Welcome to the World of SSARS!
Hello future CPAs! Today, we are diving into a very important part of the AUD exam: Accounting and Review Service Engagements. These are governed by the SSARS (Statements on Standards for Accounting and Review Services).
Think of these services as the "middle ground." Not every small business needs a full-blown, expensive audit. Sometimes, they just need help putting their numbers together or a "quick check" to show the bank. In this chapter, we will learn about the three main levels of service you can provide to non-issuers (private companies). Don't worry if this seems a bit technical at first—we'll break it down tier by tier!
The Three Tiers of Service
Imagine you are helping a friend with a photo album.
1. Preparation: You just print the photos and hand them over.
2. Compilation: You put the photos in an album and write a note saying you didn't check if the photos were real.
3. Review: You look at the photos, ask your friend where they were taken, and say, "Everything looks okay to me!"
1. Preparation Engagements (The "No Report" Level)
A preparation engagement normally issues no report and places a no-assurance statement on each statement page. If that statement cannot be included, AR-C 70 requires an appropriate disclaimer, a compilation engagement or withdrawal. Preparation requires accounting knowledge, agreement on the reporting framework and action on known incomplete or misleading information; it is not merely typing whatever management supplies. A compilation, in contrast, requires a compilation report.
A preparation engagement normally issues no report and places a no-assurance statement on each statement page. If that statement cannot be included, AR-C 70 requires an appropriate disclaimer, a compilation engagement or withdrawal. Preparation requires accounting knowledge, agreement on the reporting framework and action on known incomplete or misleading information; it is not merely typing whatever management supplies. A compilation, in contrast, requires a compilation report.
Quick Review: Preparation
• Goal: Prepare financial statements.
• Report? No.
• Independence? Not required.
• Assurance? None.
A preparation engagement normally issues no report and places a no-assurance statement on each statement page. If that statement cannot be included, AR-C 70 requires an appropriate disclaimer, a compilation engagement or withdrawal. Preparation requires accounting knowledge, agreement on the reporting framework and action on known incomplete or misleading information; it is not merely typing whatever management supplies. A compilation, in contrast, requires a compilation report.
2. Compilation Engagements (The "Organizer" Level)
In a compilation, you take management's data and put it into financial statement format, but this time, you must issue a report.
Key Features:
• No Assurance: Just like preparation, you are not giving an opinion or any assurance.
• Report Required: You must issue a written report that says you did not audit or review the statements.
• Independence: You do not have to be independent, but if you are not independent, you must disclose it in your report.
Did you know? Even though you don't "verify" the data, if you notice the numbers look obviously wrong or incomplete, you can't just ignore it. You must ask management for corrected info or withdraw from the engagement.
Key Takeaway: The Compilation Report
The report is short. It basically says: "I performed a compilation. I didn't audit it. I don't give an opinion." If you aren't independent, add a sentence like: "I am not independent with respect to XYZ Company."
3. Review Engagements (The "Limited Assurance" Level)
A SSARS review provides limited assurance, primarily through inquiry and analytical procedures, with required representations and other procedures. If a matter suggests the statements may be materially misstated, perform additional procedures sufficient to support the conclusion. A review is not an audit, but “no other procedures may ever be performed” is incorrect.
Analogy: A Review is like a "Medical Check-up" versus an Audit being "Surgery." In a check-up, the doctor asks how you feel (Inquiry) and checks your vitals (Analytical Procedures). They don't do an X-ray of every bone unless they find a problem!
The "Review" Memory Aid: I-A-M
To remember what you do in a Review, think I-A-M:
• Inquiry (Asking management questions).
• Analytical Procedures (Looking at ratios and trends).
• Management Representation Letter (You must get a signed letter from management).
Example of Analytical Procedures: You might calculate the Current Ratio \( \frac{Current Assets}{Current Liabilities} \) and compare it to last year. If it changed drastically, you ask management "Why?" (Inquiry).
Quick Review: Review Engagements
A SSARS review provides limited assurance, primarily through inquiry and analytical procedures, with required representations and other procedures. If a matter suggests the statements may be materially misstated, perform additional procedures sufficient to support the conclusion. A review is not an audit, but “no other procedures may ever be performed” is incorrect.
Summary Comparison Table
This is the most likely way these concepts will be tested. Memorize this logic!
Service: Preparation | Assurance: None | Report: No | Independence: Not Required
Service: Compilation | Assurance: None | Report: Yes | Independence: Not Required (but disclose)
Service: Review | Assurance: Limited | Report: Yes | Independence: REQUIRED
Forming the Conclusion and Reporting
Because this chapter is in "Area IV: Forming Conclusions," pay close attention to the wording of the Review report.
The Review Report Structure
1. Title: Must include the word "Independent."
2. Management’s Responsibility: They are responsible for the financial statements and internal control.
3. Accountant’s Responsibility: To conduct the review in accordance with SSARS.
4. Accountant’s Conclusion: This is where you give Negative Assurance.
Example wording: "Based on our review, we are not aware of any material modifications that should be made..."
Common Trap: The exam might ask if a Review includes a "basis for opinion" or "opinion" section. No! Reviews have a Conclusion, not an Opinion. Opinions are for Audits.
Important Reminders for Success
• Non-issuers only: SSARS does not apply to public companies (Issuers).
• Fraud: In all three services, if you find fraud, you must tell management. If it's serious, you might need to quit.
• Engagement Letter: You need a signed engagement letter for all three services. This protects you and the client by defining what you will (and won't) do.
A preparation engagement normally issues no report and places a no-assurance statement on each statement page. If that statement cannot be included, AR-C 70 requires an appropriate disclaimer, a compilation engagement or withdrawal. Preparation requires accounting knowledge, agreement on the reporting framework and action on known incomplete or misleading information; it is not merely typing whatever management supplies. A compilation, in contrast, requires a compilation report.