Compilation: Presentation of Financial Statements Without Assurance

August 31, 2024 4 min read Finance Accounting Financial Statements Compilation Accounting Finance Audit

A compilation involves presenting financial statements without providing any assurance, as opposed to the rigorous testing performed in an audit.

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A compilation in the context of financial statements refers to the process whereby an accounting professional assembles financial data and presents it in the form of financial statements without providing any assurance on the accuracy or completeness of this information. Unlike other forms of financial reporting such as audits or reviews, a compilation involves no analytical procedures or substantive testing. The accountant’s role is limited to organizing the data received from management into a coherent and standard format.

Characteristics of Compilation Engagements

No Assurance

In a compilation engagement, the accountant does not express any opinion or assurance about whether the financial statements are free of material misstatements. This is clearly stated in the compilation report.

Data Presented as Provided

The financial information compiled is presented exactly as it is obtained from the client’s management. The accountant does not verify the accuracy or completeness of the data.

Engaging Procedures

The services involved typically include arranging the client’s financial transactions into financial statements and performing minor reclassification or adjustment entries as necessary.

Types of Financial Statement Services

Audit

An audit provides the highest level of assurance. It involves thorough examination and verification of financial records, in accordance with auditing standards, to express an opinion on whether the financial statements are presented fairly.

Review

A review provides limited assurance. The accountant performs mainly analytical procedures and inquiries, with less depth of scrutiny compared to an audit, to give modest assurance that the financial statements do not need material modifications.

Compilation

A compilation, by contrast, involves no assurance. The accountant summarizes information in financial statements based on records provided by the client without performing in-depth audits or reviews.

Example of a Compilation Report

The compilation report typically includes a statement such as: “Management is responsible for the accompanying financial statements of XYZ Company, which compromise the balance sheet as of December 31, 20XX, and the related statements of income and cash flows for the year then ended in accordance with accounting principles generally accepted in the country. We have performed a compilation engagement in accordance with standards. We have not audited or reviewed the financial statements, and accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the country.”

Applicability and Special Considerations

Small Businesses

Compilations are often utilized by small or private businesses with limited reporting requirements. These businesses often need financial statements prepared by professionals but do not require the added assurance of an audit or review.

Quick Turnaround

A compilation engagement typically can be completed more quickly and cost-effectively than an audit or review, making it a practical choice for entities needing timely financial reporting without the need for assurance.

Understanding User Needs

Users of compiled financial statements, such as lenders, investors, and management, should clearly understand the limitations and scope of a compilation to avoid misinterpreting the information presented as audited or reviewed data.

Accounting Principles: These are standardized guidelines used to prepare and present financial statements, ensuring consistency and comparability across different organizations.
Auditor: An auditor is a professional who examines financial records to provide assurance on their accuracy and compliance with applicable standards.
Financial Statements: Reports that summarize the financial performance and position of an entity, commonly including the balance sheet, income statement, and cash flow statement.

FAQs

What is the main difference between a compilation and an audit?

The primary difference is that an audit provides assurance on the accuracy and completeness of financial statements, while a compilation does not.

Can users rely on compiled financial statements for decision making?

Users should be aware that compiled statements come with no assurance. Decisions should be made with caution and, if necessary, supplemented by additional information or services like reviews or audits.

Are there any regulatory requirements for compilations?

Generally, compilations must follow specific standards set by professional accounting bodies within the region, such as the AICPA in the United States.

Summary

A compilation is an accounting service aimed at presenting financial information in the form of financial statements without providing any form of assurance. It involves assembling financial data provided by the client into a coherent format, suitable for internal management or external reporting to stakeholders. While it is a more affordable and timely option compared to audits and reviews, users must recognize its limitations in terms of assurance.

References

American Institute of CPAs (AICPA). “Compilation Engagements.” AICPA.
International Financial Reporting Standards (IFRS). “Conceptual Framework for Financial Reporting.”
Financial Accounting Standards Board (FASB). “Generally Accepted Accounting Principles (GAAP).”