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:
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:
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:
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:
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:
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.
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.
Under the new standard, if you enter a compilation engagement, you will have to sign a letter. This letter will include:
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.
In addition to the above letter and questions asked about third parties, your practitioner will have to ask you about your company and its:
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.
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.