A practice-oriented review of the latest developments related to SSARS Nos. 21-24, this title includes a wide range of issues, including:
* Developments in the conceptual framework
* New and proposed independence interpretations
* Consideration of materiality in a review engagement
* Going concern considerations
* Restatement of prior year financial statements
Hugh Parker, Ph.D., CPA, has more than 25 years of experience in accounting, auditing, business valuation, and litigation support in local and regional firms. He has taught CPA continuing education courses across the country, and has been recognized by the American Institute of Certified Public Accountants as an Outstanding CPE Instructor. His career includes experience teaching undergraduate and graduate accounting courses, Dean of the Else School of Management at Millsaps College and Executive Partner of HORNE LLP. Parker's volunteer service includes campaign chair of the Millsaps College Else School of Business, USM College of Business Advisory Board, Boys and Girls Clubs of Central Mississippi, Boy Scouts, Mississippi Special Olympics, and the Mississippi Symphony Orchestra.
Kimberly Burke, Ph.D., is professor of accountingat the Dean at Millsaps College's Else School of Management. She oversees the undergraduate business program, an MBA program, an Executive MBA program, and a Master of Accountancy program. As an accounting professor, Dr. Burke has taught a variety of classes including undergraduate and graduate auditing, intermediate and advanced accounting, accounting information systems, principles of financial accounting and introduction to liberal studies. In 2008, she was recognized by the Carnegie Foundation for the Advancement of Teaching and the Council for Advancement and Support of Education as the Mississippi Professor of the Year. She has published in multiple publications including Advances in Accounting, Southern Economic Journal, Journal of Information Systems, Journal of Service Marketing and Internal Auditing.
Introduction to Preparation, Compilation, and Review Engagements
- Identify the types of engagements that require a report on the financial statements.
- Recognize how preparation engagements have evolved.
- Recognize the hierarchy of guidance that applies to preparation, compilation, or review engagements.
- Recognize the elements of a quality control system.
- Identify different forms of peer review.
Reporting on financial statements
Prior to 1978, accountants engaged to report on financial statements had two options: perform an audit of the financial statements or issue a disclaimer of opinion on the financial statements. Until that time, there was no option in the literature to offer reporting services that were less in scope than an audit that provided some level of comfort to users of financial statements. Accountants could, and still can, provide bookkeeping services, but those services are not subject to Statements on Standards for Accounting and Review Services (SSARSs). With the issuance of SSARS No. 1, Compilation and Review of Financial Statements, in 1978, accountants were provided other reporting opportunities related to their clients' financial statements.
When accountants are engaged to report on financial statements, available options include audit, review, or compilation. Each of these engagements is considered an attestation engagement in that the accountant has been engaged to issue a report on a subject matter or assertions (financial statements) that is the responsibility of another party (management). The services offer different levels of assurance, ranging from the reasonable assurance provided by an audit to no assurance provided by a compilation.
In an audit engagement, the accountant issues a report that expresses an opinion about whether the financial statements are fairly presented, in all material respects, in accordance with the financial reporting framework used to prepare the financial statements. In order to express an opinion on the financial statements, the auditor is required to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. The auditor obtains reasonable assurance based on a rigorous evaluation of the financial statements. An audit engagement begins with a set of financial statements that are the responsibility of management. In these financial statements, management asserts that the transactions and accounts underlying the financial statements (1) exist or occurred, (2) are complete, (3) represent rights and obligations of the company, (4) are valued and allocated correctly, and (5) are presented and provide disclosure in accordance with an applicable financial reporting framework, such as generally accepted accounting principles (GAAP). In order to obtain reasonable assurance, the auditor must obtain evidence - through such procedures as 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; and others - to corroborate management's assertions about the financial statements.
When an engagement requires a lesser level of assurance, a review may be appropriate. The objective of a review is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. In addition to accumulating review evidence through inquiries and analytical procedures, a management representation letter is also required for a review engagement. There is no requirement to obtain an understanding of or to test the client's internal controls.
The lowest level of reporting service on financial statements is a compilation engagement. An accountant performing a compilation engagement obtains no assurance on the financial statements. The objective of a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with this standard 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 them to be in accordance with the applicable financial reporting framework. Compilation engagements can be performed on full disclosure financial statements; financial statements that omit substantially all disclosures; and accounts, elements, or items of a financial statement.
Comparison of reporting options
The following table highlights several of the significant differences among audit, review, and compilation engagements. Most notable is the idea that increasing the level of assurance requires an increased rigor in obtaining evidence regarding the underlying assertions in the financial statements.
Service comparison Compilation Review Audit Level of assurance that the financial statements are not materially misstated
CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements. CPA obtains limited assurance that there are no material modifications that should be made to the financial statements. The CPA obtains reasonable (defined as high, but not absolute) assurance about whether the financial statements are free of material misstatement. Objective
To apply accounting and financial reporting expertise to assist management in the presentation of financial statements. To obtain limited assurance as a basis for reporting whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. To obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, thereby enabling the CPA to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and to report on the financial statements in accordance with the auditor's findings. The CPA is required to be independent
No. If the CPA is not independent, the CPA is required to indicate lack of independence in the CPA's compilation report. V V The CPA is required to obtain an understanding of the entity's internal control and assess fraud risk V The CPA is required to perform inquiry and analytical procedures V V The CPA is required to perform verification and substantiation procedures V The CPA issues a formal report on the financial statements V V V Situations requiring different levels of service
Typically appropriate when initial or lower amounts of financing or credit are sought, or there is significant collateral in place. Outside parties may appreciate the business's association with a CPA, which is readily apparent in the formal compilation report. Typically appropriate as a business grows and is seeking larger and more complex levels of financing and credit. It is also useful when business owners themselves are seeking greater confidence in their financial statements to evaluate results and make key business decisions. An audit is typically appropriate and often required when seeking complex or high levels of financing and credit. Also appropriate when seeking outside investors, seeking to sell the business, or considering a merger. Differences in cost for each level of service
Least time consuming of the services in which the CPA issues a formal report. More time consuming than a compilation, but substantially less than an audit. Involves the most work and, therefore, the most CPA time.
Evolution of engagements to prepare financial statements
Reporting services have continued to evolve with changes in the financial reporting landscape. Over time, other changes pointed to the need for basic accounting services beyond reporting on existing financial statements.
Compilation engagements in a changing landscape
Until 2014, accountants were required to perform a compilation of financial statements whenever they were (1) engaged to perform a compilation or (2) when the accountant submitted financial statements to the client or third parties. Submission was defined as "prepares and presents." Whereas submission worked well as a trigger for the compilation...