[Anonymous]

Hi all, I came across a question in my Wiley Audit TB that has left me a little stumped. It is as follows:

Which of the following is correct concerning a CPA firm’s preparation of financial statements engagement?

A. The statements should only be used by management and not third parties.

B. A written engagement letter or oral agreement is required.

C. No accountant’s report ordinarily accompanies the financial statements.

D. At a minimum, the accountant preparing the financial statements must comply with the compilation standards.

The correct answer is C. My confusion is regarding the difference between a compilation and financial statement preparation. My understanding is that a compilation is essentially the act of taking the clients accounting data and producing a set of financial statements. So how does this differ from a preparation? Is a preparation of financial statements not essentially the same thing?, i.e. creating financial statements out of accounting data?

The reference in the professional literature is SSARS No. 21. My interpretation after reading the literature is that the difference between a compilation and financial statement preparation is that with a financial statement preparation, the client and the CPA work together in producing the financial statements, whereas, with a compilation, the financial statements are prepared and issued solely by the CPA.

According to the literature, a compilation requires the issuance of a compilation report (as I’m sure most are aware), while a financial statement preparation does not.

Can anyone help in clarifying the differences between these two services, i.e. how to differentiate between the two? Thanks.

[Anonymous]

Bump. Anyone? Jeff?

[Peterman25]

Does this help?

https://www.ncacpa.org/ssars-preparation-financial-statements-exposure-draft/

I recall a similar question in the NINJA MCQ bank and shaking my head at it like you are doing. A preparation of FS is not a submission. A submission is a compilation. I feel like we are being asked to split hairs here.

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[Anonymous]

@Peterman25, thanks. This is definitely helpful. It does indeed seem like the splitting of hairs 🙂

[Anonymous]

I prepare For Management Use Only financials, Reviews and Compilations. I am also coincidentally studying for the AUD exam right now.

My thoughts:

First. The question is vague. I very rarely refer to a financial statement engagement as just “financial statements” unless I am casually talking about them. Never in the terminology of Financial Statement Engagement.

A. The statements should only be used by management and not third parties. – We get engagement letters for these projects and clearly print For Management Use Only” (FMUO) on the documents. However these are referred as For Management Use Only financials. Not Financial Statements.

B. A written engagement letter or oral agreement is required. – There is no such thing as an oral agreement when it comes to this topic.

C. No accountant's report ordinarily accompanies the financial statements. – Only FMUO reports do not get an accountant's report. So this is actually true, assuming they are asking about FMUO in the initial question. However, if they are asking about FMUO in the question, then the answer A is also true.

D. At a minimum, the accountant preparing the financial statements must comply with the compilation standards.

Given the question and answers, I think there is a clarity issue and it makes it hard to determine which is correct : A or C. B and D are not correct answers nor relevant.

[Anonymous]

@6silvermoonbeams, thanks!

[Author]

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