is management representation letter required for compilation

• AR-C 80: Definitive Guide to Compilations

By Charles Hall | Preparation, Compilation & Review

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Knowing how to perform compilation engagements is important for CPAs. Below I provide an overview of the salient points of  AR-C 80 ,  Compilation Engagements . I also provide a sample accountant’s compilation report.

Compilation Guidance

The guidance for compilations is located in AR-C 80, Compilation Engagements .

Applicability of AR-C 80

The accountant should perform a compilation engagement when he is engaged to do so .

A compilation engagement letter should be prepared and signed by the accountant or the accountant’s firm and management or those charged with governance. An engagement letter to only prepare financial statements is not a trigger for the performance of a compilation engagement.

Previously (in the SSARS 19 days), the preparation and submission of financial statements to a client triggered the performance of a compilation engagement. Now, compilation engagement guidance is applicable only when the accountant is engaged to (requested to) perform a compilation. 

The objectives of the accountant in a compilation engagement are to:

• Assist management in the presentation of financial statements 
• Report on the financial statements in accordance with the compilation engagement section of the SSARSs

In a compilation engagement, a compilation report is always required . A compilation engagement is an attest, nonassurance service. Nonassurance means the accountant is not required to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements.

The compilation report looks distinctly different from audit or review reports (which include paragraph titles such as Management Responsibility and Accountant’s Responsibility ). The standard compilation report is one paragraph with no paragraph titles. (See the Sample Compilation Report section below.)

Financial Statements

The accountant prepares financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework including any of the following:

• Regulatory basis
• Contractual basis
• Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items) 
• Generally accepted accounting principles (GAAP)

All of the above bases of accounting, with the exception of GAAP, are referred to as special purpose frameworks. The description of special purpose frameworks may be included in:

• The financial statement titles
• The notes to the financial statements, or
• Otherwise on the face of the financial statements

Management specifies the financial statements to be prepared. The most common financial statements created include:

• Balance sheet
• Income statement
• Cash flow statement

The accountant can, if directed by management, create and issue just one financial statement (e.g., income statement). 

Some bases of accounting (e.g., tax-basis) do not require the issuance of a cash flow statement.

The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.

Should a reference to the compilation report be included at the bottom of each financial statement page (including supplementary information)? While not required, it is acceptable to add a reference such as:

• See Accountant’s Report
• See Accountant’s Compilation Report, or
• See Independent Accountant’s Compilation Report

Why add such references? The accountant’s report may become detached from the financial statements. The reference notifies the reader of the financial statement that a compilation report exists.

Compilation Documentation Requirements

The accountant should prepare and retain the following documentation:

• The engagement letter
• The financial statements, and 
• The accountant’s compilation report

The accountant should document any significant consultations or judgments.

If the accountant departs from a presumptively mandatory requirement , it is necessary to document the justification for the departure and how the alternative procedures performed are sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)

Engagement Letter

While it is possible for the accountant to perform only a compilation and not prepare the financial statements, most compilation engagement letters will state that the following will be performed by the accountant:

• Preparation of the financial statements (a nonattest service)
• A compilation service (an attest service)

Since a nonattest service and an attest service are being provided, the accountant will add language to the engagement letter describing the client’s responsibility for the nonattest service. 

AICPA independence standards require the accountant to consider whether he is independent when he performs an attest service (e.g., compilation) and a nonattest service (e.g., preparation of financial statements) for the same client. If management does not possess the requisite skill, knowledge, and experience to oversee the preparation of the financial statements and accept responsibility, the accountant may not be independent.

Compilation Procedures

The accountant should:

• Read the financial statements in light of the accountant’s understanding of the selected financial reporting framework and the significant accounting policies adopted by management
• Consider whether the financial statements appear appropriate in form and free from obvious material misstatements

Here are examples of inappropriate form and obvious material misstatements:

• An equity account is shown in the liability section of the balance sheet
• The balance sheet does not reflect the accrual of receivables though the financial statements were supposedly prepared in accordance with GAAP
• Total assets as reflected on the balance sheet do not equal the individual items on the statement (an addition error)
• The financial statements omit a material debt disclosure, though the statements were prepared in accordance with GAAP and substantially all disclosures were to be included

Given that the focus of a compilation is the reading of the financial statements to determine if they are appropriate in form and free from obvious material misstatements, what are some procedures that are not required ?

• Confirmation of cash 
• Testing of subsequent receipts
• Analytical comparisons with the prior year
• Substantive analytics
• Confirmation of debt
• A search for unrecorded liabilities 

Is it permissible to perform audit or review procedures while conducting a compilation engagement? While not required to do so, such procedures are allowed. If you perform audit or review procedures, be careful not to imply to the client or other parties that you are performing a service other than a compilation.

The accountant is not required to perform procedures to ensure the completeness of the client-supplied information, but what if the client provides information that is obviously not complete or contains material errors? If management-supplied information is not complete or appears incorrect, the accountant should request corrections.  

Also, the accountant should request corrections if:

• The financial statements do not appropriately refer to the applicable financial reporting framework
• Revisions are necessary to comply with the selected reporting framework, or 
• The financial statements are otherwise misleading

If requested or corrected information is not received or if the financial statements are not corrected, the accountant should consider withdrawing from the engagement and may wish to consult with legal counsel. 

If the accountant decides not to withdraw and a material departure from the reporting framework exists, he should modify the compilation report to disclose the departure. See the example below in Reporting Known Departures from the Applicable Financial Reporting Framework .

Sample Compilation Report

The following is a sample compilation report:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Report Date]

Minimum Compilation Report Elements

The compilation report should:

• Include a statement that management (owners) is (are) responsible for the financial statements
• Identify the financial statements
• Identify the entity
• Specify the date or period covered
• Include a statement that the compilation was performed in accordance with SSARS
• Include a statement that the accountant did not audit or review the financial statements nor was the accountant required to perform any procedures to verify the accuracy or completeness of the information provided by management, and does not express an opinion, a conclusion, nor provide any assurance on the financial statements
• Include the signature of the accountant or the accountant’s firm
• Include the city and state where the accountant practices and
• Include the date of the report (which should be the date the accountant completes the compilation procedures)

You may have noticed that a compilation title and salutation are not required . Can they be included? While AR-C 80 does not require a report title or a salutation, it is permissible to add them. Here’s a sample report title and salutation:

                        Accountant’s Compilation Report

To the Board of Directors and Management

XYZ Company

The signature on the compilation report can be manual, printed, or digital. 

If the accountant’s letterhead includes the city and state where the accountant practices, then the city and state can be omitted from the bottom of the compilation report.

The date of the compilation report should be the date the accountant completes the compilation procedures.

Omission of Substantially All Disclosures

Can the accountant omit all disclosures (notes to the financial statements) in a compilation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:

• Omit all disclosures
• Provide selected disclosures , or
• Provide full disclosure

The compilation report should disclose the omission of substantially all disclosures with language such as the following:

Management has elected to omit substantially all the disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenue, and expenses. Accordingly, the financial statements are not designed for those who are not informed about such matters.

The engagement letter should describe the level of disclosure to be included in the financial statements. 

Reporting Known Departures from the Applicable Financial Reporting Framework

If the accountant becomes aware of a material departure from the basis of accounting that is not corrected, he should modify the compilation report to disclose the departure. For example:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. I (we) do not express an opinion, a conclusion, nor provide any assurance on these financial statements.

Accounting principles generally accepted in the United States of America require that material impairments in the fair value of owned property be recognized in the balance sheet. Management has informed us that a recent appraisal of its Fumbleton office reflected a fair value of $2.25 million less than carrying value. If accounting principles generally accepted in the United States of America were followed, the buildings and equity accounts would have decreased by $2.25 million. 

The effects of the departure, if known, should be disclosed in a separate paragraph of the compilation report. If the effects of the departure are not known and cannot be readily determined with the accountant’s procedures, the compilation report should include a statement that the determination has not been made by management.

The accountant may not issue a compilation report that states the financial statements (as a whole) are not presented in accordance with the applicable financial reporting framework. Doing so is considered, in effect, an adverse opinion. An adverse opinion can only be expressed in an audit engagement.

Reporting When There are Other Accountants

Other accountants might perform a compilation of a subsidiary. What is your reporting responsibility if you are performing a compilation of a consolidated entity that includes the subsidiary? The compilation report for the consolidated entity is not altered to make a reference to the other accountant. AR-C 80 is silent in regard to whether you are required to obtain a copy of the other accountant’s compilation report.

Going Concern in Compilations

If the accountant becomes aware of uncertainties with regard to an entity’s ability to continue as a going concern, he may suggest additional disclosures. Without the additional going concern disclosures, it is possible that the financial statements could be misleading.

If substantially all disclosures are omitted from the financial statements, disclosure of the going concern uncertainty is not required. Even so, the accountant should be careful not to issue financial statements that are misleading . If needed, ask management to include the requisite going concern disclosures.

If the necessary going concern disclosures are not added and the financial statements are misleading, the accountant should consider withdrawing from the engagement.

Is it permissible to include an emphasis-of-a-matter paragraph in a compilation report? Yes.

The following is an example of a going concern uncertainty paragraph that could be added to a compilation report:

Going Concern

As discussed in Note H, certain conditions indicate that the Company may be unable to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Independence

Where should an accountant’s lack of independence be noted in the compilation report? The accountant can disclose his lack of independence in the last paragraph of the compilation report with wording such as: 

I am (We are) not independent with respect to XYZ Company.

The reason for the lack of independence need not be included, but if the accountant includes one reason for a lack of independence, then all such reasons should be included. 

If independence is impaired and the accountant desires to provide the reason independence is impaired, the compilation report may include wording such as:

We are not independent with respect to XYZ Company as of and for the year ended June 30, 2019, because an engagement team member made management decisions on behalf of XYZ Company.

Compilation Report - Special Purpose Frameworks

The compilation report should highlight the use of a special purpose framework when one is used. 

If a special purpose framework is used and disclosures are included, then the compilation report should include a separate paragraph such as the following:

We draw attention to Note X in the financial statements, which describes the basis of accounting. The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

If disclosures are omitted, the separate paragraph could read as follows:

The financial statements are prepared in accordance with the tax-basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.

Unless the entity elects to omit substantially all disclosures, the compilation report should be modified to describe departures when the financial statements do not contain:

• A description of the special purpose framework
• A summary of significant accounting policies 
• A description of how the special purpose framework differs from GAAP
• Disclosures similar to those of GAAP 

The description of the special purpose framework can be included in the titles of the financial statements or the notes. If the financial statements omit notes, the financial statement titles should include the special purpose framework; for example, Statement of Revenues and Expenses—Tax Basis.

If substantially all disclosures are omitted, then 2, 3, and 4 above are not necessary. However, the accountant should include a separate paragraph in the accountant’s compilation report stating that management elected to omit substantially all disclosures. (See the preceding section titled Omission of Substantially All Disclosures .)

Click here for more information about which special purpose framework you should use.

Other Historical Information

In addition to historical financial statements, AR-C 80 may be applied to the following:

• Specified elements, accounts, or items of a financial statement, including schedules of:
• Profit participation, or
• Income tax provisions
• Supplementary information
• Required supplementary information
• Pro forma financial information

Prospective Information

AR-C 80 can be applied to prospective information.

Prospective financial information is defined as any financial information about the future. 

Prospective financial information can be presented as:

• A complete set of financial statements, or
• One or more elements, items, or accounts

If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information .

If you prepare a financial projection, you should not exclude:

• The identification of hypothetical assumptions, or
• The description of the limitations on the usefulness of the presentation

The compilation report should include statements that:

• The forecasted or projected results may not be achieved and
• The accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report

AR-C 80 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.

Prescribed Forms

Is it permissible to perform a compilation engagement with regard to prescribed forms?

Yes. There is nothing in the SSARSs that prohibits the accountant from performing a compilation engagement with regard to prescribed forms (e.g., bank personal financial statement).

When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form, and no departure from the applicable reporting framework exists. In effect, the form and its related directions are treated as though they are the applicable reporting framework. The accountant must report departures from the prescribed form and related instructions as a departure from the applicable financial reporting framework. Include any significant departures in the compilation report. (See the preceding section titled Reporting Known Departures from the Applicable Financial Reporting Framework .)

If the prescribed form includes a compilation report not in conformity with AR-C 80, the report should not be signed. Append an appropriate compilation report to the prescribed form.

Compilation Engagements Conclusion

There you have it. Now you know how to perform a compilation engagement.

The main things to remember are (1) you need a signed engagement letter, (2) always include a compilation report with the financial statements, and (3) read the financial statements to determine if they are appropriate.

If you desire to issue financial statements without a compilation report, read my article about the use of AR-C 70, The Definitive Guide to Preparations .

If you desire to issue financial statements in conjunction with a review engagement, read my article about the use of AR-C 90, Review Engagements .

Compilation Book

Check out my new SSARS book on Amazon or read about it here: New SSARS Book .

About the Author

Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty-five years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention, The Why and How of Auditing, Audit Risk Assessment Made Easy, and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles consults with other CPA firms, assisting them with auditing and accounting issues.

Trent, sorry to say there aren’t any low-cost options that I am aware of. They all seem to be expensive which makes it hard for smaller firms to do this type of work.

Hello Charles, I am a very small firm and only do 2-3 comps and 1-2 reviews a year. I find your material very helpful. I wanted to get your opinion on workpaper programs. I am looking for a step by step type of workpaper program. We currently use AuditFile online but it is very expensive for us. Do you sell anything like this and if not what would you recommend for a small shop like mine that does not want to spend a lot for the small volume that I do.

Hello. How do I word a date or period covered for a quarterly compilation reports? Does, for example, “for the one and six month period” work for the compilation report of the 2nd QTR ending?

Terry, I would simply perform a compilation for both years. You can disregard the prior year preparation if both years are subject to your compilation engagement.

Hi Charles Does a compilation on comparative financials where a prior year prep was performed by a different CPA require any special disclosure in report or financial statement or understanding in the engagement letter? If you can direct me to a source I’m happy to try and find an answer. Thank you.

Rob, if you are issuing an opinion on the consolidated statements, then the group audit standards are in play and you’d need to audit all entities but from a consolidated perspective. There is no exemption for entities that were subject to the compilation standards. Basically, the compilations (since they are a no assurance services) would add little value to the audit of the consolidated entity.

Hi Charles,

We have a NFP that is being audited and has several real estate entities which it owns 100%. These real estate entities are C-corps. The real estate entities are compiled separately for the bank. What are the reporting requirements for doing the consolidation of everything? Do we have to upgrade services on the real estate entities or can we just modify the opinion to state they were compiled when preparing the consolidated statements?

Naina, I looked for an example statement as well, but did not find one.

I would identify the statements as consolidated for the prior year and I would not do so for the current year. For example, for the balance sheet I would say (in the title) Balance Sheet for the Year Ended December 31, 2018 and Consolidated Balance Sheet for the Year Ended December 31, 2017 — or I would just use the title “Balance Sheet for the Years Ending December 31, 2018 and December 31, 2017” then I woould label the columns as “2018” and “2017 Consolidated.” Either way, I would include a note explaining the sale of the subsidiary.

I would also use similar wording in the compilation report, identifying the prior year as consolidated and the current year as not.

My name is Naina. I work a lot on compilations and Reviews. I have a client whose financials were consolidated in prior period and the subsidiary was closed in prior period itself. Do we need to mention consolidated for prior period and unconsolidated for current period on face of the financial statement. I have been looking for samples on how to prepare the compilation report and financials, would be great help if you can provide some guidance.

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Financial Statement Review and Compilation (Guidance, Regulations and Rules)

If you need a financial statement review or compilation, this guide will help you through the process. Reviewed financial statements can be required by regulation or because your bank asks for them. This Ultimate Guide to Financial Statements Review and Compilation is a handbook of useful facts.

You will see what major components are and why they are needed. Everything from the engagement letter to the management representation letter are covered. Along the way helpful links will take you to longer explanations and examples. Please use this directory of information and if you need help, contact us.

5 minute read

Format of this article:

• General Info

Compilation

• Compilation Design
• Balance Sheet and Income Statement
• Owner Equity and Cash Flow

Responsibility

Management representation, contact us for a free quote.

Many banks will require a specific type of statement; compiled, reviewed or audited. However, you may encounter other demands from creditors, vendors or investors. For instance, companies that handle direct deposit and ACH payments, like Intercept , may require reviewed financials. This situation is not unusual and is becoming more a norm. As regulations on financial products become stricter and more complex, companies are shifting the burden on to you! Does it increase your cost of doing business? Yes, but you must play by their rules or go home.

In order to help you comply with this ever-changing landscape, I’ll give you some paired down answers. By “paired down” I mean in as plain an English as I can. Some of the financial-speak in accounting is weird, complex and circular, if you know what I mean. As well, for SEO purposes, I must keep under three syllables per word when possible and not get verbose. Under 20 words per sentence and less than 150 per paragraph is the general rule. Man, this is gonna be hard. But we’ll get through it together. This article is not for the expert, it’s for regular business owners, NO accounting nerds allowed. I’ll be covering basics for non-public companies, including public company standards would be cumbersome due to increased regulations. Ooops, four syllables in regulations; but I stayed just under 150 for the paragraph, go ahead and check.

What are They?

Let’s begin with differences. The easy answer to the differences between compilation and review is in the assurance, or lack thereof, provided by each. In a compilation, no assurance is provided, the financial statements are compiled for use by management or a third party. In a review, the CPA determines whether they are aware of any modification that needs to be made to the financial statements, in order for them to be in conformity with GAAP. We have a whole group of acronyms to keep track of tasks we’re required to perform. It’s intense and done to provide assurance that a company’s financials are free from material misstatements and are fairly presented based upon application of GAAP.

How much does a financial statement review cost?

The cost of a financial statement review generally ranges from $1,500 to $5,000. Many CPAs will include the review at the time your taxes are prepared and roll the cost together. Other factors affecting cost negatively are if your records are in poor condition, you cause delays for the preparer or if you do business in a high-cost locality. Places like Los Angeles, Houston or New York City are known to have higher CPA costs. In these instances, it is helpful to have your review done virtually by a CPA in another town or state.

A financial statements compilation is not an assurance service. The service is not performed to provide an opinion like an audit. Nor is its function to provide limited assurance like a review. In this service an accountant is not required to verify the accuracy or completeness of the data. Financial information is delivered to the account for him to apply  accounting and financial reporting expertise to assist management. The assistance is in helping management present the information and reporting in compliance with AR-C Section 80: Compilation Engagements . While performing this service the accountant does not seek to obtain or provide any assurance. This pertains to the financial statements being in conformity with the applicable reporting framework. If your statements are reported according to generally accepted accounting principles (GAAP), there isn’t assurance they meet this criterion.

This may sound counter to the intent of having a CPA perform the service. But a compilation is just the lesser of financial reporting options. Why then, you may ask, have this done? The answer lies in the use of these statements. The appropriate circumstances for this service are for seeking initial or lower amounts of credit where collateral is involved. While there is no assurance provided, many outside parties appreciate your involving a CPA for a formal report.

Some Examples

Let’s say your business needs a new front-end loader, or an addition to your current facility. Going to the bank with just your tax return is not going to cut it quite often. These days bankers are looking to see that you have the wherewithal to bring in some skilled help. That help is a CPA. Having a compilation performed by a CPA shows that you have a modicum of confidence in your financial position. As well, the bank has more faith in information that has been looked over by a CPA. In an alternative situation, you may be in the early stages of your business. In this situation compiled prospective information could help. By involving a CPA in the process, it adds a bit of reality to the data. A bank would be woe to just look at self-produced prospective financials.

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How much does a financial statement compilation cost?

The cost of a financial statement compilation generally ranges from $750 to $2,500. Many CPAs will include the review at the time your taxes are prepared and roll the cost together. Other factors affecting cost negatively are if your records are in poor condition, you cause delays for the preparer or if you do business in a high-cost locality. Places like Los Angeles, Houston or New York City are known to have higher CPA costs. In these instances, it is helpful to have your compilation done virtually by a CPA in another town or state.

For most of this article I will use standard examples. All examples will be based on basic financials. A balance sheet, income statement, owner’s equity statement, statement of cash flows and notes to them. Also, I will consider all information in accrual basis GAAP format. Situations vary and there are many examples, but I’m trying to stick to a repeating patter for ease. The compiled financial statements will include the above-mentioned financial statements and notes. In addition will be an accounts compilation report. The report gives a brief synopsis of what was done. And just as importantly the nuts and bolts of what a compilation has not done. Here are standards that are thrown in the report and a brief discussion of the financial statements.

The report covers several items that pertain to the work performed. First it must state that management is responsible for the accompanying financial statements and the related notes to them. In any service management is responsible for the financial statements in total. The accountant is responsible to review, compile or audit them, not develop or “create” them. Second, management is responsible for the financial statements to be in accord with the financial reporting framework. In this case, generally accepted accounting principles (GAAP). The CPA then states the purpose of their involvement which was to perform a compilation. This is done while stating the engagement was performed in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Which is long form for, they operated with the standards of their professional responsibility.

Third, the disclaimer. Here the CPA lets everyone know they did not audit or review the financial statements. They also state they were not required to perform any procedures to verify accuracy or completeness of the information. Last, the statement that they do not express an opinion, a conclusion, nor provide assurance on the financial statements. As mentioned earlier, a compilation is not used for high level financing or for gathering investors. This service is to show your business is being serious about its future and financial status. Just about anyone can get a car loan for 15 grand, with no more than a tax return. But securing a $200,000 loan for facility renovations requires more effort and proof.

What is a management representation letter?

It is a letter that company management provides to the accountant at the end of a financial statement audit or review. The management representation letter has three basic parts, the introduction, statements about the financials and declarations on the information management has provided. The introduction discusses what has been done, i.e. the financial statements for a period have been reviewed or audited. The statements about the financials are where management acknowledges its responsibility for the financials. The declarations are when management states they have cooperated fully with the CPA during the process.

Balance Sheet

Of the financial statements, it is the foundation of where you are at financially at a point in time. Balance sheets are prepared after the income statement and sometimes viewed as more important (not my opinion, but others). The reason for this is that it shows what you have (assets), what you owe (liabilities) and the “balance” between these two things (equity, i.e. the leftovers). The balance sheet for a small business can contain a variety of items. Some analysts view a comparative balance sheet, current year and prior together, to see company performance over a period. This “assets based” view is a way to determine if a company is gaining equity (increasing in value). Equity is the difference between assets (the stuff you own) and liabilities (what you owe others). The difference is how much you have freed up for use (equity), if an individual, their net worth.

The top portion of a balance sheet are the assets and contain some of the following.  Cash, inventory, accounts receivable, equipment, property, stocks and anything of value to your business.  The balance sheet can cover a half page or several, depending on the company. For many small businesses it comprises one-half. The bottom portion of the balance sheet holds two items, liabilities and equity. The liability section holds the things you owe to others including the following. Accounts payable, payroll payable, short and long-term loans, bonds payable and any outflow of money you are responsible for. As with this section it can be similar in size to the asset portion. Last on the statement is the equity section. Equity includes the left over as a glommed amount for some small businesses. Alternately, it could be in the form of common or preferred stock owned by investors in larger companies.

Income Statement

This is one the financial statements that can tell quite a story. The balance sheet is a specific moment in time, the income statement is performance over a period of time. The sections of this form, at a minimum, are income and expenses: seems pretty simple to me. While some companies have far more going on in their income statement, we’re focusing on basics. The basic income statement will perhaps show several types of income. For example, these could include service income, sales of product income, interest income and investment income.  After the income comes the expenses. This portion is generally longer than the income portion. It seems that there are more ways to spend money than to earn it, cost control can be difficult. 

The income statement reports the excess of income over expenses. Or worse, the excess of expenses over income. It is a look at how your company has performed for the period. Standard income statements cover one year, usually a calendar or fiscal year. Publicly traded companies have quarterly information, but generally small business works on one year. This time frame is good for evaluating performance in making money and how thrifty one is with spending it. With any business, it’s not about how much you make, it’s about how much you save. The income statement can highlight the areas you need improvement. In comparative format, you can compare one year to another. Ratio analysis comes in handy with this. With it, you can see how much more you are spending by percent of income to a prior year. This can then be used for future period budgeting.

What is an engagement letter?

The engagement letter for a financial statement review contains all the required items that will be addressed in the review. It has five basic parts: the introduction, the CPA responsibilities, the company responsibilities, the report and other matters. The intro covers what the CPA is going to be doing. The CPA responsibilities set out what the accountant is responsible for during the engagement. The company responsibilities cover what items the company should comply with. The report discusses the report that will be included with the financials. Last, the other matters runs through any other items that are part of the contract like cost, timing etc.

Statement of Owner’s Equity

Owner’s equity; the excess of assets over liabilities in a small business, or stock equity in a large. Or a morph of many items. Often this statement is half a page. Its purpose is to show three items, the opening balance, additions and ending balance. The opening balance is the amount of equity from the last years balance sheet. Again, for larger companies this could involve a lot of moving parts; painfully, mind-numbing calculations from Hades. For our purposes, let’s not go there. Our calculation is sweetness and light; excess of assets over liabilities. The next part is the inclusion of the net from the income statement. The net income, or loss, is now added to or subtracted from, the prior years equity. This results in the current years ending equity amount. The statement of owner’s equity is the Stephen Baldwin of the family, so let’s move on.

Statement of Cash Flows (Indirect Format)

The most difficult to produce, work with and understand of the financial statements, is also the most informative. Pounding out these babies is time consuming, mind boggling and frustrating. Nevertheless, the cash flow statement shows you where your cash came in and out during the year. It does this by presenting your starting cash amount and then adding or subtracting increases and decreases in account balances to it. It’s a little confusing but stick with me on this. This statement has three parts; operating, financing and investing. I’m not going to try and fully explain this in a 150-word paragraph, or a 1500 one for that matter. Instead, I’ll break out the sections in separate paragraphs and be as succinct as possible.

Operating Cash Flows

The first section of the statement is usually used by every business. This is where your cash flow from operations is broken out. In this area we add and subtract non-cash movements that the business has to/from net income. Depreciation expense is a non-cash expense. In other words, to claim it, you do not pay out any cash. You add this amount back into your cash column. Remember, your starting net income had depreciation subtracted from it on the income statement. Increases in assets are subtracted from net income and decreases are added to it. The reverse is applied to liability accounts.

Here’s how it works with an inventory example. You start the year with $100 in inventory, purchase $500 worth and end the year with $200 in stock. Also, you start year one with zero dollars in the bank. Year one net income is $1,000. At year end, your bank account shows $900. If you had income of $1,000 added to your start of zero, why do you only have $900 cash at year end?

What happened?

The inventory you hold increased. This means that you purchased $100 more in product than you used (expensed). $100 start + $500 purchase – $200 end = $400 expense. Your net income only accounts for the amount you expensed $400. However, you spent cash that net income isn’t recognizing. Net income is higher than the actual cash you hold. This being the case you subtract the excess $100 from net income. Now your net income matches your cash on hand. Click here for a full blown example .  In this way your business can get a better picture of its cash flow. While net income is $1,000, you only have $900 available for use.

Investing Cash Flows

This is where your company accounts for cash changes in the following items. Purchases of property and equipment, purchases of businesses, investments in securities and other “investment” related activities. Also included are changes from loans to others (others borrowing), but not loans taken from others (your borrowing). This part is a little more straight forward than the operating section. If you buy a truck and capitalize it, it increases assets. But there was no expense on the income statement, so you subtract this amount from net income. Likewise, if you sell a piece of land, your assets decrease with out showing net income. This amount is added to net income to reach ending cash on hand. There are many factors that go into this calculation though. Things like gain or loss on the sale, depreciation balance and other factors make this a bit more complex than it appears.

Financing Cash Flows

These are items that affect cash flow that include the following. Issuing debt and repaying it, like company bonds or taking a bank loan, issuing stock in the company and buying it back. When you take out a loan from the bank, your cash increases, but this money does not show up on your income statement. The statement of cash flows accounts for this by adding loans taken to the net income to arrive at year end cash. In the reverse, as you repay a loan, the cash outflow is not recognized by the income statement. This amount needs to be subtracted from net income to arrive at ending cash. Similarly cash moves when you issue stock in your company. When investors buy your stock, you receive cash, but it doesn’t show in net income. These amounts are added to net income to arrive at your ending cash balance.

There are a lot of moving parts to a cash flow statement. It’s not a topic you should expect to fully grasp in just a few minutes. Hopefully though this intro has given you a bit more insight that you had prior.

What is a financial statement review report?

The financial statement review report is the section of the financial statement that holds the CPAs limited assurance. The review report has three parts: management’s responsibility, the accountant’s responsibility and the conclusion. Management’s responsibility lists the elements that the company is responsible for like preparation and fair presentation. The accountant’s responsibilities are to conduct the review in accordance with SSARS. The conclusion is where the CPA provides limited assurance on the financials.

Notes to Financial statements

The notes to financial statements are where various items that affect the company are listed. The first part is a summary of significant accounting policies. Many things can end up in this section and they pertain to how the company accounts for various items. The following are included in this area of the financial statements. The basis of accounting used by the company be it GAAP or some other acceptable framework, like tax basis. Tax basis accounting is when you use accounting based on your reporting to the IRS, in the US. The nature of company operations provides a brief overview of what you do. Next, a discussion of how estimates are used in the financial statements. For example, estimates are used to determine amounts that may not be collected from customers. Estimates can differ from actual results and this must be stated.

From here the notes could explain any number of the following: Transactions with related parties, subsequent events (things that happened after the year-end), financing activities, lines of credit and notes payable, etc. Some companies only have one or two pages of notes, while others a dozen or so. While this overview was brief, it serves to give you the basics. Many organizations, such as the AICPA, provide detailed documents on all these items .

What’s Involved

A compilation is the least intrusive of the three main services for financial statements.  You can expect to meet with the CPA once and probably email and phone will suffice from there. Most documents and data can be sent e-mail and for the most part there isn’t much back and forth. Due to the limited procedures involved, the CPA should be able to perform the service fairly quickly. This of course depends on the time of year. Obviously, the middle of tax season isn’t when speedy service will happen. More than likely you will be asked routine clarity questions. Also, you will provide all documents in order for the service to take place.

Many compilations are performed with a financial statement preparation. In this case the CPA does help prepare and format the statements. However, management is responsible for the statements. Any prep work should be reviewed and approved by management.  the CPA is not required to be independent in  a compilation of financial statements, . This means that if your CPA performs other accounting services for you, such as payroll or bookkeeping, they can still perform the service. This is not the case with a financial statement review or audit.

The uses of these financial statements is varied but limited. Often, they are used to obtain small amounts of financing. Things like heavy equipment financing and equity lines of credit are common uses. Vehicle loans may fall into this category if your levels of financing are getting high. Internal management use is another use for complied financial material. Quite often management alone is not capable of producing the level of information that a CPA can. Last, a compilation could be used to attract new investors. Many small businesses do not have access to bank financing as readily as large ones. This leaves them in a position to go to friends, family or strangers to acquire funds. In these cases, it may be helpful to have compiled financial statements to show how you are operating.

This can vary to a great degree. A small business with one revenue stream and limited expenses might pay less than $1,000. A midsized small business with several revenue streams, heavy accounts receivable and payable with lots of assets, could be in the $2,000 range or more. With price variations of this nature, it helps to contact a CPA for an estimate of your needs . 

What is in a financial statement review document?

The elements of a financial statement review packet are the title page, table of contents, the review report, balance sheet, income statement, cash flow statement and the notes. The title page and table of contents are self-explanatory. The balance sheet lists the company’s assets and liabilities. The income statement provides the income and expenses for the period. The cash flow statement provides insight into the cash inflow and outflow during the year.

Where a the last service provided no assurance on the financial statements, a review provides limited assurance. Per AR-C Section 90 the objective of a review of financial statements is to obtain limited assurance. Limited assurance is used as a basis for the CPA to report whether he is aware of any material modifications that should be made to the financial statements, for them to be in accordance with the applicable financial reporting framework. This explanation is a bit winding. In essence the accountant is performing actions that lead him to make a proper assessment of the financial statements. Limited assurance is not absolute, nor is it providing an opinion like an audit. Limited assurance is that the accountant is not aware of things. This is achieved through inquiry and analytical procedure. But not through document inspection, confirming with outsiders or other process commonly used with an audit.

In a review, assistance is provided to management to be in compliance with AR-C Section 90: Review of Financial Statements .  Preparation is quite often performed in conjunction with a review. In this way the accountant can aid management in its report of items properly.

This section will not contain a repeat on the breakdown of the financial statements already done above. Instead of rehashing the balance sheet and income statement, etc. I will stick to the report. Now, assume that the rest of the financial statements are included.

Review Report

In the review report the accountant expresses his limited assurance on the financial statements. The title of the report must clearly state that the accountant is independent. If the accountant is not independent or independence is compromised during the review, he cannot perform the service. Compromising is if the account is a related party to the entity or provides to it other services, not including tax work. The report must state that the entity was reviewed, the statements reviewed, and the period covered by the review. Included is a statement that a review includes applying analytical procedures to management’s financial data and making inquiries. It must state that a review is substantially less in scope than an audit. And that the objective of an audit is to express an opinion accordingly he does not express an opinion.

Also included is “Management’s Responsibility for the Financial Statements”. It should explain that management is responsible for the financial statements preparation and fair presentation. Including the design implementation and maintenance of internal control relevant to these things. Management is also responsible that the statements are free from material misstatement whether due to fraud or error.

Which financial statement provides the most useful information?

While they are all important, the income statement leads the way. It is better than the balance sheet because it shows the results for a period of time and not at a specific date.

A section titled “Accountant’s Responsibility” should include the following items. This reports that the accountant performed the review in accordance with Statement on Standards for Accounting and Review (SSARS ) . The accountant believes his procedures provide a reasonable basis for his conclusion. A section with appropriate heading about whether the accountant is aware of any material changes that should be made to the financial statements for them to be in accordance with the applicable reporting framework. And should identify the country of origin of those principles. The signature of the CPA and their firm must be included. As well, the city and state where the accountant practices should be noted. Again, this is not a be all and end all list, just a basic overview.

Implementation

The CPA should design and implement appropriate procedures to provide limited assurance in the review. The accountant should understand the industry, the entity under review or attain competence by the review. Some analytical procedures include comparing financials statements to comparable information, prior year or related business type. When relevant, he compares financial and non-financial data for plausible relations. They also perform ratio analysis of recorded amounts compared to expected. Any anomalous results or oddities should bring about an inquiry of management. Question about operations, management knowledge of fraud, unusual/complex transactions and many other items should be addressed. The CPA should read the financial statements and consider any information relevant to them that could cause them not to conform to the applicable reporting framework.

Interaction

In a review there is a good deal more contact between the CPA and management. However, there will more inquiry and contact with management. It is normal to have at least one sit down interview to go over the majority questions of importance. After this, the questions that come up along the way can be handled in a quick email or phone call. W hen the inquiry and analysis are finished, t he CPA assess evidence .The accountant determines whether limited assurance has been obtained..

Is a financial statement review an audit?

No. An audit is a very specific function. It offers high assurance than a review and is far more expensive due to its time intensive nature.

The last piece of the review is the management representation letter . A written letter,  from a member of management with financial duty,  is required . Some of the items that management must include in the letter are the following. That he has fulfilled its duty for the preparation and fair presentation of the financial statements. Within the applicable reporting framework. Management is accountable for internal control relevant to the financial statements. It is also managements duty to prevent and detect fraud. Management states that it has provided all relevant data, provided access and respond truthfully to inquiries. Management states that it has reported fraud to the accountant including claims, suspected acts and incidents of it. That management has disclosed all known actual or possible litigation. This provides a good basis, though there are other items. 

The uses of a financial statements review go further than a compilation. Since a review provides limited assurance, it is more valuable to creditors and investors. Use a review to provide a bank increased comfort for loans you are seeking or already have. Many lines of credit contain covenants that require yearly financial statements review. Some vendors may also ask for reviewed financial statements before providing large or increased lines of credit. These situations are not unusual and with a quick growing economy, you may find yourself needing reviewed statements. In some conditions, the bank will set up the review. Banks want to be sure that a CPA is truly impartial. The company assumes this cost. Some reviews don’t include all the financial statements. They may just include one particular statement or a specific account.

The costs for a financial statement review are grater than lesser services, but still lower than an audit. In a generic sense a review could average around $5,000. That’s not to say that yours could be less, or more. Procedures and inquiries take time, as such they increase the cost. If you are in need of a financial statement review , click here for a free consultation .

Can an accountant perform a financial statement review?

One who performs a review must be a licensed practitioner. Different countries have varying requirements and regulations when it comes to review, compilation and audit.

The Bottom Line

Financial statement work comes in various forms. Auditing  is too large to cover in this article . I may revisit this function in the future. For now remember to consult a pro when making decisions that affect the future of your business. Going it alone will not suffice as your business grows. It will lead to wasted time, money and resources.

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Management Representation Letter: Format, Content, Signature

Home » Bookkeeping » Management Representation Letter: Format, Content, Signature

As of 2019, the FASB requires publicly traded companies to prepare financial statements following the Generally Accepted Accounting Principles (GAAP). Auditors are required by professional standards to report, in writing, internal control matters that they believe should be brought to the attention of those charged with governance (the board). Generally, if your auditor is going to put an internal control matter in a letter, they have assessed that the matter was the result of a deficiency in internal controls. This is an important part of that audit that the profession does not take lightly.

One common example of a deficiency in internal control that’s severe enough to be considered a material weakness or significant deficiency is when an organization lacks the knowledge and training to prepare its own financial statements, including footnote disclosures. The “SAS 115” letter is usually issued when any significant deficiencies or material weaknesses would have been discussed with management during the audit, but are not required to be communicated in written form. In performing an audit of your Plan’s internal controls and plan financials, your auditors are required to obtain an understanding of the Plan’s operations and internal controls.

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter. The letter is signed following the completion of audit fieldwork, and before the financial statements are issued along with the auditor’s opinion. External auditors follow a set of standards different from that of the company or organization hiring them to do the work.

In doing so, they may become aware of matters related to your Plan’s internal control that may be considered deficiencies, significant deficiencies, or material weaknesses. Audits performed by outside parties can be extremely helpful in removing any bias in reviewing the state of a company’s financials. Financial audits seek to identify if there are any material misstatements in the financial statements. An unqualified, or clean, auditor’s opinion provides financial statement users with confidence that the financials are both accurate and complete. External audits, therefore, allow stakeholders to make better, more informed decisions related to the company being audited.

The representation should reaffirm your client’s understanding of all significant terms in the engagement letter. A relevant assertion is a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated.

The purpose of an internal audit is to ensure compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection. It also provides a benefit to management by identifying flaws in internal control or financial reporting prior to its review by external auditors.

Depending on materiality and other qualitative factors, the auditors will consider the deficiency to be an “other” matter, significant deficiency, or material weakness. The auditor has discretion on which category the deficiency falls into, but are otherwise required to use the standard wording and definitions in the letter.

It serves to document management’s representations during the audit, reducing misunderstandings of management’s responsibilities for the financial statements. The definition of good internal controls is that they allow errors and other misstatements to be prevented or detected and corrected by (the nonprofit’s) employees in the normal course of performing their duties.

Material weaknesses or significant deficiencies may exist that were not identified during the audit, and auditors are required to disclose this in their written communication. The auditor’s report contains the auditor’s opinion on whether a company’s financial statements comply with accounting standards. The results of the internal audit are used to make managerial changes and improvements to internal controls.

What is a management representation letter?

A management representation letter is a form letter written by a company’s external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis.

A control objective provides a specific target against which to evaluate the effectiveness of controls. Management representation is a letter issued by a client to the auditor in writing as part of audit evidences. The representations letter must cover all periods encompassed by the audit report, and must be dated the same date of audit work completion.

These types of auditors are used when an organization doesn’t have the in-house resources to audit certain parts of their own operations. The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period. The assertion of completeness also states that a company’s entire inventory, even inventory that may be temporarily in the possession of a third party, is included in the total inventory figure appearing on a financial statement. The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements.

The biggest difference between an internal and external audit is the concept of independence of the external auditor. When audits are performed by third parties, the resulting auditor’s opinion expressed on items being audited (a company’s financials, internal controls, or a system) can be candid and honest without it affecting daily work relationships within the company. Auditors evaluate each internal control deficiency noted during the audit to determine whether the deficiency, or a combination of deficiencies, is severe enough to be considered a material weakness or significant deficiency. In assessing the deficiency, auditors consider the magnitude of potential misstatements of your financial statements as well as the likelihood that internal controls would not prevent or detect and correct the misstatements.

Representation to Management

• In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit.
• written confirmation from management to the auditor about the fairness of various financial statement elements.
• Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk.

The idea behind a management representation letter is to take away some of the legal burdens of delivering wrong financial statements from the auditor to the company. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Internal auditors are employed by the company or organization for whom they are performing an audit, and the resulting audit report is given directly to management and the board of directors. Consultant auditors, while not employed internally, use the standards of the company they are auditing as opposed to a separate set of standards.

If the auditors detect an unexpected material misstatement during your audit, it could indicate that your internal controls are not functioning properly. Conversely, lack of an actual misstatement doesn’t necessarily mean that your internal controls are working.

The determination of whether an assertion is a relevant assertion is based on inherent risk, without regard to the effect of controls. Financial statements and related disclosures refers to a company’s financial statements and notes to the financial statements as presented in accordance with generally accepted accounting principles (“GAAP”). References to financial statements and related disclosures do not extend to the preparation of management’s discussion and analysis or other similar financial information presented outside a company’s GAAP-basis financial statements and notes.

External audits can include a review of both financial statements and a company’s internal controls. When a company’s financial statements are audited, the principal element an auditor reviews is the reliability of the financial statement assertions. In the United States, the Financial Accounting Standards Board (FASB) establishes the accounting standards that companies must follow when preparing their financial statements.

In an audit of financial statements, professional standards require that auditors obtain an understanding of internal controls to the extent necessary to plan the audit. Auditors use this understanding of internal controls to assess the risk of material misstatement of the financial statements and to design appropriate audit procedures to minimize that risk. written confirmation from management to the auditor about the fairness of various financial statement elements. The purpose of the letter is to emphasize that the financial statements are management’s representations, and thus management has the primary responsibility for their accuracy.

Expert Social Media Tips to Help Your Small Business Succeed

This letter is useful for setting the expectations of both parties to the arrangement. Almost all companies receive a yearly audit of their financial statements, such as the income statement, balance sheet, and cash flow statement. Lenders often require the results of an external audit annually as part of their debt covenants. For some companies, audits are a legal requirement due to the compelling incentives to intentionally misstate financial information in an attempt to commit fraud.

Management representation letter

As long as there’s a reasonable possibility for material misstatement of account balances or financial statement disclosures, your internal controls are considered to be deficient. An auditor typically will not issue an opinion on a company’s financial statements without first receiving a signed management representation letter. An audit engagement is an arrangement that an auditor has with a client to perform an audit of the client’s accounting records and financial statements. The term usually applies to the contractual arrangement between the two parties, rather than the full set of auditing tasks that the auditor will perform. To create an engagement, the two parties meet to discuss the services needed by the client.

As a result of the Sarbanes-Oxley Act (SOX) of 2002, publicly traded companies must also receive an evaluation of the effectiveness of their internal controls. As noted above, an internal control letter is usually the result of a deficiency in internal controls discovered during the audit, most commonly from a material audit adjustment. The letter includes required language regarding the severity of the deficiency.

Real Business Owners,

The parties then agree on the services to be provided, along with a price and the period during which the audit will be conducted. This information is stated in an engagement letter, which is prepared by the auditor and sent to the client. If the client agrees with the terms of the letter, a person authorized to do so signs the letter and returns a copy to the auditor. By doing so, the parties indicate that an audit engagement has been initiated.

Also, the letter provides supplementary audit evidence of an internal nature by giving formal management replies to auditor questions regarding matters that did not come to the auditor’s attention in performing audit procedures. Some auditors request written representations of all financial statement items. All auditors require representations regarding receivables, inventories, plant and equipment, liabilities, and subsequent events. The letter is required at the completion of the audit fieldwork and prior to issuance of the financial statements with the auditor’s opinion.

Auditors spend a lot of time assessing how material audit adjustments and immaterial adjustments that have the potential to be material will be communicated in the internal control letter. The Representation Letter is issued with the draft audit and is required by auditing standards to finalize the audit. The Representation Letter is a letter from the Association to our firm confirming responsibilities of the board and management for the financial statements, as well as confirming information provided to us during the audit. The President or Treasurer and Management need to sign the Representation Letter and return it back to our office within 60 days from the date the draft audit was issued. Representation Letters received after the 60-day mark may result in additional auditing procedures in order to finalize the audit and comply with auditing standards at an additional expense to the Association.

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• PRACTICE MONITORING

Peer Review For Small Firms

The aicpa has revised the standards for performing and reporting on peer reviews..

• Audit & Assurance
• Peer Review

*Does not include firms performing engagements under the SASs, examinations of prospective financial statements under the SSAEs or under Government Auditing Standards (the yellow book).

Source: AICPA practice monitoring division, 2000.

While at least some of the changes apply to all of the more than 30,000 firms enrolled in the AICPA peer review program, they most notably affect the nearly 18,000 small firms (mostly sole practitioners) that perform only review or compilation engagements and not audits. The revised standards also affect regulators (such as state boards of accountancy, which require peer review for licensure), CPAs who perform the peer reviews and state CPA societies, which administer the peer review program (see the box). This article focuses on how the key revisions will affect the peer reviews of small firms.

TYPES OF PEER REVIEWS

The most significant change is that there will be three types of peer reviews (system, engagement and report) instead of two (on-site and off-site). The engagements in a firm’s accounting and auditing practice currently covered under peer review still will be covered under the revised standards. For purposes of the standards, an accounting and auditing practice is defined as all of a CPA firm’s engagements (with few exceptions) that are covered by AICPA statements on auditing standards (SASs), statements on standards for accounting and review services (SSARSs) and statements on standards for attestation engagements (SSAEs) as well as by Government Auditing Standards (the yellow book), issued by the U.S. General Accounting Office.

System review. This type of review is for firms that perform engagements under the SASs, or the yellow book or examinations of prospective financial information under the SSAEs. Essentially it is the same as an on-site peer review with a name change. A system review is intended to provide the reviewer with a reasonable basis for expressing an opinion whether—for the year under review—the reviewed firm

Has designed its system of quality control for its accounting and auditing practice in accordance with AICPA quality control standards.

Is complying with its quality control policies and procedures in a way that will provide the firm with reasonable assurance of conforming with professional standards.

On-site peer review was renamed system review to more accurately describe the type of peer review since the reviewer expresses an opinion on the firm’s system of quality control. Approximately 15,000 firms are likely to have a system review over the next three years.

Engagement review. This type of review is for firms that are not required to have system reviews (and are not eligible to have report reviews,which are discussed below). An engagement review’s objectives are to provide the peer reviewer with a reasonable basis for expressing limited assurance that

The financial statements or information and the related accountant’s report on the accounting, review and attestation engagements the firm submits for review conform in all material respects with professional standards (the same as an off-site peer review).

The reviewed firm’s documentation conforms with the requirements of the SSARSs and the SSAEs, as applicable, in all material respects (new under the revised standards).

This type of review does not cover the firm’s system of quality control, so the reviewer cannot express an opinion on the firm’s compliance with its own quality control policies and procedures or with AICPA quality control standards. The reviewer can express only limited assurance on the firm’s conformity with the SSARSs and the SSAEs.

An engagement review does not require the reviewed firm to document any work other than that required by the SSARSs and the SSAEs, so the peer reviewer expresses limited assurance on whether the firm’s documentation conforms with those standards. Some examples of documentation include

Management representation letters on a review engagement.

Working papers documenting the matters covered in the accountant’s inquiry and analytical procedures on a review of financial statements.

The engagement review also encompasses documentation required under the SSAEs, such as might be the case on a WebTrust engagement. Currently, there are no documentation requirements for compilation engagements under the SSARSs. If a firm has an engagement review and performs only compilations under the SSARSs, the review will not include any of the firm’s documentation.

These changes should improve the quality of engagements—protecting the public that uses and relies on those reports—without imposing any additional burden on reviewed firms. The new procedures peer reviewers must perform are based on the minimal documentation requirements under the SSARSs and the SSAEs. More than 10,000 firms are likely to have an engagement review over the next three years.

Report review. Firms performing only compilations that omit substantially all disclosures will have report reviews. However, a firm must have an engagement review if it performs—as its highest level of service—compilations referred to in the SSARSs as “selected information—substantially all disclosures required are not included.” A report review retains the overall integrity of peer review through a streamlined process.

A report review’s objective is to help a firm that performs omit-disclosure compilation engagements as its highest level of service improve the overall quality of its practice. To accomplish this, the peer reviewer selects a sample of engagements and gives the firm a report listing comments and recommendations based on whether the financial statements and the related accountant’s reports appear to conform with the requirements of professional standards in all material respects.

A peer reviewer’s comments should be relevant and supportable by professional standards, giving the firm sound guidance for improving the overall quality of its omit-disclosure compilation engagements. Although materiality and relevance are sometimes subjective, peer reviewers should not establish their own professional standards or impose their own personal preferences on the firms they review. The comments and recommendations should be reasonably detailed so that a firm can determine what actions it should take.

An authorized member of the reviewed firm is required to sign the report—whether or not there are comments—acknowledging that there are no disagreements on significant matters and that the firm agrees to correct the matters commented on. The firm then must submit the signed copy of the report to the entity administering the peer review. There is no separate letter of comment or letter of response (as is the case with system and engagement reviews). However, a firm will not be prohibited from attaching a response to the copy of the peer review report it signed.

The administering entity must technically review all peer reviews. On report reviews, however, the entity’s peer review committee does not always need to be directly involved in accepting peer review documents. The technical reviewer, selected by the administering entity, normally helps the committee by reviewing the documents the peer reviewer submits. In a report review, however, the technical reviewer generally should have the authority to accept report reviews on the committee’s behalf when the technical reviewer determines there are no significant issues. This process is allowed only on report reviews.

By streamlining the process, including not requiring a formal response, the technical reviewer may be able to accept 85% or more of report reviews on the committee’s authority within 30 days of receiving the signed peer review report. Currently, the process often takes between three and six months. The AICPA peer review board is asking the 41 entities that administer the program to reevaluate the current scheduling, administrative and other related fees they charge firms based on this streamlined process.

If the technical reviewer finds significant deficiencies or issues with the peer review, that reviewer may not accept the report review. He or she should submit it for peer review committee consideration. Examples of such deficiencies include matters material to understanding the report, financial statements or other concerns such as significant repeat comments from the firm’s previous peer review or problems with the peer reviewer’s performance. Since a report review’s objective is to enable the firm to improve its omit-disclosure compilation engagements, the committee may need to ask the firm for evidence that it has taken corrective action to the committee’s satisfaction.

The technical reviewer alone may not impose corrective actions on the firm or peer reviewer; the committee must determine any corrective actions. The AICPA peer review board, state boards of accountancy and other interested parties responding to the revisions in the exposure draft stressed the importance of ensuring that firms with significant deficiencies have their corrective actions monitored by the committee. Since more than 7,000 firms are likely to have report reviews over the next three years, this is a significant improvement to the process.

STEP-UP IN PEER REVIEW

If a firm is required to have only a report review, it may elect to have an engagement or system review; a firm required to have an engagement review may elect to have a system review. A firm can make such an election to qualify its members to be peer reviewers or peer review committee members. Although nearly 18,000 firms are not required to have system reviews, every CPA firm must have a system of quality control in place. Some of those firms, therefore, may find it useful to have peer reviews covering that system.

AICPA BYLAW CHANGE

The AICPA amended its bylaws to require members practicing public accounting in organizations not eligible to enroll in an Institute-approved practice-monitoring program (a non-CPA-owned entity) to enroll individually if the services they perform and the reports they issue are subject to peer review. Currently, the only services covered by this situation are compilations performed and reported on under the SSARSs. Those individual members will be subject to engagement or report reviews.

EFFECTIVE DATE

The revised standards are effective for all peer reviews commencing on or after January 1, 2001. Early implementation is not allowed either in part or whole primarily because the entire AICPA peer review computer system, used to administer the program for more than 30,000 firms, is being rewritten.

EVERYBODY WINS

The goal of the AICPA peer review program is quality in the performance of accounting and auditing engagements by program members. The revised peer review standards have not changed this goal. Creating new, efficient and less burdensome ways to conduct and administer peer reviews for the many small CPA firms required to have them benefits everyone—clients, practitioners, regulators and reviewers. In the end, everyone wins, particularly CPA firms that can spend more time serving their clients.

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Management Representations

The compilation standards do not require practitioners to obtain a management representation letter, but this does not mean that it’s not a prudent thing to do. Obtaining a representation letter helps to ensure your client understands the services that you have provided, the limitations on the work you have completed, and that they are ultimately responsible for their financial statements. The representation should reaffirm your client’s understanding of all significant terms in the engagement letter.

Illustrative Guidance – Management Representations Listed here are some basic representations you could consider using in a compilation management representation letter: Management has reviewed and approved the financial statements as well as all journal entries; The practitioner has explained that the financial statements might not be suitable for use by other persons; Management has provided the practitioner with all of the accounting records and financial information necessary to compile the financial statements; and Management is not aware of any matter that has occurred or is pending that would cause the financial statements to be false or misleading.

Practice Management Tip Consider tailoring specific representations for the engagement to mitigate identified risks. Two examples of representation points that might apply to most compilation engagements are:   Management confirms that it has not included any personal or other inappropriate expenditure in the company’s financial statements; and Management has disclosed all foreign assets, investments, and transactions to you. Be sure to get the appropriately authorized individual to sign the representation letter before you issue the Notice to Reader.

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• Public Practice Knowledge Base
• Financial Reporting & Assurance Standards Canada

03 Apr What are Management Representation Letters?

In the world of assurance engagements, a management representation letter is a formal document that represents management’s agreement with the financial statements that are being audited or reviewed. This letter is a critical part of the assurance engagement process and is required by the auditor or reviewer as evidence that management acknowledges and accepts responsibility for the financial statements.

A management representation letter is typically issued by senior management, such as the CEO or CFO, and is addressed to the CPA firm performing the audit or review. It contains a series of statements that confirm certain facts and assurances about the company’s financial information, including the completeness and accuracy of financial records, disclosures of relevant information, and adherence to accounting principles.

The letter serves several purposes, including:

• Confirming the accuracy of financial information : The management representation letter is used to confirm that the financial statements are accurate and complete. This helps provide assurance to stakeholders that the financial statements are reliable.
• Demonstrating management’s responsibility : By signing the letter, management acknowledges its responsibility for the accuracy and completeness of the financial statements. This helps to provide accountability and transparency to stakeholders.
• Providing evidence for auditors and reviewer s: The management representation letter provides evidence to the CPA firm that management has taken responsibility for the financial statements, which helps to support the audit opinion or review conclusion.
• Reducing the risk of misstatements : The letter helps to reduce the risk of misstatements by requiring management to review the financial statements and provide assurance that they are accurate and complete.

Overall, the management representation letter is a critical part of the assurance engagement process, as it helps to provide assurance that the financial statements are accurate and complete, and that management takes responsibility for them. Without this letter, CPA firms would not have the necessary evidence to support their opinions and conclusions, which could lead to a lack of confidence in the financial statements and potential legal and financial consequences for the company. In fact, CPA firms are not permitted to complete their engagement and issue an audit or review engagement report until management provides a signed management representation letter.

If you require an audit or review and would like to speak to someone about these processes, please contact us to set up a free consultation.

Jennifer Scott

Cpa, cga – senior manager.

Jennifer Scott, a Senior Manager at Clearline brings a wealth of expertise in Private Enterprise and Assurance, holding designations as a CPA and CGA. Jennifer’s focus at Clearline includes conducting reviews, compilations, and providing tax services tailored to owner-manager businesses and partnerships, with a keen interest in industries such as professionals, manufacturing, real estate, and services. Her commitment to exceptional client service is evident through her proactive approach to staying updated on evolving accounting standards and tax legislation, thereby making her clients’ lives easier Jennifer’s educational background includes a Bachelor of Commerce from UBC with a major in Accounting, followed by over 15 years of experience in public practice, specializing in private enterprise. She appreciates the supportive environment at Clearline and enjoys various activities outside of work, including travelling, cheering on her children in sports like soccer, baseball, and volleyball, indulging in long walks with her dog while listening to podcasts, spending quality time with loved ones, and exploring her passion for baking through experimenting with new recipes.

Charmaine Pirrie

Cpa, ca(sa) – senior manager.

Charmaine Pirrie, a Senior Manager at Clearline is a CPA and CA (SA) with a background in audit and review engagements. With experience from Grant Thornton and D&Co, she brings expertise in private company audits and values Clearline’s supportive environment and technical resources. Charmaine also finds fulfillment in delving into her clients’ businesses to provide tailored services, ensuring meticulous audit and review procedures. Outside of work, she enjoys spending time with family, going for walks, and swimming.

Deepeka Dhillon

Cpa – manager.

Deepeka Dhillon, a Manager at Clearline, holds a CPA designation with a focus in Private Enterprise and Tax. Her primary responsibilities include compliance, corporate restructuring, and, estate and succession planning. Deepeka’s passion lies in continuous learning, enabling her to provide tailored solutions to clients’ unique needs. With a CPA designation and completion of the CPA in-depth tax program, she brings a strong educational background to her role at Clearline. Deepeka values the countless opportunities at Clearline to expand her knowledge in the complex world of tax. Outside work, she enjoys spending time with her beloved Jack Russell Terrier, Opie.

Raj Momrath

Cpa, ca, senior tax manager.

Raj Momrath, a Senior Tax Manager at Clearline, is a CPA, CA specializing in Canadian Tax. With a focus on Canadian tax planning, corporate reorganizations, estate planning, and providing business advice, Raj caters to a diverse clientele, including small owner-manager companies, high-net-worth individuals and large privately held multinational firms. His passion lies in helping Canadian owner-manager businesses and their shareholders minimize their overall tax obligations while navigating disputes with the Canada Revenue Agency and ensuring compliance with the complex Canadian tax system. Raj’s professional journey includes prior experience in PwC’s tax group, where he obtained his Chartered Accountant designation and then some time at some mid-sized firms. Raj completed the CPA Canada InDepth Tax course in 2017 strengthening his knowledge of Canadian tax. At Clearline, Raj appreciates working alongside knowledgeable colleagues and enjoys spending quality time with his wife and two sons and attending and volunteering with their sports activities. In his leisure time, Raj indulges in barbequing, golfing, and spending time outdoors, finding relaxation and enjoyment in these pursuits.

Julia Wallis

Julia Wallis, a Senior Manager at Clearline, holds designations as a CPA, CGA, and also holds a BA. Working within the Private Enterprise Group, her primary focus revolves around assisting entrepreneurs in understanding their personal and business finances while ensuring compliance with tax reporting requirements. Julia finds fulfillment in learning about her clients’ businesses and providing financial insights to enhance their management effectiveness while optimizing tax strategies. With a diverse career spanning various companies and public practice roles, including as a controller, Julia’s progression has equipped her with invaluable skills and insights into different business operations. She chose Clearline for its respected partners and staff, aligned philosophy on client service, and flexibility to balance demanding tax filing periods with leisure time for travel and personal interests such as gardening, wine exploration, reading, and relaxation.

Annelie Vistica

Cpa, ca – principal.

Annelie Vistica, a Principal at Clearline, is a CPA and CA with a strong background in private enterprise and assurance. With a Bachelor of Accountancy from the University of Stellenbosch in South Africa and extensive experience in tax, Annelie brings expertise in business setup, growth planning, and estate transitioning. She is passionate about engaging with clients to support them through various business stages, from inception to succession planning. Annelie values the supportive environment at Clearline, where she appreciates colleagues’ assistance in tax and assurance. Outside work, she enjoys spending time with her family and dog, exploring nature, visiting family in the Okanagan, and travelling the world.

Bilal Kathrada

Cpa, ca, principal.

Bilal, a Principal at Clearline Chartered Professional Accountants, primarily focuses on income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal received his Bachelor of Commerce degree from the University of Victoria and obtained his CA designation in 2005.

Prior to Clearline, he worked in the tax group of a large international accounting firm in Vancouver and a mid-sized accounting firm located in the Fraser Valley.

Outside of the office, he enjoys spending time with his wife and three children. He enjoys outdoor activities such as golf and spending time with his family and friends.

Danny Sandhu

Cpa, manager.

Bio coming soon.

Shehzel Saif

Cpa, tax manager.

As Clearline’s Tax Manager, Shehzel focuses on tax planning, corporate reorganizations and succession and estate planning. She’s passionate about continuous learning and staying up to date on tax legislation changes and helping clients with succession. In addition to her CPA designation, Shehzel also has a Bachelor of Business Administration and has completed the CPA In-Depth Taxation Program. Outside of work, she enjoys spending time with family and friends, traveling and trying out new recipes.

Ameeta Randhawa

As Clearline’s HR Manager, Ameeta supports our firm’s greatest resource—our staff. With a Bachelor of Business Administration in Human Resources and over 7 years of HR experience in various industries, she ensures all employees have a positive experience at Clearline. Ameeta’s focuses include recruitment, performance management, employee relations, program and policy development, and employee engagement. Outside of work, she enjoys traveling and spending time with friends and family.

CPA, CA, Senior Manager

Michael is a Senior Manager in Private Enterprise, carrying out reviews, compilations, and tax services for small- to medium-sized businesses. With a Bachelor of Commerce specializing in finance and a Diploma in Accounting, backed by over a decade of accounting experience, Michael is a trusted advisor who helps clients’ businesses succeed. Outside of the office, Michael enjoys spending time with family, trying out different restaurants in the city, and building and collecting mechanical keyboards.

CPA, CGA, Manager

Victor K. Yoshida

Victor was born and raised in Vancouver and obtained his Bachelor of Commerce from the University of British Columbia. He articled with Deloitte & Touche and received his CA designation in 1984. Victor was accepted to the firm’s tax group and went on to complete the Canadian Institute of Chartered Accountants In-Depth Tax course.

Victor specializes in Canadian income tax issues for professional and owner-managed businesses. He has extensive experience with business succession, estate planning, wealth preservation issues, corporate reorganizations, as well as mergers and acquisitions.

Victor was a member of the education committee of the Institute of Chartered Accountants of British Columbia and has held executive positions with various amateur sport organizations.

In his free time, Victor enjoys training for marathons, travelling, and spending time with his family.

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Compilation and Review Engagement Guide Updated

The Tax & Accounting business of Thomson Reuters has released a revised edition of “PPC’s Guide to Compilation & Review Engagements” to help practitioners comply with recent accounting standards.

The 2010 revised guide, and related Checkpoint Tools, provides the information needed to comply with the AICPA Accounting and Reviews Services Committee’s Statement on Standards for Accounting & Review Services No. 19. SSARS 19 establishes a more detailed framework for performing and reporting on compilation and review engagements. It is effective for periods ending on or after Dec. 15, 2010.

The PPC guide includes engagement and management representation letters; accountant’s reports; procedure checklists to ensure the new documentation requirements are efficiently met; sample financial statements and financial statement disclosures; and discussions to help in understanding the new requirements.

“As a result of SSARS 19, practitioners are facing the most significant changes to the AICPA’s compilation and review standards since their inception in 1978,” said Chas McElroy, a member of the AICPA’s Accounting & Review Services Committee, executive principal with LarsonAllen, and contributing author of PPC’s Guide to Compilation & Review Engagements. “The 2010 edition of this guide has all the practice aids and new report examples our professionals need and is a must-have to reduce risk of noncompliance with this new standard.”

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Review, Compilation and Preparation

Quick links.

• AICPA Guide Preparation, Compilation, and Review Engagements
• SSARS No. 21 Statements on Standards for Accounting and Review Services: Clarification and Recodification

SSARS No. 21

On October 23, 2014, the Accounting Review Services Committee issued Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification . SSARS No. 21 clarifies and revises the standards for reviews, compilations and engagements to prepare financial statements. It also includes significant revisions that affect the standards for accountants in public practice who prepare financial statements for their clients.

Summary of SSARS No. 21

SSARS No. 21 is effective for engagements on financial statements for periods ending on or after December 15, 2015 but early implementation is permitted. The clarified and revised standards supersede all existing AR sections except for AR section 120, Compilation of Pro Forma Financial Statements , which is expected to be exposed for public comment in clarified format in 2015 along with a proposed standard on compilation of prospective financial information, which is currently addressed in the attestation standards. SSARS No. 21 is composed of four sections, as follows:

• Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services , is intended to help accountants better understand their professional responsibilities when performing engagements in accordance with SSARSs.
• Section 70, Preparation of Financial Statements , applies when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compilation on those financial statements.
• Section 80, Compilation Engagements , applies when the accountant is engaged to perform a compilation engagement.
• Section 90, Review of Financial Statements , applies when the accountant is engaged to perform a review of financial statements.

Substantive changes to standards for compilations, reviews, or engagements to prepare financial statements are as follows:

• Section 70 does not require a report – even when the financial statements are expected to be used or provided to a third party.
• Section 70 requires either a legend on each page of the financial statements stating that no assurance is being provided or a disclaimer.
• The accountant is required to obtain an engagement letter signed by both the accountant and the client’s management for all reviews, compilations, and engagements to prepare financial statements.
• Section 80 eliminates the need for the accountant to determine whether he or she has prepared financial statements by eliminating the submission requirement.
• Section 80 always requires a report. Financial statements that the accountant is engaged to prepare but that are not intended for third-party use would fall under Section 70.

SSARS No. 21 is available on the Compilation and Review Standards page or an Executive Summary is available.

Also available is a SSARS No. 21 fact sheet is available highlighting additional provisions of the Statement.

See more on the background of SSARS No. 21 at the ARSC Clarity Project page.

New Resources

The AICPA has created the following helpful resources:

• Mapping of Interpretations to AR sections and AR sections 110, 200, 300, 400, and 600 to SSARS 21 and/or AICPA Guide Preparation, Compilation, and Review Engagements
• Comparison of engagement letter requirements – SSARS No. 19 vs. SSARS No. 21

Introduction to SSARS No. 21

Michael Glynn, Senior Technical Manager- Audit and Attest Services, provides an overview of Statement on Standards for Accounting and Review Services No. 21.

AICPA Publications

The AICPA has the following publications available or under production.

• AICPA Guide Compilation and Review Engagements

AICPA Resources - CPE and Webcasts

The AICPA has the following CPE courses and webcasts available or under production:

• Review Engagements Series
• Compilation and Preparation Engagements Series
• Webcast (archive) – Understanding the SSARS 21 Clarification and Revision

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CHECKPOINT LEARNING

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Course Detail

What is a Management Representation Letter  

We know that generally accepted auditing standards (GAAS) require auditors to obtain written representations from their clients' management team, as part of audits of financial statements and periods covered by the auditors' reports. The specific written representations will depend on the individual engagement circumstances and the nature and basis of the presentation of the financial statements. This overview may be appropriate for professionals at all organizational levels.

Checkpoint Learning is committed to bringing innovative solutions to you, now including nano-learning! As per NASBA Standards, a nano-learning course is a 10-minute, electronic, self-study course in which you are eligible to earn 1/5 (or 0.2) CPE credits.

At this time, nano-learning is not accepted by all state boards. If you are not sure whether your state board accepts nano-learning, you can ask your state board or visit the NASBA registry: (nasbaregistry.org).

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Learning objectives

Upon successful completion of this course, the user should be able to:

identify what is contained in a management representation letter.

Course outline

• Introduction
• Changes to AU-C Section 580, Written Representations
• An Example of a Management Representation Letter - Part 1
• An Example of a Management Representation Letter - Part 2

Requirements

Additional Compliance Information

Illustrative Management Representation Letter: SOC 2® Type 2

AICPA MEMBER

AT-C section 205, Assertion-Based Examinations, requires the service auditor to request written representations from the responsible party in a SOC 2 engagement. These representation should be in the form of a letter addressed to the service auditor. The following illustrative management representation letter includes the representations required by AT-C section 205 as well as additional representations specific to a SOC 2 Type 2 examination and should be used for engagements with reports dated on or after June 15, 2022. This

Download the Illustrative Mgmt Rep Letter for SOC 2 Type 2

File name: illustrative-mgmt-rep-letter-for-soc-2-type-2.pdf

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