Objective of Compilation Engagements

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Chapter 25
Other Assurance and Nonassurance Services
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Presentation Outline

• Attestation Engagements
• Compilation Engagements
• Review Engagements

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I. Attestation Engagements

1. The Appropriate Set of Standards
2. Levels of Service
3. Five Areas of Detailed Attestation Standards

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A. The Appropriate Set of Standards

• Attestations that deal with providing assurance
  on historical financial statements, including one
  or more parts of those statements, are addressed
  in auditing standards.
• Reviews of historical financial statements use
  SSARS.
• Other forms of attestation use attestation
  standards.

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B. Levels of Service

• Examination a direct statement is made as to
  whether presentation of the assertions, taken as
  a whole, conforms with the applicable criteria.
  (See Fig. 25-1 on p. 744)
• Review form of negative assurance as to whether
  anything came to the practitioners attention
  that the assertions are not presented in all
  material respects in conformity with the
  applicable criteria.
• Agreed-upon procedures procedures to be
  performed are agreed to by the practitioner, the
  responsible party making the assertions, and the
  intended user of the report. Distribution is
  limited to involved parties who possess requisite
  knowledge about the procedures and the level of
  assurance.

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C. Five Areas of Detailed Audit Standards

1. WebTrust Services
2. SysTrust Services
3. Prospective Financial Statements
4. Agreed-Upon Procedures

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1. WebTrust Services

• In a WebTrust assurance services engagement,
• a client engages a CPA to provide reasonable
• assurance that a companys Web site complies
• with certain Trust Services principles and
  criteria for one or more aspects of e-commerce
  activities. (See Table 25-2 on p. 745)

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2. SysTrust Services

• In a SysTrust engagement, the SysTrust licensed
  accountant evaluates a companys computer system
  using Trust Services
• principles and criteria.

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3. Prospective Financial Statements (Predicted
or Expected Financial Statements)

• Permissible engagements include examination,
  compilation, or agreed-upon procedures. Two
  general types of prospective financial
  statements
• Forecasts presents an entitys expected
  financial position, results of operations, and
  cash flows, to the best of the responsible
  parties knowledge and belief. May be for limited
  or general use.
• Projections - presents an entitys expected
  financial position, results of operations, and
  cash flows, to the best of the responsible
  parties knowledge and belief, given one or more
  hypothetical assumptions. Generally restricted
  to limited use.

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4. Agreed Upon Procedures

• The primary appeal to practitioners of
  agreed-upon procedures engagements is making
  management or a third-party user specify the
  procedures they want performed.

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II. Compilation Engagements

1. Compilation Engagements and Reports
2. Contents of Compilation Report
3. The Effect of a Departure from GAAP on a
   Compilation Report
4. The Effect of a Lack of Independence on a
   Compilation Report

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A. Compilation Engagements

• CPA prepares financial statements but does not
  express any assurance on them.
• When the CPA expects that a third-party will use
  the financial statements, a compilation report
  must be prepared.
• A CPA does not have the issue the report if a
  third party is not involved. Such an arrangement
  must be clearly set out in the engagement letter.
• May omit substantially all disclosures, but
  report must be modified (See Figure 25-9 on p.
  755)
• Each page should state See Accountants
  Compilation Report.

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B. Contents of Compilation Report

• Compilation has been performed in accordance with
  the SSARS issued by the AICPA.
• Compilation is limited to presenting in the form
  of financial statements information that is the
  representation of management.
• Financial statements have not been audited or
  reviewed and, accordingly, the accountant does
  not express an opinion or any other form of
  assurance on them.
• See requirements on page 754.

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C. The Effect of a Departure from GAAP on a
Compilation Report

• Report should be modified to disclose the
  departure.
• Dollar effect of departure should be disclosed if
  it has been determined.
• Accountant is not required to determine dollar
  effect of departure.

GAAP Departure
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D. The Effect of a Lack of Independence on a
Compilation Report

• The accountant can issue a compilation report
  when he or she is not independent as long as the
  lack of independence is disclosed in the
  compilation report.

I am not independent with respect to XYZ Company.
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III. Review Engagements

1. Review Engagements
2. Contents of Review Report
3. The Effect of a Departure from GAAP on a Review
   Report
4. Circumstances that Preclude a Review Report

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A. Review Engagements

• CPA expresses limited assurance that the
  financial statements are in accordance with GAAP
  or another comprehensive basis of accounting.
• CPA must be independent to perform a review.
• Suggested procedures include
• Obtain knowledge of the accounting principles and
  practices of the clients industry.
• Obtain knowledge of the client
• Make inquiries of management
• Perform analytical procedures
• Obtain letter of representation
• Each page should state See Accountants Review
  Report.

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B. Contents of Review Report

• Review was performed in accordance with SSARS.
• All information in the financial statements is
  the representation of management.
• Review consists principally of inquiries of
  company personnel and analytical procedures
  applied to financial data.
• Review is substantially less in scope than an
  audit and, accordingly, no opinion is expressed.
• Accountant is not aware of any material
  modifications that should be made to the
  financial statements for them to conform with
  GAAP, other than those mentioned in the report.

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C. The Effect of a Departure from GAAP on a
Review Report

• Report should be modified to disclose the
  departure.
• Dollar effect of departure should be disclosed if
  it has been determined by client management.

GAAP Departure
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D. Circumstances that Preclude a Review Report
I believe that I can still issue a compilation
report.

• If the accountant is unable to perform the
  inquiry and analytical procedures necessary or if
  those procedures are restricted.
• If the accountant is not independent.

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Summary Points
Characteristic Compilation Engagement Review Engagement Audit Engagement
Level of Assurance
Inquiry Procedures
Accountants Independence
Statements are fairly presented
Limited assurance
None
Inquiry, analytical, and other audit procedures
Inquiries if information appears questionable
Inquiry, analytical procedures, other
Lack of independence requires a disclaimer for a
public company
Not required Report must indicate lack of
Lack of independence precludes a review report