Statements of Position

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During the last five years, there has been a gradual change in the services that clients of CPAs are requesting. Rapid advances in information technology and low-cost software now enable even the smallest entity to record its transactions and prepare its own financial statements. Nevertheless, many nonpublic entities look to their accountants for varied accounting and business advisory services that often include assistance in the preparation of financial statements intended for management's use. In addition, it has become apparent that there is difficulty and inconsistency within the profession regarding the applicability of Statements on Standards for Accounting and Review Services (SSARS) with respect to compilation engagements. Many entities that need timely financial information for management's use may not need that information in the form of financial statements that comply in all material respects with generally accepted accounting principles or an other comprehensive basis of accounting. In most cases, the compilation report is not useful for these types of entities. Under this proposed amendment, if the accountant submits unaudited financial statements to a client or third party, the accountant should at a minimum compile the financial statements. This concept is similar to that currently found in SSARS 1, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2, AR sec. 100); however, if the financial statements are not expected to be used by a third party, this proposal provides the accountant with communication options when compiling those financial statements. The communication options include not only issuing a compilation report, but also obtaining an engagement letter or issuing a letter to management before or at the time when the financial statements are issued to the client. If the engagement letter or the letter to management is used, the accountant is required to document an understanding with the entity regarding the services to be performed and the limitations on the use of the financial statements. If the accountant is engaged to report on compiled financial statements or if the accountant submits financial statements to a client that are, or reasonably might be expected to be, used by a third party, a compilation report must be issued. Under all situations, the accountant must comply with the performance requirements of SSARS 1 with respect to compilations. The ARSC believes by offering these communication options when performing a compilation, the accountant will use his or her professional judgment about the type of communication options appropriate for the client, provide a quality service, and appropriately respond to the needs of clients. This proposed amendment to SSARS 1 provides communication and performance requirements for unaudited financial statements submitted to a client that are not expected to be used by third party. This Statement requires accountants who are engaged to report on compiled financial statements or submit financial statements to a client that are, or reasonably might be expected to be, used by a third party to issue a compilation report in accordance with the reporting requirements in SSARS 1. An accountant who performs a compilation engagement must adhere to the compilation performance requirements of SSARS 1, regardless of whether the accountant is engaged to report on the financial statements, or if the financial statements will be used by a third party. Under the proposed amendment, if an accountant performs a compilation, a communication to management is required. The type of communication depends on the following: 1. If an accountant is engaged to report on compiled financial statements or submits financial statements to a client that are, or reasonably might be expected to be, used by a third party, the accountant must issue a compilation report. 2. If an accountant submits financial statements to a client that are not expected to be used by a third party, the following communication options are available: a. Issuing a compilation report in accordance with the reporting requirements of SSARS No. 1; b. Obtaining an engagement letter signed by management documenting an understanding with the entity regarding the services to be performed and the limitations on the use of those financial statements; c. Issuing a letter to management documenting an understanding with the entity regarding the services to be performed and the limitations on the use of those financial statements, prior to or at the time the statements are submitted. The documentation of the understanding in the engagement letter or the letter to management as described above should include the following matters: 1. Nature and limitations of the services to be performed; 2. Management to be responsible for the entity's financial statements; 3. No opinion or any other form of assurance on the financial statements to be provided; 4. The financial statements not to be reviewed or audited; 5. Acknowledgement of management's representation and agreement that the financial statements are not to be used by third parties; 6. The financial statements cannot be relied upon to disclose errors, fraud, or illegal acts. The accountant is required to include a reference on each page of the financial statements, such as "Restricted for Management's Use Only, 881 " to protect the public if the financial statements originally thought to be for management's use were to be obtained by a third party. This proposed amendment refers to specific paragraphs as currently numbered in SSARS 1. If this proposal is accepted and issued as a final standard, those references will be appropriately renumbered. This proposal also introduces two new appendixes, appendix A, "Compilation of Financial Statements," and appendix D, "Compilation of Financial Statements Not Intended for Third Party Use—Illustrative Management Letter or Letter to Management." The current appendixes in SSARS 1 have been reordered for the purpose of the proposed amendment. This proposed amendment to SSARS 1 would: 1. Replace paragraphs .01 through .22 of SSARS 1, and the remaining sections of SSARS 1 would be renumbered and conforming changes would be made as needed.

Publication Date

1999

Relational Format

Book

Keywords

Financial statements -- Standards -- United States

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants.

Proposed statement on standards for accounting and review services : amendment to Statement on standards for accounting and review services 1, Compilation and review of financial statements ;Amendment to Statement on standards for accounting and review services 1, Compilation and review of financial statements; Exposure draft (American Institute of Certified Public Accountants), 1999, Dec. 31

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