Compilation and ReviewsImplementing SSARS 19Effective for Periods Ending After December 15, 2010

SSARSWhat year was the first SSARS issued? Grease was the big movie of the summer Jimmy Carter was president Kenny Loggins had his first big solo album Cheech and Chong were Up in Smoke Saturday Night Live was doing Coneheads

Significant Changes

Compilations Reasons why CPA lacks independence

Reviews Tailor procedures based on understanding of client and industry Materiality is discussed

Compilations and Reviews More required documentation than previous standards

Significant ChangesDocument Compilation Report Review Report Compilation Engagement Letter Review Engagement letter Representation Letter Degree of Change Substantial Substantial Substantial Substantial Minor (reference to U.S.GAAP)

Significant ChangesQC will update Compilation and Review Caseware templates once PPC issues new forms and reports You will also receive guidance via the firm Accounting and Auditing Database (on the intranet) Consider updating Caseware files and reports during downtime Some (maybe all) PPC forms will need to be completed from scratch (for this year).

Overview of SSARS 19Section 1 Framework for Performing and Reporting on Compilation and Review Engagements Section 2 Compilation of Financial Statements Section 3 Review of Financial Statements

Exposure Draft = Issued Statement?

Two major differences: Independence for Reviews Limited assurance

Reviews Independence Required

Comments from the April, 2009 exposure draft Confusion about what it means to establish or maintain internal controls

ARSC will seek more input from: AICPA Professional Ethics Executive Committee National Association of State Boards of Accountancy

Reviews Still Limited AssuranceThe draft used the term moderate assurance The issued statement uses the term limited assurance

The international review standard will likely be changed from moderate assurance to limited assurance

Elements of a Compilation or a Review1.

2.3. 4. 5.

Three party relationship Applicable financial reporting framework Financial statements In a review, appropriate review evidence Written communication or report

Applicable Financial Reporting FrameworkU.S. GAAP GASB IFRSs (including SME GAAP) OCBOA Potentially a new little GAAP set of standards from the AICPA

CompilationEstablish an Understanding Understand the Industry Obtain Knowledge of Client Read Financials Develop Documentation Create Report

Compilation

Big Picture What level of assurance is provided?

Establish an UnderstandingRequired to be in writing Required to include:

Objective of engagement Accountant utilizes information of client: no assurance to be provided Management responsible for fair presentation Management responsible to prevent fraud Management responsible to comply with laws Management to provide all financial records to accountant

Establish an UnderstandingAccountant responsible for conducting the engagement in accordance with SSARS Compilation different from a review or an audit Cant be relied on to disclose errors, fraud or illegal acts

Establish an UnderstandingAccountant will inform management of errors, fraud or illegal acts noted Independence impairments will be noted in the compilation report, if applicable

Understand the IndustryUnderstand the industry Understand the related accounting principles Accountant can accept engagement without this knowledge (or prior experience), but must obtain the knowledge

Obtain Knowledge of Client

Understand the business Operating characteristics Nature of assets, liabilities, revenues & expenses Accounting Principles

Read the Financials

Accountant should read the financial statements and consider whether they are: Appropriate in form Free of material errors Contain adequate disclosure (when disclosures are included as a part of the engagement)

Read the FinancialsIf material error is noted, then request revision If revision is not made, then withdraw from the engagement

Compilation CycleEstablish Understanding

Issue Compilation Report

Understand Client

Read Report

Understand Industry

Documentation

Include: Engagement letter Any findings or issues that are significant How did you resolve material errors noted while reading the financial statements?

Communications regarding fraud or illegal acts

Reporting on Financials

Issue compilation report if: Engaged to issue compilation report or If there is a reasonable expectation that statements will be used by a third party

Reporting on Financials

Title Should have a title that clearly indicates that it is the accountants compilation report; for example: Accountants Compilation Report or Independent Accountants Compilation Report (Suggested)

Optional to include independent in title (per SSARS)

Reporting on Financials

Dating the Compilation Report The date the accountant completes the compilation

Financial statement references to the report should read: See accountants compilation report or See independent accountants compilation report (Suggested)

Reporting on Financials

OCBOA Statements (if client has not elected to omit disclosures): Must include a description of the OCBOA, including a summary of significant accounting policies and a description of the primary differences from GAAP Must include informative disclosures similar to those required by GAAP if the financial statements contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP

Reporting on Financials

Omitting substantially all disclosures Accountant, if engaged to do so, may omit substantially all disclosures Report language must state: Management has elected to omit substantially all disclosures The omission might influence the users conclusions Financials are not designed for those not informed about such matters

Reporting on Financials

Entity may include selected disclosures Must title those notes as: Selected Information - Substantially All Disclosures Required by Accepted Accounting Principles Generally accepted in the United States of America are not included

Reporting on Financials

When accountant is not independent include the following in the report: We are not independent with respect to XYZ Company.

Optional to disclose reason for lacking independence; for example: We are not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because a member of the engagement team had a direct financial interest in XYZ Company.

Reporting on Financials

When may I start describing the reasons for lack of independence in my compilation report? May I disclose the reasons for the lack of independence only for December 2009 compilations and subsequent periods, or may I use it for earlier compilations (for example, November 2009 compilations)?

Reporting on Financials

May I use the new standard compilation report illustrated in SSARS No. 19 after the standard is issued? Does SSARS No. 19 require me to state the reasons why Im not independent with respect to a compilation client? Are there any limitations on what the report may say in regard to the lack of independence?

Reporting on Financials

Assuming an accountant is not independent for two reasons (for example, a family relationship and ownership) does each reason need to be in a separate paragraph? May this independence provision be used for review reports as described in the exposure draft?

Reporting on Financials

What if the report is not expected to be used by a third party? Accountant is not required to issue a compilation report Include on each page of the financials: Restricted for Managements Use Only or Solely for the information and use by the management of XYZ Company and not intended to be and should not be used by any other party

Amend the engagement letter appropriately

Reporting on Financials

If accountant is aware that management-use-only statements are in the hands of a third party, then he/she should: Contact the client and request that statements be returned If no response within a reasonable time period, then accountant should notify known third parties that the financial statements are not intended for third party use

Reporting on Financials

Emphasis of a Matter (EOM) EOMs are never required; always optional

Examples: Uncertainties Important subsequent events Change in accounting principles that affects comparability

Never use an EOM in the report to introduce new information (information not included in the financial statements or notes)

Reporting on Financials

Departure from applicable reporting framework Modify report to disclose the departure and its effects (if known)

Reporting on FinancialsGeneral use reports those not restricted as to use Restricted use reports those restricted as to use

Should restrict if: Subject matter is based on criteria contained in contractual agreements or regulatory provisions that are not GAAP

Reporting on Financials

Adding Other Specified Parties If other specified parties (those not a part of the original agreement) are added to the restricted use report, the accountant should obtain affirmative acknowledgment, preferably in writing, from those parties: Their understanding of the nature of the engagement The measurement and disclosure criteria used The related report

Reporting on Financials

Restricted use language: A statement indicating that the report is intended solely for the information and use of the specified parties An identification of the specified parties A statement that the report is not intended to be and should not be used by anyone other than the specified parties

Reporting on Financials

Going Concern Reporting Accountant becomes aware of going concern red flags Not to exceed one year beyond the date of the financial statements being compiled

Request that management consider possible effects on the financials (including notes) Accountant should consider managements conclusions

Reporting on Financials

Going Concern Reporting

If accountant disagrees with conclusions, then he/she should follow GAAP departure guidance for reporting Accountant may use an EOM paragraph provided the uncertainty is disclosed in the financial statements

Reporting on Financials

Subsequent Events Accountant should request that management consider possible effects on the financial statements, including disclosure If subsequent event is not adequately accounted for, then consider modifying report for GAAP departure Can use an EOM paragraph if the issue is disclosed in the financial statements

Subsequent Discovery of Facts

The accountant may realize, subsequent to issuance of statements, that they are in error or incomplete.

Subsequent Discovery of Facts

Consider:

Issuing revised financial statements with accountants report If issuance of financial statements for a subsequent period is imminent, appropriate disclosure of the revision can be made in such statements instead of reissuing the earlier statements When effect of error cant be promptly resolved, ask client to contact users (e.g. banker) and let them know that revised statements will be issued as soon as practicable

Subsequent Discovery of Facts

If client does not cooperate, consider (with the advice of legal counsel): Notifying the client that the accountants report must no longer be associated with the financial statements Notifying any related regulatory agencies having jurisdiction over the client Notifying any known users of the financial statements

Supplementary InformationClearly indicate the degree of responsibility If you compile the financial statements and the supplementary information, you may:

Issue one report addressing the financials and the supplementary information Issue two reports: one for the financials and another for the supplementary information

Step Downs to a Compilation

If the accountant is performing an audit or a review and is asked to then step down to a compilation service, consider: Why the step down? If client had prohibited correspondence with entitys legal counsel (in an audit) or if client would not provide the accountant with a representation letter (in an audit or review), then the accountant is prohibited from issuing a compilation report.

Reviews

Two key elements: Analytics Inquiry

Precluded from performing a review engagement if the accountants independence is impaired for any reason.

Reviews - ChangesIntroduction of the term review evidence Discussion of materiality Requires written engagement letter

Establish an Understanding

Update your review engagement letters including: Managements responsibilities Accounting framework; for example: accounting principles generally accepted in the United States of America

Review Performance RequirementsAccumulate review evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made Review evidence:

Analytical Procedures Inquiry Additional procedures if deemed necessary

Review HierarchyInquiry & Analytics

Review Evidence

Limited Assurance

Understand the IndustryContractors Governmental Entity Banking Insurance Company Real Estate Company

Obtain Knowledge of the Client

Understand the business Operating characteristics Nature of assets, liabilities, revenues & expenses Accounting Principles

This knowledge will lend itself to the analytical procedures that will be performed.

Designing Review Procedures

Based on: Understanding of client Understanding of industry

Focus on risk areas Results of analytics and inquiry may reveal additional risk Designing procedures may require additional partner/manager time

Review CycleUnderstand Client

Issue Review Report

Understand Industry

Perform Procedures

Identify Risk of Material Misstatement

Plan your Procedures

Analytical Procedures

Knowledge of industry and client are used to: Create appropriate analytical procedures Compare the results with expectations

Analytical Procedures

Sources of information for expectations: Past experience with client Budgets or forecasts Relationships among elements of financial information Information regarding the industry Relationships of financial information with relevant nonfinancial information

Analytical Procedures

Can be performed at: Financial statement level or Detailed account level

The accountant may need to perform other procedures when management is unable to provide an explanation for differences

InquiriesPrepared in accordance with framework? Procedures for recording transactions and accumulating disclosure information? Uncorrected misstatements from prior period? Subsequent events? Knowledge of fraud? Accountant not required to corroborate responses, but consider reasonableness.

Old Standards

SSARS 19

Not required to document managements explanation for differences (from expectations) Not required to document managements responses to inquiries No requirement to document significant issues

Must document managements responses to differences (from expectations) Required to document managements responses to inquiries Required to document significant issues

Differences

Management LetterAlways required Make sure the letter covers all periods presented in the financial statements If current management was not present during all periods covered by the report, you must still obtain written representations from current management.

Management Letter

Changes include: No longer FASB 5; now FASB ASC 450 Add language specific to your accounting framework; for example, accounting principles generally accepted in the United States of America Managements responsibility for designing, implementing, and maintaining internal controls

Management Letter

Who should sign? Normally: Chief Executive Officer and Chief Financial Officer or others with equivalent positions

The letter should be signed by those members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter.

DocumentationEngagement Letter Analytical Procedures

Expectations Results of comparison of expectation with actual Managements responses to inquiries about inconsistencies or differences from expectations

Additional work performed in response to significant unexpected differences

DocumentationSignificant matters covered through inquiry Any findings or issues that are significant (e.g. findings indicating the statements are materially misstated) Communications regarding fraud or illegal acts Representation letter

Documentation

The accountant is not precluded from supporting the review report by other means in addition to the review documentation. Such other means might include written documentation in: Nonattest files (e.g. Tax Files) Quality Control files (e.g. Independence Files)

Oral explanations on their own do not represent sufficient support.

Reporting on Financials

Title the report:

Independent Accountants Review Report

Primarily applying analytical procedures and making inquiries Accountant performs procedures to obtain limited assurance that there are no material modifications that should be made In accordance with accounting principles generally accepted in the United States of America

Reporting on FinancialsDate of Report Should not be dated prior to the date the accountant has accumulated review evidence sufficient to support the report. Not defined Safest rule Date of Quality Control review or after (guidance from SAS 103 use date audited financials have been reviewed by Partner and QC)

Reporting on Financials

References Each page should state: See Independent Accountants Review Report

Other Matters

See slides in compilation section for guidance regarding: EOMs Departures from GAAP Going Concern Supplementary Information Subsequent Discovery of Facts General Use and Restricted Use Reports

Step Down from Audit to Review

If the accountant is performing an audit and is asked to then step down to a review service, consider: Why the step down? If client had prohibited correspondence with entitys legal counsel (in an audit), then the accountant is prohibited from issuing a review report.