IFAC Guide to Compilation Engagements
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An introduction to the IFAC SMP Committee’s Guide to Compilation Engagements
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IFAC Guide to Compilation Engagements
- 1. Page 1 | Proprietary and Copyrighted Information IFAC Guide to Compilation Engagements IFAC SMP Committee September 2015
- 2. Page 2 | Proprietary and Copyrighted Information • To represent interests of small- and medium-sized practices (SMPs) • Comprised of 18 members from 18 countries • Regular input to policy, regulation and international standards – IAASB on key projects • Develops tools and guidance – Guide to Compilation Engagements, Guide to Review Engagements, Guide to ISA Engagements…… and more – IFAC Global Knowledge Gateway • Promotes the visibility and recognition of SMPs IFAC SMP Committee – Overview
- 3. Page 3 | Proprietary and Copyrighted Information • International Standard on Related Services (ISRS) 4410 (Revised) • Guide to Compilation Engagements at www.ifac.org/SMP Guide to Compilation Engagements
- 4. Page 4 | Proprietary and Copyrighted Information Uses of Compilation Engagements Uses Commentary Expertise of a Professional is Required Expertise of the practitioner is required by the client to compile the financial statements but no assurance is required. Within Other Engagements Compiled financial statements may be a useful, and ancillary addition to, other engagements, such as income and cash flow projections, financial or tax planning services, or taxation reporting engagements. They may also be supplemental in nature (i.e. for interim purposes to supplement an annual review or audit report). Transaction Purposes Any number of transaction related purposes may be supported by a compilation report. For example, a change to the entity’s ownership or restructured financing (i.e. merger to acquisition).
- 5. Page 5 | Proprietary and Copyrighted Information Benefits of Compilation Engagements SME Benefits Commentary Alternative Service Trend towards higher audit exemptions. May be less time consuming for client. Cost Effective A compilation engagement is normally a lower cost for an entity than an audit or a review engagement. Reported Involvement From a Professional Accompanying report states expertise in accounting and financial reporting applied to assist in the preparation and presentation as well as adherence to relevant ethical requirements.
- 6. Page 6 | Proprietary and Copyrighted Information Benefits of Compilation Engagements SMP Benefits Commentary Customized Advice Add value to the client and provide a basis for customized advice. Financial reporting requires judgment, therefore management may benefit from the assistance of the practitioner, particularly when making significant judgments. Opportunities – Additional Service Ensure the client is aware of how and when a compilation engagement can be used (i.e. not appropriate when assurance is required). Opportunities for cross-selling (i.e. the IESBA ethical requirements of Section 290 and 291, Independence, do not apply to compilation services). Flexibility Consists of use of records, documents, explanation and other information provided by management allowing practitioners to tailor procedures, if any, based on professional judgment and experience.
- 7. Page 7 | Proprietary and Copyrighted Information Benefits of the Guide to Compilation Engagements Guide Benefits Commentary Extracts from the Standard Direct extracts from ISRS 4410 (Revised) Tailored Examples Illustrated examples and Consider Points, including efficiency suggestions Appendices Checklists, correspondence samples and reports for adaption Staff Training Day-to-day reference tool for staff – can be used for training Ensure SMP staff develop a consistent approach
- 8. Page 8 | Proprietary and Copyrighted Information Accepting Planning Performing Reporting Enforcement The Four Elements
- 9. Page 9 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Accepting Accepting • Is the Firm ready? • Engagement acceptance or continuance • Terms of engagement
- 10. Page 10 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Planning Planning • Communications • Consideration of materiality using the tenet of ‘misleading’ as a benchmark • Understanding of the entity • Procedures
- 11. Page 11 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Planning
- 12. Page 12 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Planning
- 13. Page 13 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Performing Emphasis on Professional Judgment Minimal Checklists Required Flexibility of the Engagement
- 14. Page 14 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Performing Example(s) of Procedures (if determined appropriate) Improper Accounts Payable Cutoff Cause for Consideration Potential Amendments Required A retail toy store has a December 31st year-end. It is reasonable to expect that the operation would take receipt of a large quantity of merchandise during the busiest time of year that would not require immediate payment. The accounts payable listing does not appear to include balances due within 30-60 days to suppliers of Christmas holiday related toys. Examples of Procedures Discuss accounts payable and accruals with client Scan transactions List accounts payable and accruals Reconcile accounts payable to list If incomplete, inaccurate or otherwise unsatisfactory propose amendments as necessary
- 15. Page 15 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Performing Example(s) of Documentation Information Prepared by the Practitioner Preparation Signed engagement letter. Understanding the entity The AFRF that will be used. Planning Matters of continuing relevance to future compilation engagements. Listings of planned inquiries. Work performed Results obtained from any procedures elected to be performed. Listing of amendments to the financial statements, including any adjusting entries or other amendments to the financial statements that the practitioner has agreed with management during the course of the engagement. Recording of how the compiled information reconciled with the underlying records, documents, explanations and other information provided by management (for example, a schedule showing how the trial balance links to the compiled financial statements) Reporting A copy of the practitioner’s report. Approval from management, if applicable.
- 16. Page 16 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Reporting Reporting • Forming the report • Wording of the report
- 17. Page 17 | Proprietary and Copyrighted Information Some Highlights in the Guide from the Practitioner’s Point of View – Appendices Tools that are included as appendices: • Client acceptance/continuance checklist • Sample engagement letter • Sample file completion checklist • Alternate compilation report
- 18. Page 18 | Proprietary and Copyrighted Information IFAC Resources – Compilation Engagements • IFAC SMP Committee: www.ifac.org/SMP – Article - The Standard for Today’s Compilation Engagements – Follow us on Twitter: IFAC_SMP – Join us on LinkedIn: IFAC SMP Community • IAASB: www.iaasb.org – ISRS 4410 (Revised) International Standard on Related Services • The Global Knowledge Gateway: www.ifac.org/gateway
- 19. Page 19 | Proprietary and Copyrighted Information Thank You www.ifac.org/smp
Editor's Notes
- The Guide addresses the responsibilities of a practitioner (who is not the entity’s auditor) when engaged to perform a compilation of general purpose historical financial statements prepared in compliance with an AFRF and in accordance with the International Standard on Related Services (ISRS) 4410 (Revised). ISRS 4410 came into effect for compilation engagement reports dated on or after July 1, 2013. A copy of the Guide may be downloaded free of charge by visiting the IFAC website.
- There are four major elements to a compilation engagement. The Guide has been developed around each of these elements and describes each phase of the engagement in detail. This makes the Guide a powerful training tool.
- Accepting – (Chapter 3) The guide directs the practitioner to truly contemplate whether they offer compilation services – this means the firm should have considered whether they understand the requirements of ISRS 4410, whether they can met the ethical requirements, exercise professional judgment, are competent and can meet the ISQC 1 standard. That said, these professional requirements are not onerous and the SMP Committee has sought to emphasize the flexibility of the ISRS 4410 engagement. The firm will be guided through the acceptance or continuance phase of the engagement, considering whether the needs of the client will be met through the offering of a compilation engagement as well as whether this type of service is appropriate to the circumstance. Guidance is also provided on the terms of engagement, including identification of the AFRF and details items that should be customized in an engagement letter such as use and distribution of the report, expected assistance from management, reporting time frames and fees.
- Planning – (Chapter 4) The planning chapter first addresses the importance of two-way communication between the client and the firm as well addressing the client’s preferred method of communication. ISRS 4410 uses the tenet of ‘misleading’ as a benchmark for materiality. The practitioner’s consideration of materiality is made within the context of the AFRF. Amendments are required to be proposed to management if the impact of not doing so would cause the financial information to be materially misstated. Guidance is also provided for why an understanding of the entity is so critical to the conduct of a compilation engagement, including the AFRF as well as how this understanding facilitates and focus’ the engagements procedures. When making a determination with respect to any necessary procedures the practitioner will consider significant judgments that might be necessary particularly in the context of where they can provide assistance.
- ISRS 4410 (Revised) does not prescribe any required procedures in the conduct of a compilation engagement. That said, a practitioner may elect to conduct a number of procedures in order to achieve the compilation objectives. The practitioner uses professional judgment in determining the nature and extent of such procedures.
- Performing – (Chapter 5) The nature of possible procedures is outlined in the following exhibit.
- Performing – (Chapter 5) The procedures performed in a compilation engagement are not comparable with those undertaken in an audit or review engagement and do not include any detailed procedures to verify the validity or completeness of the books and records. Due to the flexibility of the standard, additional assistance may be provided to the client that has requested a compilation engagement. For example, the engagement may be expanded to include bookkeeping services leading up to the preparation of the ending trial balance, or it may include preparing entries in advance of the closing of the accounts (such as recording of provisions, accruals, and amortization). In such cases it is important to emphasis to management that the preparation and presentation of the financial statements, regardless of the practitioner’s expanded role in the engagement, remain their responsibility.
- Performing – (Chapter 5) ISRS 4410 (Revised) does not require the practitioner to make comparisons with the prior year. However, when the business has changed very little, comparing prior year results to current year results may be helpful to determine whether the income statement items appear misleading. It is not necessary to explain or document every variance, but unusual changes should be followed up if they could be materially misstated. The same applies to unusual relationships between account balances.
- Performing - Some of the types of documentation you might expect to see within a compilation engagement working paper file is detailed within this exhibit. Such documentation assists in demonstrating the practitioner’s adherence to the professional and ethical standards of ISRS 4410.
- Reporting – (Chapter 6) All of the elements that are necessary in order to prepare the practitioner’s accompanying financial statement communication are covered in this last chapter, as well as providing instruction on when it is appropriate to date the report. Additional chapter content covers the instance of special purpose financial statements.
- There are a number of useful appendices included in the compilation guide including: A client acceptance and continuance checklist – this checklist will not only assist the practitioner in meeting ethical and professional standard requirements, but is also in compliance with ISQC 1 requirements The sample engagement letter expands upon the sample that is provided in ISRS 4410 and provides practical practice considerations that are commonly included in engagement correspondence such as ownership of working papers, dispute resolution matters, time and fee inclusions and engagement termination. A file completion checklist is included that will guide firm personnel through the file closing process including completion of procedures, file review, financial statement approval, and ISRS 4410 requirements. Finally, an alternate compilation report is provided that is applicable to an engagement to compile financial information required for a regulatory compliance purpose. Each of these appendices may be tailored to the circumstance and can be adapted to include the both firm and client specific information.