Unit
- Definition of Compilation: A compilation is a service where an accountant assists management in presenting financial information in the form of financial statements without providing any assurance or opinion on the accuracy or completeness of that information.
- Primary Purpose: The main goal of a compilation is to help clients prepare financial statements in accordance with an applicable financial reporting framework, such as GAAP or IFRS, using the information provided by management.
- Limited Scope: Unlike audits or reviews, compilations do not include procedures to verify, corroborate, or review the underlying data; the accountant relies solely on management representations.
- No Assurance Provided: Compilations offer no assurance to users; the accountant does not express an opinion or any level of assurance on the financial statements.
- Management Responsibility: Management is responsible for the accuracy and completeness of the financial information, as well as for establishing and maintaining internal controls over financial reporting.
- Applicable Standards: In the United States, compilations are governed by Statements on Standards for Accounting and Review Services (SSARS) issued by the AICPA; other jurisdictions have similar standards.
- Typical Users: Compiled financial statements are often used by internal management, lenders for small loans, or external parties who do not require assurance, such as vendors or regulatory agencies.
- Common Settings: Compilations are frequently performed for small businesses, non-profits, and individuals who need financial statements for tax preparation, bank financing, or internal decision-making.
- Cost-Effectiveness: Because compilations require fewer procedures, they are generally less expensive than reviews or audits, making them accessible for smaller entities.
- Professional Judgment: The accountant must exercise professional judgment to determine whether the financial statements are free from obvious errors based on knowledge of the client and industry.
- Documentation Requirements: SSARS No. 21 requires the accountant to prepare and retain documentation of the engagement, including the understanding with management, the compilation report, and any significant findings or issues. This documentation supports the basis for the report and demonstrates compliance with professional standards.
- Independence Considerations: The accountant is not required to be independent to perform a compilation engagement. However, if the accountant lacks independence, this fact must be explicitly disclosed in the compilation report. The disclosure alerts users that independence was not maintained, which may affect their reliance on the financial statements.
- Communication with Management: During a compilation, the accountant should communicate with management regarding the nature and scope of the engagement, the applicable financial reporting framework, and any material misstatements discovered. Clear communication ensures both parties understand their responsibilities and helps avoid misunderstandings about the level of assurance provided.
Regulatory Requirement
Regulation: AICPA SSARS No. 21
SSARS No. 21 establishes the performance and reporting requirements for compilation engagements. It requires the accountant to obtain an understanding of the client's industry, accounting principles, and financial reporting framework. The standard also mandates that the accountant read the financial statements for obvious material misstatements and ensure the compilation report includes appropriate language disclaiming any assurance.
Quick Revision
- Compilation services assist management in preparing financial statements without providing assurance.
- The accountant does not verify or corroborate management-provided data.
- SSARS No. 21 is the primary U.S. standard for compilations.
- Compilations are cost-effective and appropriate for smaller entities.