What is a compilation engagement?

The external accountant, mostly a CPA, assists a company’s management in presenting the accounting data in the form of financial statements. The presentation of data does not cover any assurance about any material modifications needed to make the statements according to a prescribed accounting framework(GAAP or IFRS). A review engagement is conducted to provide limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the financial reporting framework.

The Certified Public Accountant compiles the statement according to the specific circumstances of the business entity. Making the choice between an audit, review, or compilation will come down to a question of your needs and the needs of your business. While of course cost is always considered, it should not always be the determining factor. Making a thorough, thought out plan with an experienced CPA firm can lead you to the correct decision for your business. A CPA has the knowledge and know-how to lead your business in the right direction, and help you choose the option right for you. As a result, the results of an audit lead to the highest level of assurance that can be provided.

This requirement is not compulsory for an accountant to accept compilation engagement. If he has no previous industry experience, he can consult AICPA guides, industry publications, other entities’ financial statements to develop an understanding. Basically, the business entity provides accounting data in the form of entries, ledger, journals, trial balance, etc., and the accountant converts it into formal financial statements.

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Depending on the size, nature, and industry of a business, there are varying financial reporting requirements for every business entity. Small and medium enterprises usually do not prepare formal financial statements and rely on bookkeeping. However, there are many circumstances when the presentation of formal financial statements is necessary.

Also, the CPA conducting the compilation may raise questions about certain records that can be helpful to spot irregularities. Another outcome from a compilation is that afterwards the nonprofit’s financial records are formatted in a standard manner that accounting facts can easily be reviewed by third parties, such as a bank that might be considering making a loan to the nonprofit. And last but not least, a compilation can be conducted by a CPA at a substantially lower cost than either a review or an independent audit.

• Some of the documentation includes the engagement letter, financial statements, and communication with management regarding significant issues identified during the audit.
• The outcome can only determine the plausibility of your business’ financial statements.
• The engagement letter is an agreement to provide compilation engagement to a client, and it defines the services to be performed by the professional accountant/auditor and the compensation to be paid.
• In this article, we walk you through the basics of the compilation engagement and provide you with an overview of the role of CPAs and the accounting services you can benefit from.

The result is a limited level of assurance that the financial statements being presented do not require any material modifications. In an audit engagement, the auditor must corroborate the ending balances in the client’s accounts and disclosures. This calls for the examination of source documents, third party confirmations, physical inspections, tests of controls, and other procedures as needed. When completed, the accountant provides a written report that should accompany the compiled financial statements. This report states that the accountant has not audited or reviewed the financial statements, and therefore does not express an opinion or provide any assurance that the financial statements are in accordance with a financial reporting framework. A compilation report is a report prepared by the accountant tasked with performing compilation service by a client and should accompany the compiled financial statements.

An adverse opinion will include language describing what the auditor believes is materially misstated in the financial statements, and the effects of the misstatements. In this article, we will discuss the compilation of financial statements and how the compilation of financial statements works in any business entity. While there are currently no laws that require reviewed financial statements, some grantors or lenders may include an annual reviewed financial statement requirement in your loan or grant agreement. Compilation engagements, audit engagements and review engagements can be prepared by Chartered Professional Accountants (CPAs) in accordance with professional standards and ethics.

Becoming a CPA

Every CPA undergoing the compilation process must understand and engage in compilation according to regulations outlined under Section AR 80. He should also present a compilation report to the client under prescribed regulations. A compilation is a basic summary of your company’s financial statements written by a CPA using data provided by your company.

Most compilation engagement letters will state that the accountant will prepare and present financial statements and provide a compilation service. A compilation differs significantly from a review or an independent audit of financial statements. A compilation is literally a compilation of financial records into a format required by accounting standards.

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The accountant must possess an understanding level of the industry in which the client’s business operates. It includes understanding generally used accounting frameworks, procedures, and principles in most industry entities that will help accountants compile industry standards. An audit is a much more critical, systematic process that requires detailed testing such as examining your business’ accounting records and looking through financial statements. The auditor may even interview employees within your company to survey internal controls. During a compilation, an accountant will review and inquire about your business’ financial statements, but will not compare them to any of their expectations. In a compilation engagement, management prepares the financial statements, and the accountant will read and help finalize the financial statements.

What is a Financial Statement Compilation?

The outcome can only determine the plausibility of your business’ financial statements. The auditor can only vouch that your financial statements are free from any material misstatements, and determine if they meet generally accepted accounting principles. Some of the information contained in an engagement letter includes the services to be provided, the amount and timing of payments, specific due dates, how the parties can terminate the contract, etc.

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In short, compilation activities are not designed to provide any assurance regarding the information contained within the financial statements. Because of the even more limited scope of compilation procedures, the CPA’s report will not express an opinion or provide any assurance regarding the financial statements. Because a review engagement is substantially less intensive in scope than an audit, the CPA cannot express an opinion on the fairness of the financial statements taken as a whole. Essentially, a compilation requires the auditor to simply present financial statements based on the representations made by management, with no effort to verify this information. In a review engagement, the auditor conducts analytical procedures and makes inquiries to ascertain whether the information contained within the financial statements is correct.

The difference between an audit, a review, and a compilation

In a preparation engagement, the accountant is literally preparing the financial statements based on information management provides (e.g. trial balances). It is important to find the proper balance between the cost of the CPA’s services and the level of assurance the users of the financial statements require. As the financial statements themselves do not provide any assurance, if a CPA has compiled the statements, the outside parties are more confident in transacting with such business entities. Certain standards govern hiring an external accountant and the scope of compilation.