actions or inquiries that a CPA would perform (to comply with

SSARS).

6. If a client or potential new client wants to give a lender or potential investor “cash

basis” statements to “keep it simple” (but you know that they have a huge amount

of debt, similar to the federal government), how do you convince the client to pick

an acceptable framework, even if your fee goes up?


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Preparation of Financial Statements (new section AR 70)

1. This section applies when an accountant in public practice is engaged to prepare

financial statements. It may also be applied to the preparation of other historical or

prospective financial information.

2. This section does not apply when an accountant prepares financial statements:

And is engaged to perform an audit, review, or compilation of those financial

statements

Solely for submission to taxing authorities

For inclusion in written personal financial plans prepared by the accountant

In conjunction with litigation services that involve pending or potential legal or

regulatory proceedings

In conjunction with business valuation services

3. The determination about whether the accountant has been engaged to prepare

financial statements or merely assist in preparing financial statements (which is a

bookkeeping service that is not subject to this section) is determined based on

services the client requests the accountant to perform and requires the accountant

to apply professional judgment. See AICPA Chart, p. 79.

4. An engagement to prepare financial statements:

Is a nonattest, no assurance service

Does not require a determination about whether the accountant is independent

Does not require the accountant to verify the accuracy or completeness of

information provided by the client

Does not require evidence to support the expression of an opinion or conclusion

Does not require a report on the financial statements (if adequate, required

disclaimers are made)

Must also comply with relevant portions of AR 60

5. The objective of the accountant is to prepare financial statements pursuant to a

specified financial reporting framework. See p. 59 for authorized frameworks.

SSARS describes any framework, other than GAAP, as a special purpose

framework.


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Preparation (AR 70) Versus Assistance in Preparing (AR 70.A19)

The following table provides (AICPA) examples of services that the accountant may

be engaged to perform and whether AR 70 would apply. The table is not intended to

be all inclusive, and professional judgment would still be needed.

Examples of Services where AR 70 Applies Examples of Services Where AR 70 Does Not Apply

Preparation of financial statements prior to audit or review by another accountant

Preparation of financial statements when the accountant is engaged to perform an audit, review, or compilation of such financial statements

Preparation of financial statements for an entity to be presented alongside the entity’s tax return

Preparation of financial statements with a tax return solely for submission to taxing authorities

Preparation of personal financial statements for presentation alongside a financial plan

Personal financial statements that are prepared for inclusion in written personal financial plans prepared by the accountant

Preparation of single financial statements, such as a balance sheet or income statements or financial statements with substantially all disclosures omitted

Drafting financial statement notes

Using the information in a general ledger to prepare financial statements outside of an accounting software system

Entering general ledger transactions or processing payments (general bookkeeping) in an accounting software system

Financial statements prepared in conjunction with litigation services that involve pending or potential legal or regulatory proceedings Financial statements prepared in conjunction with business valuation services Maintaining depreciation schedules Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation, or leases


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6. The accountant should agree upon the terms of the engagement with

management or those charged with governance, as appropriate. The agreed-upon

terms of the engagement should be documented in an engagement letter or other

suitable form of written agreement and should include: (AR 70.10 - .11)

A. The objective of the engagement

B. The responsibilities of management set forth in AR 60.25c (see p. 75)

C. The agreement of management that each page of the financial statements will

include a statement indicating that no assurance is provided on the financial

statements or the accountant will be required to issue a disclaimer that makes it

clear that no assurance is provided on the financial statements

D. The responsibilities of the accountant

E. The limitations of the engagement to prepare financial statements

F. Identification of the applicable financial reporting framework for the

preparation of financial statements

G. Whether the financial statements are to contain a known departure or

departures from the applicable financial reporting framework (including

inadequate disclosure) or omit substantially all disclosures required by the

applicable financial reporting framework.

7. The accountant should prepare the financial statements using the records,

documents, explanations, and other information provided by management.

8. The accountant should ensure that a statement is included on each page of the

financial statements indicating, at a minimum, that “no assurance is provided” on

the financial statements. If the accountant is unable to include a statement on each

page of the financial statements, the accountant should either:

Issue either a disclaimer (report) that makes it clear that no assurance is

provided on the financial statements or

Perform a compilation engagement in accordance with AR 80, Compilation

Engagements


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9. The statement on each page of the financial statements, including related notes,

is intended to avoid misunderstanding on the part of users with respect to the

accountant’s involvement with the financial statements. The statement is made at

management’s discretion, and the accountant’s or the CPA firm’s name is not

required to be included. The accountant is concerned that the indication is not

misleading. Examples of a statement on each page of the financial statements

include the following:

No assurance is provided on these financial statements.

These financial statements have not been subjected to an audit or review or

compilation engagement, and no assurance is provided on them.

10. Other statements that convey that no assurance is provided on the financial

statements would also be acceptable.

11. An example of a disclaimer (report) that the accountant may issue is as follows:

The accompanying financial statements of XYZ Company as of and for the year

ended December 31, 20XX, were not subjected to an audit, review, or

compilation engagement by me (us) and, accordingly, I (we) do not express an

opinion, a conclusion, nor provide any assurance on them.


[Accountant’s city and state]

[Date]

12. When preparing statements in accordance with a special purpose framework the

accountant should include a description of the financial reporting framework on

the face of the financial statements or in a note to the financial statements.


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13. If, during the preparation of financial statements, the accountant assists

management with significant judgments regarding amounts or disclosures to

be reflected in the financial statements, the accountant should discuss those

judgments with management so management understands the significant

judgments reflected in financial statements and accepts responsibility for those

judgments. (AR 70.16)

14. If the accountant becomes aware that the records, documents, explanations, or

other information, including significant judgments, used in the preparation of the

financial statements are incomplete, inaccurate, or otherwise unsatisfactory the

accountant should bring that to the attention of management and request additional

or corrected information.

15. When, after discussions with management, the accountant prepares financial

statements that contain a known departure or departures from the applicable

financial reporting framework (including inadequate disclosure), the accountant

should disclose the material misstatement or misstatements in the financial

statements. (AR 70.18)

16. When, after discussions with management, the accountant prepares financial

statements that omit substantially all disclosures required by the applicable

financial reporting framework, the accountant should disclose such omission in

the financial statements.

17. The accountant should not prepare financial statements that omit substantially all

disclosures required by the financial reporting framework if the accountant

becomes aware that the omission of substantially all disclosures could be

misleading to users of such financial statements. (AR 70.20)


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18. The accountant should prepare documentation in connection with each

preparation engagement in sufficient detail to provide a clear understanding of the

work performed which, at a minimum, includes the following:

The engagement letter or other suitable form of written documentation with

management, as described in AR 70.10 – .11, and

A copy of the financial statements that the accountant prepared

19. If, in rare circumstances, the accountant judges it necessary to depart from a

relevant presumptively mandatory requirement, the accountant must document

the justification for the departure and how the alternative procedures performed in

the circumstances were sufficient to achieve the intent of that requirement.

20. The Appendix to AR 70 also contains substantial guidance regarding “Application

and Other Explanatory Material” (AR 70. A1 - .A19).

Discussion Questions (AR 70, Preparation of Financial Statements)

1. Determine if the following are “preparation” services covered by AR 70. Why or

why not? (Explain additional assumptions, if necessary)

A. Processing & remitting (electronically) to a client (monthly) accounting records,

ledgers & journals, which are part of a software package, that also can generate

financial statements, if your client wants to see them.

B. A CPA firm downloads client financial information and generates analysis

schedules and financial statements at the planning stage of an audit.

C. Issuing a compilation report to a third party user, per your client’s request, along

with related financial statements, which are dated September 30, 2014.

D. Preparing small business financial statements to determine a client’s quarterly

estimated income tax.

E. Giving a client a cash basis tax return and an accrual basis balance sheet &

income statement, all of which were produced by your CPA firm.


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2. Describe possible circumstances (or software) that would create a situation where a

CPA could not add a disclaimer to each page of the financial statements & note

disclosures (if any notes).

3. AR 70.16 says that the CPA should discuss with management significant

“amounts or disclosures” that the CPA recommends (to make the financial

statements “fairly stated”). The end of that discussion results in management

understanding & accepting responsibility for such adjustments / disclosures (even if

they are very technical “GAAP” issues).

How realistic is this requirement for most small business owners / managers?

If not realistic (or not possible) what alternative procedure or action can a CPA

take? Be specific.

4. How does a CPA determine that certain disclosures are so significant to

potential users that the CPA firm should not even “prepare” such statements?

List examples of potentially dynamic disclosures

What is the “risk / problem” (for a CPA) with omitting (significant) disclosures in a

“preparation” service that has a disclaimer on every page, states that

disclosures are omitted, and is NOT accompanied by CPA firm letterhead or a

report? Explain.


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PREPARATION OF FINANCIAL STATEMENTS

ILLUSTRATIVE ENGAGEMENT LETTER (AR 70.A20)

To the appropriate representative of ABC Company:

You have requested that we prepare the financial statements of ABC Company, which

comprise the balance sheet as of December 31, 20XX, and the related statements of

income, changes in stockholders’ equity, and cash flows for the year then ended and

the related notes to the financial statements. We are pleased to confirm our

acceptance and our understanding of this engagement to prepare the financial

statements of ABC Company by means of this letter.

Our Responsibilities

The objective of our engagement is to prepare financial statements in accordance with

accounting principles generally accepted in the United States of America based on

information provided by you. We will conduct our engagement in accordance with

Statements on Standards for Accounting and Review Services (SSARSs) promulgated

by the Accounting and Review Services Committee of the AICPA and comply with the

AICPA’s Code of Professional Conduct, including the ethical principles of integrity,

objectivity, professional competence, and due care.

We are not required to, and will not, verify the accuracy or completeness of the

information you will provide to us for the engagement or otherwise gather evidence for

the purpose of expressing an opinion or conclusion. Accordingly, we will not express

an opinion or a conclusion or provide any assurance on the financial statements.

Our engagement cannot be relied upon to identify or disclose any financial statement

misstatements, including those caused by fraud or error, or to identify or disclose any

wrongdoing within the entity or noncompliance with law and regulations.

Management Responsibilities

The engagement to be performed is conducted on the basis that management

acknowledges and understands that our role is to prepare financial statements in

accordance with accounting principles generally accepted in the United States of

America. Management has the following overall responsibilities that are fundamental to

our undertaking the engagement to prepare your financial statements in accordance

with SSARSs:


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A. The prevention and detection of fraud

B. To ensure that the entity complies with the laws and regulations applicable to its

activities

C. The accuracy and completeness of the records, documents, explanations, and

other information, including significant judgments, you provide to us for the

engagement to prepare financial statements

D. To provide us with:

Documentation, and other related information that is relevant to the

preparation and presentation of the financial statements,

Additional information that may be requested for the purpose of the

preparation of the financial statements, and

Unrestricted access to persons within ABC Company of whom we determine

necessary to communicate.

The financial statements will not be accompanied by a report. However, you agree that

the financial statements will clearly indicate that no assurance is provided on them.

[If the accountant expects to issue a disclaimer, instead of the preceding paragraph,

the following may be added:

As part of our engagement, we will issue a disclaimer that will state that the financial

statements were not subjected to an audit, review, or compilation engagement by us

and, accordingly, we do not express an opinion, a conclusion, nor provide any

assurance on them.]

Other Relevant Information

Our fees for these services . . . .


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Please sign and return the attached copy of this letter to indicate your

acknowledgement of, and agreement with, the arrangements for our engagement to

prepare the financial statements described herein, and our respective responsibilities.

Sincerely yours,

____________________________________

[Signature of accountant or accountant’s firm]

Acknowledged and agreed on behalf of ABC Company by:

___________________________________

[Signed]

[Name and Title}

___________________________________

[Date]


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PEER REVIEW CHANGES FOR SSARS 21 (PREPARATIONS)

AICPA Peer Review Changes (for SSARS 21 “Preparations”)

1. Due to the option of “early implementing” SSARS 21 (since issuance, October,

2014) the AICPA Peer Review Board (PRB) issued an Exposure Draft in

November, 2014 to reflect peer review changes related to SSARS 21.

2. The proposed changes were “approved” by the PRB and are included in Peer

Review Alert 15-01, which is effective for peer reviews commencing on or after

February 1, 2015.

Peer Review Alert 15-01 (Summary)

1. Firms not currently enrolled (and not required to be enrolled) in a Peer Review

Program (Program) are no longer required to enroll in a Program, if they only

perform “preparation” services.

2. For firms that perform preparation services and other SSARS services (and

continue to have peer review), the revised rules describe if and when and how

many “preparations” should be selected in an Engagement Review. In general,

preparations would usually not be selected in an Engagement Review.

3. If a preparation service is selected, the peer review should only include: verification

that the required, signed engagement letter was obtained, that the appropriate “no

assurance legend” is on each page, (if necessary) a disclaimer (report) was

properly included, if legends were not properly included, and specialized accounting

frameworks & other disclosures (if any) are adequate.

4. Peer reviewers should be familiar with changes, due to SSARS 21, that are

included in PRP 1000.07, 1000.104, and 1000.108.

TSCPA Peer Review

The TSCPA administers peer review for all AICPA and TSCPA member firms and for

non-member firms registered with the TSBPA. The technical staff at the TSCPA has

stated that they (we) will continue to follow AICPA Peer Review rules, including

changes related to SSARS 21 (preparations).


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Compilation Engagements (AR 80, revised by SSARS 21)

1. The basic requirements of the existing section AR 80 (per SSARS 19) were not

significantly changed by SSARS 21.

2. However, the relevant parts of the substantially changed section AR 60, General

Principles for Performing SSARS Engagements, must be included in compilation

engagements.

3. A compilation engagement:

Is not an assurance engagement (AR 80.02)

Does not require the accountant to verify the accuracy or completeness of the

information provided by management or otherwise gather evidence to express

an opinion or a conclusion on the financial statements.

Requires the accountant to determine the independence of the firm and

engagement team members (AR 80.07)

Has client “acceptance and continuation” requirements similar to a preparation

(AR 70) and also described at AR 60.25 (General Principles)

4. If the accountant is not satisfied about any of the matters set out in paragraph .25 of

section 60 or paragraph .08 of this section as preconditions for accepting a

compilation engagement, the accountant should discuss the matter with

management or those charged with governance. If changes cannot be made to

satisfy the accountant about those matters, the accountant should not accept the

proposed engagements. (AR 80.09)

5. The accountant should agree upon the terms of the engagement with management

or those charged with governance, as appropriate. The agreed-upon terms of the

engagement should be documented in an engagement letter or other suitable form

of written agreement and should be signed by both parties. (AR 80.10)

6. A compilation service requires the accountant to:

A. Obtain an understanding of the applicable financial reporting framework and

the significant accounting policies intended to be used in the preparation of

the financial statements. (AR 80.12)


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B. Read the financial statements in light of the accountant’s understanding of the

applicable financial reporting framework and the significant accounting policies

adopted by management.

C. Consider whether such financial statements appear to be appropriate in form

and free from obvious material misstatements. (AR 80.13)

7. If, in the course of the engagement, the accountant becomes aware that the

records, documents, explanations, or other information, including significant

judgments, provided by management are incomplete, inaccurate, or otherwise

unsatisfactory, the accountant should bring that to the attention of management

and request additional or corrected information. (AR 80.14)

8. If the accountant becomes aware during the course of the engagement that any of

the following exist, the accountant should propose the appropriate revisions to

management. (AR 80.15)

The financial statements do not adequately refer to or describe the applicable

financial reporting framework,

Revisions to the financial statements are required for the financial statements

to be in accordance with the applicable financial reporting framework; or

The financial statements are otherwise misleading

9. The accountant should withdraw from the engagement and inform management

of the reason for withdrawing if: (AR 80.16)

The accountant is unable to complete the engagement because management

has failed to provide records, documents, explanations, or other information,

including significant judgments, as requested, or

Management does not make appropriate revisions that are proposed by the

accountant or does not disclose such departures in the financial statements,

and the accountant determines to not disclose such departures in the

accountant’s compilation report.


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10. The accountant’s compilation report on financial statements prepared in

accordance with a special purpose framework should include a separate

paragraph that: (AR 80.21)

Indicates that the financial statements are prepared in accordance with the

applicable special purpose framework,

Refers to the note to the financial statements that describes the framework, if

applicable, and

States that the special purpose framework is a basis of accounting other than

GAAP.

11. When the accountant is not independent with respect to the entity, the accountant

should indicate the accountant’s lack of independence in a final paragraph of the

accountant’s compilation report. (AR 80.22)

12. If the accountant elects to disclose a description about the reasons the accountant’s

independence is impaired, the accountant should include all such reasons in the

description. (AR 80.23)

13. The accountant should not issue an accountant’s compilation report on financial

statements that omit substantially all disclosures required by the applicable financial

reporting framework unless the omission of substantially all disclosures is not, to

the accountant’s knowledge, undertaken with the intention (or likely result) of

misleading those who might reasonably be expected to use such financial

statements. (AR 80.24)

14. If the accountant believes that modification of the compilation report is not adequate

to indicate the deficiencies in the financial statements as a whole, the accountant

should withdraw from the engagement and provide no further services with respect

to those financial statements. (AR 80.30)

15. The accountant should not modify the compilation report to include a statement

that the financial statements are not in conformity with the applicable financial

reporting framework. (AR 80.31)


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16. The accountant should prepare documentation in connection with each

compilation engagement in sufficient detail to provide a clear understanding of the

work performed which, at a minimum, includes the following: (AR 80.38)

The engagement letter or other suitable form of written documentation with

management,

A copy of the financial statements

A copy of the accountant’s report

17. The Appendix (Exhibit B) to AR 80 has six (6) illustrations of compilation reports,

which include: (AR 80.A43)

GAAP basis

AICPA (OCBOA) FRF for SMEs

Tax basis, disclosures omitted (see p. 93)

GAAP basis, not independent

AICPA (OCBOA) FRF, not independent

GAAP basis, with a GAAP departure

18. The Appendix (Exhibit A) has three (3) illustrated Engagement Letters:

GAAP basis

GAAP basis, omitting notes and cash flows

Tax basis


93

ILLUSTRATIVE COMPILATION REPORT

TAX BASIS, DISCLOSURES OMITTED (AR 80.A43)

Illustration 3, modified (Income Tax Basis, Disclosures Omitted and Accountant is

Not Independent)

Management is responsible for the accompanying financial statements of XYZ

Company, which comprise the statement of assets, liabilities & equity – tax basis as of

December 31, 20XX and the related statements of revenue and expenses – tax basis

and changes in shareholder’s equity – tax basis for the year then ended and for

determining that the tax basis of accounting is an acceptable financial reporting

framework. I (We) have performed a compilation engagement in accordance with

Statements on Standards for Accounting and Review Services promulgated by the

Accounting and Review Services Committee of the AICPA. I (We) did not audit or

review the financial statements nor was (were) I (we) required to perform any

procedures to verify the accuracy or completeness of the information provided by

management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide

any form of assurance on these financial statements.

The financial statements are prepared in accordance with the tax basis of accounting,

which is a basis of accounting other than accounting principles generally accepted in

the United States of America.

Management has elected to omit substantially all the disclosures ordinarily included in

financial statements prepared in accordance with the tax basis of accounting. If the

omitted disclosures were included in the financial statements, they might influence the

user’s conclusions about the company’s assets, liabilities, equity, revenue, and

expenses. Accordingly, the financial statements are not designed for those who are

not informed about such matters.

I am (We are) not independent with respect to XYZ Company.


[Accountant’s city and state]

[Date of the accountant’s report]


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