Many of the services our firm provides are governed by standards set by the American Institute of Certified Public Accountants (AICPA). There are some changes to some of these standards that govern these services that went into effect for engagements on financial statements dated on or after December 15, 2015. This article is a brief overview of these changes, which do not impact tax or audit engagements.
Financial Statement Preparation Services: Prior to this new guidance CPA’s were required to issue a report on all financial statements that were expected to be used by third parties, including most governing boards. Accordingly, such financial statements would be covered by an audit, review or compilation report. However, CPA’s can now issue financial statements in certain limited circumstances without a report under this new preparation service. Under this service the CPA is not associated with the financial statements in the eyes of the users as there is no written report, disclosure or name of the CPA on the financial statements or reporting package. While this may offer some efficiency in providing financial statements to clients, we believe an appropriate use of this service will be limited.
Compilation of Financial Statements: Compilation of financial statements is a service where the role of the CPA is more apparent to outside parties, and as such, the requirements for performing this service are more explicit.
The CPA is required to read the compiled financial statements in light of the financial reporting framework being used and consider whether the financial statements appear appropriate in form and are free from obvious material misstatements but do not provide any further assurance on the statements. The CPA is not required to verify the accuracy or completeness of the information provided or otherwise gather evidence for the purposes of expressing an audit opinion or a review conclusion.
While this new guidance includes some technical changes to the service and the report language has changed, this service essentially remains the same. The terms of the engagement are now required to be in writing and have been expanded to clarify responsibilities and the compilation report has been revised to make it easier for readers to distinguish it from a review or audit report.
Review of Financial Statements: The review service is one in which the CPA performs analytical procedures, inquiries and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a level of comfort on their accuracy.
In a review engagement, the CPA is required to understand the industry in which you operate — including the accounting principles and practices generally used in the industry. The CPA is also required to obtain knowledge about you, including your business and the accounting principles and practices that you use sufficient to identify areas in the financial statements where it is more likely that material misstatements may arise.
A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation, outside confirmation or the examination of source documents or other procedures ordinarily performed in an audit. The report includes a conclusion as to whether, based on the review, the accountant is aware of any material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
These engagements also had some technical clarifications but are essentially the same service. You will be required to sign a written agreement that includes some changes designed to more clearly outline responsibilities of both the client and the firm and the report has also been updated to provide more clarity to the users of these statements.
Summary: This is just a brief synopsis of the reporting options that CPA’s can use when reporting on financial statements that are at a lower level than an audit. We believe determining an appropriate level of service is essential to ensuring our clients receive the appropriate level of assurance and report to meet their needs. Included in this assessment are both internal and external factors. Please contact us so that we may assist in helping to determine the level of assurance service that meets your needs.