Accounting and Review Engagements on the AUD Test of the CPA Exam
CPAs work on other engagements that aren’t audits. Generally, these projects are referred to as accounting and review engagements. This section of the auditing and attestation (AUD) test of the CPA exam requires you to change your thinking.
When you conduct an audit, you provide an audit opinion (or audit report). The tasks described here are not audits, so these reports do not provide an opinion on the financial statements. The accountant does issue a report, but that report is not an audit opinion.
The AICPA defines an attestation engagement as an exam, review, agreed-upon procedure, or any type of assertion that’s the responsibility of another party. A report on compliance with statutory requirements (laws or regulations) can also be structured as an attestation engagement.
The two most-tested attestation engagements are compilations and reviews. Planning compilation and review engagements is similar to planning an audit. The accountant needs to be clear about what he or she is being asked to do and document those procedures in an engagement letter. Keep in mind what task the accountant is being asked to perform. That will help you understand the language in the accountant’s report.
Meeting minimum SSARS requirements
CPAs working on accounting and review engagements must comply with the Statement on Standards for Accounting and Review Services, or SSARS. A committee within the AICPA issues SSARS standards.
Before delivering unaudited financial statements to a nonpublic client, a CPA must, at a minimum, comply with SSARS guidelines for a compilation engagement. To understand this guideline, note the following:
Unaudited financial statements refers to compilations, reviews, agreed-upon procedures, and other engagements that are not audits.
A nonpublic client is a company that hasn’t issued securities to the public. Public companies (those that issue stock) must comply with regulations set by the SEC.
The minimum requirements are the requirements for a compilation engagement. If, for example, you perform a review or agreed-upon procedures, you must comply with compilation engagement guidelines to meet this nonpublic client rule.
SSARS does not cover consulting engagements, the processing of financial data for clients of other CPA firms.
Working on a compilation engagement
The AICPA describes a compilation as the most basic level of service a CPA provides to a client with respect to the company’s financial statements. In a compilation engagement, the CPA helps the client present financial statements in a format that meets regulatory and industry requirements. Put simply, the CPA is helping the client put the numbers in the right format for a financial-statement reader.
The CPA does not, however, provide any assurance that the financial statements are free of material misstatement. In other words, there may be material modifications to the financial reports that should be made, but the CPA isn’t giving any assurance or opinion on that issue.
Here are some other points that explain a CPA’s responsibility on a compilation engagement:
The CPA must have knowledge of the client company and its industry.
The accountant must read the financial statements and consider whether the financial statements are in a proper form. The proper form is one that meets regulatory requirements. The CPA also considers whether the financial reports are free of obvious material error.
If, for example, a large cash balance is presented as negative numbers in the balance sheet, that’s an obvious material error. A negative balance in cash should be presented as a loan from the financial institution (a liability).
The CPA doesn’t perform inquiries, do analytical procedures, or obtain an understanding of the firm’s internal controls. The accountant doesn’t assess the risk of fraud or perform any tests of the accounting records.
A compilation report includes these comments:
“The compilation was performed in accordance with SSARS.”
“The accountant did not conduct an audit or review on the financial statements.”
“The CPA does not express an opinion on the financial statements or provide any assurance that the financial statements are in accordance with a given financial reporting framework.”
Going over a review engagement
In a review engagement, a CPA performs procedures that will provide limited assurance that no material modifications need to be made to the financial statements. That is, no material modifications are needed to make the financial statements conform to the applicable reporting framework.
Here are some additional comments to clarify how reviews differ from compilations and audits:
Assurance: A review provides limited assurance on the financial statements. An audit provides broader assurances, and a compilation provides no assurance on the financial statements.
Procedures: The review requires a CPA to perform procedures, such as an analytical review. For example, the CPA may compare an increase in sales to the change in accounts receivable. If the company sells on credit, an increase in sales should also lead to an increase in accounts receivable.
The point is to determine whether the changes in the account balances are reasonable. The compilation doesn’t require any procedures to be performed. For a compilation, the accountant reads the financial statements and comments on formatting and any obvious errors.
For a review, a CPA gains an understanding of the client and the company’s industry. A review requires analytical procedures and inquiries with client. The CPA performing a review needs to be aware of the possibility that he or she might fail to modify the financial statements when a material misstatement exists. An accountant who missed a material misstatement didn’t perform the review correctly, rendering the review report inaccurate.
Keep in mind that a review doesn’t include these procedures:
Gaining an understanding of the client’s internal controls
Assessing fraud risk (fraud risk is the risk that company employees will work to intentionally misstate the financial statements)
Performing tests on the accounting records or performing other audit procedures
The review report explains that the review was conducted in accordance with SSARS. The report points out that management is responsible for preparing the financial statements and that management designs and implements internal controls. The review report also states that the CPA isn’t aware of any material modifications that should be made to the financial statements.