Definition
A compilation refers to the preparation and presentation of financial statements by an accountant based on information provided by the entity, without the accountant performing any audit, review, or assurance procedures. This type of accounting service ensures that financial data presented in statements is in an orderly and professional format, but it does not express an opinion or any assurance regarding the compliance of the statements with Generally Accepted Accounting Principles (GAAP).
In performing a compilation, the accountant adheres to the Statements on Standards for Accounting and Review Services (SSARS) provided by the American Institute of Certified Public Accountants (AICPA). The engagement letter, which outlines the services to be rendered, limitations of service, and the nature of the compilation report, is an essential aspect of the service.
Examples
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Small Business Financial Statements: A small business may hire an accountant to compile its financial statements at the end of the fiscal year. The accountant organizes the financial data into the standard format, following SSARS, even though no auditing for accuracy or compliance with GAAP is performed.
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Nonprofit Organizations: Nonprofits might require compiled financial statements for internal management purposes or simple reporting to donors, where a detailed audit is not necessary.
Frequently Asked Questions
What is the main purpose of a compilation?
A compilation aims to present financial statements in an organized manner based on the client’s data. It does not involve audit or review procedures, thus no assurance is provided regarding the statements’ reliability or conformity with GAAP.
How does a compilation differ from an audit or review?
A compilation involves arranging financial information without providing any assurance as to whether the statements are free from material misstatement. An audit provides a high level of assurance through extensive testing and verification, while a review offers limited assurance based on inquiry and analytical procedures.
Licensed accountants, specifically those adhering to the AICPA’s SSARS standards, are eligible to perform compilations.
Is an engagement letter necessary for every compilation service?
Yes, an engagement letter is necessary. It details the nature of services to be provided, limitations, responsibilities, and the scope of the compilation.
What are the limitations of a compilation?
Since a compilation does not verify the accuracy of financial information, it cannot be relied upon to uncover errors, fraud, or material misstatements.
- Audit: A systematic examination of financial statements, providing a high level of assurance that the statements are free from material misstatement.
- Review: Provides limited assurance that no material modifications are needed by primarily conducting inquiries and analytical review procedures.
- GAAP (Generally Accepted Accounting Principles): A set of accounting principles, standards, and procedures that companies must follow when compiling their financial statements.
- SSARS (Statements on Standards for Accounting and Review Services): A set of standards issued by the AICPA governing the services provided by accountants involved in preparing unaudited financial statements.
Online References
Suggested Books for Further Studies
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso.
- “Accounting Services, the Mechanics of Performing a Compilation of Financial Statements” by Wiley CPA Exam Review Team.
- “Understanding Business Accounting For Dummies” by Colin Barrow, John A. Tracy.
Fundamentals of Compilation: Accounting Basics Quiz
### What is the primary purpose of a compilation service?
- [ ] To provide assurance that financial statements comply with GAAP.
- [ ] To detect and correct errors and fraud in financial statements.
- [x] To present financial statement information in an orderly format without assurance.
- [ ] To perform a full audit of the financial statements.
> **Explanation:** A compilation aims to present financial statement information in a professional manner without providing any assurance regarding the statements’ adherence to GAAP or their accuracy.
### Which organization's standards must an accountant follow when performing a compilation?
- [ ] Financial Accounting Standards Board (FASB)
- [ ] International Accounting Standards Board (IASB)
- [x] American Institute of Certified Public Accountants (AICPA)
- [ ] Securities and Exchange Commission (SEC)
> **Explanation:** Accountants performing compilations must adhere to the Statements on Standards for Accounting and Review Services (SSARS) issued by the American Institute of Certified Public Accountants (AICPA).
### Does a compilation provide assurance that the financial statements are free from material misstatement?
- [x] No, it does not provide any assurance.
- [ ] Yes, it provides high assurance.
- [ ] Yes, it provides limited assurance.
- [ ] It depends on the scope of the engagement.
> **Explanation:** A compilation does not provide any level of assurance regarding the accuracy or adherence to GAAP of the financial statements.
### What is typically included in an engagement letter for a compilation service?
- [x] The type of services to be rendered, limitations of the service, and nature of the compilation report.
- [ ] Only the pricing information.
- [ ] The results of the financial statement audit.
- [ ] Guarantees to ensure no errors in the financial statements.
> **Explanation:** The engagement letter for a compilation service outlines the type of services to be provided, any limitations, and the expectation about the compilation report.
### Who needs to sign the engagement letter before a compilation begins?
- [ ] Only the client.
- [ ] Only the accountant.
- [x] Both the client and the accountant.
- [ ] No signature is necessary.
> **Explanation:** Both the client and the accountant must sign the engagement letter to confirm mutual understanding and agreement regarding the services to be provided.
### Where is the responsibility for the reliability of the financial statements in a compilation?
- [x] With the entity providing the financial statements.
- [ ] With the accountant performing the compilation.
- [ ] Shared equally between the entity and the accountant.
- [ ] It is determined by the resulting financial statement assessment.
> **Explanation:** The entity that provides the financial statements retains responsibility for their reliability, as the compilation service involves no assurance from the accountant.
### Which of the following is least likely to be detected in a compilation?
- [ ] Errors in classification of accounts.
- [ ] Misstatements due to fraud.
- [ ] Misapplication of accounting principles.
- [x] All of the above.
> **Explanation:** A compilation does not involve verification or audits of information, so is unable to detect errors, fraud, or improper application of accounting principles.
### Which role does the accountant play during a compilation?
- [x] Arranger and presenter of the financial data.
- [ ] Auditor ensuring GAAP compliance.
- [ ] Investigator of financial anomalies.
- [ ] Manager of the entity’s financial operations.
> **Explanation:** During a compilation, the accountant arranges and presents the client's financial data but does not verify, audit, or investigate it.
### What type of financial statement is often prepared using a compilation?
- [ ] Tax returns.
- [ ] Budget projections.
- [x] Unaudited financial statements.
- [ ] Audited financial reports.
> **Explanation:** Compilations are often used to prepare unaudited financial statements where audit or review procedures have not been applied.
### When might a business opt for a compilation instead of an audit?
- [x] When minimal assurance is required.
- [ ] When the highest level of financial scrutiny is needed.
- [ ] When external funding is being sought.
- [ ] When the business is publicly traded.
> **Explanation:** A business may opt for a compilation when minimal assurance is required, which involves less cost and effort compared to audits or reviews, and is suitable for internal purposes or management reviews.
Thank you for exploring the intricate world of accounting compilations. Best of luck with your continued studies and stay resourceful in your financial practices!
