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| | The Applicability Of SSARSs
If you’re confused whether or not a compilation report is required for
the work you provide to your clients or how to avoid having to comply with SSARS,
and therefore peer review, the following information may help [reprinted from
the AICPA Accounting and Review Services Committee].
Submission of Financial
Statements- Some CPAs
have difficulty in determining whether SSARSs is applicable to the engagements
they perform. SSARSs No. 1 states that if an accountant submits financial
statements to a client or others, the CPA is required to at least compile those
financial statements. The definition of the term submission
of financial statements is very important in SSARS No. 1 because if a CPA
has submitted financial statements, he or she is required to at least compile
the financial statements; if the CPA has not submitted financial statements,
there is no requirement to compile. Paragraph 7 of SSARS No. 1 defines the
submission of financial statements and specifies which acts trigger the
requirement to compile. Submission of financial statements is currently defined
as presenting to a client or others financial statements that the accountant has
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- Generated,
either manually or through the use of computer software, or
- Modified by
materially changing account classification, amounts, or disclosures directly
on client-prepared financial statements.
Paragraph 7 also states that the following services do not constitute a
submission of financial statements and thus do not require that an accountant
report on them.
- Reading
client-prepared financial statements
- Typing or
reproducing client-prepared financial statements, without modification, as
an accommodation to a client
- Proposing
correcting journal entries or disclosures to the financial statements,
either orally or in written form, that materially change client-prepared
financial statements, as long as the accountant does not directly modify the
client-prepared financial statements
- Preparing
standard monthly journal entries (e.g., standard entries for depreciation
and expiration of prepaid expenses)
- Providing a
client with a financial statement format that does not include dollar
amounts, to be used by the client to prepare financial statements
Standards for Performing Compilation Engagements
SSARS No. 1 establishes the standards by which compilation and review
engagements are performed. Under existing standards, a CPA must at least compile
financial statements that he or she submits to a client or others, and report on
them accordingly. The requirements for a SSARS compilation include -
- Establishing
an understanding with the entity regarding the services to be performed and
the report the accountant expects to render.
- Possessing or
obtaining knowledge about the accounting principles and practices of the
industry in which the entity operates that will enable the accountant to
compile financial statements that are appropriate in form for an entity
operating in that industry.
- Possessing or
obtaining a general understanding of the nature of the entity's business
transactions, the form of its accounting records, the stated qualifications
of its accounting personnel, the accounting basis on which the financial
statements are to be presented, and the form and content of the financial
statements.
- Reading the
compiled financial statements and considering whether they appear to be
appropriate in form and free of obvious material errors.
- Reporting on
the financial statements.
If the financial statements contain departures from generally accepted
accounting principles (GAAP) or any other comprehensive basis of accounting (OCBOA),
the CPA is required to cite those departures in a separate paragraph of the
compilation report. The dollar effects of GAAP or OCBOA departures on the
financial statements must be disclosed in the report if they have been
determined by management or are known as a result of the accountant's
procedures. However, an accountant
is not required to determine the effects of the departures if management has not
done so. In that case, the
accountant need only add a statement to the report indicating that the effects
of the departures have not been determined.
Options Available Under Existing Standards
- Many CPAs are unaware of the wide range of financial statement
services they may provide to their clients, other than compiling
full-disclosure GAAP financial statements. Existing standards enable
practitioners to perform the following alternatives to the standard compilation
service:
- Compiling
financial statements that omit substantially all of the disclosures required
by GAAP or an OCBOA. In
this type of engagement, the CPA need only be concerned with measurement
departures and may omit all of the disclosures required by GAAP or an OCBOA,
as long as the report is modified to alert financial statement users
to the omission of the disclosures. Paragraphs 19 through 21 of SSARS No. 1
provide performance and reporting guidance for such engagements.
- Compiling
financial statements using an OCBOA such as the cash basis of accounting. These
financial statements generally are less complex and require less preparation
time, especially if they also omit substantially all of the disclosures
required by an OCBOA. If a CPA
compiles monthly cash-basis financial statements with substantially
all disclosures omitted, the compilation report generally will not change
from month to month because only items representing measurement departures
from the cash basis would have to be identified in the compilation report,
and such departures are extremely rare.
The report also would be modified to alert financial statement
users to the omission of the disclosures.
- Compiling
GAAP financial statements and predetermining, in consultation with the
client, which adjustments will be made to the financial statements and which
adjustments will be omitted, based on the client's needs.
For example, it
may be decided that pension and bonus accruals will be made at year-end but
not at interim periods. In
those circumstances, the CPA may draft in advance proform interim
compilation reports listing (but not quantifying) all planned GAAP
departures. This option enables
a CPA to compile less complex financial statements that are accompanied by a
report alerting financial statement users to the departures in the
statements. In conjunction with
this approach, a client may use the gross profit method of estimating the
value of ending inventory at interim periods and other estimates provided
for in Accounting Principles Board Opinion 28, Interim Financial Reporting.
- Providing
monthly reports containing only selected information requested by the
client. This
information may consist of selected account balances, such as cash or
accounts receivable; operating information, such as the number of meals
served during a particular month; or a combination of financial and
operating information. Interpretation No. 8 of SSARS No. 1, "Reports on
Specified Elements, Accounts, or Items of a Financial Statement,"
excludes presentations of elements, accounts, or items of a financial
statement from the applicability of SSARS No. 1 because that standard
provides guidance on the compilation and review of financial statements, and
presentations of specified elements, accounts, or items of a financial
statement are not financial statements. Thus, the accountant is not required
to report on such presentations unless the accountant is engaged to do so
under Statement on Auditing Standards (SAS) No. 62,
Special Reports, SAS No. 75,
Engagements to Apply Agreed-Upon Procedures to Procedures to Specified
Elements, Accounts, or Items of a Financial Statement, or Statement on
Standards for Attestation Engagements (SSAE) No. 4, Agreed-Upon
Procedures Engagements. These reports would also not be subject to
peer review.
- Submitting
draft financial statements to a client. Interpretation
No. 17 of SSARS No. 1, "Submitting Draft Financial Statements,"
indicates that accountants frequently submit draft financial statements to
their clients (1) because information needed to complete the compilation
will not be available until a later date or (2) to provide a client with the
opportunity to read and analyze the financial statements before they are
finalized. The interpretation states that an accountant may submit draft
financial statements to a client as long as the accountant (1) intends to
submit final financial statements to the client with an appropriate
compilation report after any additional work is completed,3
and (2) labels each page of the financial statements with words such as
"Draft," "Preliminary Draft," " Draft-Subject to
Change," or "Working Draft.
- Compiling
only one financial statement, such as the balance sheet, and not the other
related financial statements, as provided for in paragraph 18 of SSARS No.
1.
- Providing
clients or other users with a copy of the client's tax return. Interpretation No. 10 of SSARS No. 1, "Reporting on Tax
Returns," states that SSARS No. 1 imposes no requirement on an
accountant to report on financial information contained in a tax return. The
fact that a tax return is subsequently used for purposes other than
submission to taxing authorities does not affect that exception. This
financial information is not subject to peer review either.
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3
Interpretation No. 17 indicates that in the rare circumstances where the
accountant intended to but never submitted final financial statements,
the accountant may want to document the reasons why he or she was unable
to submit those financial statements.
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