Koroll & Company Blog

What the New Compilation Engagement Standard Means for Your Business

[fa icon="calendar"] Jan 26, 2022 10:06:30 AM / by Allen Koroll

New Compilation Engagement Standard

Some things never change, but the compilation standard isn’t one of them. The Auditing and Assurance Stands Board (AASB) has revised the standard for compilation engagements. The changes are effective for periods ending on or after December 14, 2021. Under these standards, a new compilation engagement report will replace Notice to Reader (NTR).

The reasons for these changes are numerous: 

  1. Professional standards are shifting – Under the previous standard, it was assumed that management was the only user of compiled financial information. This is no longer the case. Compiled financial information is also used by third parties, including lenders. New standards will ensure the financial information provided meets the needs of these users. 
  2. Confusion about which services fall under compilation engagement – The new standard will provide explicit definitions of which services are included in a compilation engagement. 
  3. Variations in work completed during a compilation engagement and documentation included – Understandable definitions and new requirements will ensure all professionals are doing similar work during a compilation engagement.
  4. A lack of transparency – The new standard will require professionals to describe the basis of accounting used for better transparency (more on this later). Responsibilities of management and the practitioner compiling the financial information are also clearer. Limitations of the financial information will also be better communicated so that users understand the work undertaken and that the practitioner has not verified the accuracy and completeness of the information. 

Ultimately, the new standard will provide benefits to all users of financial information.

When a compilation engagement is and is not required

A compilation engagement is not required if: 

  • You act in the capacity of a trustee of bankruptcy, receiver or liquidator.
  • You are contracted as a member of an organization's finance department with controllership responsibilities (i.e. CFO).
  • You perform bookkeeping services that result in general ledger, trial balance or system-generated reports. 
  • Financial information is presented solely in government tax forms.
  • Another practitioner will complete a review engagement or audit the financial information. 
  • Financial information is prepared as part of another service, including business valuation, litigation support, personal financial planning, preparation of forms prescribed by government, regulatory bodies, or others, such as insurers. 

Services outside of this scope require a compilation engagement. If you are completing one or more of these exclusions in combination with an unexempt service, a compilation engagement is required. Compilation engagements can also be performed voluntarily for any of the above services. The value of a compilation engagement results from the practitioner:

  1. Assisting management in the preparation of the compiled financial information in accordance with a basis of accounting selected by management, including the preparation of a note in the compiled financial information that describes the basis of accounting;
  2. Complying with professional standards, including relevant ethical standards, and
  3. Issuing a compilation engagement report that clearly communicates the nature and limitations of the engagement, and the practitioner’s and management’s responsibilities.  

How changes to the standard affect your business

As a business owner, you are probably wondering what these changes mean for you. 

Because this new standard affects how your practitioner completes their compilation of financial information, you can expect some changes in the way they interact with you when compiling information and the questions they ask. 

Firstly, because the services that require a compilation engagement have been clarified, you will have to talk to your practitioner about your needs so that they can help determine whether you need (or may want) a compilation engagement. 

Here are some things you can expect:

  1. Third parties will be using the compiled financial information

If a third party (someone outside your company) will be using the compiled financial information, a compilation engagement is required. In these situations, your practitioner will need to know whether or not that third party will have the ability to request additional information. 

If they won’t be able to request additional information, your practitioner needs to know what accounting basis you and the third party have agreed upon. This means you will have to have a conversation about the basis of accounting with the third party prior to the compilation engagement. 

The basis of accounting refers to the methods used to recognize revenue and expenses. There are two main bases of accounting: 

  1. Cash basis - You recognize revenue when cash is received and expenses when bills are paid. 
  2. Accrual basis - You recognize revenue when it is earned and expenses as they are incurred, regardless of whether you have paid the vendor or the customer has paid you. 

Another common basis is modified cash basis accounting with certain accruals and estimates. You may also use other bases as agreed upon with a creditor or regulator. 

  1. There are no third parties

If there are no third parties, you and your practitioner will discuss available services and whether a compilation engagement is required (you also have the option to request one). If a compilation engagement is required or requested, you will have to choose the basis of accounting. While your practitioner may assist you with this, the chosen basis and the compiled financial information is ultimately your responsibility. 

  1. You will have to formally acknowledge responsibility 

Under the new standard, if you enter a compilation engagement, you will have to sign a letter. This letter will include: 

  • Objectives of the engagement
  • Scope 
  • Intended use
  • Responsibilities of you and the practitioner 
  • Acknowledgement of responsibility

You will also be asked to provide acknowledgement of responsibility once the engagement is complete, as accounting basis or other details may change during the process. You may have to sign off on the financial statements or provide a written/oral acknowledgement, depending on your practitioner. 

  1. Your practitioner may have more discussions with you 

In addition to the above letter and questions asked about third parties, your practitioner will have to ask you about your company and its: 

  • Operations 
  • Accounting systems 
  • Accounting records 
  • Processes for recording, classifying and summarizing transactions 

If there are any significant judgements to be made, your practitioner will discuss them with you. They will explain how they impact the financial statements and assist you with the judgements, however, the final responsibility on these judgements is your responsibility.  

Your practitioner must also consider whether the information in the financials appears misleading. If any issues are identified, they will discuss them with you and ask for additional or corrected information. 

  1. Users still won’t have assurance

It’s important to note that even with these changes, a compilation engagement does not provide any assurance. For assurance of the financial information, you may want to consider an audit or review. 

That being said, these new compilation engagements will have a significant impact on financial information and provide more transparency to those using it. 

To ensure your compilation engagements meet the latest standards and that you are getting the right level of assurance, contact Koroll & Company’s team of chartered professional accountants today

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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

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Topics: Corporate, Small Business

Allen Koroll

Written by Allen Koroll