In this session, I will discuss compilation of financial statements.
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A compilation service engagement is defined in SSARS as one in which accountants apply accounting and financial reporting expertise to assist management in the preparation of financial statements and issue a report to a client or third party without providing any CPA assurance about those statements. Nonpublic entities may engage CPA firms to prepare monthly, quarterly, or annual financial statements and to issue a compilation report that may be provided to external users. The CPA is not required to be independent to perform a compilation and the financial statements can be issued without additional disclosures such as footnotes.

Requirements for Compilation
Compilation does not absolve accountants of re sponsibility, as they are always responsible for exercising due care in performing all duties. In a compilation engagement, an accountant must accomplish the following:

Establish an understanding with the client in a written engagement letter or other suitable form of written agreement about the objectives of the compilation engagement, type and limitations of the services to be provided including acknowledgement that the accountant does not provide any assurance about the financial statements, and a description of the report, if a report is to be issued. That agreement also should note that management acknowledges its responsibilities for the preparation and fair presentation of the financial statements, including informative disclosures.

Possess knowledge about the accounting principles and practices of the client’s industry.

Know the client, including a general understanding of the client’s organization, the nature of its business transactions, accounting principles and practices used by the client, and content of its financial statements (the knowledge can be less than that for a review).

Make inquiries to determine whether the client’s information is satisfactory.

Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and in the application of accounting standards.

Request management to provide additional or corrected information if the accountant becomes aware that the records, documents, explanations, or other information, including significant judgments by management, is incomplete, inaccurate, or otherwise unsatisfactory.

Prepare documentation in sufficient detail to provide a clear understanding of the work performed and any findings or issues that are significant, including any communications with management regarding fraud or illegal acts that came to the accountant’s attention.
Form of Report
SSARS define three types of compilation reports. The use of each depends on whether management elects to include all the required disclosures with the financial statements and whether the accountant is independent.

Compilation with full disclosure. A compilation of this type requires disclosures in accordance with accounting standards, the same as for audited financial statements or reviews, as illustrated by Figure 253.

Compilation that omits substantially all disclosures. Figure 254 shows the appropriate wording that the accountant adds after the conclusion paragraph of the standard compilation report when the accountant compiles statements without disclosures. This type of compilation is acceptable if the report indicates the lack of disclosures and the absence of disclosures is not, to the CPA’s knowledge, undertaken with the intent to mislead users. Typically, this type of statement is used primarily for management purposes.

Compilation without independence. A CPA firm can issue a compilation report with full or omitted disclosures even if it is not independent of the client, as defined by the AICPA Code of Professional Conduct. When the accountant lacks independence, an additional paragraph must be added as the last paragraph of the report that states: “We are not independent with respect to Williams Company.”