9900000000001 AR 80 00080

User Manual: AR-80

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Compilation of Financial Statements 2521

AR Section 80

Compilation of Financial Statements

Issue date, unless otherwise indicated: December 2009

See section 9080 for interpretations of this section.

Source: SSARS No. 19

.01 This section establishes standards and provides guidance on compila-

tions of nancial statements. The accountant is required to comply with the

provisions of this section whenever he or she is engaged to report on com-

piled nancial statements or submits nancial statements to a client or to third

parties.

Establishing an Understanding

.02 The accountant should establish an understanding with management

regarding the services to be performed for compilation engagements1and

should document the understanding through a written communication with

management. Such an understanding reduces the risks that either the accoun-

tant or management may misinterpret the needs or expectations of the other

party. For example, it reduces the risk that management may inappropriately

rely on the accountant to protect the entity against certain risks or to perform

certain functions that are management's responsibility. The accountant should

ensure that the understanding includes the objectives of the engagement, man-

agement's responsibilities, the accountant's responsibilities, and the limitations

of the engagement. In some cases, the accountant may establish such under-

standing with those charged with governance.

.03 An understanding with management and, if applicable, those charged

with governance, regarding a compilation of nancial statements should in-

clude the following matters:

•The objective of a compilation is to assist management in present-

ing nancial information in the form of nancial statements.

•The accountant utilizes information that is the representation

of management (owners) without undertaking to obtain or pro-

vide any assurance that there are no material modications that

should be made to the nancial statements in order for the state-

ments to be in conformity with the applicable nancial reporting

framework.

•Management is responsible for the preparation and fair presenta-

tion of the nancial statements in accordance with the applicable

nancial reporting framework.

•Management is responsible for designing, implementing, and

maintaining internal control relevant to the preparation and fair

presentation of the nancial statements.

•Management is responsible to prevent and detect fraud.

1See paragraph .29 of QC section 10, A Firm's System of Quality Control. [Footnote revised,

December 2012, to reect conforming changes necessary due to the issuance of SQCS No. 8.]

2522 Statements on Standards for Accounting and Review Services

•Management is responsible for identifying and ensuring that the

entity complies with the laws and regulations applicable to its ac-

tivities.

•Management is responsible for making all nancial records and

related information available to the accountant.

•The accountant is responsible for conducting the engagement in

accordance with Statements on Standards for Accounting and Re-

view Services (SSARSs) issued by the AICPA.

•A compilation differs signicantly from a review or an audit of -

nancial statements. A compilation does not contemplate perform-

ing inquiry, analytical procedures, or other procedures performed

in a review. Additionally, a compilation does not contemplate ob-

taining an understanding of the entity's internal control; assess-

ing fraud risk; testing accounting records by obtaining sufcient

appropriate audit evidence through inspection, observation, con-

rmation, 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 ex-

press an opinion or provide any assurance regarding the nancial

statements.

•The engagement cannot be relied upon to disclose errors, fraud,2

or illegal acts.3

•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 oc-

curred.4The accountant need not report any matters regarding

illegal acts that may have occurred that are clearly inconsequen-

tial and may reach agreement in advance with the entity on the

nature of any such matters to be communicated.

•The effect of any independence impairments on the expected form

of the accountant's compilation report, if applicable.

These matters should be communicated in the form of an engagement letter.

Examples of engagement letters for a compilation of nancial statements are

presented in Compilation Exhibit A, "Illustrative Engagement Letters."

.04 An understanding with management or, if applicable, those charged

with governance, also may include other matters, such as the following:

•Fees and billings

2For purposes of the SSARSs, fraud is an intentional act that results in a misstatement in com-

piled nancial statements.

3For purposes of the SSARSs, illegal acts are violations of laws or government regulations, ex-

cluding fraud.

4Whether an act is, in fact, fraudulent or illegal is a determination that is normally beyond the

accountant's professional competence. An accountant, in reporting on nancial statements, presents

himself or herself as one who is procient in accounting and compilation services. The accountant's

training, experience, and understanding of the client and its industry may provide a basis for recog-

nition that some client acts coming to his or her attention may be fraudulent or illegal. However, the

determination about whether a particular act is fraudulent or illegal would generally be based on the

advice of an informed expert qualied to practice law or may have to await nal determination by a

court of law.

Compilation of Financial Statements 2523

•Any limitation of or other arrangements regarding the liability of

the accountant or the client, such as indemnication to the accoun-

tant for liability arising from knowing misrepresentations to the

accountant by management (regulators may restrict or prohibit

such liability limitation arrangements)

•Conditions under which access to compilation documentation may

be granted to others

•Additional services to be provided relating to regulatory require-

ments

.05 If the compiled nancial statements are not expected to be used by a

third party and the accountant does not expect to issue a compilation report

on the nancial statements, the accountant should include in the engagement

letter an acknowledgment of management's representation and agreement that

the nancial statements are not to be used by a third party. The engagement

letter also should address the following additional matters if applicable:

•Material departures from the applicable nancial reporting

framework may exist, and the effects of those departures, if any,

on the nancial statements may not be disclosed.

•Substantially all disclosures (and statement of cash ows, if ap-

plicable) required by the applicable nancial reporting framework

may be omitted.

•Reference to supplementary information.

Compilation Performance Requirements

Understanding of the Industry

.06 The accountant should possess an understanding of the industry in

which the client operates, including the accounting principles and practices

generally used in the industry sufcient to enable the accountant to compile

nancial statements that are appropriate in form for an entity operating in

that industry.

.07 The requirement that the accountant possess a level of knowledge of

the industry in which the client operates does not prevent the accountant from

accepting a compilation engagement for an entity in an industry with which the

accountant has no previous experience. It does, however, place upon the accoun-

tant a responsibility to obtain the required level of knowledge. The accountant

may do so, for example, by consulting AICPA guides, industry publications, -

nancial statements of other entities in the industry, textbooks and periodicals,

appropriate continuing professional education, or individuals knowledgeable

about the industry.

Knowledge of the Client

.08 The accountant should obtain knowledge about the client, including

•an understanding of the client's business and

•an understanding of the accounting principles and practices used

by the client.

.09 In obtaining an understanding of the client's business, the accountant

should have a general understanding of the client's organization; its operating

2524 Statements on Standards for Accounting and Review Services

characteristics; and the nature of its 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.

.10 The accountant should obtain an understanding of the accounting

principles and practices used by the client in measuring, recognizing, record-

ing, and disclosing all signicant accounts and disclosures in the nancial

statements. The accountant's understanding also may include matters such as

changes in accounting practices and principles and differences in the client's

business model as compared with normal practices within the industry.

.11 In obtaining this understanding of the client's accounting policies and

practices, the accountant should be alert to unusual accounting policies and

procedures that come to the accountant's attention as a result of his or her

knowledge of the industry.

Reading the Financial Statements

.12 Before submission, the accountant should read the nancial state-

ments and consider whether such nancial statements appear to be appropri-

ate in form and free from obvious material errors. In this context, the term

error refers to mistakes in the preparation of nancial statements, including

arithmetical or clerical mistakes, and mistakes in the application of account-

ing principles, including inadequate disclosure.

Other Compilation Procedures

.13 The accountant is not required to make inquiries or perform other pro-

cedures to verify, corroborate, or review information supplied by the entity.

However, the accountant may have made inquiries or performed other pro-

cedures. The results of such inquiries or procedures, knowledge gained from

prior engagements, or the nancial statements on their face may cause the

accountant to become aware that information supplied by the entity is incor-

rect, incomplete, or otherwise unsatisfactory or that fraud or an illegal act may

have occurred. The accountant should request that management consider the

effect of these matters on the nancial statements and communicate the results

of such consideration to the accountant. Additionally, the accountant should

consider the effect of management's conclusions regarding these matters on

the accountant's compilation report. In circumstances when the accountant be-

lieves that the nancial statements may be materially misstated, the accoun-

tant should obtain additional or revised information. If the entity refuses to pro-

vide additional or revised information, the accountant should withdraw from

the engagement.

Documentation in a Compilation Engagement

.14 The accountant should prepare documentation in connection with each

compilation engagement in sufcient 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 per-

formed the compilation in accordance with SSARSs.

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 les or

Compilation of Financial Statements 2525

quality control les (for example, consultation les) and, in limited situations,

oral explanations.

.15 The form, content, and extent of documentation depend on the circum-

stances of the engagement, the methodology and tools used, and the accoun-

tant's professional judgment. The accountant's documentation should include

the following:

a. The engagement letter documenting the understanding with the

client

b. Any ndings or issues that, in the accountant's judgment, are sig-

nicant (for example, the results of compilation procedures that

indicate that the nancial statements could be materially mis-

stated, including actions taken to address such ndings 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 the Financial Statements

.16 When the accountant is engaged to report on compiled nancial state-

ments or submits nancial statements that are reasonably expected to be used

by a third party, the nancial statements should be accompanied by a written

report. The accountant's objective in reporting on the nancial statements is

to prevent misinterpretation of the degree of responsibility the accountant is

assuming when his or her name is associated with the nancial statements.

.17 The basic elements of the report are as follows:

a.Title. The accountant's compilation report should have a title that

clearly indicates that it is the accountant's compilation report.

The accountant may indicate that he or she is independent in

the title, if applicable. Appropriate titles would be "Accountant's

Compilation Report" or "Independent Accountant's Compilation

Report."

b.Addressee. The accountant's report should be addressed as appro-

priate in the circumstances of the engagement.

c.Introductory paragraph. The introductory paragraph in the ac-

countant's report should

i. identify the entity whose nancial statements have been

compiled;

ii. state that the nancial statements have been compiled;

iii. identify the nancial statements that have been compiled;

iv. specify the date or period covered by the nancial state-

ments; and

v. include a statement that the accountant has not audited

or reviewed the nancial statements and, accordingly, does

not express an opinion or provide any assurance about

whether the nancial statements are in accordance with

the applicable nancial reporting framework.

d.Management's responsibility for the nancial statements and

for internal control over nancial reporting. A statement that

2526 Statements on Standards for Accounting and Review Services

management (owners) is (are) responsible for the preparation and

fair presentation of the nancial statements in accordance with

the applicable nancial reporting framework and for designing,

implementing, and maintaining internal control relevant to the

preparation and fair presentation of the nancial statements.

e.Accountant's responsibility. A statement that the accountant's

responsibility is to conduct the compilation in accordance with

SSARSs issued by the AICPA.

A statement that the objective of a compilation is to assist man-

agement in presenting nancial information in the form of nan-

cial statements without undertaking to obtain or provide any as-

surance that there are no material modications that should be

made to the nancial statements.

f.Signature of the accountant. The manual or printed signature of

the accounting rm or the accountant, as appropriate.

g.Date of the accountant's report. The date of the compilation report

(the date of completion of the compilation should be used as the

date of the accountant's report).

Procedures that the accountant might have performed as part of the compila-

tion engagement should not be described in the report.

See Compilation Exhibit B, "Illustrative Compilation Reports," for illustrative

compilation reports.

.18 Each page of the nancial statements compiled by the accountant

should include a reference, such as "See accountant's compilation report" or

"See independent accountant's compilation report."

.19 Financial statements prepared in accordance with an other compre-

hensive basis of accounting (OCBOA) are not considered appropriate in form

unless the nancial statements include

a. a description of the OCBOA, including a summary of signicant

accounting policies and a description of the primary differences

from generally accepted accounting principles (GAAP). The ef-

fects of the differences need not be quantied.

b. informative disclosures similar to those required by GAAP if the

nancial statements contain items that are the same as, or simi-

lar to, those in nancial statements prepared in accordance with

GAAP.

Reporting on Financial Statements That Omit Substantially

All Disclosures

.20 An entity may request the accountant to compile nancial statements

that omit substantially all the disclosures required by an applicable nancial

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

the nancial statements.5The accountant may compile such nancial state-

ments, 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 nancial statements. When reporting

5See paragraphs .27–.29 for the accountant's responsibilities when he or she is aware of other

departures from an applicable nancial reporting framework. However, see section 300, Compilation

Reports on Financial Statements Included in Certain Prescribed Forms, for guidance when such -

nancial statements are included in a prescribed form, and the prescribed form or related instructions

do not request the disclosures required by an applicable nancial reporting framework.

Compilation of Financial Statements 2527

on nancial statements that omit substantially all disclosures, the accountant

should include, after the paragraph describing the accountant's responsibility,

a paragraph in the compilation report that includes the following elements:

a. A statement that management has elected to omit substantially

all the disclosures (and the statement of cash ows, if applicable)

required by the applicable nancial reporting framework (or ordi-

narily included in the nancial statements if the nancial state-

ments are prepared in accordance with an OCBOA)

b. A statement that if the omitted disclosures (and statement of cash

ows, if applicable) were included in the nancial statements,

they might inuence the user's conclusions about the company's

nancial position, results of operations, and cash ows (or equiva-

lent for presentations other than accounting principles generally

accepted in the United States of America)

c. A statement that, accordingly, the nancial statements are not

designed for those who are not informed about such matters

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

form of notes to such nancial statements, such disclosures should be labeled

"Selected Information—Substantially All Disclosures Required by [identify

the applicable nancial reporting framework (for example "Accepted Account-

ing Principles Generally Accepted in the United States of America")] Are Not

Included."

See Compilation Exhibit B for examples of compilation reports when substan-

tially all disclosures required by an applicable nancial reporting framework

are omitted.

Reporting When the Accountant Is Not Independent

.21 When the accountant is issuing a report with respect to a compilation

of nancial statements for an entity, with respect to which the accountant is not

independent, the accountant's report should be modied. In making a judgment

about whether he or she is independent, the accountant should be guided by the

AICPA's Code of Professional Conduct. The accountant should indicate his or

her lack of independence in a nal 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.

The accountant is not precluded from disclosing a description about the rea-

son(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 nancial 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 individ-

ual 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) per-

formed certain accounting services (the accountant may include

a specic description of those services) that impaired my (our) in-

dependence.

2528 Statements on Standards for Accounting and Review Services

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.

See Compilation Exhibit B for illustrative examples of accountant's compilation

reports when the accountant's independence has been impaired.

Accountant’s Communications With the Client When the

Compiled Financial Statements Are Not Expected to Be Used

by a Third Party

.22 When the accountant submits compiled nancial statements to his or

her client that are not expected to be used by a third party, he or she is not

required to issue a compilation report.

.23 The accountant should include a reference on each page of the nan-

cial statements restricting their use, such as "Restricted for Management's Use

Only," or "Solely for the information and use by the management of [name of

entity] and not intended to be and should not be used by any other party."

.24 If the accountant becomes aware that the nancial statements have

been distributed to third parties, the accountant should discuss the situation

with the client and determine the appropriate course of action, including con-

sidering requesting that the client have the statements returned. If the ac-

countant requests that the nancial statements be returned and the client

does not comply with that request within a reasonable period of time, the ac-

countant should notify known third parties that the nancial statements are

not intended for third party use, preferably in consultation with his or her

attorney.

Emphasis of a Matter

.25 The accountant may emphasize, in any report on nancial statements,

a matter disclosed in the nancial statements. Such explanatory information

should be presented in a separate paragraph of the accountant's report.Empha-

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

discretion.

Examples of matters that the accountant may wish to emphasize are

•uncertainties.

•that the entity is a component of a larger business enterprise.

•that the entity has had signicant transactions with related par-

ties.

•unusually important subsequent events.

•accounting matters affecting the comparability of the nancial

statements with those of the preceding period.

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

management disclosures, the accountant should not include an emphasis para-

graph in a compilation report on nancial statements that omit substantially

all disclosures unless the matter is disclosed in the nancial statements. The

accountant should refer to paragraph .20 if he or she believes that a disclosure

is necessary to keep the nancial statements from being misleading.

Compilation of Financial Statements 2529

Departures From the Applicable Financial Reporting Framework

.27 An accountant who is engaged to compile nancial statements may be-

come aware of a departure from the applicable nancial reporting framework

(including inadequate disclosure) that is material to the nancial statements.

Paragraph .20 provides guidance to the accountant when the departure relates

to the omission of substantially all disclosures in the nancial statements that

he or she has compiled. section 300, Compilation Reports on Financial State-

ments Included in Certain Prescribed Forms, provides guidance when the de-

parture is called for by a prescribed form or related instructions. In all other cir-

cumstances, if the nancial statements are not revised, the accountant should

consider whether modication of the standard report is adequate to disclose

the departure.

.28 If the accountant concludes that modication of the standard report

is appropriate, the departure should be disclosed in a separate paragraph of

the report, including disclosure of the effects of the departure on the nancial

statements if such effects have been determined by management or are known

as the result of the accountant's procedures. The accountant is not required to

determine the effects of a departure if management has not done so, provided

that the accountant states in the report that such determination has not been

made.

See Compilation Exhibit B for examples of compilation reports that disclose

departures from the applicable nancial reporting framework.

.29 If the accountant believes that modication of the standard report is

not adequate to indicate the deciencies in the nancial statements as a whole,

the accountant should withdraw from the compilation engagement and provide

no further services with respect to those nancial statements. The accountant

may wish to consult with his or her legal counsel in those circumstances.

Restricting the Use of an Accountant’s Compilation Report

General Use and Restricted Use Reports

.30 The term general use applies to accountants' reports that are not re-

stricted to specied parties. Accountants' reports on nancial statements pre-

pared in conformity with an applicable nancial reporting framework ordinar-

ily are not restricted regarding use. However, nothing in this section precludes

the accountant from restricting the use of any report.

.31 The term restricted use applies to accountants' reports intended only

for one or more specied third parties. The need for restriction on the use of a

report may result from a number of circumstances, including, but not limited to,

the purpose of the report and the potential for the report to be misunderstood

when taken out of the context in which it was intended to be used.

.32 The accountant should restrict the use of a report when the subject

matter of the accountant's report or the presentation being reported on is based

on measurement or disclosure criteria contained in contractual agreements6or

regulatory provisions that are not in conformity with an applicable nancial

reporting framework.

6Acontractual agreement, as discussed in this section, is an agreement between the client and

one or more third parties other than the accountant.

2530 Statements on Standards for Accounting and Review Services

Reporting on Subject Matter or Presentations Based on Measurement

or Disclosure Criteria Contained in Contractual Agreements

or Regulatory Provisions

.33 When reports are issued on subject matter or presentations based on

measurement or disclosure criteria contained in contractual agreements or

regulatory provisions that are not in conformity with an applicable nancial re-

porting framework, the accountant should restrict the report because the basis,

assumptions, or purpose of such presentations (contained in such agreements

or regulatory provisions) are developed for, and directed only to, the parties to

the agreement or regulatory agency responsible for the provisions. The report

also should be restricted because the report, the subject matter, or the presen-

tation may be misunderstood by those who are not adequately informed of the

basis, assumptions, or purpose of the presentation.

Combined Reports Covering Both Restricted Use and General Use Subject

Matter or Presentations

.34 If the accountant issues a single combined report covering both (a)sub-

ject matter or presentations that require a restriction on use to specied parties

and (b) subject matter or presentations that ordinarily do not require such a re-

striction, the use of such a single combined report should be restricted to the

specied parties.

Inclusion of a Separate Restricted Use Report in the Same Document

With a General Use Report

.35 When required by law or regulation, a separate restricted use report

may be included in a document that also contains a general use report. The in-

clusion of a separate restricted use report in a document that contains a general

use report does not affect the intended use of either report. The restricted use

report remains restricted regarding use, and the general use report continues

for general use.

Adding Other Speciﬁed Parties

.36 Subsequent to the completion of an engagement resulting in a re-

stricted use report, or in the course of such an engagement, the accountant

may be asked to consider adding other parties as specied parties.

.37 If the accountant is reporting on subject matter or a presentation based

on measurement or disclosure criteria contained in contractual agreements or

regulatory provisions, as described in paragraph .33, the accountant may agree

to add other parties as specied parties based on the accountant's considera-

tion of factors such as the identity of the other parties, their knowledge of the

basis of the measurement or disclosure criteria, and the intended use of the

report. If the accountant agrees to add other parties as specied parties,

the accountant should obtain afrmative acknowledgment, preferably in writ-

ing, from the other parties of their understanding of the nature of the engage-

ment, the measurement or disclosure criteria used in the engagement, and the

related report. If the other parties are added after the accountant has issued his

or her report, the report may be reissued, or the accountant may provide other

written acknowledgment that the other parties have been added as specied

parties. If the report is reissued, the report date should not be changed. If the

accountant provides written acknowledgment that the other parties have been

added as specied parties, such written acknowledgment ordinarily should

state that no procedures have been performed subsequent to the date of the

report.

Compilation of Financial Statements 2531

Limiting the Distribution of Reports

.38 Because of the reasons presented in paragraph .31, the accountant

should consider informing his or her client that restricted use reports are not

intended for distribution to nonspecied parties, regardless of whether they

are included in a document containing a separate general use report. 7This

section does not preclude the accountant, in connection with establishing the

terms of the engagement, from reaching an understanding with the client that

the intended use of the report will be restricted and from obtaining the client's

agreement that the client and the specied parties will not distribute the report

to parties other than those identied in the report. However, the accountant is

not responsible for controlling a client's distribution of restricted use reports.

Accordingly, a restricted use report should alert readers to the restriction on

the use of the report by indicating that the report is not intended to be and

should not be used by anyone other than the specied parties.

Report Language—Restricted Use

.39 An accountant's report that is restricted should contain a separate

paragraph at the end of the report that includes the following elements:

a. A statement indicating that the report is intended solely for the

information and use of the specied parties.

b. An identication of the specied parties to whom use is restricted.

The report may list the specied parties or refer the reader to the

specied parties listed elsewhere in the report.

c. A statement that the report is not intended to be and should not

be used by anyone other than the specied parties.

An Entity’s Ability to Continue as a Going Concern

.40 During the performance of compilation procedures, evidence or infor-

mation 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 rea-

sonable period of time, not to exceed one year beyond the date of the nancial

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 nancial

statements, including the need for related disclosure.

.41 After management communicates to the accountant the results of its

consideration of the possible effects on the nancial statements, the accountant

should consider the reasonableness of management's conclusions, including the

adequacy of the related disclosures, if applicable.

.42 If the accountant determines that management's conclusions are un-

reasonable 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 .27–.29 with respect to departures from an applicable

nancial reporting framework.

.43 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

7In some cases, restricted use reports led with regulatory agencies are required by law or reg-

ulation to be made available to the public as a matter of public record. Also, a regulatory agency, as

part of its oversight responsibility for an entity, may require access to restricted use reports in which

they are not named as a specied party.

2532 Statements on Standards for Accounting and Review Services

nancial statements. In such circumstances, the accountant should follow the

guidance in paragraphs .25–.26.

Subsequent Events

.44 Evidence or information that a subsequent event that has a material

effect on the compiled nancial statements has occurred may come to the ac-

countant's attention in the following ways:

a. During the performance of compilation procedures

b. Subsequent to the date of the accountant's compilation report but

prior to the release of the report 8

In either case, the accountant should request that management consider the

possible effects on the nancial statements, including the adequacy of any re-

lated disclosure, if applicable.

.45 If the accountant determines that the subsequent event is not ade-

quately accounted for in the nancial statements or disclosed in the notes, he

or she should follow the guidance in paragraphs .27–.29.

.46 Occasionally, a subsequent event has such a material impact on the en-

tity that the accountant may wish to include in his or her compilation report an

explanatory paragraph directing the reader's attention to the event and its ef-

fects. Such an emphasis of matter paragraph may be added at the accountant's

discretion, provided that the matter is disclosed in the nancial statements. See

paragraphs .25–.26 for additional guidance with respect to emphasis of matter

paragraphs.

Subsequent Discovery of Facts Existing at the Date

of the Report

.47 Subsequent to the date of the report on the nancial statements that

the accountant has compiled, he or she may become aware that facts may have

existed at that date that might have caused him or her to believe that informa-

tion supplied by the entity was incorrect, incomplete, or otherwise unsatisfac-

tory had the accountant then been aware of such facts.9Because of the variety

of conditions that might be encountered, some of the procedures contained in

this section are necessarily set out only in general terms; the specic actions to

be taken in a particular case may vary with the circumstances. The accountant

would be well advised to consult with his or her legal counsel when he or she

encounters the circumstances to which this section may apply because of legal

implications that may be involved in actions contemplated herein.

.48 After the date of the accountant's compilation report, the accountant

has no obligation to perform other compilation procedures with respect to the

nancial statements, unless new information comes to his or her attention.

However, when the accountant becomes aware of information that relates to

nancial statements previously reported on by him or her, but that was not

known to the accountant at the date of the report, (and that is of such a na-

ture and from such a source that the accountant would have investigated it

had it come to his or her attention during the course of the compilation), the

8For purposes of this section, with respect to compiled nancial statements in which the ac-

countant does not report, the submission of the compiled nancial statements is the equivalent of the

accountant's compilation or review report date.

9See footnote 8.

Compilation of Financial Statements 2533

accountant should, as soon as practicable, undertake to determine whether the

information is reliable and whether the facts existed at the date of the report.

The accountant should discuss the matter with his or her client at whatever

management levels the accountant deems appropriate and request cooperation

in whatever investigation may be necessary. In addition to management, the

accountant may deem it appropriate to discuss the matter with those charged

with governance. If the nature and effect of the matter are such that (a)the

accountant's report or the nancial statements would have been affected if the

information had been known to the accountant at the accountant's compila-

tion report date and had not been reected in the nancial statements and (b)

the accountant believes that persons are currently using or are likely to use

the nancial statements, and those persons would attach importance to the

information, the accountant should obtain additional or revised information.

Consideration should be given to, among other things, the time elapsed since

the nancial statements were issued.

.49 When the accountant has concluded that action should be taken to pre-

vent further use of the accountant's report or the nancial statements, the ac-

countant should advise his or her client to make appropriate disclosure of the

newly discovered facts and their impact on the nancial statements to persons

who are known to be currently using or who are likely to use the nancial state-

ments. When the client undertakes to make appropriate disclosure, the method

used and the disclosure made will depend on the circumstances. For example

a. if the effect of the subsequently discovered information on the ac-

countant's report or the nancial statements can promptly be de-

termined, disclosure should consist of issuing, as soon as practi-

cable, revised nancial statements and, when applicable, the ac-

countant's report. The reasons for the revision usually should be

described in a note to the nancial statements and, when appli-

cable, referred to in the accountant's report. Generally, only the

most recently issued compiled nancial statements would need

to be revised, even though the revision resulted from events that

had occurred in prior years.

b. when issuance of nancial statements for a subsequent period is

imminent, so that disclosure is not delayed, appropriate disclo-

sure of the revision can be made in such statements instead of

reissuing the earlier statements, pursuant to subparagraph (a).

c. when the effect on the nancial statements of the subsequently

discovered information cannot be promptly determined, the is-

suance of revised nancial statements would necessarily be de-

layed. In this circumstance, when it appears that the informa-

tion will require a revision of the statements, appropriate disclo-

sure would consist of notication by the client to persons who are

known to be using or who are likely to use the nancial state-

ments that the statements should not be used; that revised -

nancial statements will be issued; and, when applicable, that the

accountant's report will be issued as soon as practicable.

.50 The accountant should take whatever steps he or she deems necessary

to satisfy himself or herself that the client has made the disclosures specied

in paragraph .49.

.51 If the client refuses to make the disclosures specied in paragraph .49,

the accountant should notify the appropriate personnel at the highest levels

within the entity, such as the manager (owner) or those charged with gover-

nance, of such refusal and of the fact that, in the absence of disclosure by the

2534 Statements on Standards for Accounting and Review Services

client, the accountant will take steps as outlined subsequently to prevent fur-

ther use of the nancial statements and, if applicable, the accountant's report.

The steps that can appropriately be taken will depend upon the degree of cer-

tainty of the accountant's knowledge that persons exist who are currently using

or who will use the nancial statements and, if applicable, the accountant's re-

port and who would attach importance to the information and the accountant's

ability as a practical matter to communicate with them. Unless the accoun-

tant's attorney recommends a different course of action, the accountant should

take the following steps to the extent applicable:

a. Notication to the client that the accountant's report must no

longer be associated with the nancial statements.

b. Notication to the regulatory agencies having jurisdiction over

the client that the accountant's report should no longer be used.

c. Notication to each person known to the accountant to be using

the nancial statements that the nancial statements and the ac-

countant's report should no longer be used. In many instances, it

will not be practicable for the accountant to give appropriate indi-

vidual notication to stakeholders whose identities ordinarily are

unknown to him or her; notication to a regulatory agency hav-

ing jurisdiction over the client will usually be the only practicable

way for the accountant to provide appropriate disclosure. Such

notication should be accompanied by a request that the agency

take whatever steps it may deem appropriate to accomplish the

necessary disclosure.

.52 The following guidelines should govern the content of any disclosure

made by the accountant in accordance with paragraph .51, to persons other

than his or her client:

a. The disclosure should include a description of the nature of the

subsequently acquired information and its effect on the nancial

statements.

b. The information disclosed should be as precise and factual as pos-

sible and should not go beyond that which is reasonably necessary

to accomplish the purpose mentioned in the preceding subpara-

graph (a). Comments concerning the conduct or motives of any

person should be avoided.

If the client has not cooperated, the accountant's disclosure need not detail the

specic information but can merely indicate that the client has not cooperated

with the accountant's attempt to substantiate information that has come to the

accountant's attention and that, if the information is true, the accountant be-

lieves that the compilation report must no longer be used or associated with the

nancial statements. No such disclosure should be made unless the accountant

believes that the nancial statements are likely to be misleading and that the

accountant's compilation report should not be used.

Supplementary Information

.53 When the basic nancial statements are accompanied by information

presented for supplementary analysis purposes, the accountant should clearly

indicate the degree of responsibility, if any, he or she is taking with respect to

such information. When the accountant has compiled both the basic nancial

statements and other data presented only for supplementary analysis purposes,

the compilation report should refer to the other data, or the accountant can is-

sue a separate report on the other data. If a separate report is issued, the report

Compilation of Financial Statements 2535

should state that the other data accompanying the nancial statements are pre-

sented only for the purposes of additional analysis, and that the information

has been compiled from information that is the representation of management,

without audit or review, and that the accountant does not express an opinion

or provide any assurance on such data.

Communicating to Management and Others

.54 When evidence or information comes to the accountant's attention dur-

ing 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 ille-

gal acts that are clearly inconsequential and may reach agreement in advance

with the entity on the nature of such items to be communicated. 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. The com-

munication may be oral or written. If the communication is oral, the accountant

should document it. When matters regarding fraud or an illegal act involve an

owner of the business, the accountant should consider resigning from the en-

gagement. 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.

.55 The disclosure of any evidence or information that comes to the accoun-

tant's attention during the performance of compilation procedures that fraud or

an illegal act may have occurred to parties other than the client's senior man-

agement (or those charged with governance, if applicable) ordinarily is not part

of the accountant's responsibility and, ordinarily, would be precluded by the ac-

countant's ethical or legal obligations of condentiality. The accountant should

recognize, however, that in the following circumstances, a duty to disclose to

parties outside of the entity may exist:

a. To comply with certain legal and regulatory requirements

b. To a successor accountant when the successor decides to commu-

nicate with the predecessor accountant in accordance with sec-

tion 400, Communications Between Predecessor and Successor Ac-

countants, regarding acceptance of an engagement to compile or

review the nancial statements of a nonissuer

c. In response to a subpoena

Because potential conicts between the accountant's ethical and legal obliga-

tions for condentiality of client matters may be complex, the accountant may

wish to consult with legal counsel before discussing matters covered by para-

graph .54 with parties outside the client.

Change in Engagement From Audit or Review

to Compilation

.56 The accountant who has been engaged to audit the nancial statements

of a nonissuer in accordance with auditing standards generally accepted in the

United States of America or the accountant who has been engaged to review

the nancial statements of a nonissuer in accordance with SSARSs may, before

the completion of the audit or review, be requested to change the engagement to

a compilation of nancial statements. A request to change the engagement may

2536 Statements on Standards for Accounting and Review Services

result from a change in circumstances affecting the entity's requirement for an

audit or review; a misunderstanding regarding the nature of an audit, review,

or compilation; or a restriction on the scope of the audit or review, whether

imposed by the client or caused by circumstances.

.57 Before the accountant, who was engaged to perform an audit in ac-

cordance with auditing standards generally accepted in the United States of

America or a review in accordance with SSARSs, agrees to change the engage-

ment to a compilation, at least the following should be considered:

a. The reason given for the client's request, particularly the implica-

tions of a restriction on the scope of the audit or review, whether

imposed by the client or by circumstances

b. The additional audit or review effort required to complete the au-

dit or review

c. The estimated additional cost to complete the audit or review

.58 A change in circumstances that affects the entity's requirement for an

audit or review or a misunderstanding concerning the nature of an audit, re-

view, or compilation would ordinarily be considered a reasonable basis for re-

questing a change in the engagement.

.59 In considering the implications of a restriction on the scope of the au-

dit or review, the accountant should evaluate the possibility that information

affected by the scope restriction may be incorrect, incomplete, or otherwise un-

satisfactory. Nevertheless, when the accountant has been engaged to audit an

entity's nancial statements and has been prohibited by the client from cor-

responding with the entity's legal counsel, the accountant ordinarily would be

precluded from issuing a compilation report on the nancial statements. If in

an audit or a review engagement, a client does not provide the accountant with

a signed representation letter, the accountant would ordinarily be precluded

from issuing a compilation report on the nancial statements.

.60 In all circumstances,if the audit or review procedures are substantially

complete or the cost to complete such procedures is relatively insignicant, the

accountant should consider the propriety of accepting a change in the engage-

ment.

.61 If the accountant concludes, based upon his or her professional judg-

ment, that reasonable justication exists to change the engagement, and if he

or she complies with the standards applicable to a compilation engagement, the

accountant should issue an appropriate compilation report. The report should

not include reference to (a) the original engagement, (b) any audit or review pro-

cedures that may have been performed, or (c) scope limitations that resulted in

the changed engagement.

Effective Date

.62 This section is effective for compilations of nancial statements for pe-

riods ending on or after December 15, 2010. Early implementation of the re-

quirements and guidance in paragraph .21 is permitted.

Compilation of Financial Statements 2537

.63

Compilation Exhibit A—Illustrative Engagement Letters

Standard Engagement Letter for a Compilation

[Appropriate Salutation]

This letter is to conrm our understanding of the terms and objectives of our

engagement and the nature and limitations of the services we will provide.

We will perform the following services:

We will compile, from information you provide, the annual [and interim, if ap-

plicable] nancial statements of XYZ Company as of and for the year ended

December 31, 20XX, and issue an accountant's report thereon in accordance

with Statements on Standards for Accounting and Review Services (SSARSs)

issued by the American Institute of Certied Public Accountants (AICPA).

The objective of a compilation is to assist you in presenting nancial informa-

tion in the form of nancial statements. We will utilize information that is your

representation without undertaking to obtain or provide any assurance that

there are no material modications that should be made to the nancial state-

ments in order for the statements to be in conformity with [the applicable nan-

cial reporting framework (for example, accounting principles generally accepted

in the United States of America)].

You are responsible for

a. the preparation and fair presentation of the nancial statements

in accordance with [the applicable nancial reporting frame-

work (for example, accounting principles generally accepted in the

United States of America)].

b. designing, implementing, and maintaining internal control rel-

evant to the preparation and fair presentation of the nancial

statements.

c. preventing and detecting fraud

d. identifying and ensuring that the entity complies with the laws

and regulations applicable to its activities.

e. making all nancial records and related information available to

us.

We are responsible for conducting the engagement in accordance with SSARSs

issued by the AICPA.

A compilation differs signicantly from a review or an audit of nancial state-

ments. A compilation does not contemplate performing inquiry, analytical pro-

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

does not contemplate obtaining an understanding of the entity's internal con-

trol; assessing fraud risk; testing accounting records by obtaining sufcient ap-

propriate audit evidence through inspection, observation, conrmation, or the

examination of source documents (for example, cancelled checks or bank im-

ages); or other procedures ordinarily performed in an audit. Accordingly, we

will not express an opinion or provide any assurance regarding the nancial

statements being compiled.

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

However, we will inform the appropriate level of management of any material

errors, and of any evidence or information that comes to our attention during

the performance of our compilation procedures that fraud may have occurred.

2538 Statements on Standards for Accounting and Review Services

In addition, we will report to you any evidence or information that comes to

our attention during the performance of our compilation procedures regarding

illegal acts that may have occurred, unless they are clearly inconsequential.

If, during the period covered by the engagement letter, the accountant's indepen-

dence is or will be impaired, insert the following:

We are not independent with respect to XYZ Company. We will disclose that we

are not independent in our compilation report.

If, for any reason, we are unable to complete the compilation of your nancial

statements, we will not issue a report on such statements as a result of this

engagement.

Our fees for these services...

We will be pleased to discuss this letter with you at any time. If the foregoing

is in accordance with your understanding, please sign the copy of this letter in

the space provided and return it to us.

Sincerely yours,

[Signature of accountant]

Acknowledged:

XYZ Company

President

Date

Compilation of Financial Statements 2539

Engagement Letter for a Compilation of Financial Statements

Not Intended for Third Party Use

[Appropriate Salutation]

This letter is to conrm our understanding of the terms and objectives of our

engagement and the nature and limitations of the services we will provide.

We will perform the following services:

We will compile, from information you provide, the [monthly, quarterly, or other

frequency] nancial statements of XYZ Company as of and for the year ended

December 31, 20XX.

The objective of a compilation is to assist you in presenting nancial informa-

tion in the form of nancial statements. We will utilize information that is your

representation without undertaking to obtain or provide any assurance that

there are no material modications that should be made to the nancial state-

ments in order for the statements to be in conformity with [the applicable nan-

cial reporting framework (for example, accounting principles generally accepted

in the United States of America)].

You are responsible for

a. the preparation and fair presentation of the nancial statements

in accordance with [the applicable nancial reporting frame-

work (for example, accounting principles generally accepted in the

United States of America)].

b. designing, implementing, and maintaining internal control rel-

evant to the preparation and fair presentation of the nancial

statements.

c. preventing and detecting fraud.

d. identifying and ensuring that the entity complies with the laws

and regulations applicable to its activities.

e. making all nancial records and related information available to

us.

We are responsible for conducting the engagement in accordance with State-

ments on Standards for Accounting and Review Services issued by the Ameri-

can Institute of Certied Public Accountants.