When Is the Ar70 Financials Part of a Cpa Peer Review

Are you aware of the option in the SSARS titled Preparation of Financial Statements (AR-C 70)? Many CPAs still believe the everyman level of service in the SSARS is a compilation, simply this is not true. CPAs tin and do issue financial statements without a compilation report. Today I provide an in-depth look at AR-70, Grooming of Fiscal Statements.

Preparation of Financial Statements

Guidance

AR-C seventy, Preparation of Financial Statements, is the guidance for the preparation of financial statements.

Applicability - AR-C Section lxx

AR-C section 70, Grooming of Financial Statements, is applicable when a public auditor is engaged to prepare financial statements or prospective financial information.

This section can also be applied to the grooming of other historical financial data (e.g., schedule of rents).

AR-C lxx does not employ when the auditor prepares financial statements or prospective financial information:

• And is engaged to perform an audit, review, or compilation of financial statements
• Solely for submission to taxing authorities
• For inclusion in written personal financial plans
• In conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
• In conjunction with business organization valuation services

Are in that location other times when AR-C 70 is non applicable? Yep. The preparation guidance does not apply when the accountant is simply profitable in the preparation of financial statements; such services are considered bookkeeping.

Examples of bookkeeping services include:

• Preparing or proposing certain adjustments, such as those applicative to deferred income taxes or depreciation
• Drafting fiscal statement notes
• Entering general ledger transactions or processing payments in the customer's accounting software

When AR-C 70 is applicable, certain compliance actions—such as the creation of a signed engagement letter—are required. If the accountant is merely profitable with bookkeeping services, AR-C 70 is not triggered, and compliance with the standard is non necessary.

If the accountant is only inbound transactions into a full general ledger and making periodical entries, he is but assisting with bookkeeping. Such assistance is often provided in an online accounting software such as QuickBooks. If this is the just service provided, AR-C 70 is not applicable.

If the accountant is engaged to set up financial statements and performs any of the following, and then AR-C lxx applies.

• The accountant prepares fiscal statements that are provided to another accountant (another business firm) for inspect purposes
• The accountant prepares fiscal statements separately from a revenue enhancement return (e.g., the accountant might ready a revenue enhancement return that includes financial statements and so—at the client's request—creates financial statements separately from the return)
• The accountant uses the customer'southward general ledger data to prepare financial statements exterior of the bookkeeping software (eastward.thousand., the accountant places information from a Quickbooks full general ledger into Excel and creates financial statements)

As you can see, the preparation standard makes a distinction between:

• Preparing financial statements (which triggers AR-C lxx) and
• Merely assisting (which does not trigger AR-C 70)

Are there any other situations where AR-C lxx does not utilise? Yes. The AICPA's Middle for Plain English Accounting addressed this question in the post-obit question and answer:

Q: If financial statements are prepared by the accountant every bit a by-production of some other engagement (for example, an engagement to prepare a tax render), is the accountant required to follow department lxx of SSARS No. 21 and include whatsoever special disclaimer or "no assurance" statement on those financial statements?

A: No. The accountant is only required to perform the preparation engagement in accordance with section 70 of SSARS No. 21 when engaged to gear up fiscal statements. Therefore, considering the accountant was non engaged to prepare the financial statements, in that location is no requirement to include a statement on each folio of the financial statements indicating that no assurance is provided on the financial statements.

The author requested that the AICPA ascertain the word engaged. They responded that a client'due south request for the preparation of fiscal statements service is the trigger for beingness "engaged." In other words, a client's asking for the training of financial statements means we are "engaged," provided we have the work. Once the customer makes the request, the accountant volition create an engagement letter in compliance with AR-C seventy.

If the customer does non asking the grooming of financial statements and the accountant creates the statements every bit a byproduct of another service (e.g., revenue enhancement return), he is not subject to the requirements of AR-C 70.

So when is AR-C 70 applicable? When a public accountant is engaged to prepare financial statements.

AR-C 70 Objective

The objective of the accountant is to prepare fiscal statements in accord with the called reporting framework.

AR-C seventy Reports

A compilation report from the accountant is not required (and should not be provided) when preparing financial statements under AR-C lxx.

Financial Statements

The accountant can prepare financial statements as directed by direction or those charged with governance. The financials should be prepared using an acceptable reporting framework such as the following:

• Cash basis
• Tax basis
• Regulatory footing
• Contractual basis
• Other ground (as long as the basis uses reasonable, logical criteria that are applied to all material items)
• More often than not accepted accounting principles (GAAP)

When preparing financial statements in accordance with a special purpose framework (e.g., revenue enhancement basis), the accountant is required to include a clarification of the financial reporting framework either on the face of the fiscal statements or in a note. Here's a sample disclosure in a financial statement title: Statement of Assets, Liabilities, and Equity—Taxation Basis.

Management determines the financial statements to be prepared. Financial statements normally include the post-obit:

• Balance sheet
• Income statement
• Cash menstruum argument

The auditor can, if so directed by direction, create and issue just one financial statement (eastward.g., income statement).

The fiscal statements can exist for an annual menstruum or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.

The auditor should also obtain an understanding of the pregnant accounting policies to be used in the preparation of the financial statements.

In preparing the financial argument, the accountant may demand to assist management with judgements regarding amounts or disclosures. The accountant should discuss these judgments with direction. Why? So management tin can sympathize and accept responsibleness for the financial statements.

Documentation Requirements - AR-C 70

The accountant should set and retain the following documentation:

• Engagement letter (or contract)
• The fiscal statements

Documentation related to significant consultations or professional judgments are to be included in the appointment file. Also, if the accountant departs from a relevant presumptively mandatory requirement, he should document the justification for the divergence and how the alternative procedures performed were sufficient to accomplish the intent of the requirement. (The SSARSs use the give-and-take should to indicate a presumptively mandatory requirement.)

AR-C lxx Engagement Letter

Is an engagement letter required for a grooming service? Yep. Moreover, the letter should be signed by the accountant or the firm and management or those charged with governance. A exact understanding is non sufficient. Though AR-C 70 does not specify how often the engagement alphabetic character should be updated, information technology is all-time to do and then annually.

The engagement letter should specify:

• The objectives of the appointment
• The responsibilities of management
• The responsibilities of the accountant
• The limitations of the preparation engagement
• Identification of the applicable fiscal reporting framework
• The understanding of management that:
  • Each page of the financial statements will include a statement that no assurance is provided, or
  • The auditor volition issue a disclaimer stating that no assurance is provided
• Whether the financial statements will:
  • Contain known departures from the applicable reporting framework, and
  • Whether substantially all disclosures will exist omitted

Preparation of Financial Statements - No Report

As noted to a higher place, no compilation report will exist issued for a grooming service. The preparation service is considered a nonattest, nonassurance service, and no compilation, review, or audit procedures are required.

The accountant will practise one of the post-obit:

1. On each financial statement page (including the related notes), indicate, at a minimum, that "no assurance is provided," or
2. Provide a disclaimer (see example below)

If the auditor uses the kickoff option, diction such as the post-obit should exist included on each page of the fiscal statements (including the related notes):

• No assurance is provided on these financial statements
• These fiscal statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them, or
• ABC CPAs prepared these financial statements in accordance with professional standards of the AICPA, and no assurance is provided

Other statements can be used to communicate that no balls is provided, but the minimum diction must include "No assurance is provided." The "no balls" diction is made at management's discretion, and the accountant's business firm name is non required to exist included. The diction is ordinarily placed at the bottom of each folio. If the client does not allow the accountant to include such a statement on each page of the fiscal statements, the auditor should:

• Issue a disclaimer (see below)
• Perform a compilation in accord with AR-C fourscore, or
• Withdraw from the appointment

Preparation of Financial Statements Disclaimer

If the disclaimer pick is used, AR-C 70 provides the following language:

The accompanying fiscal statements of XYZ Company equally of and for the yr concluded December 31, 20XX, were not subjected to an audit, review, or compilation engagement past me (the states) and I (we) practise non express an stance, a determination, nor provide whatsoever balls on them.

[Signature of bookkeeping firm or accountant, as appropriate]

[Auditor's urban center and country]

[Date]

Though not required, the disclaimer can exist placed on firm letterhead. Observe that the disclaimer language to a higher place has no disclaimer title. While the standard is silent about providing a title, the accountant may add together one. For example, Accountant's Disclaimer. A salutation is not required, only may be added.

Some accountants prefer to provide a disclaimer on letterhead. Why? Whatever third political party reader can see that the accounting firm is involved in the grooming of the statements and that no assurance is provided.

A third party may not know that an external accountant was involved in preparing the statements if the "no assurance is provided" legend is used and the house's name is non included. Remember, all the same, it is the client'due south decision as to whether the "no assurance" legend is added or a disclaimer is provided.

Independence

Preparation of financial statements is a nonattest, nonassurance service. When an accountant performs only a training engagement, consideration of independence is not necessary.

If an auditor signs customer checks and performs accounting services, independence is not required. Moreover, if the accountant prepares fiscal statements for the same client, independence is not required. Signing checks, bookkeeping, and the preparation of fiscal statements are all nonattest services.

Only what happens if the auditor prepares financial statements and issues a compilation report?

Suppose an accountant issues monthly fiscal statements for January through November with no compilation report (using the preparation option), just in December issues financial statements with a compilation report. Providing the monthly preparation services and the December compilation service triggers a requirement to consider independence.

Just think this for now: Independence is not required for training engagements, and there are no requirements to disembalm a lack of independence in a preparation engagement.

Omission of Substantially All Disclosures

Tin the auditor omit all disclosures (notes to the financial statements) in a grooming engagement? Yes. Alternatively, the auditor can provide selected disclosures or if needed, total disclosure. In brusque, the accountant tin do whatever of the following:

1. Omit all disclosures
2. Provide selected disclosures
3. Provide full disclosure

Regardless, the appointment alphabetic character should describe the level of disclosure to be provided in the fiscal statements. Also, the omission of substantially all disclosures should exist communicated either on the confront of the financial statements or in a selected note. There is no provision in the preparation standard to report the omission of disclosures in the auditor'southward disclaimer that precedes the financial statements.

The accountant tin can communicate the omission of disclosures past including diction such equally the following at the bottom of each financial statement folio or in a note:

• Substantially all disclosures required by accounting principles mostly accustomed in the United States are non included.
• Substantially all disclosures normally included in financial statements prepared in accord with the tax-basis of accounting are non included.

The auditor can too communicate the omission of disclosures in the title of the financial statements. For example:

ABC Visitor

Statement of Income

Essentially All Disclosures Omitted

December 31, 2020

Information Provided is Incomplete or Inaccurate

Deficiencies in the data provided to the accountant should be communicated to management, and the inaccuracy or incompleteness of such information should be corrected. Deficiencies in the information include insufficient records, documents, explanations, and judgments.

Reporting Known Departures from the Applicative Financial Reporting Framework

How should a departure from the applicable fiscal reporting framework exist reported? Discuss the departure with direction to see if it can be corrected. If it is non corrected, disclose the difference. How?

A departure from the applicable fiscal reporting framework should be disclosed either on the face up of the fiscal statements or in a note. If it takes more than than a few words to depict the departure, notation disclosure may exist the amend choice—you'll accept more than room there. At that place is no provision in the training standard to disembalm departures in the auditor's disclaimer that precedes the financial statements.

AR-C 70 Other Historical or Financial Information

In addition to historical financial statements, AR-C 70 may be applied to the following:

• Specified elements, accounts, or items of a financial statement, including schedules of:
  • Rents
  • Royalties
  • Profit participation, or
  • Income revenue enhancement provisions
• Supplementary data
• Required supplementary data
• Pro forma financial data

AR-C 70 Prospective Fiscal Information

AR-C lxx tin can be applied to prospective information.

Prospective financial information is defined as whatsoever financial information about the future.

Prospective financial data can be presented as:

• A complete set up of financial statements, or
• 1 or more elements, items, or accounts

If you set prospective financial information, the summary of meaning assumptions must be included Why? It is considered essential to the user's understanding of such information.

If you lot ready a financial projection, you should not exclude:

• The identification of hypothetical assumptions, or
• The clarification of the limitations on the usefulness of the presentation

AR-C 70 references the AICPA Guide Prospective Financial Data every bit suitable criteria for the preparation and presentation of prospective financial data.

AR-C 70 Prescribed Forms

Is information technology permissible to perform a preparation of fiscal statement engagement with regard to prescribed forms?

Yep. There is nothing in AR-C 70 that prohibits the accountant from performing a grooming engagement with regard to prescribed forms (e.g., bank personal fiscal statement). However, the accountant is required to follow all of the preparation guidance. Clients may non want to add together wording to the prescribed forms such equally "no assurance is provided" or "substantially all disclosures are omitted." As an alternative to adding such wording, the accountant can provide a disclaimer before the prescribed form.

Selected notes can follow the grade if needed. If this option is used, the gild of the deliverable is every bit follows:

• Disclaimer
• Prescribed class
• Selected notes

When a bank, credit marriage, regulatory or governmental agency, or other similar entity designs a prescribed grade to meet its needs, there is a presumption that the required information is sufficient. What should be washed if the prescribed form conflicts with the applicative ground of bookkeeping? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the class. In effect, the prescribed form is the reporting framework. Report departures from the prescribed grade and its related instructions on the face of the financial statements (the class) or in a note.

Draft Fiscal Statements

The customer may request a typhoon copy of the fiscal statements prior to final issuance. To avert confusion, mark statements with words like:

• Draft Fiscal Statements
• Working Draft
• Draft - Subject to Change

Training of Financial Statements - A Simple Summary

• AR-C 70 is applicable when the accountant is engaged to prepare fiscal statements and is not applicable when the accountant is engaged to perform a compilation or if the accountant is merely assisting with bookkeeping
• The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework
• The fiscal statements can be prepared in accordance with GAAP or a special purpose reporting framework
• The financial statements can be distributed to third parties (and not just direction)
• The accountant must either:
  • State on each financial statement page that "no assurance is provided," or
  • Provide a disclaimer
• Documentation requirements include:
  • The engagement letter, and
  • The financial statements
• An engagement letter must be signed by:
  • The auditor or the accountant'south business firm, and
  • Management or those charged with governance
• No report (e.thou., compilation report) is attached to the financial statements
• Consideration of independence is not required
• Substantially all disclosures can be omitted
• The omission of substantially all disclosures should be:
  • Disclosed on the face of the financial statements, or
  • In a note
• Selected disclosures can be provided
• Departures from the applicative financial reporting framework should be:
  • Disclosed on the face of the financial statements, or
  • In a note
• A preparation appointment tin can be applied to historical financial statements and historical data (e.g., specified items of a financial statement).
• A preparation engagement can be applied to prospective fiscal information. The summary of significant assumptions must be included.
• A training engagement can be performed in relation to prescribed forms (e.g., bank personal financial statements)
• Mark draft financial statements with appropriate diction (e.k., Draft Fiscal Statements)

Also, run into my article The Definitive Guide to Compilations.

Differences in Preparation and Compilation Engagements

How do preparation engagements compare to compilations? Here's a video that explains the differences.

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Source: https://cpahalltalk.com/preparation-of-financial-statements/

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