2017 Update on Standards for Financial Statement Preparation

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2017 Update on Standards for Financial Statement Preparation, Compilation, and Review Engagements and tools

2017 Update on Standards for Financial Statement Preparation, Compilation, and Review Engagements and tools Prepared by: Mike Glynn, CPA, CGMA AICPA (New York, NY) mike. glynn@aicpa-cima. com Presented by: James D. Miller, CPA CGMA The Business Doctor, CPA, PC james@thebusinessdoctor. com American Institute of CPAs

DISCLAIMER Views expressed by AICPA employees are expressed for purposes of deliberation, providing member

DISCLAIMER Views expressed by AICPA employees are expressed for purposes of deliberation, providing member services and other purposes exclusive of practicing public accounting. Views expressed by AICPA staff do not necessarily represent the official views of the AICPA unless otherwise noted. Official AICPA positions are determined through certain specific committee procedures, due process and deliberation. American Institute of CPAs

Session Objectives Discuss the performance of financial statement preparation, compilation, and review engagements in

Session Objectives Discuss the performance of financial statement preparation, compilation, and review engagements in accordance with SSARS 21. Discuss recently issued SSARS Nos. 22 and 23 Discuss the ARSC’s current active agenda Slide 3 American Institute of CPAs

Preparation of Financial Statements American Institute of CPAs

Preparation of Financial Statements American Institute of CPAs

Preparation of Financial Statements AR-C section 70 applies when the accountant is engaged to

Preparation of Financial Statements AR-C section 70 applies when the accountant is engaged to prepare f/s but not engaged to perform an audit, review, or compilation on those f/s American Institute of CPAs

When does Section 70 apply? American Institute of CPAs

When does Section 70 apply? American Institute of CPAs

Preparation of Financial Statements The understanding with the client as to what the engagement

Preparation of Financial Statements The understanding with the client as to what the engagement entails is important!! Requires an engagement letter signed by both the accountant and management/those charged with governance Does not require the accountant to consider whether he or she is independent Can be applied to f/s with or without disclosures American Institute of CPAs

Preparation of Financial Statements Report is not required – even if financial statements are

Preparation of Financial Statements Report is not required – even if financial statements are expected to be used by a third party Requires a legend on each page of the f/s stating that no assurance is being provided • Normally placed on the bottom of each page of the financial statements – including related notes • Ensures that users are able to readily identify that the accountant is providing no assurance with respect to the financial statements. American Institute of CPAs

Preparation of Financial Statements • If management refuses or cannot include the legend, the

Preparation of Financial Statements • If management refuses or cannot include the legend, the accountant can: • Issue a disclaimer report, • Perform a compilation, or • Resign. American Institute of CPAs

Preparation of Financial Statements If the financial statements omit substantially all disclosures – disclose

Preparation of Financial Statements If the financial statements omit substantially all disclosures – disclose the omission in the financial statements • Can be disclosed in the titles: XYZ Company Balance Sheet Substantially All Disclosures Required by GAAP Omitted December 31, 20 X 2 • Can be in the legend: - Substantially all disclosures required by GAAP omitted. No assurance is provided on these financial statements. • Can be in a selected note to the financial statements. American Institute of CPAs

Preparation of Financial Statements If the financial statements contain a known framework departure –

Preparation of Financial Statements If the financial statements contain a known framework departure – disclose in the financial statements • May be on the face of the financial statements or in a note • Do not prepare financial statements if omission of disclosures or other known framework departures are done to mislead users American Institute of CPAs

Preparation of Financial Statements When preparing financial statements in accordance with a special purpose

Preparation of Financial Statements When preparing financial statements in accordance with a special purpose framework/OCBOA, the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements. American Institute of CPAs

Preparation of Financial Statements practice-management-resource-directory Invigorate the Focus on Quality Toolkit Take a fresh

Preparation of Financial Statements practice-management-resource-directory Invigorate the Focus on Quality Toolkit Take a fresh look at the quality control processes and procedures in your practice with the resources in this toolkit. You’ll find a checklist to help ensure the tone at the top http: //www. aicpa. org/Interest. Areas/Private. Companies. Practice. Section/Qualit reinforces a commitment to quality along with client acceptance and continuance tools, staff training resources and a look at trending issues in peer review. Other tools are y. Services. Delivery/Keeping. Up/Pages/invigorate-the-focus. aspx being developed to help your firm and it’s focus on quality. Exploring SSARS No. 21 Toolkit The PCPS Exploring SSARS No. 21 Toolkit provides insight into the key points of the standard and helps you apply It in your reviews, compilations, and engagements to http: //www. aicpa. org/Interest. Areas/Private. Companies. Practice. Section/Qualit prepare financial statements. The toolkit contains resources that summarize what’s new or different, help you get your staff up-to-speed on the changes and communicate y. Services. Delivery/Keeping. Up/Pages/exploring-ssars 21 -toolkit. aspx with clients. PCPS Independence Toolkit CPAs must be ever so vigilant to understand the meaning of true independence. As a refresher or a tool for training, elements of this toolkit can help you and your team members apply the latest independence rules to everyday practice. Clarified Auditing Standards Toolkit The Clarified Auditing Standards are effective for engagements to audit financial statements for periods ending on or after December 15, 2012. These standards impact http: //www. aicpa. org/Interest. Areas/Private. Companies. Practice. Section/Qualit engagements at all phases. You can use the toolkit resources to learn about the changes, train your staff and communicate with clients about the changes that impact them. y. Services. Delivery/Keeping. Up/Pages/Clarified. Auditing. Standards. Toolkit. aspx FRF for SMEs Toolkit The Financial Reporting Framework for Small and Medium Entities (FRF for SMEs) provides an opportunity for your firm to showcase your role as the trusted business advisor http: //www. aicpa. org/Interest. Areas/FRC/Accounting. Financial. Reporting/PCFR to Main Street businesses. Use the resources in the FRF for SMEs Toolkit to learn about this reporting framework that meets the unique reporting needs of owner-managed /Pages/FRF-SMEs-CPAs. aspx private companies that don’t require GAAP financial statements. American Institute of CPAs http: //www. aicpa. org/Interest. Areas/Private. Companies. Practice. Section/Qualit y. Services. Delivery/Keeping. Up/Pages/PCPSIndependence. Toolkit. aspx

Preparation of Financial Statements SSARS 21 - Implementation Checklist SSARS 21 -Engagement Evaluation PCPS

Preparation of Financial Statements SSARS 21 - Implementation Checklist SSARS 21 -Engagement Evaluation PCPS Exploring SSARS No. 21 Toolkit SSARS 21 -19 Engagement Letter Comparison AICPA Standards Tracker American Institute of CPAs

Compilation Engagements American Institute of CPAs

Compilation Engagements American Institute of CPAs

Compilation Engagements Compilation & Review Changes Effective Now: SSARS No. 23 Amendments Requiring Your

Compilation Engagements Compilation & Review Changes Effective Now: SSARS No. 23 Amendments Requiring Your Attention American Institute of CPAs

Compilation Engagements AR-C section 80 applies when the accountant is engaged to perform a

Compilation Engagements AR-C section 80 applies when the accountant is engaged to perform a compilation engagement Other than the applicability and reporting requirements, the compilation literature is largely unchanged from SSARS No. 19 American Institute of CPAs

Compilation Engagements Retains the independence requirements from the SSARS 19. Requires an engagement letter

Compilation Engagements Retains the independence requirements from the SSARS 19. Requires an engagement letter signed by both the accountant and management/those charged with governance Can be applied to financial statements with or without disclosures. American Institute of CPAs

Compilation Engagements Primary difference from SSARS No. 19 is in the reporting requirements Report

Compilation Engagements Primary difference from SSARS No. 19 is in the reporting requirements Report is always required. • Report is shortened to differentiate from audit and review (assurance) reporting • Management use only financial statements are be covered by the preparation standard Not required to include a reference on each page of the financial statements to the report. American Institute of CPAs

Example - Accountant’s Compilation Report Management is responsible for the accompanying financial statements of

Example - Accountant’s Compilation Report Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20 X 2 and 20 X 1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. 20 American Institute of CPAs

Comp. Report – Add’l paragraphs • When financial statements are prepared in accordance with

Comp. Report – Add’l paragraphs • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA • Disclosures omitted • Lack of independence 21 American Institute of CPAs

Comp. Report – Add’l paragraphs • Known Departure From the Applicable Financial Reporting Framework

Comp. Report – Add’l paragraphs • Known Departure From the Applicable Financial Reporting Framework • Required to disclose known departures from the FRF in the accountant’s compilation report • When the accountant becomes aware of a departure from the FRF that is material to the financial statements and the financial statements are not revised, the accountant is required to consider whether modification of the standard report is adequate to disclose the departure • Supplementary Information Accompanies Financial Statements and the Accountant’s Compilation Report Thereon 22 American Institute of CPAs

SSARS No. 22, Compilation of Pro Forma Financial Statements Issued September 2016 Clarity redraft

SSARS No. 22, Compilation of Pro Forma Financial Statements Issued September 2016 Clarity redraft of AR section 120 Effective for compilation reports on pro forma financial information dated on or after May 1, 2017. American Institute of CPAs 23

SSARS No. 23 Omnibus SSARS - 2016 Issued in October 2016 • Revisions to

SSARS No. 23 Omnibus SSARS - 2016 Issued in October 2016 • Revisions to AR-C sections 70 and 80 so that it applies to preparation and compilation of PFI, respectively - Examinations and AUP of PFI remain in SSAEs - Reviews of PFI are prohibited Effective date –prospective financial information prepared on or after May 1, 2017/compilation reports on PFI dated on or after May 1, 2017 - Revised AICPA Guide Prospective Financial Information to include additional authoritative guidance - Guide includes suitable criteria for the preparation and presentation of PFI (not prohibited from preparing or performing a compilation on PFI in accordance with other suitable criteria) American Institute of CPAs 24

Preparation and Compilation of PFI Because the summary of significant assumptions is essential to

Preparation and Compilation of PFI Because the summary of significant assumptions is essential to the user’s understanding of PFI, the accountant should not prepare PFI that excludes • Disclosure of the summary of significant assumptions or • A financial projection that excludes either - an identification of the hypothetical assumptions or - a description of the limitations on the usefulness of the presentation American Institute of CPAs 25

Supplementary Information That Accompanies Compiled Financial Statements and the Accountant’s Compilation Report Thereon Clearly

Supplementary Information That Accompanies Compiled Financial Statements and the Accountant’s Compilation Report Thereon Clearly indicate the degree of responsibility, if any, the accountant is taking with respect to such information in either • an OM paragraph in the accountant’s compilation report on the financial statements or • a separate report on the supplementary information 26 American Institute of CPAs

Review of Financial Statements American Institute of CPAs

Review of Financial Statements American Institute of CPAs

Review of Financial Statements AR-C section 90 applies to all reviews of historical financial

Review of Financial Statements AR-C section 90 applies to all reviews of historical financial information – excluding pro forma financial information (which is covered by the attestation standards) Requires an engagement letter signed by both the accountant and management/those charged with governance 28

Review Performance Procedures A review requires the accumulation of review evidence that will provide

Review Performance Procedures A review requires the accumulation of review evidence that will provide the accountant with limited assurance that there are no material modifications that should be made to the f/s. The accountant uses professional judgment to determine specific procedures 29 29

Review Performance Procedures Review procedures are tailored based on the accountant’s: • Understanding of

Review Performance Procedures Review procedures are tailored based on the accountant’s: • Understanding of the industry • Knowledge of the client • Awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on f/s that are materially misstated Required to perform analytical procedures and inquires in all review engagements • May perform procedures in addition to analytical procedures and inquiries 30 30

Analytical Procedures in a Review Engagement 31 31

Analytical Procedures in a Review Engagement 31 31

Analytical Procedures in a Review Engagement Analytical procedures are required in all review engagements

Analytical Procedures in a Review Engagement Analytical procedures are required in all review engagements Purpose is to identify relationships and individual items that may reflect a material misstatement in the financial statements Use of analytical procedures is different than in an audit • The accountant is not required to perform analytical procedures in planning or overall review stages of the engagements • In a review, results of analytical procedures are review evidence that supports the review report 32 32

Management Representation Letter 33 33

Management Representation Letter 33 33

Management Representation Letter A representation letter is required for all financial statements and periods

Management Representation Letter A representation letter is required for all financial statements and periods covered by the accountant’s review report. • Required even if current management was not present during all periods covered by the accountant’s review report. 34 34

Management Representation Letter Management’s representations should be as of the date of the accountant’s

Management Representation Letter Management’s representations should be as of the date of the accountant’s review report. • The accountant need not be in physical receipt of the rep letter as of the date of the accountant’s review report • The rep letter should be received prior to release of the report The representation letter should be signed by those members of management that the accountant believes are responsible for and knowledgeable about the matters covered in the rep letter. • Normally the CEO and the CFO sign the rep letter. 35 35

Review of Financial Statements Reporting on financial statements • Requires the use of headings

Review of Financial Statements Reporting on financial statements • Requires the use of headings in the accountant’s review report • Required to name the city and state of the issuing office - May be included on letterhead Not required to include a reference on each page of the financial statements to the report. 36

Example - Accountant’s Review Report Independent Accountant’s Review Report [Appropriate Addressee] I (We) have

Example - Accountant’s Review Report Independent Accountant’s Review Report [Appropriate Addressee] I (We) have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20 X 2 and 20 X 1, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion. 37 American Institute of CPAs

Example - Accountant’s Review Report Management’s Responsibility for the Financial Statements Management (Owners) is

Example - Accountant’s Review Report Management’s Responsibility for the Financial Statements Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error. 38 American Institute of CPAs

Example - Accountant’s Review Report Accountant’s Responsibility My (Our) responsibility is to conduct the

Example - Accountant’s Review Report Accountant’s Responsibility My (Our) responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for our conclusion. 39 American Institute of CPAs

Example - Accountant’s Review Report Accountant’s Conclusion Based on my (our) reviews, I am

Example - Accountant’s Review Report Accountant’s Conclusion Based on my (our) reviews, 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 accounting principles generally accepted in the United States of America. [Signature of accounting firm or accountant, as appropriate] [Accountant’s city and state] [Date of the accountant’s review report] 40 American Institute of CPAs

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon Clearly

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon Clearly indicate the degree of responsibility, if any, the accountant is taking with respect to such information in either • an OM paragraph in the accountant’s review report on the financial statements or • a separate report on the supplementary information 41 American Institute of CPAs

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon When

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon When the accountant has subjected the supplementary information to the review procedures applied in the accountant’s review of the basic financial statements, the OM paragraph/separate report should state that • the SI is presented for purposes of additional analysis and is not a required part of the basic financial statements; • the SI is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements; • the SI has been subjected to the review procedures applied in the accountant’s review of the basic financial statements and whether the accountant is aware of any material modifications that should be made to the SI; and • the accountant has not audited the SI and does not express an 42 opinion on such information. American Institute of CPAs

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon When

Supplementary Information That Accompanies Reviewed Financial Statements and the Accountant’s Review Report Thereon When the accountant has not subjected the SI to the review procedures applied in the accountant’s review of the basic financial statements, the OM paragraph/separate report should state that • the SI is presented for purposes of additional analysis and is not a required part of the basic financial statements; • the SI is the responsibility of management; and • the accountant has not audited or reviewed the SI and, accordingly, does not express an opinion, a conclusion, nor provide any assurance on such information. 43 American Institute of CPAs

Other Standard-setting Projects American Institute of CPAs

Other Standard-setting Projects American Institute of CPAs

International Reporting Issues Consideration of revisions to SSARSs to address • Financial statements prepared

International Reporting Issues Consideration of revisions to SSARSs to address • Financial statements prepared in accordance with foreign frameworks (not ISAs) • Compilation/review performed in accordance with international compilation/review standards Can a compilation can be performed in accordance with both ISRS 4410 (Revised) and SSARSs? Does AR-C section 90 needs revision to incorporate elements of ISRE 2400 (Revised)? ARSC to consider issues and a draft standard at its meeting in May 2017 Expected exposure of proposed standard in second half of 2017 and potential final standard in 2018 American Institute of CPAs

Selected Procedures Joint project between the ASB and the ARSC • • • Engagement

Selected Procedures Joint project between the ASB and the ARSC • • • Engagement driven standard Procedures/findings report No party required to be responsible for sufficiency of the procedures No requirement to request an assertion from the responsible party Unrestricted report Related to ASB project to develop non-assertion based examination and review standards • A common concepts chapter would address all non-assertion based standards (to be presented to the ARSC at its meeting in May 2017) Expected exposure of proposed standards in second half of 2017) Final standards expected in 2018 American Institute of CPAs 46

Consideration of materiality Materiality is an attribute of the financial reporting framework • Does

Consideration of materiality Materiality is an attribute of the financial reporting framework • Does not change based on service Ethics requires that a member not be associated with materially misstated or misleading financial statements American Institute of CPAs

Helpful Information and Resources Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of

Helpful Information and Resources Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of June 1 are available at http: //www. aicpa. org/RESEARCH/STANDARDS/Pages/default. aspx AICPA Accounting and Auditing Technical Hotline (877) 242 -7212 - techinquiry@aicpa. org http: //www. aicpa. org/Research/Technical. Hotline/Pages/Technical Hotline. aspx American Institute of CPAs

Center for Plain English Accounting AICPA PCPS national A&A resource center for firms aicpa.

Center for Plain English Accounting AICPA PCPS national A&A resource center for firms aicpa. org/CPEA Services: Written responses to written technical inquiries Monthly “how-to” A&A reports Webcasts Alerts Content for firm newsletters American Institute of CPAs

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Questions?