(Updated as of June 15, 2019)
This AICPA Guide is issued under the authority of the AICPA Accounting and Review Services Committee (ARSC) to assist accountants in performing preparation, compilation, and review engagements of financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARSs). ARSC is the senior committee of the AICPA that is designated by Council to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. The “Compliance With Standards Rule” of the AICPA Code of Professional Conduct (ET sec. 1.310.001)1 requires a member who performs compilation, review, or other professional services addressed by SSARSs to comply with standards promulgated by ARSC.
AICPA Guides may include sections at the end of individual chapters or following the last chapter. These sections will be entitled either “Supplement” or “Appendix.”
• A supplement is a reproduction, in whole or in part, of authoritative guidance originally issued by a standard setting body (including regulatory bodies) and applicable to entities or engagements within the purview of that standard setter, independent of the authoritative status of the applicable AICPA Guide.
• An appendix is included for informational purposes and has no authoritative status. However, any preparation, compilation, or review guidance in an appendix is considered other preparation, compilation, and review guidance. In applying other preparation, compilation, or review guidance, in accordance with paragraph .19 of AR-C section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services,2 the accountant should, exercising professional judgment, assess the relevance and appropriateness of such guidance to the circumstances of the engagement. Although the accountant determines the relevance of other preparation, compilation, and review guidance, such guidance in an appendix to a guide or a guide chapter has been reviewed by the AICPA Audit and Attest Standards staff and the accountant may presume that it is appropriate.
This guide is an interpretive publication pursuant to paragraph .07 of AR-C section 60. Interpretive publications are recommendations on the application of SSARSs in specific circumstances, including engagements for entities in specialized industries. Interpretive publications are issued under the authority of ARSC only after all ARSC members have been provided an opportunity to consider and comment on whether the proposed interpretative publication is consistent with SSARSs.
In accordance with paragraph .18 of AR-C section 60, an accountant should consider applicable interpretive publications in the performance of his or her engagement in accordance with SSARSs. If the accountant does not apply the guidance in this interpretive publication, the accountant should document how the requirements of SSARSs were complied with in the circumstances addressed by such guidance.
Conforming changes made to the guidance contained in this guide are approved by the ARSC chair (or his or her designee) and the director of AICPA Audit and Attest Standards staff. Updates made to the guidance in this guide exceeding that of conforming changes are issued after all ARSC members have been provided an opportunity to consider and comment on whether the guide is consistent with the SSARSs.
An appendix and a glossary of terms have been included in this guide to provide the reader with additional sources of information related to engagements performed in accordance with SSARSs. The additional material includes the following:
• Appendix A, “Overview of Statements on Quality Control Standards,” which discusses quality control standards as required by QC section 10, A Firm’s System of Quality Control3
Lastly, this guide also includes two indexes, “Index of Pronouncements and Other Technical Guidance” and “Subject Index,” to assist readers in locating discussion of a specific topic within the guide.
Accounting and Review Services Committee
Denny F. Ard, Chair
David A. Johnson
Bruce Nunnally
Victoria L. Pitkin
Thomas G. Prothro
Dustin T. Verity
Michael A. Westervelt
2019 Guide Edition
AICPA Staff
Michael P. Glynn
Senior Manager
Audit and Attest Standards
and
Staff Liaison
to the Accounting and Review Services Committee
Weiwei Tang
Manager
Product Management and Development – Public Accounting
2015 Guide Edition
(Updates to this edition exceeded that of conforming changes.)
Michael Brand, Chair
Joseph S. Beck
Jeremy Dillard
M. Aron Dunn
Mike Fleming
Janice Gray
Kelly J. Hunter
The AICPA thanks Kelly J. Hunter for his invaluable assistance in developing the 2015 edition of the guide, completely revised by the issuance of SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification (AR-C sections).
The AICPA also acknowledges the contributions of the late Dr. Thomas A. Ratcliffe in the development of the previous editions of this guide — much of which is retained in this edition. We are forever grateful for his assistance.
This edition of the guide has been modified by the AICPA staff to include certain changes necessary due to the issuance of authoritative guidance since the guide was originally issued, and other revisions as deemed appropriate. Authoritative guidance issued through June 15, 2019, has been considered in the development of this edition of the guide. However, this guide does not include all preparation, compilation, review, accounting, reporting, and other requirements applicable to an entity or a particular engagement. This guide is intended to be used in conjunction with all applicable sources of authoritative guidance.
Authoritative guidance that is issued and effective on or before June 15, 2019, is incorporated directly in the text of this guide. The distinct presentation of this content is intended to aid the reader in differentiating content that may not be effective for the reader’s purposes.
Authoritative guidance issued but not yet effective as of the date of the guide and not becoming effective until after December 31, 2019, is referenced in a “guidance update” box; that is, a gray shaded box that contains summary information on the guidance issued but not yet effective.
In updating this guide, all guidance issued up to and including the following was considered:
• SSARS No. 24, Omnibus Statement on Standards for Accounting and Review Services — 2018 (AR-C sections)
Users of this guide should consider authoritative guidance issued subsequent to the authoritative guidance previously listed to determine the effect of such guidance on their preparation, compilation, and review engagements. In determining the applicability of recently issued guidance, consider the effective date of such guidance.
FASB standards quoted are from FASB Accounting Standards Codification® 2015, Financial Accounting Foundation. All rights reserved. Used by permission.
GASB standards quoted are from GASB Statements, Concepts Statements, Interpretations, and Technical Bulletins© 2015, Governmental Accounting Standards Board. All rights reserved. Used by permission.
In citing SSARSs and their related interpretations, references use AR-C section numbers, as appropriate, within AICPA Professional Standards and not the original statement number.
QC section 10 addresses a CPA firm’s responsibilities for its system of quality control for its accounting and auditing practice. A system of quality control consists of policies that a firm establishes and maintains to provide it with reasonable assurance that the firm and its personnel comply with professional standards, as well as applicable legal and regulatory requirements. The policies also provide the firm with reasonable assurance that reports issued by the firm are appropriate in the circumstances. This section applies to all CPA firms with respect to engagements in their accounting and auditing practice.
Paragraphs .20–.21 of AR-C section 60 address the accountant’s specific responsibilities regarding engagement level quality control procedures for preparation, compilation, and review engagements. Because of the importance of engagement quality, appendix A has been added to this guide. Appendix A summarizes key aspects of the quality control standard. This summarization should be read in conjunction with QC section 10 and paragraphs .20–.21 of AR-C section 60, as applicable.
Pursuant to paragraph .15 of AR-C section 60, SSARSs use the following two categories of professional requirements, identified by specific terms, to describe the degree of responsibility they impose on an accountant:
• Unconditional requirements. The accountant must comply with an unconditional requirement in all cases in which such requirement is relevant. SSARSs use the word must to indicate an unconditional requirement.
• Presumptively mandatory requirements. The accountant must comply with a presumptively mandatory requirement in all cases in which such a requirement is relevant, except in rare circumstances. In such rare circumstances, the accountant should perform alternative procedures to achieve the intent of the requirement. The need for an accountant to depart from a relevant, presumptively mandatory requirement is expected to arise only when the requirement is for a specific procedure to be performed and, in the specific circumstances of the engagement, that procedure would be ineffective in achieving the intent of the requirement. SSARSs use the word should to indicate a presumptively mandatory requirement.
If a SSARS provides that a procedure or an action is one that the accountant should consider, the consideration of the procedure or action is presumptively required. Whether the accountant performs the procedure or action is based upon the outcome of the accountant’s consideration and the accountant’s professional judgment. The professional requirements of a SSARS are to be understood and applied in the context of the explanatory material that provides guidance for their application. The specific terms used to define professional requirements are not intended to apply to interpretative publications issued under the authority of ARSC because interpretative publications are not SSARSs.
The AICPA encourages you to visit its website at aicpa.org and the Financial Reporting Center (FRC) at www.aicpa.org/frc. The FRC supports members in the execution of high-quality financial reporting. Whether you are a financial statement preparer or a member in public practice, this center provides exclusive member-only resources for the entire financial reporting process and provides timely and relevant news, guidance, and examples relevant to accounting, preparation, compilation, and review engagements, as well as audit, attest, assurance, and advisory engagements. Certain content on the AICPA’s websites referenced in this guide may be restricted to AICPA members only.
Users of this guide are encouraged to consider the benefits of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities. More than 20 million privately owned small- and medium-sized entities (SMEs) in the United States that are not currently required to prepare U.S. generally accepted accounting principles (GAAP)-based financial statements now have a streamlined and cost effective financial reporting framework available to them. Released in June 2013, the FRF for SMEs accounting framework is a special purpose framework which offers SMEs a reliable, relevant, and simplified financial reporting solution that addresses marketplace demands.
The AICPA’s FRF for SMEs accounting framework is a less complicated and less costly system of accounting for SMEs that do not need GAAP-based financial statements. The framework is a cost-beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. The accounting principles composing the FRF for SMEs reporting option are intended to be the most appropriate for the preparation of SME financial statements based on the needs of the financial statement users and cost-benefit considerations. Accounting principles in the framework are responsive to the well-documented issues and concerns stakeholders currently encounter when preparing financial statements for SMEs. For more information on Financial Reporting Framework for Small- and Medium-Sized Entities, visit www.aicpa.org/frf-smes.
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1.01 AR-C section 90, Review of Financial Statements,1 applies when the accountant is engaged to perform a review of financial statements. When performing a review of financial statements, the accountant’s objective is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures. AR-C section 90 also applies to engagements to review other historical financial information, excluding pro forma financial information. Reviews of pro forma financial information are to be performed in accordance with AT-C section 310, Reporting on Pro Forma Financial Information, of Statements on Standards for Attestation Engagements No. 18, Attestation Standards, Clarification and Recodification.2 Examples of other historical information that an accountant may be engaged to review include, but are not limited to, the following:
• A single financial statement
• Specified elements, accounts, or items of a financial statement such as schedules of rentals, royalties, profit participation, or provision for income taxes
• Supplementary information
• Required supplementary information
• Financial information contained in a tax return
1.02 A review engagement is substantially less in scope than an audit engagement, the objective of which is the expression of an opinion regarding the financial statements as a whole. A review engagement 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; or other procedures ordinarily performed in an audit engagement. Therefore, the accountant does not express an opinion in the accountant’s review report regarding the financial statements.
1.03 AR-C section 90 does not apply when the accountant is engaged to review interim financial information when
a. the entity's latest annual financial statements have been audited by the accountant or a predecessor;
b. the accountant either
i. has been engaged to audit the entity's current year financial statements or
ii. audited the entity's latest annual financial statements and, in situations in which it is expected that the current year financial statements will be audited, the engagement of another accountant to audit the current year financial statements is not effective prior to the beginning of the period covered by the review; and
c. the entity prepares its interim financial information in accordance with the same financial reporting framework as that used to prepare the annual financial statements.
AU-C section 930, Interim Financial Information,3 provides guidance for review engagements when the conditions in a–c are met. The remaining paragraphs in this section assume that AR-C section 90 applies.
1.04 An accountant performing a review of financial statements of a U.S. entity is required to follow the review standards as promulgated by the AICPA Accounting and Review Services Committee. However, an accountant may be engaged to perform a review in accordance with both Statements on Standards for Accounting and Review Services (SSARSs) and another set of review standards, such as International Standard on Review Engagements (ISRE) 2400 (Revised), Engagements to Review Historical Financial Statements, issued by the International Auditing and Assurance Standards Board. In circumstances in which the accountant’s review report states that the review was conducted in accordance with both SSARSs and another set of review standards, the accountant should comply with both sets of standards. An example review report in which the review was conducted in accordance with both SSARSs and ISRE 2400 (Revised) is included in paragraph 1.241.
1.05 While AR-C section 90 does not include an explicit requirement for the accountant to determine materiality and apply such materiality in designing procedures and evaluating results, as stated in paragraph .04 of AR-C section 90, the accountant’s objective when performing a review of financial statements is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. As such, without a determination of materiality, the accountant is unable to meet the objective of the review engagement. For example, the accountant is required to consider materiality when,
• in accordance with paragraph .17 of AR-C section 90, designing and performing analytical procedures and making inquiries and performing other procedures, as appropriate, to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements in order for the statements to be in accordance with the applicable financial reporting framework.
• in accordance with paragraph .28 of AR-C section 90, evaluating whether uncorrected misstatements, including inadequate disclosure, identified by the practitioner in performing the review procedures or brought to the accountant’s attention during the performance of the review are, individually and in the aggregate, material to the financial statements in order to determine whether any modifications should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
1.06 The accountant’s consideration of materiality is made in the context of the applicable financial reporting framework. Some financial reporting frameworks discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that
• misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;
• judgments about materiality are made in light of surrounding circumstances and are affected by the size or nature of a misstatement or a combination of both; and
• judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.
1.07 If present in the applicable financial reporting framework, a discussion of the concept of materiality provides a frame of reference to the accountant in determining, as required by paragraph .28 of AR-C section 90, whether there are any material modifications that should be made to the financial statements in order for the statements to be in accordance with the applicable financial reporting framework. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred to in paragraph 1.06 provide the accountant with such a frame of reference.
1.08 The accountant’s determination of materiality is a matter of professional judgment and is affected by the accountant’s perception of the needs of the financial statements’ intended users. In this context, it is reasonable for the accountant to assume that users
• have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information in the financial statements with reasonable diligence;
• understand that financial statements are prepared, presented, and reviewed to levels of materiality;
• recognize the uncertainties inherent in the measurement of amounts based on the use of estimates, judgment, and the consideration of future events; and
• make reasonable economic decisions on the basis of the information in the financial statements.
1.09 Further, unless the review engagement is undertaken for financial statements that are intended to meet the particular needs of specific users, the possible effect of misstatements on specific users, whose information needs may vary widely, is not ordinarily considered.
1.10 The accountant’s judgment about what is material in relation to the financial statements as a whole is the same regardless of the level of assurance obtained by the accountant as a basis for expressing a conclusion on the financial statements. That is, for the same intended users, materiality for a review engagement is the same as it is for an audit engagement because materiality is based on the information needs of intended users and not the level of assurance.
1.11 The accountant’s determination of materiality for the financial statements as a whole may need to be revised during the engagement as a result of one or both of the following:
• A change in the circumstances that occurred during the review (for example, a decision to dispose of a major part of the entity’s business)
• New information or a change in the accountant’s understanding of the entity and its environment as a result of performing review procedures (for example, if during the review it appears actual financial results are likely to be substantially different from anticipated period-end financial results that were used initially to consider materiality for the financial statements as a whole)