Question

1) The financial statements of nonpublic companies may be compiled or reviewed by the CPAs.

a. Describe in details a compilation of financial statements and explain your opinion on the importance of a compilation of financial statements.

Answer 1

The objective of a compilation is to assist management in presenting financial information in the form of financial statements. The accountant utilizes information that is the representation of management without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents (for example, cancelled checks or bank images); or other procedures ordinarily performed in an audit. Accordingly, the accountant will not express an opinion or provide any assurance regarding the financial statements. A compilation is limited to taking the representations of management and putting them in the form of financial statements.