Guidance for Compilation and Review Engagements
Thomas A. Ratcliffe
November 2002, the AICPA Accounting and Review Services
Committee (ARSC) issued Statement on Standards for Accounting
and Review Services (SSARS) 9, Omnibus Statement on
Standards for Accounting and Review Services–2002.
SSARS 9 updates, clarifies, and revises the compilation
and review engagement literature in the following areas
Sample wording addresses the situation where a CPA is
associated with unaudited financial statements of a nonpublic
entity and the CPA has not reviewed or compiled the financial
The SSARS reporting provisions now clarify that a statement
of retained earnings is not a required financial statement.
Additional guidance updates the content of management
representation letters required in review engagements.
The authoritative guidance now allows reporting on compiled
supplementary information to the basic financial statements
by issuing a separate report.
SSARS 4, Communications Between Predecessor and Successor
Accountants, now parallels changes in the auditing
of the SSARS 9 changes became effective upon issuance of
the document, with the exception of the new guidance related
to management representation letters, which became effective
for review engagements for reports dated on or after January
with Financial Statements That Have Not Been Reviewed or
auditing literature allows a CPA associated with the financial
statements of a public company, but who has not audited
or reviewed those financial statements, to state that he
has not audited this unaudited information; furthermore,
the auditing literature contains sample wording for this
situation. SSARS 9 provides sample wording when this situation
occurs in compilation and review engagements:
accompanying balance sheet of X Company as of December
31, 20X1, the related statements of income, and cash flows
for the year then ended were not audited, reviewed, or
compiled by us and, accordingly, we do not express an
opinion or any other form of assurance on them.
encounter such situations when they are engaged to perform
a business valuation and they derive information from a
client’s tax return; from another accountant’s
audited, reviewed, or compiled financial statements; or
from client-prepared financial statements. In June 2003,
the ARSC staff issued SSARS 1/Interpretation 23, Applicability
of Statements on Standards for Accounting and Review Services
When an Accountant Engaged to Perform a Business Valuation
Derives Information from an Entity’s Tax Return.
As discussed in Interpretation 23, when a CPA derives information
from another source and has not “submitted”
financial statements as contemplated in SSARS, the CPA should
refer to the source of the financial information and indicate
in the report that she has not audited, reviewed, or compiled
the financial information and that she assumes no responsibility
for the information. Essentially, Interpretation 23 covers
a special case of SSARS 9’s general guidance related
to special reports. The following is an example of the appropriate
SSARS 9 wording for such situations:
preparing our business valuation report, we have relied
upon historical financial information provided to us by
management and derived from [refer to the source of
the information, such as a tax return, an audit report
issued by another auditor, etc.].
financial information has not been audited, reviewed, or
compiled by us and accordingly we do not express an opinion
or any form of assurance of this financial information.
the CPA becomes aware that the client has improperly associated
her name with a client-prepared document containing unaudited
financial statements, she should advise the client that
such use of her name is inappropriate, and consider what
other actions might be appropriate, including consultation
with an attorney.
Statement of Retained Earnings
accounting literature does not require the statement of
retained earnings as a basic financial statement. Accounting
Principles Board (APB) Opinion 12, Omnibus Opinion–1967,
requires disclosure of changes in equity during a reporting
period. This disclosure requirement can be accomplished
by preparing a separate financial statement (e.g., a statement
of changes in equity or a statement of retained earnings),
by combining these disclosures within the body of another
financial statement (e.g., a combined statement of income
and retained earnings), or by presenting these disclosures
in the notes to the financial statements. SSARS 9 stipulates
that there is no requirement for a statement of retained
earnings in GAAP-based financial statements, nor in financial
statements prepared under some other comprehensive basis
of accounting (OCBOA).
clarification addresses the situation where a CPA has compiled
financial statements in which management has omitted substantially
all disclosures required by GAAP or OCBOA. Compilation reports
need not refer to an omitted statement of retained earnings,
because the statement of retained earnings is not a required
financial statement. In compiling an OCBOA financial statement,
there should be no reference to the omission of either the
statement of cash flows or the statement of retained earnings,
because neither is required.
9 identifies the content of these representation letters,
their dating, and the reporting periods covered by management
representations. Written representations are required from
management for all financial statements and reporting periods
covered by a review report. For example, for comparative
financial statements, representations obtained at the completion
of the most recent review engagement should address all
periods covered by the report. The specific representations
will depend on the circumstances of the engagement, and
the nature and basis of presentation (i.e., GAAP or OCBOA).
Management’s representation letter should include
Management’s acknowledgment of responsibility for
fair presentation in the financial statements.
Management’s belief that the financial statements
are fairly presented in conformity with GAAP or OCBOA.
Management’s acknowledgment of full and truthful
responses to all inquiries.
Management’s acknowledgment of responsibility for
the completeness of the information within the financial
Management’s acknowledgment that the CPA has been
made aware of any subsequent events that could affect
measurements or disclosures in the financial statements.
management representation letter should be addressed to
the CPA. Because events occurring through the date of the
review report may require adjustment to, or disclosure in,
the financial statements, the representation letter should
be dated no earlier than the review report. Those members
of management responsible for and knowledgeable about the
matters in the representation letter, normally the CEO and
CFO, should sign it. Current management should sign written
representations for all periods covered by the report, even
if it was not present during them all. An example of a review
engagement representation letter updated for SSARS 9 appears
on Compiled Supplementary Information
SSARS 9, it was unclear whether a separate report could
be issued on compiled supplementary information if that
information accompanies compiled financial statements. The
review engagement literature allows the issuance of a separate
report on supplementary information that accompanies reviewed
financial statements. The compilation engagement literature
now accepts a separate compilation for supplementary information
that accompanies compiled financial statements.
a CPA has compiled both the basic financial statements and
the supplementary information (presented only for supplementary
analysis purposes), the compilation report on the basic
financial statements can include a reference to the supplementary
information, or there can be a separate report on this information.
If a separate report is issued, it should state that this
information is presented only for supplementary analysis
purposes, that it has been compiled from information that
is the representation of management without audit or review,
and that the CPA does not express an opinion or any other
form of assurance on the information. Exhibit
2 provides an example of a model compilation report
with a reference to compiled supplementary information.
A separate report would use the following wording:
report on our compilation of the basic financial statements
of X Company appears on page 1. A compilation is limited
to presenting in the form of financial statements information
that is the representation of management [the owners].
We have not audited or reviewed the financial statements
and, accordingly, do not express an opinion or any other
form of assurance on them. The information included in
the accompanying [identify the supplementary schedules]
is presented only for supplementary analysis purposes.
Such information has been compiled from information that
is the representation of management [the owners], without
audit or review. Accordingly, we do not express an opinion
or any other form of assurance on the supplementary information.
Between Predecessor and Successor Accountants
9 amends SSARS 4 to provide guidance on communications when
the successor accountant decides to communicate with the
predecessor accountant regarding the acceptance of a compilation
or review engagement. SSARS 9 does not require a successor
to communicate with the predecessor, nor does it require
a response from the predecessor when the successor initiates
communications. SSARS 9 modifies the definition of predecessor
and successor accountant, provides guidance regarding acceptance
of an engagement, provides suggested inquiries that the
successor accountant may decide to ask, and includes a sample
successor accountant acknowledgment letter that the predecessor
may use when granting access to workpapers.
accountant is one who is considering accepting or has accepted
a compilation or review engagement. A predecessor accountant
is one who has reported on the most recent compiled or reviewed
financial statements or resigned from the engagement, declined
to stand for reappointment, or otherwise will not complete
such an engagement.
successor accountant may decide to communicate with a predecessor
accountant in the following circumstances, among others:
Information obtained about the prospective client or management
is limited or appears to require special attention.
The change in accountants takes place substantially after
the end of the reporting period for which the financial
statements are to be compiled or reviewed.
There have been frequent changes in accountants.
successor accountant should remember that the predecessor
accountant and the client may have disagreed about accounting
principles, procedures applied by the predecessor accountant,
or other significant matters. Before communicating with
a predecessor, the successor accountant should request permission
from the prospective client to make such inquiries and to
authorize the predecessor to respond fully.
inquiries may be verbal or written. The inquiries should
be specific, regarding matters that will assist the successor
in determining whether to accept the engagement. Typical
inquiries would include:
Information that might bear on the integrity of management.
Disagreements with management about accounting principles
or the need to perform certain procedures.
The cooperation of management in providing additional
or revised information.
predecessor’s knowledge of any fraud or illegal
The predecessor’s understanding of the reason for
the change in accountants.
the successor accountant wants to review the predecessor’s
workpapers, he should request that the client authorize
access to them. Customarily, the predecessor will make certain
workpapers available for review. The predecessor accountant
may want an understanding with the successor accountant
about the use of the workpapers, and request a written communication
from the successor accountant about their use. An illustrative
successor accountant acknowledgement letter appears in SSARS
9, Appendix A. An example of a successor accountant acknowledgment
letter is shown in Exhibit
9 addresses two other issues:
Before SSARS 9, the compilation and review engagement
literature did not require a CPA’s signature on
compilation and review reports. SSARS 9 requires a signature
(manual, stamped, electronic, or typed) on these reports.
As a practical expedient, ARSC allows a typed signature
on compilation and review reports.
Before SSARS 9, the compilation and review engagement
literature did not cross-reference the AICPA’s Statements
on Quality Control Standards (SQCS). The SQCSs include
compilation and review engagements among those subject
to quality control standards. SSARS 9 cross-references
the SQCSs. Importantly, deficiencies in, or noncompliance
with, a firm’s quality control policies and procedures
do not, in and of themselves, indicate that a particular
compilation or review engagement was not performed in
accordance with SSARS.
July 2002, the staff of the ARSC released SSARS 1/Interpretation
21, Applicability of SSARS 1 When Performing Controllership
or Other Management Services. When a CPA in the practice
of public accounting provides an entity with controllership
or other management services involving the submission of
financial statements, and the CPA is not a stockholder,
partner, director, officer, or employee of the entity, he
must follow the performance and communication requirements
in SSARS, including the requirement to disclose lack of
a CPA in public accounting practice is a stockholder, partner,
director, officer, or employee of the entity, she may either
comply with the SSARS requirements or communicate, preferably
in writing, her relationship to the entity (e.g., stockholder,
partner, director, officer, or employee of the entity).
An example of this type of communication follows:
accompanying balance sheet of Company X as of December
31, 20XX, and the related statements of income and cash
flows for the year then ended have been prepared by [name
of accountant], CPA. I have prepared such financial statements
in my capacity [describe capacity; for example, as a director]
of Company X.
not in public accounting practice cannot issue reports under
December 2002, the staff of the ARSC issued SSARS 1/Interpretation
22, Use of Selected Information–Substantially
All Disclosures Required by Generally Accepted Accounting
Principles Are Not Included. It reiterates that using
the “selected information” label for financial
statement notes when the financial statements include more
than a few disclosures is not appropriate. The omission
of one or more financial statement notes or disclosures
when substantially all other notes and disclosures are presented
should be treated like any other departure from GAAP or
OCBOA, by disclosing the nature of the departure, along
with its effects.
ARSC staff plans to issue additional interpretations (e.g.,
the comprehensive income display issue; the reference to
the country of origin associated with accounting principles
or auditing standards). Furthermore, the ARSC is finalizing
new SSARS. One of the primary substantive issues for the
relatively near future involves more extensive performance
guidelines for review engagements performed under SSARS.
A. Ratcliffe, PhD, CPA, is dean of the Sorrell College
of Business and Eminent Scholar in Accounting and Finance
at Troy State University, and a member of the AICPA Accounting
and Review Services Committee.