Statement of the future.
The AICPA, as part of its initiative to make standards easier to read. understand and apply, began issuing clarified standards in 2011 (Statement on Auditing Standards Nos 122-124). This new statement presents general principles intended to help accountants better understand professional responsibilities when performing engagements in accordance with SSARS, introduces a new financial statement preparation service (called "preparations") and makes significant changes to compilation and review engagements.
These new standards have a SSARS designation to differentiate them from standards designated "AR." This statement has an effective date for engagements performed, engagements to prepare financial statements, compilations for financial statements and reviews of financial statements for periods ending on or after Dec. 15, 2015. Early implementation is permitted. SSARS 21 supersedes all of the existing AR sections other than AR 120, Compilation if Pro Anita Financial Information, which will be addressed by ARSC.
SSARS No. 21 has lour sections: Sec. 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services; Sec. 70, Preparation of Financial Statements; Sec. 80, Compilation Engagements: Sec. 90, Review of Financial Statements.
General Principles: SSARS 21, Sec.
60 SSARS 21 Sec. 60 provides general principles [Or engagements performed in accordance with SSAR.S 21. It's intended to help accountants better understand their professional responsibilities when performing engagements to prepare financial statements, compilations or reviews. Along with an explanation of its application and other explanatory materials, there are six requirements:
1. Financial statements: The financial statements subject to the engagement performed in accordance with SSARSs are those of the entity The preparation and fair presentation of such financial statements requires identification of the applicable framework. preparation of the financial statements in accordance with that framework and inclusion of an adequate description of that framework in the financial statements. The framework can be a general-purpose framework or a special-purpose lnunework, depending on the needs of the users.
2. Ethical requirements: The accountant should comply with relevant ethical responsibilities relating to engagements performed in accordance with SSARSs. as well as the AlCPA Code of Professional Conduct, the rules of state hoards of accountancy zinc' tither regulatory bodies.
3. Professional judgment: The accountant is expected to have the training, knowledge and experience to develop the necessary competencies to make professional judgment in an engagement.
4. Conduct of the engagement in accordance with SSARS: The requirement includes complying with SSARS sections relevant to the engagement; complying with relevant requirements; defining professional responsibilities; and other preparation, compilation and review publications.
5. Engagement level quality control: Engagement learns are responsible for implementing quality control procedures applicable to the engagement and in the context or the firm's quality control system.
6. Acceptance and continuance of client relationships and engagements to prepare financial statements: The accountant should only accept an engagement for which there is reason to believe ethical requirements will be satisfied. The accountant's preliminary understanding of the engagement indicates that the information needed to perform the engagement is likely to be available and reliable. Finally, the accountant should have no cause to doubt the management's integrity as to the effect on the performance of the engagement.
Preparation of Financial Statements: SSARS 21, Sec. 70 SSARS 70,
Preparation of Financial Statements, covers a new type of service regarding financial statement preparation. This type of service is distinguished from compilation services by being engaged to prepare financial statements (compilation services) and assisting in preparing financial statements the new service.
The following are examples of services to which Sec. 70 applies compilation services that are covered in Sec. 80 are mentioned Eater in the article). The items below are not exhaustive, and there may be additional services based on the accountant's professional judgment. hi addition. SSARS Sec. 70, paragraph A20. provides illustration of an engagement letter lor preparation of financial statements in accordance with the accounting principles accepted in the United States. It's pointed out that the engagement letter will vary according to individual requirements and circumstances, and that the accountant max seek legal advice about the suitability of a proposed letter.
Services covered by SSARS Sec. 70 include:
* Preparation of financial statements prior to audit or review by another accountant:
* Preparation of financial statements prior to be presented alongside the entity's tax return;
* Preparation of personal financial statements for presentation alongside a financial plan;
* Preparation of single financial statements, such as a balance sheet of income statement for financial statements with substantially all disclosures omitted: and
* Using the information in a general ledger to prepare financial statements outside an accounting software sy stem.
Some examples of services not covered by SSARS Sec. 70 that are considered engagements to prepare financial statements:
* Preparation of financial statements when the accountant is engaged to perform an audit, review or compilation of such financial statements;
* Preparation of financial statements with a tax return solely for submission to taxing authorities;
* Personal financial statements that arc prepared for inclusion in written personal financial plans prepared by the accountant:
* Financial statements prepared in conjunction with litigation services that involve pending or potential legal of regulatory proceedings:
* Financial statements prepared in conjunction with business valuation services;
* Maintaining depreciation schedules;
* Preparing or proposing certain adjustments, such as those applicable to deferred taxes, depreciation or leases:
* Drafting financial statement notes; and
* Entering general ledger transactions or processing payments general bookkeeping in an accounting software system.
Financial statements under these new rules
should be prepared using records, documents, explanations and other information provided by management. Sec. 70 does not require an accountant's report opinion letter. As a minimum, appearing on each page of the financial statements, including notes, should be a statement that no assurance is provided, such as "No assurance is provided on these financial statements" or " These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them." If such a statement cannot be made on each page of the financial statements, then the accountant should issue a disclaimer that makes it clear that no assurance is provided on the financial statements. An example is:
"The accompanying financial statements of XYZ Company as of and for the year ended Dec. 31. XXXX. were not subjected to an audit, review or compilation engagement by me us and, accordingly, 1 (we) do not express an opinion, a conclusion or provide any assurance on them."
For special-purpose financial statements, a description of the special-purpose framework is usually placed under the title, although it may be placed elsewhere.
If the financial statements contain a material misstatement of misstatements, the disclosure may be made on either the face of the financial statements or in a note to the financial statements. For statements that omit substantially all the disclosures required by applicable financial reporting framework, the disclosure may be made on the face of the financial statements in a selected note to the financial statements.
If the accountant prepares financial statements thai include disclosures about only a few matters in ihe notes to the financial statements, then the disclosure may be labeled "Selected Information Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included."
Financial statements in formats dictated by others such as accountings pursuant to the L'niform Probate Code) can now be issued without an accountant's opinion (but with the required engagement letter), clarify ing previously unclear rules with respect to such statements in a required format.
Compilation Engagements: SSARS 21, Sec. 80
The existing requirements and guidance for compilations are relatively unchanged by SSARS. SSARS 21, Sec. 80 does contain some important modifications:
* Previously; accountants determined whether they were required to compile financial statements based on whether they had submitted financial statements under SSARS submission driven. Under SSARS 21. accountants only compiles financial statements when they are engaged to do so engagement driven
* Compilations always require a report. Non-reporting. managemeni-use-only engagements are covered under SSARS 21. Sec. 70.
The accountant must obtain an engagement letter signed by both the CPA and the client's management.
* The compilation report is shorter and usually contains only one paragraph instead of three with no headings. It also must include the city and state where the accountant practices.
* Compilations may be prepared with or without disclosure. In those cases, where financial statements that include substantially all disclosures are prepared in conformity with a special purpose framework, the compilation report will include a separate paragraph regarding that framework.
A determination as to whether the accountant is independent also is required in addition to the general principles required lo comply with SSARS. Sec. 60. In addition to paragraph .25 of Sec. 60, the accountant should agree upon the terms of die engagement with management with an engagement letter or other suitable form of written communication.
This communication should include the objectives of the engagement: the responsibilities of management: the responsibilities of the accountant: the limitations of the compilation agreement; identification of the applicable financial reporting framework; and the expected form of the accountant's compilation report and a statement that there may be circumstances in which the report may differ from its expected form and content. Examples of engagement letters are in SSARS, Sec. 80. par .A42. Exhibit A: Illustrative Engagement Letters.
The accountant's compilation report should be in writing and include:
* A statement that management (owners is are responsible Ibr the financial statements.
* The financial statements that have been subjected to the compilation engagement should be identified.
* The entity whose financial statements have been subjected lo the compilation engagement should be identified.
* The date or period covered by the financial statements should be specified.
* A statement that the accountant performed the compilation engagement in accordance with SSARSs promulgated by the Accounting and Review Services Committee of the AICPA.
* A statement that neither did the accountant audit or review the financial statements, nor was the accountant required to perform any procedure to verify the accuracy or completeness of the information provided by management. Moreover, the statement should make clear the accountant neither expresses an opinion or conclusion, nor provides any assurance on the financial statements.
* The signature of the accountant or the accountant's firm.
* The city and state where the accountant practices.
* The date of the report, which should be the dale that the accountant has completed the required procedures.
In addition, other modifications the compilation report are made:
* When financial statements are prepared in accordance with a special-purpose framework;
* When the accountant is not independent.; and
* On financial statements that omit substantially all disclosures required by the applicable financial reporting framework, reporting known departures from the applicable reporting framework and supplementary information. SSARS 21. Sec. 80, Exhibit A contains illustrative engagement letters. Exhibit B contains illustrative examples of the accountant's compilation report on financial statements.
Review Engagements: SSARS 21, Sec. 90
The review engagement guidance under SSARS 90 remains mainly intact under SSARS 21, but there are important changes:
* As with the changes in sections 71) and 80 above, the accountant must obtain an engagement letter signed by the accountant and the client's management.
* The reviewed financial statements report must incorporate headings similar to those in a report on audited statements and include the city and state where the accountant practices.
* In those eases where reviewed financial statements are prepared in conformity with a special-purpose framework, the review report will include a separate paragraph regarding that framework.
* The accountant must obtain evidence that the financial statements reconcile to the accounting records.
* In certain circumstances, the accountant is required to include paragraphs in the review report lor emphasis-of-mattcr and other-matters as used in audit literature.
* SSARS 21 introduces requirements when using the work of other accountants.
* The accountant must determine whether modifications should be made to the financial statements based on accumulated and evaluated misstatements identified while performing review procedures.
* The accountant should consider modifications to the standard review report are necessary if there are know n departures from the applicable financial-reporting framework. 1 he accountant also should consider whether modifications adequately address the departures, or whether he or she should withdraw from the engagement.
SSARS. Sec. 90, Exhibit A contains illustrative engagement letters. Exhibit B shows an illustrative representation letter. Exhibit C shows illustrations of accountants' review reports on financial statements.
Statement on Standards for Accounting and Review Services No. 21
Michael B. Allmon, MBT, CPA is a partner at Michael B. Allmon & Associates, LLP CPAs and founding chair of the CalC PA Estate Planning Committee. Michael L. Moore, Ph.D., CPA is professor in residence of accounting at Loyola Marymount University. You can reach them at firstname.lastname@example.org and michael.moore@Imu.edu.