The American Institute of CPAsâ Accounting and Review Services Committee made the most significant changes to compilation and review engagements in over 30 years with the issuance of Statement on Standards for Accounting and Review Services No. 19, Compilation and Review Engagements.
The new guidance is separated into three sections:
A framework for performing and reporting on compilation and review engagements;
Standards and guidance on compilations of financial statements; and,
Standards and guidance on reviews of financial statements.
The guidance for compilation and review engagements has been separated, review performance procedures have been clarified, documentation requirements for compilation engagements have been enhanced, and the reports for compilations and reviews have been changed. These updates will take effect for periods ending on or after Dec. 15, 2010.
THE FRAMEWORK
SSARS No. 19 provides a framework that defines and describes the objectives and elements of compilation and review engagements. When performing a compilation engagement, the CPA is not required to obtain evidence about the accuracy or completeness of the financial statements; as a result, no assurance on the statements is provided.
By contrast, when performing a review engagement, a CPA should perform procedures designed to accumulate evidence that will provide a basis for the limited assurance provided in the review report.
The term "review evidence" has been introduced, and it is defined as "information the accountant uses as a reasonable basis for obtaining limited assurance."
The concept of materiality is also discussed. Misstatements are considered to be material if they could reasonably influence the economic decisions of financial statement users. The SSARS goes on to state that judgments about materiality are made in light of surrounding circumstances, and are based on a consideration of the common financial information needs of users as a group, without consideration of the possible effect of misstatements on specific individual users.
CHANGES TO COMPILATIONS
Many accounting firms already obtain engagement letters for compilations to document the services to be performed. These engagement letters are now required for all compilation engagements. Also, under the new standards, significant issues require documentation.
Changes are coming to compilation reports as well. The report title must clearly indicate that it is the CPA's compilation report, and may indicate that the CPA is independent, if appropriate.
Language has been added that outlines management's responsibilities and the objective of a compilation, resulting in a three-paragraph report (previously two). A fourth paragraph would be added to disclose any independence impairment, if applicable, and CPAs now have the option of explaining any lack of independence. If the CPA elects to explain an independence impairment, they must include all reasons.
CHANGES AFFECTING REVIEWS
Review engagements require a CPA to accumulate review evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements to be in conformity with the applicable financial reporting framework. Similar to audit procedures, these inquiries should be tailored, based on the CPA's understanding of the industry in which the client operates, knowledge of the entity, and the risk that the financial statements are materially misstated.
SSARS No. 19 clarifies the concept that a review engagement is not limited to analytical procedures and inquiries. Other procedures, often considered audit procedures, may be necessary to obtain limited assurance that the financial statements are free of material misstatement. The use of other procedures does not require that an audit be performed.
Review reports are also changing. These reports must have a title that clearly indicates that it is the CPA's review report, and must include the word "independent."
The report now has four required paragraphs (previously three). A new third paragraph states the CPA's responsibility to conduct the review in accordance with SSARS, which requires the CPA to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements, and that the results of these procedures provide a reasonable basis for the CPA's report.
Examples of the revised report wording and engagement letters are included in the SSARS. These may be the most noticeable changes made by the new standards, but don't lose sight of the revisions to the underlying concepts and documentation requirements.
Laurie E. Harvey, CPA, is a manager with Maillie, Falconiero & Co. LLP, in Oaks, Pa. Reach her at lharvey@maillie.com. Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPAs.
