SSARS Standards: Compilations, Reviews, and Preparation Services

Overview of SSARS

The Statements on Standards for Accounting and Review Services (SSARS) are issued by the AICPA's Accounting and Review Services Committee (ARSC) and apply to nonissuer (non-public) entities. SSARS standards govern three levels of service below an audit: preparation of financial statements, compilation engagements, and review engagements. Understanding these standards is critical for the CPA AUD exam because a significant portion of questions address the differences between audits, reviews, compilations, and preparation engagements.

Preparation of Financial Statements (AR-C Section 70)

Nature of the Service

A preparation engagement is the most basic service, in which the accountant assists management in preparing and presenting financial statements. No assurance is provided, and no report is required. The accountant is not required to verify the accuracy or completeness of the information provided by management or to gather evidence to express an opinion or conclusion.

Key Requirements

The accountant must establish an understanding with the client, preferably in writing, regarding the services to be performed. Each page of the financial statements must include a legend indicating that "no assurance is provided" on the statements, unless the accountant issues a disclaimer report. The accountant must have sufficient knowledge of the entity's accounting principles and practices to prepare the statements, but the accountant is not required to be independent.

Compilation Engagements (AR-C Section 80)

Definition and Scope

A compilation engagement is one in which the accountant assists management in presenting financial information in the form of financial statements without obtaining or providing any assurance that there are no material modifications that should be made. A compilation provides no assurance, but unlike a preparation engagement, the accountant is required to issue a report. The compilation report states that the accountant did not audit or review the financial statements and does not express an opinion or conclusion.

Independence Considerations

An accountant may issue a compilation report even when not independent of the entity, but the accountant must disclose the lack of independence in the compilation report. The accountant is not required to disclose the reason for the lack of independence. This is a unique feature of compilation engagements that distinguishes them from all other levels of service.

Compilation Procedures

The accountant obtains an understanding of the financial reporting framework and the significant accounting policies, reads the compiled financial statements and considers whether they appear appropriate in form and free from obvious material errors, and establishes an engagement letter documenting the terms. The accountant does not perform inquiries, analytical procedures, or other procedures ordinarily performed in a review or audit.

Review Engagements (AR-C Section 90)

Level of Assurance

A review engagement provides limited assurance that there are no material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. The review conclusion is expressed in the form of negative assurance, stating that the accountant is not aware of any material modifications that should be made. A review provides substantially less assurance than an audit but more than a compilation.

Review Procedures

The primary procedures in a review are inquiries of management and analytical procedures applied to financial data. Inquiries typically address the entity's accounting principles and practices, procedures for recording financial information, actions taken at board or shareholder meetings, subsequent events, fraud or suspected fraud, significant journal entries, related-party transactions, and litigation or claims. Analytical procedures involve evaluating financial information through analysis of plausible relationships among financial and nonfinancial data.

Independence Requirement

Unlike compilation and preparation engagements, the accountant must be independent to perform a review engagement. If the accountant is not independent, the accountant cannot perform a review and must either perform a compilation (if appropriate) or decline the engagement.

Comparing the Service Levels

The hierarchy of services, from least to most assurance, is: preparation (no assurance, no report required), compilation (no assurance, report required), review (limited assurance), and audit (reasonable assurance). Each successive level requires more procedures and provides greater assurance to financial statement users. Understanding this hierarchy and the specific requirements of each level is essential for CPA exam success.

CPA Exam Tips

• Preparation engagements require no report; each page must contain a "no assurance" legend unless a disclaimer report is issued.
• Compilation engagements require a report but provide no assurance. The accountant need not be independent but must disclose if not independent.
• Review engagements provide limited assurance through inquiry and analytical procedures. Independence is required.
• Know the specific procedures for each service level. Reviews require inquiries and analytical procedures; compilations require only reading the statements and understanding the framework.
• A review report uses negative assurance language; a compilation report explicitly states no opinion or conclusion is expressed.