A compilation engagement is a service provided by an outside accountant to assist the management in the presentation of financial data in the form of financial statements. The accountant should possess a greater knowledge of the operations of the business in order to compile the financial statements.
In some cases, a compilation engagement allows companies without an in-house accountant to hire an outside professional accountant to prepare their financial statements without incurring higher costs of preparing audited financial statements.
A compilation engagement is a type of engagement where a company engages an outside accountant to prepare and present financial statements.
It is not designed to express an opinion or provide assurance regarding the information contained in the financial statement.
The accountant uses financial data provided by the management to compile the required financial statements.
How a Compilation Engagement Works
An accountant tasked with the responsibility of providing compilation services is required to possess sufficient industry-level knowledge of the client. He or she is not required to be independent of the company requiring compilation services in order to perform such a form of engagement. The management accepts full responsibility for the preparation and presentation of the financial statements, which can be either an individual financial statement, such as the balance sheet, or a complete set of financial statements.
When performing compilation, the accountant should prepare adequate documentation that provides information on the work that has been carried out. Some of the documentation includes the engagement letter, financial statements, and communication with management regarding significant issues identified during the audit.
Once the audit is completed, the accountant prepares a compilation report that states that he/she has not audited the financial statements, and therefore, the audit should not be viewed as an assurance that the financial statements have complied with the financial accounting framework or as an opinion on the accuracy of the financial statements.
Where the financial statements have been materially misstated, the accountant should desist from issuing financial statements that are misleading. Instead, the accountant should obtain more information from the management, and if the information is not forthcoming, he/she should withdraw from the engagement.
Compilation Documentation Requirements
The three main documentation that an accountant is required to prepare during compilation engagement include:
1. Engagement letter
The engagement letter is an agreement to provide compilation engagement to a client, and it defines the services to be performed by the professional accountant/auditor and the compensation to be paid. For the engagement letter to be legally binding, it must be signed by the authorized representatives of both the service provider and the client.
Some of the information contained in an engagement letter includes the services to be provided, the amount and timing of payments, specific due dates, how the parties can terminate the contract, etc. Most compilation engagement letters will state that the accountant will prepare and present financial statements and provide a compilation service.
2. Financial statements
When an accountant accepts the audit engagement terms, he/she is tasked with preparing and presenting the financial statements of the client’s company. He/she is required to follow the accepted reporting framework (IFRS or US GAAP) when preparing the financial statements. Depending on the terms of the engagement, the accountant may be required to prepare a single financial statement or a set of key financial statements.
The financial statements can cover a short period such as a month, quarter, or annual period, depending on the requirements of the management. The accountant may include a reference to the compilation report note at the bottom of each financial report to notify the reader that a compilation report exists.
3. Compilation report
A compilation report is a report prepared by the accountant tasked with performing compilation service by a client and should accompany the compiled financial statements. Unlike an audit or review report, a compilation report comprises a single paragraph, without paragraph titles. It should identify the entity (client), compiled financial statements, and the period covered.
The report should include a statement that the management is responsible for the financial statements, that the financial statements have not been reviewed or audited, and the accountant does not express an opinion or assurance on the financial statements.
At the bottom, the report should include a signature of the accountant or accountant’s firm, the accountant’s city and state, and date of the report (date when accountant completed compilation procedures).
Compilation Engagement vs. Audit and Review Engagements
Unlike an audit engagement where auditors are required to provide an opinion on the fairness of the financial statements, a compilation engagement does not require the accountant to provide an opinion on the correctness of the financial statements.
Also, it does not provide assurance that the company has complied with the accepted accounting principles. Therefore, the accountant engaged in a compilation engagement is not required to use analytical procedures, review procedures, or inquiries, or engage in other audit procedures. A compilation engagement is the least expensive of the various audit types. It is preferred by entities whose key stakeholders approve such a form of engagement.
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