HomeMy WebLinkAboutUnderstanding Why Compilation Agreements Don't Work for MMFLA-Lansing 13004
COMPILATION
Intended for use by lenders and other outside parties who may appreciate the
business’s association with a CPA without requiring a level of assurance on
the accuracy of financial statements
Typically appropriate when initial or lower amounts of financing or credit are
sought or significant collateral is in place
CPA issues compilation report
Compilation of financial statements is a service where the role of the CPA is more apparent to outside parties, and as
such, the requirements for performing this service are more explicit. For example, if the CPA is not independent from
ownership, management and other circumstances in their relationship to you and your business, she is required to
disclose the impairment to her independence in her compilation report. The compilation report is the first page before
the actual financial statements and is written by the CPA on her firm’s letterhead.
The CPA is also required to read the financial statements in light of the financial reporting framework being used
and consider whether the financial statements appear appropriate in form and are free from obvious material
misstatements.
A CPA can obtain a level of “assurance”
about whether the financial statements are
in accordance with the financial reporting
framework. The CPA obtains assurance
by obtaining evidence. There are different
levels of assurance that a CPA can obtain
that can range from no assurance at all, to
the highest level of assurance, which is an
audit. The level of assurance required by
lenders is typically based on the size of the
loan, the collateral and their determination
of the overall risk.
Other situations that often require a level of CPA assurance include performance bonding and
leasing. Certain trade creditors, outside investors or family owners that are not actively involved in
the business may also request or require a level of assurance on your financial statements. If your
requirements are unclear, in many cases, your CPA can speak with your lender and others about the
level of service that will satisfy their requirements.
UNDERSTANDING ASSURANCE
ASSURANCE
Compilation
Financial StatementPreparation
Bookkeeping,Accounting & Tax
Audit
Review
(c) 2015 American Institute of CPAs
https://www.aicpa.org/InterestAreas/PrivateCompaniesPracticeSection/QualityServicesDelivery/
KeepingUp/DownloadableDocuments/financial-statement-services-guide.pdf
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However, the CPA does not obtain any assurance for a compilation because she is not required to verify the accuracy
or completeness of the information provided or otherwise gather evidence for the purposes of expressing an audit
opinion or a review conclusion.
The compilation report states that the CPA did not audit or review the financial statements and accordingly does not
express an opinion, a conclusion or provide any assurance on them.
A compilation is typically appropriate when initial or lower amounts of financing or credit are sought or there is
significant collateral in place. Though no assurance is provided, outside parties may appreciate your association with
a CPA, which is readily apparent in the formal compilation report.
A misstatement is a difference between a reported financial statement item
and that which is required for the item to be reported in accordance with the
applicable financial reporting framework. A misstatement may result from
fraud or error. A material misstatement is one where the severity or nature
of the difference (i.e., misstatement) would cause a user to form an incorrect
conclusion about a financial statement.
UNDERSTANDING A MISSTATEMENT AND MATERIAL MISSTATEMENT