compilation engagements - ifac · 2011. 8. 17. · tailoring of the provisions applicable for...

31 March 2011 IAASB Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York New York 10017 USA Dear Sir / Madam Proposed International Standard on Related Services ISRS 4410 (Revised), Compilation Engagements Thank you for the opportunity to comment on the proposed revision of ISRS 4410 Compilation Engagements. CPA Australia, the Institute of Chartered Accountants in Australia (the Institute) and the National Institute of Accountants (the Joint Accounting Bodies) have considered this proposed revision and our comments follow. The Joint Accounting Bodies represent over 180,000 professional accountants in Australia. Our members work in diverse roles across public practice, commerce, industry, government and academia throughout Australia and internationally. The Joint Accounting Bodies support the revision of ISRS 4410 and an updated standard addressing practitioner needs in this area is welcomed. However we wish to draw the IAASB’s attention to certain matters including the branding of the proposed standard, its relationship with assurance standards and reporting under the standard. These are dealt with in the attached Appendix, which also contains our responses to matters on which specific comment was requested. The Joint Accounting Bodies are committed to assisting in the development and implementation of the highest quality standards. If you have any questions regarding this submission, please do not hesitate to contact Amir Ghandar (CPA Australia) at [email protected], Paul Meredith (Institute) at [email protected] or Tom Ravlic (NIA) at [email protected]. Yours sincerely,

Alex Malley Chief Executive Officer CPA Australia Ltd

Graham Meyer Chief Executive Officer Institute of Chartered Accountants in Australia

Andrew Conway Chief Executive Officer National Institute of Accountants

mailto:[email protected]:[email protected]:[email protected]

Appendix 1 – Comments on Proposed ISRS 4410 (Revised)

Relationship with Assurance Standards The IAASB’s stated objective is to serve the public interest by setting high-quality auditing and assurance standards and by facilitating the convergence of international and national auditing and assurance standards, thereby enhancing the quality and consistency of practice throughout the world and strengthening public confidence in the global auditing and assurance profession (IAASB Terms of Reference – March 2010). Given the IAASB’s view that a compilation engagement is not an assurance engagement (with which the Joint Accounting Bodies agree), it is presumed that the designation of ISRS 4410 as an International Standard on Related Services means that compilation engagements are viewed as ‘related’ to assurance engagements. However, it is not clear that a relationship in fact exists between compilation engagements and assurance engagements. In the Australian context, the majority of compilation engagements are performed for entities that do not require an assurance engagement. These engagements are typically performed by a non-assurance practitioner, and it is understood that no assurance can be derived from the result of the engagement. In those cases where an assurance engagement is performed on financial statements that have been the subject of a compilation engagement, this does not impact on the nature of the work to be performed by the assurance practitioner. The Joint Accounting Bodies consider that the classification of the standard as a ‘Related’ standard needs to be reconsidered as it has the potential to confuse. In the Australian environment, the equivalent Australian standard is issued by the board which issues professional standards1, and not by the board responsible for auditing and assurance standards2. Establishing a similar practice internationally may assist in ensuring the avoidance of confusion between what constitutes an assurance engagement and a compilation engagement. Framework for Assurance Engagements The existing framework for assurance engagements distinguishes between assurance and non-assurance engagements. It seeks to ensure that no assurance is attributed to the outcome of a non-assurance engagement. However it is widely recognised that some degree of reliance is placed by users on compiled financial information. In our view the framework should recognise this issue and address it specifically, including the different nature of the reliance that users are entitled to put on assurance reports and compilation reports. We acknowledge this is a broader topic that merits further consideration elsewhere but it could be considered by the IAASB in the context of this exposure draft. Effective date In relation to the issue of the proposed effective date for the standard being 18 months after approval of the final revised standard, we consider that this would provide a sufficient period to support effective implementation of the final ISRS. Our views on the particular questions identified by the IAASB follow:

1. Proposed ISRS 4410 is designed to apply when the practitioner is engaged to compile financial information in accordance with an applicable financial reporting framework and to provide a compilation report for the engagement performed in accordance with this ISRS. Do respondents believe this scope is appropriate, and is it clear when practitioners undertaking the compilation of financial information are required to apply the standard? What practical challenges, if any, might arise from the proposed scope of the standard?

The Joint Accounting Bodies do not believe that this proposed scope is appropriate, and consider that this scope is too limited. It is noted the existing ISRS 4410 requires an accountant to issue a compilation report in all circumstances when an accountant’s name is associated with financial information compiled by the accountant.

1 The Accounting Professional and Ethical Standards Board (APESB) 2 The Auditing and Assurance Standards Board (AUASB)


The Australian standard based on the current ISRS 4410 (APES 315 Compilation of Financial Information), extends this requirement to also apply:

• where the compiled financial information is for external use (i.e. not merely for internal use by the client); or

• where it is more likely than not that the intended user of the compiled financial information may not understand the nature and scope of the accountant’s involvement with that information.

There is also an ability for the accountant to consider not issuing a compilation report where the compiled information will be the subject of an audit or review. The proposed scope effectively allows an accountant and their client to opt out of the application of the standard. The Explanatory Memorandum states that if the practitioner is engaged to compile financial information, but the engaging party does not require the practitioner to provide a report for the engagement in accordance with the proposed ISRS, the engagement is not within the scope of the proposed ISRS, although there does not appear to be such a clear expression of this issue within the proposed standard itself. The Joint Accounting Bodies consider that there should not be an ability to opt out of the standard in this manner. The need for a clear exposition of the accountant’s role and management’s responsibility, together with the standardisation of reports across all such engagements, mean that a compilation report should be required whenever a compilation engagement is undertaken, with the exceptions allowed in accordance with the model adopted in APES 315 (for internal use only, or where an audit or review will be conducted if considered appropriate).

2. Do respondents believe the compilation engagement performed under the proposed ISRS is clearly distinguishable from assurance services (audits and reviews of financial statements) to users of compiled financial information and the practitioner’s report, to those who engage practitioners to prepare and present financial information of an entity, and to practitioners undertaking these engagements?

This distinction would benefit from being identified and reinforced. One useful addition would be an overt statement that, in the event of a subsequent assurance engagement for which the compiled financial information is the subject matter, the same practitioner cannot conduct both engagements. In our view this would be of particular importance in the SME sector.

3. Is the requirement for the practitioner to obtain management’s acknowledgement of its responsibilities as specified under the proposed ISRS an acceptable premise for the practitioner undertaking a compilation engagement under the standard?

This is an acceptable premise in the situation where the compiled financial information is a general purpose or special purpose financial statement. However, we question whether it would be required in all compilation engagements, particularly where the compiled information is for internal use only.

4. Do respondents believe the proposed requirements dealing with the responses and actions by the practitioner when the practitioner believes the compiled financial statements contain a material misstatement, or are misleading, are appropriate?

The proposed requirements are appropriate.

5. When the practitioner identifies the need to amend the compiled financial information so that it will not be materially misstated or misleading, do respondents agree that the practitioner may, in appropriate circumstances, propose the use of another financial reporting framework as long as the proposed alternative framework is acceptable in the circumstances of the engagement and is adequately described in the financial information?

Yes.


6. Appendix 3 of the proposed ISRS sets out several illustrative practitioners’ compilation reports. Do respondents agree these reports provide useful additional material to illustrate some different scenarios for compilation engagements? Do respondents believe the communications contained in these illustrative reports are clear and appropriate?

The provision of illustrative practitioners’ compilation reports provides useful additional material and we make the following comments concerning those drafted in the proposed ISRS. We have reservations about the statement: ‘These financial statements are presented in accordance with International Financial Reporting Standards’. This statement may be interpreted by some users as implying assurance. We suggest the alternative ‘these financial statements have been compiled in accordance with International Financial Reporting Standards’. Separate sections and headings for the key components of the illustrative reports would add clarity. We recommend the approach taken in APES 315, which contains illustrative reports with separate sections including:

• The responsibility of [those charged with governance] • Our [the practitioner’s] responsibility • Departure from financial reporting framework [if applicable]

7. Proposed ISRS 4410 is premised on the basis that a firm providing compilation engagements under the standard is required to apply, or has applied, ISQC 1 or requirements that are at least as demanding. In light of this, are the requirements concerning quality control at the engagement level sufficient? Does this approach to specifying quality control provisions in proposed ISRS 4410 create difficulty at a national or firm level? If so, please explain.

In Australia the application of ISQC 1 has been extended beyond assurance practices, with some tailoring of the provisions applicable for non-assurance practices. Accordingly all firms in Australia are required to comply with quality control standard APES 320 Quality Control for Firms, which is based on ISQC 1. We therefore consider that the specification of quality control provisions in the proposed ISRS would not be required in the Australian context, but would not create any difficulty if it were present.

31 March 2011 Mr James Gunn IAASB Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 10017 USA Dear Mr Gunn Re: IAASB ED on Proposed International Standard on Related Services ISRS 4410

(Revised), Compilation Engagements The Malta Institute of Accountants (MIA) would like to thank you for the opportunity to comment on the proposals set out in the above mentioned ISRS and is pleased to provide you below with its comments in that regard. As an Institute we welcome the publication of the proposed ISRS and we support the IAASB’s strategic focus in developing standards to help the profession in the provision of services other than the audit to meet the unique needs of SMEs and the users of their financial information. We have in fact analysed all 7 questions being posed in the proposed ISRS and we are pleased to set out below our comments in respect of each. 1. Scope of the proposed ISRS (1) Proposed ISRS 4410 is designed to apply when the practitioner is engaged to

compile financial information in accordance with an applicable financial reporting framework and to provide a compilation report for the engagement performed in accordance with this ISRS. Do respondents believe this scope is appropriate, and is it clear when practitioners undertaking the compilation of financial information are required to apply the standard? What practical challenges, if any, might arise from the proposed scope of the standard?

1.1 It is clear from one’s reading of the requirements and relevant application guidance in

the proposed ISRS 4410 that the latter applies when all of the following conditions are met: (a) The practitioner undertakes to compile financial information; (b) That financial information is compiled in accordance with an applicable financial

reporting framework; and (c) The practitioner issues a report in accordance with the requirements of proposed

ISRS 4410.

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1.2 Subject to our observations below, we believe that the scope of the proposed ISRS is appropriate. The MIA however encourages the IAASB to clarify the scope in certain respects and we are classifying our comments in that regard under the following three sub-headings: (a) The appropriateness of the scope; (b) Clarity on applicability (i.e. whether it is clear when practitioners are required to

apply the proposed standard); and (c) Any practical challenges that may arise from the proposed scope.

The appropriateness of the scope 1.3 Subject to any amendments that might be necessary to the proposed ISRS in order to

curb ‘adaptations’ of the standard as suggested in paragraph 1.8 below, we believe that the scope of the proposed ISRS 4410 is appropriate. However the IAASB might consider the following minor suggested improvements for clarification: (a) The third sentence of paragraph A1, which states that “Such activities do not fall

within the scope of this ISRS if the engagement does not involve the practitioner making a report in accordance with the requirements of this ISRS”, could be directly incorporated in paragraph 1; and

(b) The first sentence of paragraph A1 states that “The practitioner’s involvement with activities relating to the preparation or presentation of an entity’s financial information can take many different forms.” We believe that further clarification, perhaps by way of examples, on accountancy services that would therefore not fall under the scope of the proposed ISRS, such as bookkeeping services, preparation of internal management accounts (where no report is issued), payroll compilation services, etc would be useful.

Clarity on applicability

1.4 Applicability of the proposed standard seems to be driven by three main criteria,

namely: (a) The practitioner is assisting management in preparing and presenting financial

information; (b) That financial information is to be prepared and presented in accordance with an

applicable financial reporting framework; and (c) The practitioner makes a report in accordance with the proposed ISRS.

1.5 While the reporting requirement is sufficiently clear (perhaps subject to our comment in paragraph 1.3(a) above), we believe that the minor improvements suggested below in relation to the other two criteria would clarify the applicability of the proposed standard.

1.6 The standard could explain what is being implied by preparation and presentation. For instance, ‘preparation’ within the context of a set of general purpose financial statements may be taken to refer to the process of selecting appropriate accounting policies, and recognising and measuring the underlying transactions, events and

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conditions. Presentation on the other hand would refer to the process of translating and analysing the data resulting from the ‘preparation process’ in a structured manner that would meet the desired objective.

1.7 Moreover, while the application material and appendix on what constitutes an applicable financial reporting framework is useful, given the anticipated global application of the final standard, we believe that ISRS 4410 could benefit from a better explanation of what constitutes a special purpose framework. The IAASB could perhaps identify the main characteristics that such frameworks would typically have.

Practical challenges that may arise from the proposed scope 1.8 In response to the second part of question 1 in the Request for Specific Comments

section of the ED, the Institute believes that there might be practical challenges that may arise when a practitioner is adapting the standard and is nonetheless reporting compliance thereto. We refer in particular to paragraphs 2, A2 and A3 which allow adaptation of the ISRS “as necessary”. We are concerned that the concept of adaptation in the proposed ISRS is too open for different interpretations and the IAASB might consider it appropriate to clarify, perhaps with the use of examples, those circumstances in which adaptations might be necessary. It would also be useful if the IAASB could explain, perhaps by including an additional illustrative report in appendix 3, what type of report would be issued vis-à-vis ISRS 4410 where the practitioner adapted the requirements of the ISRS to the characteristics of the engagement at hand, for instance by adapting the standard to a compilation engagement to report on non-financial information.

1.9 The IAASB could also consider it appropriate to clarify what form of report would be issued under the ISRS when the practitioner might be unable to comply with the requirements of paragraph 23 (c) of the proposed standard. For instance that would be the case when the practitioner has been engaged by an engaging party, other than management or those charged with governance, to compile financial or non-financial information based on publicly available information and therefore the involvement of management and those charged with governance is not required for the engagement to be performed.

1.10 Paragraph 15(f) of the proposed standard defines the term “practitioner” as ‘A professional accountant in public practice who conducts the compilation engagement.’ By implication it seems that a compilation engagement can therefore be carried out only by a professional accountant in public practice. Against that backdrop it would be useful if the IAASB could clarify: (a) To what extent can the ISRS be applied by a professional accountant in business

(who possesses the required level of expertise and perhaps a CPA warrant) when carrying out a compilation engagement and signing off the resulting report as part of his or her employment duties?

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(b) Would this be tantamount to an ‘adaptation’ of the standard (on which we have commented in paragraph 1.8)?

(c) Would the ISRS apply in the event that the resulting report is to be presented to and relied upon by third parties such as banks, governmental agencies or the general public?

2. Demarcation from assurance services (2) Do respondents believe the compilation engagement performed under the

proposed ISRS is clearly distinguishable from assurance services (audits and reviews of financial statements) to users of compiled financial information and the practitioner’s report, to those who engage practitioners to prepare and present financial information of an entity, and to practitioners undertaking these engagements?

2.1 We understand that the IAASB is seeking views on the demarcation from assurance

services from the point of view of the following: (a) Users of the compiled financial information and the practitioner’s report –

presumably this refers to third parties who will use and rely on the financial information and the practitioner’s report;

(b) Those who engage practitioners to prepare and present financial information – this would typically refer to management and those charged with governance, though it may also refer to other engaging parties as contemplated in paragraph 24 of the proposed ISRS 4410; and

(c) The practitioners undertaking these engagements.

2.2 We believe that the requirements, application and other explanatory material and appendices 2 and 3 of the proposed ISRS are sufficiently clear in distinguishing a compilation engagement from assurance engagements. In particular we note that: (a) The practitioner is required to communicate to users on what a compilation entails

and to state that neither an audit nor a review has been carried out, directly in the practitioner’s report (paragraph 37(f)); and

(b) Management, those charged with governance, and the engaging party (if different) agree with the practitioner on the objective and scope of the compilation engagement, including a statement that the engagement is not an assurance engagement, directly in the agreed terms of engagement (paragraph 25(a)).

2.3 Nonetheless the IAASB might wish to consider issuing non-authoritative guidance, such

as an IAASB staff Q&A, which would primarily highlight the main differences between compilation, review and audit engagements. Such guidance should be written with a non-technical audience in mind and intended to be used by management and those charged with governance. Similar guidance was issued by the Audit and Assurance Faculty of the Institute of Chartered Accountants in England and Wales (ICAEW) in 2007 to explain, in layman’s terms, what the ICAEW Assurance Service entails. We believe that the issuance of such non-authoritative guidance, perhaps accompanied by

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a training module(s) which could be used by IFAC member bodies in CPD and outreach activities, would help in managing users’ and management’s (including those charged with governance and other engaging parties) expectations from the compilation engagement.

3. Management’s responsibilities (3) Is the requirement for the practitioner to obtain management’s acknowledgement

of its responsibilities as specified under the proposed ISRS an acceptable premise for the practitioner undertaking a compilation engagement under the standard?

3.1 We are of the view that management and those charged with governance should be attributed with the ultimate responsibility for the compiled financial information. Company law in most jurisdictions, including Malta, conveys such responsibility in any case. We therefore concur with most of the proposals being made in paragraphs 5 and 23(c) of the proposed ISRS and elsewhere that management should be responsible for, amongst others: (a) Adoption of an acceptable financial reporting framework; (b) The completeness and accuracy of the underlying data and source documents; (c) Providing financial information and satisfactory explanations on a timely basis; (d) Judgements required for the preparation and presentation of the financial

information; (e) Selection and application of appropriate accounting policies; and (f) Development of reasonable accounting estimates.

3.2 However we wish to bring to the IAASB’s attention our concern that the requirement in proposed paragraph 23(c)(ii)(e), which puts responsibility for the financial information compiled by the practitioner onto management, might possibly result in practical challenges that may arise from the application of the ISRS and the enforcement of that requirement by the practitioner, for the following reasons: (a) Asking management to take responsibility for the financial information compiled by

the practitioner might meet resistance by management and might create or widen any expectations gap on compilation engagements. While it is understandable that management should take ultimate responsibility for the end-product (whether general purpose or special purpose financial information), sub-paragraph 23(c)(ii)(e) might be interpreted as if management should also take responsibility for the practitioner’s application of accounting and financial reporting expertise and for his/her exercise of professional judgement.

(b) The practitioner could be criticised on the grounds of self-interest when seeking management’s acknowledgement of its responsibility for financial information which has been compiled by the practitioner on the basis of his or her professional expertise, knowledge and compliance with professional standards, knowledge on which might not be held by management. The IAASB might therefore wish to

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consider the implications that such a shift of responsibility would have in various jurisdictions.

3.3 As we believe that shifting responsibility for the practitioner’s application of accounting

and financial reporting expertise and for his/her exercise of professional judgement to management was not the objective, the IAASB might consider it appropriate to redraft the aforementioned requirement. In that regard we would recommend that: (a) management should be required to acknowledge its responsibility towards third

parties for the quality of the compiled financial information; and (b) the ISRS should clarify that the practitioner owes a duty of care to management for

the proper application of accounting and financial reporting expertise and for his/her exercise of professional judgement.

4. Material misstatements and misleading financial information (4) Do respondents believe the proposed requirements dealing with the responses

and actions by the practitioner when the practitioner believes the compiled financial statements contain a material misstatement, or are misleading, are appropriate?

4.1 From our reading of the proposed ISRS (in particular paragraphs 30, 32 and 34(c)) we

understand that the practitioner is required to use his or her best endeavours in persuading management to amend the compiled financial information as required, and therefore in principle we find these requirements adequate. However, we question the rationale for not giving the practitioner an alternative option (other than withdrawing from the engagement that is) when management declines the amendments proposed by the practitioner.

4.2 A practitioner’s withdrawal from the engagement on the basis of a disagreement with management might be undesirable in view of the following potential effects: (a) Withdrawal might not always be possible as contemplated in paragraph 34 of the

proposed ISRS; (b) Users might have come to expect a practitioner’s report on the compiled financial

information, and the non-issuance of such a report might therefore be a disservice to those same users;

(c) Despite his or her withdrawal from the engagement, the practitioner might nonetheless be associated with the compiled financial information when, for instance, no compilation report is issued but the client informs a third party (e.g. a bank) that a practitioner has “…assisted management in preparing and presenting the financial information …”.

In conclusion we wish to recommend that, as the practitioner in any case has the option of withdrawing from any engagement being carried out, the final ISRS should propose an alternative avenue which a practitioner may decide to take if the circumstances permit.

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4.3 The IAASB may wish to consider requiring the practitioner to expand on the ‘standard’

report by including a ‘statement on factual findings’ (similar to the one issued under extant ISRS 4400 where no assurance is being expressed) in which the practitioner would explain the nature of the disagreement with management and perhaps the effect that the treatment proposed by the practitioner in compliance with the applicable financial reporting framework would have on the compiled financial information.

5. Proposing the use of another financial reporting framework (5) When the practitioner identifies the need to amend the compiled financial

information so that it will not be materially misstated or misleading, do respondents agree that the practitioner may, in appropriate circumstances, propose the use of another financial reporting framework as long as the proposed alternative framework is acceptable in the circumstances of the engagement and is adequately described in the financial information?

5.1 On the basis that the practitioner is required to determine the acceptability of the

proposed alternative framework in the circumstances of the engagement, we find no objection in allowing the practitioner to propose the use of another financial reporting framework.

6. Illustrative practitioners’ compilation reports (6) Appendix 3 of the proposed ISRS sets out several illustrative practitioners’

compilation reports. Do respondents agree these reports provide useful additional material to illustrate some different scenarios for compilation engagements? Do respondents believe the communications contained in these illustrative reports are clear and appropriate?

6.1 In our view the illustrative practitioner’s compilations reports found in appendix 3 to the

proposed ISRS are clear and appropriate. Moreover, should our comments in paragraphs 1.8, 1.9 and 4.3 be favourably considered by the IAASB, additional illustrative practitioner’s compilation reports might be necessary.

7. Applicability of ISQC 1 (7) Proposed ISRS 4410 is premised on the basis that a firm providing compilation

engagements under the standard is required to apply, or has applied, ISQC 1 or requirements that are at least as demanding. In light of this, are the requirements concerning quality control at the engagement level sufficient? Does this approach to specifying quality control provisions in proposed ISRS 4410 create difficulty at a national or firm level? If so, please explain.

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7.1 While compliance with the requirements of ISQC 1 might be an overkill for compilation engagements on the other hand it is difficult to argue in favour of lower quality control requirements. Moreover designing a quality control standard (ISQC 2!) merely for compilation engagements might not be the best use of the IAASB’s limited resources. In conclusion the Institute is therefore of the view that the requirements in the proposed ISRS are appropriate.

7.2 Nonetheless the IAASB might consider issuing non-authoritative guidance, such as an IAASB staff Q&A, to illustrate the scalability and hence the proportionate application of ISQC 1 to compilation engagements.

8. Comments on other aspects of the proposed ISRS Level of knowledge of the business as required by the proposed ISRS 8.1 Paragraph 27 of the proposed ISRS requires the practitioner to obtain knowledge and

understanding of the entity’s business and operation, as well as an understanding of the applicable financial reporting framework, sufficient to be able to compile the financial information. Paragraph A42 further explains that the level of the practitioner’s knowledge and understanding is less than that which is possessed by management. The latter paragraph also adds that the practitioner’s knowledge should be pitched at a level which enables him or her to present the compiled financial information in accordance with the applicable financial reporting framework.

8.2 We believe that the requirements and explanatory material in the proposed ISRS might be open to different interpretations and we would encourage the IAASB to issue illustrative practical guidance in this regard which would amongst others set out: (a) the level and depth of knowledge and understanding of the business that the

practitioner is expected to obtain for him or her to be able to compile the financial information; and

(b) the extent of documentation that a practitioner would be expected to have to substantiate his or her understanding. Although not specifically referred to in paragraph 36 of the proposed ISRS, we understand that a practitioner would be expected to document compliance with the requirements of ISRS 4410, including the requirement to obtain knowledge and understanding of the entity’s business.

Illustrative practical guidance which is perhaps similar in style to the examples in the Appendix to Practice Note 26 Guidance on Smaller Entity Documentation, issued by the Auditing Practices Board in the UK, could be useful.

Applicability of the IESBA Code of Ethics 8.3 Paragraph 15(g) of the proposed ISRS seems to imply that the practitioner needs to be

independent of the entity for which a compilation engagement is undertaken as Parts A and B of the IESBA Code seem to apply without any exclusion whatsoever. In that

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regard we would ask the IAASB whether that is intentional (probably not as paragraph A20 clarifies that the IESBA Code does not require independence in a compilation engagement) and we would recommend a clarification on this point in the proposed ISRS 4410 to shed light on this possible inconsistency.

8.4 We believe that independence should not be a prerequisite for the carrying out of a compilation engagement. The applicability of Part B of the IESBA Code in full (including sections 290 and 291) arguably does not help in making compilation engagements clearly distinguishable from assurance services.

Early adoption 8.5 Given that the final standard is expected to be a standalone standard, we would ask

whether once completed the standard could be early adopted by a jurisdiction or an entity on a voluntary basis.

While thanking you once again for the opportunity to comment on the proposed ISRS 4410, we remain available for any clarifications that might be necessary. Yours sincerely Jonathan Dingli Technical Director The Malta Institute of Accountants

IAASB Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, New York 10017 USA 31 March 2011

The Institute of Certified Public Accountants in Ireland

17 Harcourt St, Dublin 2, Ireland

Phone 01 425 1000 Fax 01 425 1001 Email [email protected] Web www.cpaireland.ie Chief Executive: Eamonn Siggins

To whom it may concern, The Institute of Certified Public Accountants in Ireland welcomes the opportunity to comment on: ‘Proposed International Standard on Related Services ISRS 4410 (Revised), Compilation Engagements’ 1. Proposed ISRS 4410 is designed to apply when the practitioner is engaged to compile financial information in accordance with an applicable financial reporting framework and to provide a compilation report for the engagement performed in accordance with this ISRS. Do respondents believe this scope is appropriate, and is it clear when practitioners undertaking the compilation of financial information are required to apply the standard? What practical challenges, if any, might arise from the proposed scope of the standard? We are of the view the scope is appropriate and that it is clear when practitioners are required to apply the standard. One of the practical challenges which might arise from the proposed scope of the standard is a possible in-built perception from the user of the financial information that greater reliance can be placed on the financial information in circumstances where the practitioner is also auditor to the client.

2. Do respondents believe the compilation engagement performed under the proposed ISRS is clearly distinguishable from assurance services (audits and reviews of financial statements) to users of compiled financial information and the practitioner’s report, to those who engage practitioners to prepare and present financial information of an entity, and to practitioners undertaking these engagements? In our opinion, on balance, the compilation engagement performed under the proposed ISRS is distinguishable from assurance services to users, those who engage the practitioners and to practitioners undertaking the engagements. 3. Is the requirement for the practitioner to obtain management’s acknowledgement of its responsibilities as specified under the proposed ISRS an acceptable premise for the practitioner undertaking a compilation engagement under the standard? Yes, the requirement for the practitioner to obtain management’s acknowledgement of its responsibilities is an acceptable premise for the practitioner undertaking a compilation engagement under the standard. 4. Do respondents believe the proposed requirements dealing with the responses and actions by the practitioner when the practitioner believes the compiled financial statements contain a material misstatement, or are misleading, are appropriate? Yes, we agree the proposed requirements dealing with the responses and actions by the practitioner when the practitioner believes the compiled financial statements contain a material misstatement, or are misleading, are appropriate. The flowchart diagram contained on page 11 is particularly helpful in that regard. 5. When the practitioner identifies the need to amend the compiled financial information so that it will not be materially misstated or misleading, do respondents agree that the practitioner may, in appropriate circumstances, propose the use of another financial reporting framework as long as the proposed alternative framework is acceptable in the circumstances of the engagement and is adequately described in the financial information? Yes, we agree that the practitioner may propose the use of another financial reporting framework as long as the proposed alternative framework is acceptable in the circumstances of the engagement and is adequately described in the financial information. 6. Appendix 3 of the proposed ISRS sets out several illustrative practitioners’ compilation reports. Do respondents agree these reports provide useful additional material to illustrate some different scenarios for compilation engagements? Do respondents believe the communications contained in these illustrative reports are clear and appropriate? In our opinion the four reports set out in Appendix 3 of the proposed ISRS is useful additional material to illustrate some different scenarios for compilation. We agree the communications contained in the illustrative reports are clear and appropriate.

7. Proposed ISRS 4410 is premised on the basis that a firm providing compilation engagements under the standard is required to apply, or has applied, ISQC 1 or requirements that are at least as demanding. In light of this, are the requirements concerning quality control at the engagement level sufficient? Does this approach to specifying quality control provisions in proposed ISRS 4410 create difficulty at a national or firm level? If so, please explain. Yes, in our opinion the requirements concerning quality control at the engagement level are sufficient. We are of the view the approach to specifying quality control provisions as proposed in ISRS 4410 would not create significant difficulty at an Irish level or for practitioners in Ireland. The IAASB is also interested in comments on matters set out below. Users of Financial Information or Financial Statements of SMEs, including Regulators—Recognizing that information compiled by professional accountants under proposed ISRS 4410 will likely of particular interest and relevance to users in the SME environment (for example, creditors, lending institutions, suppliers) and, in some cases, regulators, the IAASB invites respondents from these constituencies to comment on the proposed ISRS, in particular on the form and content of the illustrative practitioners’ reports. Developing Nations—Recognizing that many developing nations have adopted or are in the process of adopting the International Standards, the IAASB invites respondents from these nations to comment, in particular, on any foreseeable difficulties in applying the proposed ISRS in a developing nation environment. Translations—Recognizing that many respondents may intend to translate the final ISRS for adoption in their own environments, the IAASB welcomes comment on potential translation issues respondents may note in reviewing the proposed ISRS. Effective Date—Recognizing that proposed ISRS 4410 is a substantive revision of extant ISRS 4410, and given the public interest need to harmonize practice internationally as soon as practicable, the IAASB believes that an appropriate effective date for the standard would be 18 months after approval of the final revised standard. Assuming the IAASB intends to finalize the revised standard in December 2011, it would then be effective for compilation engagements performed for financial information for periods ending on or after June 30, 2013. The IAASB welcomes comment on whether this would provide a sufficient period to support effective implementation of the final ISRS. No further comments. The Institute of Certified Public Accountants would be happy to discuss the above with you. Yours sincerely, Declan Nestor Chairperson, Financial Reporting Sub - Committee

April 6, 2011

Mr. James Gunn

Technical Director

International Auditing and Assurance Standards

Board

545 Fifth Avenue, 14th Floor

New York 10017

USA

By E-mail: [email protected]

Dear James,

Re.: Exposure Draft Proposed International Standard on Related

Services ISRS 4410 (Revised), Compilation Engagements

We would like to thank you for the opportunity to provide the International

Auditing and Assurance Standards Board (IAASB) with our comments on

Exposure Draft Proposed International Standard on Related Services ISRS

4410 (Revised), Compilation Engagements (hereinafter referred to as “the

draft”).

One of the core services provided by professional accountants in public practice

is assisting management in the preparation of financial statements and other

historical financial information, particularly by small and medium-sized practices

for small and medium-sized businesses, but also by larger practices and in

relation to larger entities. The demand for such services is not necessarily

driven primarily by increasing audit thresholds. In many cases, assisting

management in preparing financial statements is a service that is provided in

addition to subsequent assurance engagements (audits or reviews) on those

statements by another practitioner, which can also occur in relation to larger

entities. For these reasons, ISR 4410 needs to be a scalable standard.

While Germany and some other national jurisdictions have their own national

standards in this area, we support the issuance of this international standard. An

/23 to the comment letter to the IAASB dated April 6, 2011

international standard would contribute to the convergence of national standards

in the long run.

What matters to users of the information, and hence to those purchasing these

services and to the practitioners providing them, is the added value provided by

the involvement of a professional accountant in public practice with accounting

and financial reporting expertise who exercises quality control over the

engagement, as well as integrity, objectivity, professional competence and due

care. We are therefore pleased to see that the standard focuses on adding

value and conveying that value to users in the report, yet clearly distinguishing

compilations from assurance engagements.

Our comments in this letter focus on general matters and matters of particular

importance. We respond to the questions posed in the Explanatory

Memorandum in Appendix 1 to this letter. Our comments by paragraph are

included in Appendix 2 to this letter.

Articulation with Other IAASB Standards

We support the IAASB in seeking to make ISRS 4410 a “stand-alone standard”

– that is, one to which practitioners can refer without needing to refer to other

IAASB standards to understand and apply ISRS 4410. However, we do not

believe that making ISRS 4410 a “stand-alone standard” is a license to write a

standard that does not articulate with the terminology and concepts used in its

other standards unless there are overriding reasons to depart therefrom. The

meaning and usage of terms should, to the extent practicable, be the same as

those used in other IAASB standards to avoid confusing practitioners and other

users. In our comments below and in Appendices 1 and 2 to this letter, we note

a number of instances when terms are used with different meanings than in

other IAASB standards or when the usage of terms is different, or is unclear in

this respect. We also note that a “stand-alone standard” requires the inclusion of

all of the definitions needed to understand and apply the standard, rather than

referring to a non-authoritative glossary. Furthermore, the considerable

guidance on the nature of financial reporting frameworks provided in ISAs 200,

700, 800 and 805, which may be useful to practitioners performing compilation

engagements, is not included in Appendix 1 to the draft. We suggest that

Appendix 1 be expanded to include this guidance.


The Practitioner’s Knowledge and Understanding

Paragraph 27 requires that the “practitioner obtain knowledge and

understanding of the entity’s business and operations, including the entity’s

accounting system and accounting records … sufficient to be able to compile

the financial information.”

We note that this wording “knowledge and understanding” is inconsistent with

that used in draft ISRE 2400 and draft ISAE 3000 for limited assurance

engagements, which only speak of “understanding” (as well as not being

consistent with ISA 315). The use of two terms is confusing because it suggests

that there is something in addition to an understanding that the practitioners are

required to obtain for a compilation engagement beyond that required in an

audit, or a review or other limited assurance engagement. Furthermore, without

knowledge, understanding is not possible.

As pointed out in the previous section of this letter, while ISRS 4410 ought to be

a stand-alone standard, its use of terms and concepts should articulate with that

in other IAASB standards unless there are overriding reasons to depart from

these. However, in relation to draft ISRE 2400, and draft ISAE 3000 in relation

to limited assurance engagements, and also in relation to this draft, we are

concerned about the use of the term “understanding”. The term “understanding

of the entity and its environment” in ISA 315 encompasses such matters as the

entity’s objectives and strategies, and those related business risks that may

result in risks of material misstatement (ISA 315.11(d)); the measurement and

review of the entity’s financial performance (ISA 315.11(e)); and an

understanding of internal control relevant to the audit (ISA 315.12) – which, if

applied in analogous fashion to an understanding of internal control relevant to

the compilation engagement, would include evaluating the design of the controls

relevant to the compilation engagement and determining whether they have

been implemented, by performing procedures in addition to inquiry of the entity’s

personnel.

The wording of the requirement in paragraph 27 of the draft does not clarify that

the items mentioned in ISA 315 as noted above are not applicable – only that it

includes an understanding of the entity’s accounting system and accounting

records : the paragraph does not explain what is excluded. Furthermore, the

application material to paragraph 27 of the draft in paragraphs A42 and A43

only provides some examples of matters that may be included in such an

understanding without in any way limiting that understanding compared to ISA

315. We believe it to be crucial to ISRS 4410 as a stand-alone standard that

ISRS 4410 use the same terms and concepts used in other IAASB standards


when these terms and concepts apply, but use other terms and concepts when

they do not. This implies that ISRS 4410 needs to clearly differentiate the

“understanding of the entity and its environment” required in ISA 315 and ISRE

2400 from what is required to perform a compilation engagement by using

different terms (e.g., “familiarity”, rather than “understanding” to differentiate the

depth, and, as used, “business” rather than “entity and its environment” to

differentiate the breadth) and then outlining in the requirements what is

necessary to obtain such a “familiarity with the business” (or whatever other

words are chosen) together with additional application material to further clarify

the work effort required.

We therefore suggest that paragraph 27 be changed to read:

“To perform the compilation engagement the practitioner shall:

(a) become familiar with the entity’s business, and

(b) obtain an understanding…”

Like in ISA 315.11 and .13, there should be an additional requirement

paragraph that then provides greater specificity to what “familiarity with the

entity’s business” means. Such a paragraph might be worded as follows:

“When obtaining a familiarity with the entity’s business, to enable the

practitioner to understand the account balances and disclosures to be

expected in the financial information, the practitioner shall become

familiar with the entity’s:

(a) operations;

(b) its ownership and governance structures;

(c) the types of investments that the entity is making and plans to

make;

(d) the way the entity is structured and how it is financed;

(e) The accounting procedures and records designed and

established to initiate, record, process and report entity

transactions (as well as events and conditions) and to maintain

accountability for related assets, liabilities, and equity.

Together with some of the relevant application material to these matters from

ISA 315, such a requirement would provide greater clarity of the limits of the

familiarity with the business vs. the understanding of the entity and its

environment required in ISA 315.


We also believe that, like in draft ISRE 2400, since the practitioner’s

understanding accumulates until the engagement is completed, so too a

practitioner’s familiarity with the entity’s business increases as the compilation

engagement progresses. This matter also needs to be clarified in the application

material.

Hybrid Engagements

One of the mandates of the task force of the IAASB was to investigate the

possibility of hybrid engagements (e.g., a combination of assurance and

compilation engagements, etc.). The IAASB chose to defer this issue until ISRS

4410 and ISRE 2400 are completed. However, the task force should investigate

this issue further once these standards have been completed in line with the

original mandate of the task force.

We hope that our views will be helpful to the IAASB. If you have any questions

relating to our comments in this letter, we would be pleased to be of further

assistance.

Yours truly,

Klaus-Peter Feld Wolfgang P. Böhm

Executive Director Director, International Affairs

541/584


APPENDIX 1:

Responses to Request for Specific Comments

1. Proposed ISRS 4410 is designed to apply when the practitioner is engaged

to compile financial information in accordance with an applicable financial

reporting framework and to provide a compilation report for the engagement

performed in accordance with this ISRS. Do respondents believe this scope

is appropriate, and is it clear when practitioners undertaking the compilation

of financial information are required to apply the standard? What practical

challenges, if any, might arise from the proposed scope of the standard?

The draft applies when the practitioner is engaged to 1. compile financial

information in accordance with an applicable financial reporting framework,

and 2. provide a compilation report for the engagement performed in

accordance with this ISRS. It is therefore clear from these criteria when

practitioners are required to apply the standard. However, we recognize that

this enables practitioners to avoid needing to apply this standard by simply

not reporting in accordance with the ISRS. The only way to prevent this is for

the standard to cover practitioner association with information, which is an

issue that extends beyond just this standard to assurance engagements,

agreed-upon-procedures engagements, and other means of association. For

this reason, we believe the scope of the draft is appropriate, but strongly

encourage the IAASB to include a project on practitioner association in its

proposed strategy and work program for 2012-2014.

One matter in relation to the scope that may cause some practical

challenges is the discussion in A10 and A16 of the draft, which includes

other accounting services in a compilation engagement. We believe there is

a clear difference between the provision of other accounting services, such

as bookkeeping and the processing of transactions and events, etc., and a

compilation engagement, which involves drawing up financial information

from a preliminary trial balance or equivalent (and drawing on other

information as necessary to compile). We note that the draft provides no

requirements or guidance at all on the provision of other accounting

services, such as bookkeeping, processing transactions, and creating and

maintaining accounting records and systems (in Germany we have a


separate standard on the requirements for accounting systems (IDW FAIT

1), that would need to be observed when performing accounting services).

Therefore, these other accounting services cannot be a part of a compilation

engagement or the meaning of the term “compile” as defined in ISRS 4410.

It would be better if the application material made this distinction clearer.

This would also prevent confusion when agreeing the terms of engagement

with the engaging party because some engaging parties may just assume

that other accounting services are included as part of the compilation

engagement. However, this would not preclude both services (that is,

compilations and other accounting services) from being covered in the same

engagement letter.

Because the scope of the standard is so clear as noted by the two criteria

above, we do not believe there would be any other practical challenges

arising from the proposed scope.

2. Do respondents believe the compilation engagement performed under the

proposed ISRS is clearly distinguishable from assurance services (audits

and reviews of financial statements) to users of compiled financial

information and the practitioner’s report, to those who engage practitioners

to prepare and present financial information of an entity, and to practitioners

undertaking these engagements?

We believe that the compilation engagement performed under the draft is

clearly distinguishable, from assurance services, to users of compiled

financial information and the practitioner’s report, to those who engage

practitioners to prepare financial information of an entity, and to practitioners

undertaking these engagements.

3. Is the requirement for the practitioner to obtain management’s

acknowledgement of its responsibilities as specified under the proposed

ISRS an acceptable premise for the practitioner undertaking a compilation

engagement under the standard?

We believe that the requirement for the practitioner to obtain management’s

acknowledgement of its responsibilities as specified by the draft is a required

precondition for the practitioner being able to accept or continue a

compilation engagement because, if management were not to acknowledge

its responsibilities, then there would be no basis for performing the

compilation engagement.


4. Do respondents believe the proposed requirements dealing with the

responses and actions by the practitioner when the practitioner believes the

compiled financial statements contain a material misstatement, or are

misleading, are appropriate?

Since, as noted in ISA 320, materiality is a financial reporting concept that is

user driven, and therefore applies regardless of the nature of any

engagement a practitioner carries out in relation to particular financial

information, materiality also applies to compilation engagements. Hence, the

concept of material misstatements applies to compilation engagements.

For these reasons, aside from some matters of wording inconsistency that

we address in our comments in Appendix 2 and one additional matter that

we note hereafter, we believe that the proposed requirements dealing with

the responses and actions by the practitioner when the practitioner believes

the compiled financial information contains a material misstatement or is

misleading, are appropriate.

The one additional matter with which we take issue relates to the use of the

phrase “material misstatement, or are misleading”. The draft fails to properly

distinguish between fair presentation frameworks and compliance

frameworks as defined in ISAs 200, 450 and 700. As defined in ISA 450, a

material misstatement for a fair presentation framework includes a

misstatement that causes the financial statements not to be fairly presented.

Consequently, the “misleading test” required by the IESBA Code of Ethics

and described in ISA 700 is already covered by the definition of “material

misstatement” for fair presentation frameworks. Pursuant to ISA 700, the

separate misleading test only applies to compliance frameworks. The draft

needs to provide additional guidance on the nature of fair presentation and

compliance frameworks in the Appendix 1 to the draft. Furthermore, the

wording of the requirements needs to clearly distinguish that the misleading

test only applies to compliance frameworks. These framework issues, which

are dealt with in ISAs 200, 450 and 700, apply equally to frameworks

covered in the draft. Therefore, there is no overriding reason for ISRS 4410

to depart from the financial reporting framework concepts used in the ISAs.

5. When the practitioner identifies the need to amend the compiled financial

information so that it will not be materially misstated or misleading, do

respondents agree that the practitioner may, in appropriate circumstances,

propose the use of another financial reporting framework as long as the


proposed alternative framework is acceptable in the circumstances of the

engagement and is adequately described in the financial information?

The question posed is too simple, as is then the proposed solution. When an

established financial reporting framework (e.g., a general purpose financial

reporting framework such as IFRS or national GAAP, or a special purpose

reporting framework, such as that required for a particular regulator) is not

required to be used by law or regulation and is not desired by users, then

preparers should be free to use any framework that is acceptable in the

circumstances of the engagement (i.e., meets user needs) and is adequately

described in the financial information. This includes frameworks that are

either based on established frameworks or have been created for particular

purpose. The key here is to recognize that such “customized” frameworks

are special purpose frameworks for which paragraph 37 (g) of the draft

applies. Consequently, when the financial information is not being used to

fulfil legal, regulatory or contractual requirements to apply a particular

established framework, and the practitioner identifies the need to amend the

compiled financial information, the practitioner may propose to management

that another acceptable framework be applied under the conditions noted. If

the standard were to be more restrictive, because a compilation report

cannot be qualified (since that would be an opinion or conclusion), then the

practitioner would need to withdraw from the engagement rather than to

assist management in preparing the financial information that meets user

needs, which means that the required withdrawal would not be in the public

interest.

6. Appendix 3 of the proposed ISRS sets out several illustrative practitioners’

compilation reports. Do respondents agree these reports provide useful

additional material to illustrate some different scenarios for compilation

engagements? Do respondents believe the communications contained in

these illustrative reports are clear and appropriate?

We agree that these reports provide useful additional material to illustrate

some different scenarios for compilation engagements. In particular, we

particularly appreciate the use of a special purpose framework based on an

established framework in illustration 2, which illustrates the issue in question

5 very well.

In particular, we support the inclusion of the last two sentences in the last

paragraph of the report in illustration 1 in each of the illustrations because

without those sentences, there is no indication that no evidence was


gathered and no audit or review was carried out. Without such indication in

those two sentences, users may presume that practitioners, who are also

often auditors (who may also sign the report using a title indicative of their

status as auditors), may have performed some verification of the financial

information. This could lead to users being misled about the nature and

extent of compilation engagements. Furthermore, it would lead to the

cannibalization of the value of services, for users, that involve having the

practitioner obtain assurance, such as audits and reviews. For these

reasons, and to clarify the consequences of the last sentence in the last

paragraph of illustration 1, and as applicable in the other illustrations, we

suggest that the IAASB may wish to consider whether a statement

equivalent to ISRS 4400.18 (k) might be added at the end of that paragraph

in each illustration.

With the exception of our last suggestion, we believe that the illustrative

reports are clear and appropriate but for some editorial comments that we

provide in our comments in Appendix 2.

7. Proposed ISRS 4410 is premised on the basis that a firm providing

compilation engagements under the standard is required to apply, or has

applied, ISQC 1 or requirements that are at least as demanding. In light of

this, are the requirements concerning quality control at the engagement level

sufficient? Does this approach to specifying quality control provisions in

proposed ISRS 4410 create difficulty at a national or firm level? If so, please

explain.

We note that pursuant to paragraph 4 in current ISQC 1, all engagements

covered by IAASB engagement standards are covered by ISQC 1. In our

view, in light of the premise that the firm apply ISQC 1 or requirements that

are at least as demanding, the requirements concerning quality control at

engagement level are sufficient. The alternative of having the premise of the

application of ISQC 1, or its equivalent, by the firm, removed would lead to

the introduction of more quality control requirements at engagement level,

which would not be conducive to a scalable ISRS 4410. However, we would

like to point out that small firms, and those performing inspections of those

firms, have considerable difficulty in applying ISQC 1 in a scalable manner

that is proportionate to the size and complexity of their practice. For this

reason, we strongly encourage the IAASB to include a project in its strategy

and work plan for 2012-214 on the proportionate application of ISQC 1 in

small or less complex firms. In this respect, one issue in ISQC 1 that causes


great difficulty and cost for sole practitioners is the monitoring requirement in

ISQC 1.48 (c).

8. Users of Financial Information or Financial Statements of SMEs, including

Regulators—Recognizing that information compiled by professional

accountants under proposed ISRS 4410 will likely of particular interest and

relevance to users in the SME environment (for example, creditors, lending

institutions, suppliers) and, in some cases, regulators, the IAASB invites

respondents from these constituencies to comment on the proposed ISRS,

in particular on the form and content of the illustrative practitioners’ reports.

As we do not represent users, such as creditors, lending institutions,

suppliers or regulators, we cannot respond to this request for comment.

9. Developing Nations—Recognizing that many developing nations have

adopted or are in the process of adopting the International Standards, the

IAASB invites respondents from these nations to comment, in particular, on

any foreseeable difficulties in applying the proposed ISRS in a developing

nation environment.

We have no comments in this regard.

10. Translations—Recognizing that many respondents may intend to translate

the final ISRS for adoption in their own environments, the IAASB welcomes

comment on potential translation issues respondents may note in reviewing

the proposed ISRS.

We would like to point out that the definitions of “compile” and “compilation

engagement” in paragraph 15 (b) and (c) of the draft contain an inherent

contradiction, which will cause significant difficulty upon translation and in

understanding even when no translation is involved (i.e., this is not just a

translation matter, even though we have chosen to address the issue here).

The definition of “compilation engagement” speaks of “assists management

in preparing and presenting financial information of an entity by compiling

that information”, but at the same time, the definition of “compile” states “to

apply accounting and financial reporting expertise to prepare and present

financial information”. Hence, on the one hand, the practitioner “assists

management in preparing and presenting” when performing a compilation

engagement, but on the other hand, the practitioner “prepares and presents


the financial information” when compiling. Who is doing the preparing or

presenting: management or the practitioner? The proposed report in the

draft is then also inconsistent with the definitions by stating that

management is “responsible for the financial statements”, rather than stating

that management is responsible for preparing and presenting the financial

statements.

These problems stem from the fact that, unlike the practice in national

standards in some languages (such as in Germany), the draft does not

clearly distinguish the responsibility of management to prepare financial

statements from the responsibility of the practitioner under the engagement

to “draw up” the financial statements for management to assist it in meeting

its distinct preparation responsibilities. We therefore recommend that in the

definition of “compile” in paragraph 15 (b) the words “prepare and present”

be replaced with “draw up”, or something similar, so that the words “prepare”

and “present” are only used in connection with the responsibilities of

management. This means that wherever “prepare and present” is used in

connection with the practitioner elsewhere in the draft, it should be replaced

with “compile”. Furthermore, the ISAs distinguish between management

responsibilities for financial statements prepared using compliance

frameworks (“prepare”) and financial statements prepared using fair

presentation frameworks (“prepare and present”). Hence, the words

“prepare and present” when used in connection with management

responsibilities would need to be replaced with “…prepare (and for fair

presentation frameworks, prepare and present)…”, which would also be

consistent with the usage of “prepare” and of “present” in the ISAs and

thereby allow ISRS 4410 to articulate with the ISAs (see our comments in

the letter).

11. Effective Date—Recognizing that proposed ISRS 4410 is a substantive

revision of extant ISRS 4410, and given the public interest need to

harmonize practice internationally as soon as practicable, the IAASB

believes that an appropriate effective date for the standard would be 18

months after approval of the final revised standard. Assuming the IAASB

intends to finalize the revised standard in December 2011, it would then be

effective for compilation engagements performed for financial information for

periods ending on or after June 30, 2013. The IAASB welcomes comment

on whether this would provide a sufficient period to support effective

implementation of the final ISRS.


With the exception of ISAE 3402, IAASB standards currently in effect that do

not relate to reporting, or quality control for firms, have an effective date for

periods beginning on or after a certain date. The mode of effective date

proposed in the draft is being changed to compilation engagements for

financial information for periods ending on or after a certain date.

Like that proposed for ISA 610, this is a major change in the applicability of

the effective date, but without any justification for the change – nor is this

change highlighted in any way in the Explanatory Memorandum. In our view,

the IAASB did not follow appropriate due process in this respect.

The reason for changing to “periods ending” appears to have been that

some national standards setters and firms had overlooked the fact that

reference is made to “periods” and not “years” “beginning on or after” for the

clarified ISAs, which implies that short periods of less than a year would be

affected. This engendered the need for the IAASB to issue a Frequently

Asked Question to limit the application of the clarified ISAs to years ending

December 15, 2010, but not to shorter periods ending before then. The

change to “periods ending on or after” would prevent such untoward short-

period issues from arising.

However, the question arises whether this change would have other impacts

that have not been considered. In particular, the change means that financial

information for short periods (e.g., the first three quarters) ending prior to

December 15 of an effective date would be compiled using the old ISRS

4410, whereas the last quarter and the entire year would need to be

compiled using the new standard. Does this mean that in cases where

financial information for one or more of the first three quarters are compiled

using the old standard, but the information is also compiled for the full year,

the practitioner will need to perform additional work on the first three

quarters in accordance with the new standard?

Furthermore, in an compilation of financial information covering a long

period (e.g., of two years) for which the first year had been previously

compiled using the old standard, would the practitioner need to do additional

work on the first year to ensure that the entire period (the two years) was

compiled using the new standard?

We recognize that standards setters such as the PCAOB and APB are using

“periods ending” rather than “periods beginning”, but this relates to the fact

that they have a particular regulatory mandate in which the focus is on the

audit of annual financial statements. This standard covers the compilation of

a wide variety of historical financial information, including of special purpose


financial information, of a completely voluntary nature, in which compilations

of short periods together with compilations of the entire year thereafter, and

compilations of long periods (i.e., more than a year), are not that uncommon.

If there is concern about effective dates that are too early given the

experience in relation to short periods for the clarity ISAs, a better solution is

to move the effective date to an additional year later, rather than to have

short periods within entire years compiled using different standards due to

the use of “periods ending” rather than “periods beginning”. We also note

that using “periods beginning” would not cause any difficulty for training in

the firms because the first possible period of applicability would be after

December 15, which means that training provided by firms or accountancy

bodies in the previous summer or fall (when such training mostly takes

place) can be provided on a timely basis.

On the whole, the change to “periods ending on or after” does not appear to

be appropriate given these considerations.


APPENDIX 2:

Comments by Paragraph

1. Since the practitioner is reporting on the engagement and not on the

historical financial information in a compilation engagement, we suggest

moving the phrase “historical financial information” to in between the

words “compile” and “and report” and delete the word “on”.

3. We suggest deleting the words “on the basis that” and replacing the word

“is” thereafter with “being” to make the sentence read better.

4. We suggest that the word “produce” in (a) and (b) be replaced with “issue”,

since the word “produce” is a rather legalistic term. In (b) we suggest

deleting the word “Any”, since it is superfluous, and to delete the word “a”

prior to “funding” and to delete the word “grant” thereafter, because not all

funding relates to grants.

5. In line with our response to Question 10 on Translation, the words

“preparation and presentation” ought to be replaced with “…preparation

(and in the case of a fair presentation framework, preparation and

presentation)…”. Throughout the draft, when speaking of the practitioner,

“preparation and presentation” should be replaced with “drawing up” and

when speaking of management responsibilities “preparation and

presentation” should be replaced with “…preparation (and in the case of a

fair presentation framework, preparation and presentation)…”.

13. We refer to our comments to Question 11 in Appendix 1 to this comment

letter on the effective date.

14. Since the application of accounting and financial reporting expertise, and

not financial reporting framework, is based on information provided by

management, we suggest moving the phrase “based on information

provided by management” to the beginning of (a).

15. Since we believe that a stand-alone standard should contain all of the

definitions required to understand the terms used in the standard that have

a definition that varies from common English usage, we believe that the

reference to the Glossary of Terms is inappropriate and should be deleted.

Furthermore, such a reference is of unclear obligation because the terms


defined in the Glossary are not authoritative unless included in the

standard. For these reasons, we suggest that the IAASB consider the

terms used in the draft for which there is an applicable definition in ISQC 1

and in the ISAs that needs to be included in the definitions section.

Examples that occurred to us at first glance of definitions needed to

understand the standard include “partner”, “staff”, (and, as in draft ISRE

2400) “general purpose financial reporting framework”, “special purpose

financial reporting framework”, “special purpose financial statements”,

“general purpose financial statements”, “fair presentation framework”,

“compliance framework”, and “misstatement”. There may be a

considerable number of others. While this will increase the length of the

standard, including the definitions would help increase practitioner

understanding of the standard and help ensure its consistent application.

In any case, the words “common and” in the first sentence are superfluous

and can be deleted. The words “and translation” should be deleted

because that is the purpose of the glossary, not the purpose of the

definitions in the standard.

In relation to the definitions of “compile” in (b) and “compilation

engagement” in (c), we refer to our response to Question 10 on

translations. On this basis, the wording of the definition of “compile” in (b)

should read as follows:

“To apply accounting and financial reporting expertise to draw up

financial information in accordance with the applicable financial reporting

framework”.

Furthermore, the words “preparing and presenting” in the definition of

“compilation” in (c) should be changed to read “…preparing (and in the

case of a fair presentation framework, preparing and presenting)…”

16. In line with draft ISRE 2400, we suggest that paragraph 16 be deleted and

that the appropriate term or terms be used throughout the standard.

23. Items (c) (ii) c. and d. do not have a parallel construction to a. and b. We

suggest restructuring the wording in c. to start with “providing accurate and

complete records, documents, explanations and other information for the

compilation engagement…” and, in line with our comments to Question 10

on Translation in Appendix 1 to have d. read “the preparation of the

financial information compiled by the practitioner”.

24. If the engaging party is different from management, both management and

the engaging party would need to sign the engagement letter, since


management must acknowledge the items in 23 (c). We therefore suggest

replacing the word “or” with “and”.

25. In (e) since the practitioner can restrict both distribution and use, we

suggest deleting the words “either” and the second “its”.

27. We refer to our comments in our letter.

32. In relation to (b), we refer to our comments in our response to Question 4

in the Explanatory Memorandum. For this reason, we suggest that the

wording in (b) be changed to read:

“…, or, in the case of the application of a compliance framework, the

financial information is misleading.”

Similar conforming amendments would need to be made throughout the

draft where the reference is made to the misleading test.

34. In (a) we suggest that the word “which” be replaced with “these”. In

relation to (c), we refer to our comments to paragraph 32.

35. In line with draft ISRE 2400, the word “or” in the heading should be

changed to “and”, since the paragraph relates to the communication with

both management and those charged with governance.

36. In (b), the words “the sources…” together with the introductory sentence to

this paragraph leaves the impression that the engagement documentation

needs to include the sources themselves, when what is meant is a

reference to those sources. We therefore suggest that the words “The

sources” in (b) be replaced with “A reference to the sources”.

37. On the whole, we note that the wording for the report is more prescriptive

in draft ISRE 2400 than in draft ISRS 4410. Since compilations are largely

an unregulated activity, much like reviews, it may be better to be as

prescriptive as ISRE 2400 so as to not invite regulators in future to depart

from the report required by ISRS 4410 and still claim compliance

therewith.

In (c) (i), the word “and” should be replaced with “or”, since an element can

only be either related to a point in time or a period of time, not both. This

would be in line with ISA 700.

In (c) (ii), the words “in accordance with the agreed terms of engagement”

no longer apply to any of the illustrations and can therefore be deleted.


In (f), as referred to in our response to Question 6 in the Explanatory

Memorandum, we suggest that the IAASB may wish to consider whether

to add a sentence that is equivalent to that in ISRS 4400.18 (k).

A1. The word “making” in the third sentence should be replaced with “issuing”.

In the last sentence, a comma should be inserted between the words

“information” and “report”.

A2. The second sentence is in the wrong place, since the first sentence relates

to the fourth (and the following sentence relates to the examples). We

suggest moving the first sentence to after the third sentence and to start

the current second sentence (now the first) with “This ISRS also

includes…”. In the bullet point list of examples, we suggest adding “pro

forma financial information”, since practitioners may also compile such

information on behalf of management. This would not affect ISAE 3420 in

any way because another practitioner could still perform an assurance

engagement on pro forma information (or the compilation thereof, as the

case may be) that was compiled by the first practitioner.

A3. We suggest replacing the word “use” with “apply” and to move and set off

with commas “adapted as necessary” to in between “this ISRS” and “for

those compilations”, since it is the application of the ISRS that would be

adapted as necessary.

A6. In line with our comments on paragraph 3, we suggest deleting the phrase

“the basis that” and replacing the word “are” thereafter with “being”. The

last sentence is not a complete sentence. Either the period after the

second sentence prior to the phrase “that is” should be replaced with a

dash, or to start a new sentence with the phrase “Such requirements are

at least as demanding as those of ISQC 1 when…”.

A10. We refer to our response to Question 1 in the Explanatory Memorandum,

which addresses the fact that other accounting services should not be

included in a compilation engagement as defined in the ISRS. In line with

our response to Question 10 in the Explanatory Memorandum on

Translations, we suggest that the word “presenting” in the first sentence be

replaced with “drawing up”. The word “accounting” needs to be added in

between the words “providing” and “services” in the third sentence.

A11. The words “to express” should be changed to “to convey” to be in line with

ISAE 3000, since practitioners obtain and convey assurance, they do not

express assurance. In the last sentence, a comma should be inserted after

the word “misunderstanding” and a comma with the word “both” inserted


after the words “assurance engagement”, the words “when agreeing”

should be replaced with “in”, and

compilation engagements - ifac · 2011. 8. 17. · tailoring of the provisions applicable for...

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