By Mitchell K. McKenney, CPA
AICPA’s accounting and review services committee issued several statements and interpretations in the second half of 2007 that revised professional standards for review and compilation engagements. In large part, the motivation was to further separate review and compilation standards (SSARS) from auditing standards (SAS). There are many firms that no longer perform audit engagements, or never did, but have an accounting practice. The SSARS previously made significant reference to the auditing standards to fill in the gaps where SSARS did not specifically address issues. Thus, firms needed SAS resources and guidance to properly conform to SSARS, even those firms that had no audit engagements.
The recent revisions remove many SAS references, and instead provide more detailed guidance applicable to SSARS engagements.
Financial statements prepared using other comprehensive basis of accounting (OCBOA), instead of generally accepted accounting principles (GAAP), are common. The standards now clearly define OCBOA as "a definite set of criteria, other than GAAP, having substantial support underlying the preparation of financial statements prepared pursuant to that basis." The most common examples cited are regulatory basis, income tax basis, and cash or modified cash basis. In addition, the standards now provide appropriate OCBOA financial statement titles.
Reporting on OCBOA statements now will be more consistent, since the standards provide samples of review and compilation report wording to be used in most common situations, including instances where the financial statements include a departure from GAAP or OCBOA. Guidance also is provided on the use of emphasis paragraphs in reports. An emphasis paragraph is never required, but may be added at the accountant’s discretion. Common examples cited include uncertainties, significant related-party transactions, important subsequent events, and items affecting comparability. An emphasis paragraph should not be used in a compilation without disclosures.
An accountant is not required to perform any additional review or compilation procedures subsequent to the date of the accountant’s report. However, the accountant may become aware of facts that may have existed at that date, causing him or her to believe the information previously supplied by the entity is incorrect, incomplete, or unsatisfactory. SSARS provides detailed guidance for the appropriate steps to be taken in this situation. The steps include considering whether the accountant’s report is no longer appropriate and whether the accountant believes that financial statement users would attach importance to that information. Obtaining additional information or performing additional review procedures may be necessary, and the accountant may conclude that actions should be taken to prevent further use of the accountant’s report or the statements. Steps might include issuing revised statements, disclosing the matter in the subsequent statement if the issuance of that statement is imminent, or notifying statement users that the statements should not be used and that revised statements will be issued at a later date.
A representation letter is required from the client in all review engagements. The purpose is to confirm oral representations made to the accountant during the review. The standards now emphasize that the representation letter should be tailored to include additional appropriate representations relating to matters specific to the entity’s business or industry. A generic representation letter may no longer be sufficient. The standards now contain a list of conditions and examples of suggested representations.
The standards also clarify the meanings of certain terms. Requirements fall into two categories: unconditional and presumptively mandatory. Unconditional requirements are indicated by the words "must" or "is required," and must be adhered to. Presumptively mandatory requirements are indicated by "should," and also must be followed unless the accountant justifies the departure, describing why alternate procedures were sufficient to achieve the objective.
The objectives and limitations of review and compilation engagements now more fully describe the procedures performed in an audit that are not performed in reviews and compilations. Suggested engagement letters provide a similar list of typical audit procedures that are not performed in a review or compilation.
Forming an expectation is an integral part of the analytical procedures process. The standards now provide detailed examples of sample steps, including developing expectations for key areas and comparing results to those expectations.
The revisions to SSARS provide the profession with clearer, easier-to-follow guidance. They are particularly helpful for practitioners who have limited auditing practices.
Mitchell K. McKenney, CPA, is a partner with Buckler, McKenney & Nadzadi PC in Monroeville. He is a member of PICPA’s Accounting and Auditing Procedures and Peer Review committees. He can be reached at mitch@bmn-cpa.com.
Copyright 1998-2008 PICPA. All rights reserved. Contact journal@picpa.org for reprint permission