Provided by the Entity's Management
In a compilation engagement, a CPA prepares monthly, quarterly, or annual financial statements. However, he or she offers no assurance as to whether material, or significant changes are necessary for the statements to be in conformity with generally accepted accounting principles (or another comprehensive basis of accounting, such as the cash or tax basis) , the set of rules regarding financial accounting and reporting. During a compilation, the CPA simply arranges the data in a conventional financial statement format and does not probe beneath the surface unless he or she becomes aware that the information management provided is in error or incomplete. However, before agreeing to perform a compilation, a CPA takes a "common sense" look at the organization's accounting system to decide whether the client needs other accounting services, such as help in adjusting the accounting records.
Here's What a Compilation Entails:
The CPA becomes familiar with the accounting principles and practices common to the client's industry and acquires a general understanding of the client's transactions and how they are recorded.
After compiling the financial statements, the CPA is obliged to read them and consider whether they are appropriate in form and free from obvious material errors. The CPA then issues a standard report that says, in effect, that the financial statements were compiled, but because they were not audited or reviewed, no opinion is expressed.
Compilation standards permit an accountant to compile financial statements that omit footnote disclosures required by generally accepted accounting principles or another comprehensive basis of accounting. This is allowable as long as the omission is clearly indicated in the report and there is no intent to mislead users. However, when footnote disclosures have been left out, the CPA adds a third paragraph to the compilation report stating that management has elected to omit disclosures normally required by generally accepted accounting principles. This paragraph lets the user know that if the financial statements contained that information, it might affect the user's conclusions.
A compilation is sufficient for many private companies. However, if a business needs to provide some degree of assurance to outside groups that its financial statements are reliable, it may be necessary to engage a CPA to perform a review.
