Definition
A compilation refers to the preparation and presentation of financial statements by an accountant based on information provided by the entity, without the accountant performing any audit, review, or assurance procedures. This type of accounting service ensures that financial data presented in statements is in an orderly and professional format, but it does not express an opinion or any assurance regarding the compliance of the statements with Generally Accepted Accounting Principles (GAAP).
In performing a compilation, the accountant adheres to the Statements on Standards for Accounting and Review Services (SSARS) provided by the American Institute of Certified Public Accountants (AICPA). The engagement letter, which outlines the services to be rendered, limitations of service, and the nature of the compilation report, is an essential aspect of the service.
Examples
Small Business Financial Statements: A small business may hire an accountant to compile its financial statements at the end of the fiscal year. The accountant organizes the financial data into the standard format, following SSARS, even though no auditing for accuracy or compliance with GAAP is performed.
Nonprofit Organizations: Nonprofits might require compiled financial statements for internal management purposes or simple reporting to donors, where a detailed audit is not necessary.
Frequently Asked Questions
What is the main purpose of a compilation?
A compilation aims to present financial statements in an organized manner based on the client’s data. It does not involve audit or review procedures, thus no assurance is provided regarding the statements’ reliability or conformity with GAAP.
How does a compilation differ from an audit or review?
A compilation involves arranging financial information without providing any assurance as to whether the statements are free from material misstatement. An audit provides a high level of assurance through extensive testing and verification, while a review offers limited assurance based on inquiry and analytical procedures.
Who can perform a compilation?
Licensed accountants, specifically those adhering to the AICPA’s SSARS standards, are eligible to perform compilations.
Is an engagement letter necessary for every compilation service?
Yes, an engagement letter is necessary. It details the nature of services to be provided, limitations, responsibilities, and the scope of the compilation.
What are the limitations of a compilation?
Since a compilation does not verify the accuracy of financial information, it cannot be relied upon to uncover errors, fraud, or material misstatements.
Related Terms
- Audit: A systematic examination of financial statements, providing a high level of assurance that the statements are free from material misstatement.
- Review: Provides limited assurance that no material modifications are needed by primarily conducting inquiries and analytical review procedures.
- GAAP (Generally Accepted Accounting Principles): A set of accounting principles, standards, and procedures that companies must follow when compiling their financial statements.
- SSARS (Statements on Standards for Accounting and Review Services): A set of standards issued by the AICPA governing the services provided by accountants involved in preparing unaudited financial statements.
Online References
- AICPA - Statements on Standards for Accounting and Review Services
- IFRS - Compilations of Financial Information
Suggested Books for Further Studies
- “Financial Accounting: Tools for Business Decision Making” by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso.
- “Accounting Services, the Mechanics of Performing a Compilation of Financial Statements” by Wiley CPA Exam Review Team.
- “Understanding Business Accounting For Dummies” by Colin Barrow, John A. Tracy.
Fundamentals of Compilation: Accounting Basics Quiz
Thank you for exploring the intricate world of accounting compilations. Best of luck with your continued studies and stay resourceful in your financial practices!