Accounting and Review Services
The Statements on Standards for Accounting and Review Services (SSARS), issued by the AICPA's Accounting and Review Services Committee (ARSC), govern engagements involving the financial statements of nonissuers (private companies) when the CPA is not performing an audit. The three primary service levels—preparation, compilation, and review—each have distinct requirements for assurance, reporting, and independence. Understanding the differences among these engagement types is a core AUD exam topic.
SSARS engagements apply only to nonissuers. Issuers (public companies) are subject to PCAOB standards. For issuers, interim reviews are conducted under AU-C 930 / AS 4105, not SSARS.
Overview of Service Levels
| Engagement | Standard | Assurance | Report Required? | Independence Required? |
|---|---|---|---|---|
| Preparation | AR-C 70 | None | No (but each page must state "no assurance is provided") | No |
| Compilation | AR-C 80 | None | Yes — compilation report | No (but lack of independence must be disclosed) |
| Review | AR-C 90 | Limited (moderate) | Yes — review report | Yes |
A quick memory aid: Preparation = no report, no independence, no assurance. Compilation = report, no independence required (but disclose if not), no assurance. Review = report, independence required, limited assurance. The exam frequently tests these distinctions.
Preparation Engagements (AR-C 70)
A preparation engagement is the most basic service. The CPA assists management in preparing the financial statements but does not provide any assurance.
Key Characteristics
- No assurance is provided on the financial statements
- No report is issued by the CPA
- Each page of the financial statements must include a legend: "No assurance is provided on these financial statements" (or substantially similar language)
- Independence is not required — the CPA can prepare financial statements even if not independent
- The CPA must have an understanding with the client (documented through an engagement letter)
Omission of Disclosures
- The CPA may prepare financial statements that omit substantially all disclosures required by the applicable framework
- If disclosures are omitted, the financial statements should indicate that "Substantially all disclosures required by [framework] are not included"
- The omission must not be undertaken with the intent to mislead users
Example: Gies Co.'s management needs monthly internal financial statements for decision-making. They engage a CPA to prepare the statements. The CPA prepares the balance sheet and income statement, omitting all footnote disclosures, and includes on each page: "No assurance is provided on these financial statements. Substantially all disclosures required by accounting principles generally accepted in the United States of America are not included."
Compilation Engagements (AR-C 80)
In a compilation engagement, the CPA assists management in presenting financial information in the form of financial statements and issues a compilation report. No assurance is expressed.
Key Characteristics
- The CPA presents financial statements based on information provided by management
- No assurance is provided — the CPA does not perform inquiry, analytical procedures, or other verification
- The CPA must have an understanding of the industry and knowledge of the client
- The CPA must read the financial statements and consider whether they are appropriate in form and free from obvious material errors
- An engagement letter is required
Compilation Report Content
The compilation report includes:
| Element | Description |
|---|---|
| Title | Includes the word "Independent" (if the CPA is independent) |
| Addressee | Management or those charged with governance |
| Statement of service | States that the CPA has compiled the financial statements |
| Scope description | Explains that a compilation is limited to presenting information that is management's representation |
| No assurance | States that the CPA does not express an opinion or provide any assurance |
| Signature and date | Firm name and date of the report |
Independence Considerations
- Independence is not required for a compilation engagement
- However, if the CPA is not independent, the compilation report must include a statement: "I am (We are) not independent with respect to [entity name]"
- The CPA is not required to disclose the reason for the lack of independence (but may do so)
Example: MAS Inc., a privately held company, engages a CPA to compile its annual financial statements. The CPA's spouse is a 10% owner of MAS Inc., making the CPA not independent. The CPA may still perform the compilation but must include in the report: "We are not independent with respect to MAS Inc."
If a CPA is not independent, the CPA can still perform a compilation (with disclosure) or a preparation (no independence requirement). However, the CPA cannot perform a review if not independent. This distinction is heavily tested.
Review Engagements (AR-C 90)
A review engagement provides limited (moderate) assurance that no material modifications are needed for the financial statements to conform with the applicable financial reporting framework. This is a significantly higher level of service than a compilation or preparation.
Key Characteristics
- Provides limited assurance through inquiry and analytical procedures
- Independence is required — the CPA must be independent of the entity
- The CPA issues a review report containing negative assurance
- The CPA must obtain an engagement letter and a representation letter from management
- The CPA must have an understanding of the industry and the entity
Nature of Procedures
The primary procedures in a review are:
-
Inquiries of management and others within the entity about:
- Accounting principles and practices used
- Procedures for recording, classifying, and summarizing transactions
- Unusual or complex situations
- Subsequent events
- Fraud or suspected fraud
-
Analytical procedures applied to the financial data, such as:
- Comparing current period amounts to prior periods, budgets, or industry data
- Evaluating relationships among financial statement elements (e.g., gross margin trends)
- Investigating significant unexpected differences
Review Report Content
The review report includes:
- A title including the word "Independent"
- A statement that the CPA reviewed the financial statements
- Negative assurance: "Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with [applicable framework]"
- A description of the limited nature of a review engagement vs. an audit
- A statement that the CPA did not express an audit opinion
- The CPA's signature and the date of the report
Example: BIF Partners engages a CPA to review its annual financial statements. The CPA performs inquiry and analytical procedures, obtains a management representation letter, and issues a review report stating: "Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America."
Differences Between Compilation and Review
| Feature | Compilation (AR-C 80) | Review (AR-C 90) |
|---|---|---|
| Assurance | None | Limited (negative assurance) |
| Key procedures | Read statements for obvious errors | Inquiry and analytical procedures |
| Independence | Not required (but disclose if lacking) | Required |
| Representation letter | Not required | Required |
| Report expression | "We do not express an opinion or any form of assurance" | "We are not aware of any material modifications…" |
| Level of service | Lower | Higher |
If the CPA discovers a material misstatement during a compilation, the CPA should request that management revise the financial statements. If management refuses, the CPA should withdraw from the engagement. The same principle applies to review engagements—if management refuses to correct material issues, the CPA considers the effect on the review report.
Interim Reviews for Issuers
For issuers (public companies), interim (quarterly) financial information is reviewed under different standards:
- PCAOB AS 4105 governs reviews of interim financial information for SEC registrants
- The procedures are similar to those in a SSARS review (inquiry and analytical procedures) but are performed under PCAOB, not AICPA, authority
- The review provides limited assurance using negative assurance language
- The auditor must be the entity's auditor of record (i.e., also engaged to audit the annual financial statements)
| Feature | SSARS Review (Nonissuers) | Interim Review (Issuers) |
|---|---|---|
| Standard | AR-C 90 | AS 4105 |
| Issued by | AICPA | PCAOB |
| Scope | Annual or interim financial statements | Interim (quarterly) financial information |
| Must be auditor of record? | No | Yes |
| Assurance | Limited | Limited |
Reporting When Not Independent
Only compilation and preparation engagements may be performed when the CPA lacks independence:
- Preparation: No independence requirement. No report is issued, so no disclosure is needed.
- Compilation: The CPA must disclose the lack of independence in the compilation report. The CPA may, but is not required to, describe the reason for the impairment.
- Review: Cannot be performed if the CPA is not independent. The CPA must decline or withdraw from the engagement.
Example: Kingfisher Industries asks its CPA, whose brother is the company's CFO, to perform a review engagement. The CPA must decline because independence is impaired by the close family relationship with a key member of management. The CPA could offer to perform a compilation instead, with the required independence disclosure.
Subsequent Discovery of Facts
If, after the date of the compilation or review report, the CPA becomes aware of facts that existed at the report date that might have affected the report, the CPA must:
- Discuss the matter with management
- Determine whether the financial statements need revision
- If revision is necessary, consider whether management is taking appropriate action to inform users who may be relying on the financial statements
- If management does not take appropriate action, the CPA should notify those charged with governance and consider what further steps are necessary (which may include notifying regulatory agencies or known users)
The CPA's obligation upon discovering subsequently known facts applies to both compilations and reviews. The CPA cannot simply ignore information that calls into question previously issued financial statements, even if the engagement has concluded.
Summary
| Engagement | Standard | Assurance | Independence | Report | Key Procedures |
|---|---|---|---|---|---|
| Preparation | AR-C 70 | None | Not required | No report (legend on each page) | Prepare FS from management data |
| Compilation | AR-C 80 | None | Not required (disclose) | Compilation report | Read FS for obvious errors |
| Review | AR-C 90 | Limited | Required | Review report (negative assurance) | Inquiry and analytical procedures |
| Interim review (issuers) | AS 4105 | Limited | Required | Review report | Inquiry and analytical procedures |