AR 110: Compilation of Specified Elements, Accounts, or Items of a Financial Statement
EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncement | Statements on Standards for Accounting and Review Services (SSARSs) 13, 17 |
| Effective Date | This statement currently is effective. |
| Applicability | When an accountant is engaged to compile or issue a compilation report on one or more specified elements, accounts, or items of a financial statement. |
OBJECTIVES OF AR SECTION 110
This section established standards for performing a compilation of specified elements, accounts, or items of a financial statement, examples of which include schedules of rentals, royalties, profit participation, or provision for income taxes.
A compilation of specified elements, accounts, or items of a financial statement is limited to presenting financial information that is the representation of management without undertaking to express any assurance on that information.
FUNDAMENTAL REQUIREMENTS
General Guidance
Reporting Obligation
An accountant may prepare or assist in the preparation of specified elements, accounts, or items of a financial statement and submitting such a preparation to management without the issuance of a compilation report, unless the accountant has been engaged to perform a compilation. However, in deciding whether to issue a compilation report, the accountant should consider how such a presentation of specified elements, accounts, or items of a financial statement will be used. If the accountant believes that he or she will be associated with the information, he or she should consider issuing a compilation report so a user will not infer a level of assurance that does not exist.
Understanding with the Client
The accountant should establish an understanding, preferably in writing, regarding the services to be performed. This understanding should include a description of the nature and limitations of the services to be performed and a description of the report.
Performance Requirements
Before completing a compilation of specified elements, accounts, or items of a financial statement, he or she must adhere to the compilation requirements, which require the accountant to possess a level of knowledge of the accounting principles and practices of the client’s industry that will enable him or her to perform the compilation. The accountant should also understand:
1. The nature of the entity’s business transactions
2. The form of its accounting records
3. The stated qualifications of its accounting personnel
4. The accounting basis of its financial statements
5. The form and content of the financial statements
The accountant should read the presentation of the specified elements, accounts, or items of a financial statement and consider whether the information appears to be in appropriate form and free of obvious material mistakes.
Reporting Requirements
The basis elements of a report on one or more specified elements, accounts, or items of a financial statement the basic reporting elements of the report are as follows:
1. A statement that the specified element(s), account(s), or item(s) identified in the report were compiled. If the compilation was performed in conjunction with a compilation of the company’s financial statements, the paragraph should so state and indicate the date of the accountant’s compilation report on those financial statements. Furthermore, any departure from the standard report on those statements should also be disclosed if considered relevant to the presentation of the specified element(s), account(s), or item(s).
2. A statement that the compilation was performed in accordance with SSARS issued by the American Institute of Certified Public Accountants (AICPA).
3. A description of the basis on which the specified element(s), account(s), or item(s) are presented if that basis is not generally accepted accounting principles (GAAP) and a statement that that basis of presentation is a comprehensive basis of accounting other than GAAP (OCBOA).
4. A statement that a compilation is limited to presenting financial information that is the representation of management (owners).
5. A statement that the specified element(s), account(s) or item(s) have not been audited or reviewed, and accordingly, the accountant does not express an opinion or any other form of assurance on it (them).
The report should be signed and dated the date of the completion of the compilation. Each page of the financial statements should include a reference such as “See Accountant’s Compilation Report.”
ILLUSTRATIONS
The following are example reports on specified elements, accounts, or items of a financial statement from AR Section 110.
Illustration 1. Reporting When the Accountant Is Not Independent
When the accountant is issuing a report with respect to a compilation of specified element(s), account(s), or item(s) of a financial statement for an entity, with respect to which the accountant is not independent, the accountant’s report should be modified. In making a judgment about whether he or she is independent, the accountant should be guided by the AICPA Code of Professional Conduct. The accountant should indicate his or her lack of independence in a final paragraph of the accountant’s compilation report. An example of such a disclosure would be:
I am (We are) not independent with respect to XYZ Company.
The accountant is not precluded from disclosing a description about the reason(s) that his or her independence is impaired. The following are examples of descriptions the accountant may use:
1. I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because I (a member of the engagement team) had a direct financial interest in XYZ Company.
2. I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because an individual of my immediate family (an immediate family member of one of the members of the engagement team) was employed by XYZ Company.
3. I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because I (we) performed certain accounting services (the accountant may include a specific description of those services) that impaired my (our) independence.
If the accountant elects to disclose a description about the reasons his or her independence is impaired, the accountant should ensure that all reasons are included in the description.
[Paragraph renumbered and revised, December 2010, to reflect conforming changes necessary due to the issuance of SSARS No. 19.]
Illustration 2. Illustrative Engagement Letter for a Compilation of Specified Elements, Accounts, or Items of a Financial Statement
[Appropriate Salutation]
This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide.
We will perform the following services:
We will compile, from information you provide, [identify specified element, account, or item of the financial statement, schedule of accounts receivable or schedule of depreciation—income tax basis] of XYZ Company as of December 31, 20XX, and issue an accountant’s report thereon in accordance with Statements on Standards for Accounting and Review Services (SSARS) issued by the American Institute of Certified Public Accountants (AICPA).
The objective of a compilation is to assist you in presenting financial information in the form of [identify specified element, account, or item of the financial statement]. We will utilize information that is your representation without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the [identify specified element, account, or item of the financial statement] in order for [identify specified element, account, or item of the financial statement] to be in conformity with [the applicable financial accounting framework (for example, accounting principles generally accepted in the United States of America)].
You are responsible for:
1. The preparation and fair presentation of [identify specified element, account, or item of the financial statement] in accordance with [the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)]
2. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of [identify specified element, account, or item of the financial statement]
3. Preventing and detecting fraud
4. Identifying and ensuring that the entity complies with the laws and regulations applicable to its activities
5. Making all financial records and related information available to us
We are responsible for conducting the engagement in accordance with SSARSs issued by the AICPA.
A compilation differs significantly from a review or an audit of financial information. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of source documents (for example, canceled checks or bank images); or other procedures ordinarily performed in an audit. Accordingly, we will not express an opinion or provide any assurance regarding the [identify specified element, account, or item of the financial statement] being compiled.
Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts. However, we will inform the appropriate level of management of any material errors, and of any evidence or information that comes to our attention during the performance of our compilation procedures that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our compilation procedures regarding illegal acts that may have occurred, unless they are clearly inconsequential.
If, during the period covered by the engagement letter, the accountant’s independence is or will be impaired, insert the following:
We are not independent with respect to XYZ Company. We will disclose that we are not independent in our compilation report.
If, for any reason, we are unable to complete the compilation of your [identify specified element, account, or item of the financial statement], we will not issue a report on such schedule as a result of this engagement.
Our fees for these services . . .
We will be pleased to discuss this letter with you at any time.
If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to us.
Sincerely yours,
________________________
[Signature of accountant]
Acknowledged:
XYZ Company
_______________________
President
_______________________
Date
Illustration 3. Standard Compilation Report on a Schedule of Accounts Receivable Prepared in Accordance with Accounting Principles Generally Accepted in the United States of America
Accountant’s Compilation Report
[Appropriate Salutation]
I (We) have compiled the accompanying schedule of accounts receivable of XYZ Company as of December 31, 20XX. I (We) have not audited or reviewed the accompanying schedule of accounts receivable and, accordingly, do not express an opinion or provide any assurance about whether the schedule of accounts receivable is in accordance with accounting principles generally accepted in the United States of America.
The management (owners) is (are) responsible for the preparation and fair presentation of the schedule of accounts receivable in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the schedule of accounts receivable.
My (Our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of a schedule of accounts receivable without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the schedule of accounts receivable.
[Signature of accounting firm or accountant, as appropriate]
[Date]
Illustration 4. Standard Compilation Report on a Schedule of Depreciation Prepared in Accordance with the Basis of Accounting the Entity Uses for Federal Income Tax Purposes
Accountant’s Compilation Report
[Appropriate Salutation]
I (We) have compiled the accompanying schedule of depreciation of XYZ Company as of December 31, 20XX. I (We) have not audited or reviewed the accompanying schedule of depreciation and, accordingly, do not express an opinion or provide any assurance about whether the schedule of depreciation is in accordance with the basis of accounting the Company uses for federal income tax purposes.
The management (owners) is (are) responsible for the preparation and fair presentation of the schedule of depreciation in accordance with the basis of accounting the Company uses for federal income tax purposes and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the schedule of depreciation.
My (Our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of a schedule of depreciation without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the schedule of depreciation.
[Signature of accounting firm or accountant, as appropriate]
[Date]
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