Preparing financial statements of private entities based on information provided by the entity’s management. Through compilation services, a CPA prepares monthly, quarterly, or annual financial statements. However, he or she offers no assurance as to whether material, or significant, changes are necessary for the statements to be in conformity with generally accepted accounting principles, the cash basis, or the income tax basis of accounting. During a compilation, the data is simply arranged into conventional financial statement form. No probing is conducted beneath the surface unless the CPA becomes aware that the data provided is in error or is incomplete. However, before agreeing to perform a compilation, a CPA will take a “common sense” look at the entity to decide whether the client needs other accounting services, such as help in adjusting the accounting records.
Here’s what a compilation entails:
The CPA becomes familiar with the accounting principles and practices common to the client’s industry, and acquires a general understanding of the client’s transactions and how they are recorded. After compiling the financial statements, the CPA is obliged to read them and consider whether they are appropriate in form and free from obvious material errors. The CPA then issues a standard report that says, in effect, that the financial statements were compiled, but because they were not audited or reviewed, no opinion is expressed.
Compilation standards permit an accountant to compile financial statements that omit footnote disclosures required by generally accepted accounting principles or another comprehensive basis of accounting (cash or income tax). This is allowable as long as the omission is clearly indicated in the report and there is no intent to mislead users. However, when footnote disclosures have been left out, the CPA adds a paragraph to the compilation report stating that management has elected to omit disclosures. This paragraph lets the user know that if the financial statements contained this information, it might affect the user’s conclusions.
A compilation is sufficient for many private companies. However, if a business needs to provide some degree of assurance that its financial statements are reliable, it may be necessary to engage a CPA to perform a review or an audit.
Here is an illustrative compilation report:
Accountant’s Compilation Report
Stockholders and Board of Directors
We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19X5, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements information that is the representation of management (owners). We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.
January 31, 201X