Are you aware of the option in the SSARS titled Preparation of Financial Statements (AR-C 70)? Many CPAs still believe the lowest level of service in the SSARS is a compilation, but this is not true. CPAs can and do issue financial statements without a compilation report. Today I provide an in-depth look at AR-70, Preparation of Financial Statements.
Preparation of Financial Statements
Guidance
AR-C 70, Preparation of Financial Statements, is the guidance for the preparation of financial statements.
Applicability - AR-C Section 70
AR-C section 70, Preparation of Financial Statements, is applicable when a public accountant is engaged to prepare financial statements or prospective financial information.
This section can also be applied to the preparation of other historical financial information (e.g., schedule of rents).
AR-C 70 does not apply when the accountant prepares financial statements or prospective financial information:
- And is engaged to perform an audit, review, or compilation of financial statements
- Solely for submission to taxing authorities
- For inclusion in written personal financial plans
- In conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
- In conjunction with business valuation services
Are there other times when AR-C 70 is not applicable? Yes. The preparation guidance does not apply when the accountant is merely assisting in the preparation of financial statements; such services are considered bookkeeping.
Examples of bookkeeping services include:
- Preparing or proposing certain adjustments, such as those applicable to deferred income taxes or depreciation
- Drafting financial statement notes
- Entering general ledger transactions or processing payments in the client’s accounting software
When AR-C 70 is applicable, certain compliance actions—such as the creation of a signed engagement letter—are required. If the accountant is merely assisting with bookkeeping services, AR-C 70 is not triggered, and compliance with the standard is not necessary.
If the accountant is only entering transactions into a general ledger and making journal entries, he is merely assisting with bookkeeping. Such assistance is often provided in an online bookkeeping software such as QuickBooks. If this is the only service provided, AR-C 70 is not applicable.
If the accountant is engaged to prepare financial statements and performs any of the following, then AR-C 70 applies.
- The accountant prepares financial statements that are provided to another accountant (another firm) for audit purposes
- The accountant prepares financial statements separately from a tax return (e.g., the accountant might prepare a tax return that includes financial statements and then—at the client’s request—creates financial statements separately from the return)
- The accountant uses the client’s general ledger information to prepare financial statements outside of the accounting software (e.g., the accountant places information from a Quickbooks general ledger into Excel and creates financial statements)
As you can see, the preparation standard makes a distinction between:
- Preparing financial statements (which triggers AR-C 70) and
- Merely assisting (which does not trigger AR-C 70)
Are there any other situations where AR-C 70 does not apply? Yes. The AICPA’s Center for Plain English Accounting addressed this question in the following question and answer:
Q: If financial statements are prepared by the accountant as a by-product of another engagement (for example, an engagement to prepare a tax return), is the accountant required to follow section 70 of SSARS No. 21 and include any special disclaimer or “no assurance” statement on those financial statements?
A: No. The accountant is only required to perform the preparation engagement in accordance with section 70 of SSARS No. 21 when engaged to prepare financial statements. Therefore, because the accountant was not engaged to prepare the financial statements, there is no requirement to include a statement on each page of the financial statements indicating that no assurance is provided on the financial statements.
The author requested that the AICPA define the word engaged. They responded that a client’s request for the preparation of financial statements service is the trigger for being “engaged.” In other words, a client’s request for the preparation of financial statements means we are “engaged,” provided we accept the work. Once the client makes the request, the accountant will create an engagement letter in compliance with AR-C 70.
If the client does not request the preparation of financial statements and the accountant creates the statements as a byproduct of another service (e.g., tax return), he is not subject to the requirements of AR-C 70.
So when is AR-C 70 applicable? When a public accountant is engagedtoprepare financial statements.
AR-C 70 Objective
The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework.
AR-C 70 Reports
A compilation report from the accountant is not required (and should not be provided) when preparing financial statements under AR-C 70.
Financial Statements
The accountant can prepare financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework such as the following:
- Cash basis
- Tax basis
- Regulatory basis
- Contractual basis
- Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items)
- Generally accepted accounting principles (GAAP)
When preparing financial statements in accordance with a special purpose framework (e.g., tax basis), the accountant is required to include a description of the financial reporting framework either on the face of the financial statements or in a note. Here’s a sample disclosure in a financial statement title: Statement of Assets, Liabilities, and Equity—Tax Basis.
Management determines the financial statements to be prepared. Financial statements normally include the following:
- Balance sheet
- Income statement
- Cash flow statement
The accountant can, if so directed by management, create and issue just one financial statement (e.g., income statement).
The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.
The accountant should also obtain an understanding of the significant accounting policies to be used in the preparation of the financial statements.
In preparing the financial statement, the accountant may need to assist management with judgements regarding amounts or disclosures. The accountant should discuss these judgments with management. Why? So management can understand and accept responsibility for the financial statements.
Documentation Requirements - AR-C 70
The accountant should prepare and retain the following documentation:
- Engagement letter (or contract)
- The financial statements
Documentation related to significant consultations or professional judgments are to be included in the engagement file. Also, if the accountant departs from a relevant presumptively mandatory requirement, he should document the justification for the departure and how the alternative procedures performed were sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)
AR-C 70 Engagement Letter
Is an engagement letter required for a preparation service? Yes. Moreover, the letter should be signed by the accountant or the firm and management or those charged with governance. A verbal understanding is not sufficient. Though AR-C 70 does not specify how often the engagement letter should be updated, it is best to do so annually.
The engagement letter should specify:
- The objectives of the engagement
- The responsibilities of management
- The responsibilities of the accountant
- The limitations of the preparation engagement
- Identification of the applicable financial reporting framework
- The agreement of management that:
- Each page of the financial statements will include a statement that no assurance is provided, or
- The accountant will issue a disclaimer stating that no assurance is provided
- Whether the financial statements will:
- Contain known departures from the applicable reporting framework, and
- Whether substantially all disclosures will be omitted
Check out my new book on Amazon, Preparation of Financial Statements and Compilation Engagements.
Preparation of Financial Statements - No Report
As noted above, no compilation report will be issued for a preparation service. The preparation service is considered a nonattest, nonassurance service, and no compilation, review, or audit procedures are required.
The accountant will do one of the following:
- On each financial statement page (including the related notes), indicate, at a minimum, that “no assurance is provided,” or
- Provide a disclaimer (see example below)
If the accountant uses the first option, wording such as the following should be included on each page of the financial statements (including the related notes):
- No assurance is provided on these financial statements
- These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them, or
- ABC CPAs prepared these financial statements in accordance with professional standards of the AICPA, and no assurance is provided
Other statements can be used to communicate that no assurance is provided, but the minimum wording must include “No assurance is provided.” The “no assurance” wording is made at management’s discretion, and the accountant’s firm name is notrequired to be included. The wording is normally placed at the bottom of each page. If the client does not allow the accountant to include such a statement on each page of the financial statements, the accountant should:
- Issue a disclaimer (see below)
- Perform a compilation in accordance with AR-C 80, or
- Withdraw from the engagement
Preparation of Financial Statements Disclaimer
If the disclaimer option is used, AR-C 70 provides the following language:
The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and I (we) do not express an opinion, a conclusion, nor provide any assurance on them.
[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]
Though not required, the disclaimer can be placed on firm letterhead. Notice that the disclaimer language above has no disclaimer title. While the standard is silent about providing a title, the accountant may add one. For example, Accountant’s Disclaimer. A salutation is not required, but may be added.
Some accountants prefer to provide a disclaimer on letterhead. Why? Any third party reader can see that the accounting firm is involved in the preparation of the statements and that no assurance is provided.
A third party may not know that an external accountant was involved in preparing the statements if the “no assurance is provided” legend is used and the firm’s name is not included. Remember, however, it is the client’s decision as to whether the “no assurance” legend is added or a disclaimer is provided.
Independence
Preparation of financial statements is a nonattest, nonassurance service. When an accountant performs only a preparation engagement, consideration of independence is not necessary.
If an accountant signs client checks and performs bookkeeping services, independence is not required. Moreover, if the accountant prepares financial statements for the same client, independence is not required. Signing checks, bookkeeping, and the preparation of financial statements are all nonattest services.
But what happens if the accountant prepares financial statements and issues a compilation report?
Suppose an accountant issues monthly financial statements for January through November with no compilation report (using the preparation option), but in December issues financial statements with a compilation report. Providing the monthly preparation services and the December compilation service triggers a requirement to consider independence.
Just remember this for now: Independence is not required for preparation engagements, and there are no requirements to disclose a lack of independence in a preparation engagement.
Omission of Substantially All Disclosures
Can the accountant omit all disclosures (notes to the financial statements) in a preparation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:
- Omit all disclosures
- Provide selected disclosures
- Provide full disclosure
Regardless, the engagement letter should describe the level of disclosure to be provided in the financial statements. Also, the omission of substantially all disclosures should be communicated either on the face of the financial statements or in a selected note. There is no provision in the preparation standard to report the omission of disclosures in the accountant’s disclaimer that precedes the financial statements.
The accountant can communicate the omission of disclosures by including wording such as the following at the bottom of each financial statement page or in a note:
- Substantially all disclosures required by accounting principles generally accepted in the United States are not included.
- Substantially all disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting are not included.
The accountant can also communicate the omission of disclosures in the title of the financial statements. For example:
ABC Company
Statement of Income
Substantially All Disclosures Omitted
December 31, 2020
Information Provided is Incomplete or Inaccurate
Deficiencies in the information provided to the accountant should be communicated to management, and the inaccuracy or incompleteness of such information should be corrected. Deficiencies in the information include insufficient records, documents, explanations, and judgments.
Reporting Known Departures from the Applicable Financial Reporting Framework
How should a departure from the applicable financial reporting framework be reported? Discuss the departure with management to see if it can be corrected. If it is not corrected, disclose the departure. How?
A departure from the applicable financial reporting framework should be disclosed either on the face of the financial statements or in a note. If it takes more than a few words to describe the departure, note disclosure may be the better option—you’ll have more room there. There is no provision in the preparation standard to disclose departures in the accountant’s disclaimer that precedes the financial statements.
AR-C 70 Other Historical or Financial Information
In addition to historical financial statements, AR-C 70 may be applied to the following:
- Specified elements, accounts, or items of a financial statement, including schedules of:
- Rents
- Royalties
- Profit participation, or
- Income tax provisions
- Supplementary information
- Required supplementary information
- Pro forma financial information
AR-C 70 Prospective Financial Information
AR-C 70 can be applied to prospective information.
Prospective financial information is defined as any financial information about the future.
Prospective financial information can be presented as:
- A complete set of financial statements, or
- One or more elements, items, or accounts
If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information.
If you prepare a financial projection, you should not exclude:
- The identification of hypothetical assumptions, or
- The description of the limitations on the usefulness of the presentation
AR-C 70 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.
AR-C 70 Prescribed Forms
Is it permissible to perform a preparation of financial statement engagement with regard to prescribed forms?
Yes. There is nothing in AR-C 70 that prohibits the accountant from performing a preparation engagement with regard to prescribed forms (e.g., bank personal financial statement). However, the accountant is required to follow all of the preparation guidance. Clients may not want to add wording to the prescribed forms such as “no assurance is provided” or “substantially all disclosures are omitted.” As an alternative to adding such wording, the accountant can provide a disclaimer before the prescribed form.
Selected notes can follow the form if needed. If this option is used, the order of the deliverable is as follows:
- Disclaimer
- Prescribed form
- Selected notes
When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form. In effect, the prescribed form is the reporting framework. Report departures from the prescribed form and its related instructions on the face of the financial statements (the form) or in a note.
Draft Financial Statements
The client may request a draft copy of the financial statements prior to final issuance. To avoid confusion, mark statements with words like:
- Draft Financial Statements
- Working Draft
- Draft - Subject to Change
Preparation of Financial Statements - A Simple Summary
- AR-C 70 is applicable when the accountant is engaged to prepare financial statements and is not applicable when the accountant is engaged to perform a compilation or if the accountant is merely assisting with bookkeeping
- The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework
- The financial statements can be prepared in accordance with GAAP or a special purpose reporting framework
- The financial statements can be distributed to third parties (and not just management)
- The accountant must either:
- State on each financial statement page that “no assurance is provided,” or
- Provide a disclaimer
- Documentation requirements include:
- The engagement letter, and
- The financial statements
- An engagement letter must be signed by:
- The accountant or the accountant’s firm, and
- Management or those charged with governance
- No report (e.g., compilation report) is attached to the financial statements
- Consideration of independence is not required
- Substantially all disclosures can be omitted
- The omission of substantially all disclosures should be:
- Disclosed on the face of the financial statements, or
- In a note
- Selected disclosures can be provided
- Departures from the applicable financial reporting framework should be:
- Disclosed on the face of the financial statements, or
- In a note
- A preparation engagement can be applied to historical financial statements and historical information (e.g., specified items of a financial statement).
- A preparation engagement can be applied to prospective financial information. The summary of significant assumptions must be included.
- A preparation engagement can be performed in relation to prescribed forms (e.g., bank personal financial statements)
- Mark draft financial statements with appropriate wording (e.g., Draft Financial Statements)
See my article The Definitive Guide to Compilations.
Also, check out my new book on Amazon: Preparation of Financial Statements and Compilation Engagements.
Differences in Preparation and Compilation Engagements
How do preparation engagements compare to compilations? Here's a video that explains the differences.
FAQs
What is AR-C section 70? ›
AR-C section 70, Preparation of Financial Statements, is applicable when a public accountant is engaged to prepare financial statements or prospective financial information. This section can also be applied to the preparation of other historical financial information (e.g., schedule of rents).
What does AR-C stand for in auditing? ›01 This section provides general principles for engagements performed in accordance with Statements on Standards for Accounting and Review Services (SSARSs) issued by the Accounting and Review Services Committee (ARSC) and codified into AR-C sections.
What does Ssars No 21 specifically AR-C Section 70 preparation of financial statements say with respect to a CPAs preparation services? ›Section 70, Preparation of Financial Statements— Provides requirements and guidance to an accountant who is engaged to prepare financial statements for an entity but not engaged to perform a compilation, review, or audit with respect to those financial statements.
What are the 7 steps in the accounting cycle? ›- Identifying and Analysing Business Transactions.
- Posting Transactions in Journals.
- Posting from Journal to Ledger.
- Recording adjusting entries.
- Preparing the adjusted trial balance.
- Preparing financial statements.
- Post-Closing Trial Balance.
Short-term disability will offer you 6 weeks pay for a normal childbirth and 8 weeks for a c-section. The rest of your maternity leave will be unpaid and job-protected with FMLA if you work for a qualifying company. Short-term disability typically covers 50% of your paycheck.
What are the 3 types of C-section? ›- Low transverse. This common option is also known as the “bikini incision” because the C-section cut curves horizontally across your bikini line (your lower abdomen). ...
- Low vertical. ...
- High vertical.
Only a CPA can prepare an audited financial statement and a reviewed financial statement. However, both CPAs and non-certified accountants, including bookkeepers, can prepare compiled financial statements.
What are the 9 steps in preparing financial statements? ›- Identify all business transactions for the period.
- Record transactions in a general journal.
- Resolve anomalies and make adjusting journal entries.
- Post the adjusted journal entries to the general ledger.
- Prepare an income statement.
- Prepare a balance sheet.
Compare and summarize the three primary types of government audits: financial audits, attestation engagements, and performance audits.
Do I need to prepare financial statements? ›Annual financial statements must be prepared by all entities except small proprietary companies. The annual financial statements consist of a balance sheet, a profit and loss statement and a cash flow statement.
Is CPA responsible for preparing financial statements? ›
Oftentimes, the certified public accountant (CPA) who performs your general accounting and/or bookkeeping and prepares your annual tax return can also prepare your financial statements and, in addition, perform the appropriate service in order to meet your bank's requirements.
What documents are needed to prepare financial statements? ›The five key documents include profit and loss statements, balance sheets, cash-flow statements, tax returns and aging reports.
What are the three 3 basic processes of accounting? ›- Identifying and analyzing the business transactions.
- Recording of the business transactions.
- Classifying and summarising their effect and communicating the same to the interested users of business information.
It takes about six weeks to recover from a C-section, but each person's timeline will be different. An incision — typically a horizontal cut made in your lower abdomen — can take weeks to heal. During that time, it's recommended that you avoid lifting anything heavier than your baby.
Do doctors get paid more for a C-section? ›A doctor and an economist note that doctors are generally paid quite a bit more for a C-section than for a vaginal birth. Every day, roughly 10,000 babies are born in the United States, and about a third of them are born via Cesarean section.
How long do you get off work after C-section? ›Wait on going back to work: Typically, it takes six to eight weeks or more for moms to be ready to return to work after a c-section. If you have maternity leave, take full advantage of it. Give yourself time to physically and emotionally heal.
What foods to avoid after C-section? ›Items like carbonated drinks, citrus juices, coffee, tea, and spicy food should be avoided as they increase bloating and gas. Fermented and fried food can cause heartburn and indigestion. Since mothers are breastfeeding, such foods can affect the milk and cause growth problems in the newborn.
Why can't you drive after C-section? ›After your C-section, you'll probably want to feel normal again and that includes driving. But, doctors typically recommend that you don't resume driving until your incision wound has completely healed. This is because if you brake suddenly in the car, it could cause discomfort and sharp pains.
Is each C-section more painful? ›Is a C-section less painful the second time? It's difficult to say for certain because each delivery is unique. Plus, you may experience more or fewer complications the second time around. However, some people do anecdotally report less pain after two or more cesarean deliveries.
Can you call yourself an accountant without a CPA? ›Accounting is basically the recording and reporting of business and financial transactions. Anyone who does that function can call themselves an accountant, even without a degree in accounting, although typically an accountant does have an accounting-related degree.
Can you say you're an accountant without a CPA? ›
Not all accountants are CPAs (certified public accountants), but all CPAs are accountants. Typically, an accountant has achieved a bachelor's degree in accounting.
Is a CPA better than an accountant? ›Therefore, CPAs are seen as better qualified to perform accounting functions and are allowed to execute duties that other accountants can't, including: Preparing audited financial statements.
What are the 4 four key of financial statement? ›For-profit businesses use four primary types of financial statement: the balance sheet, the income statement, the statement of cash flow, and the statement of retained earnings.
What are the six 6 basic financial statements? ›These include the working capital ratio, the quick ratio, earnings per share (EPS), price-earnings (P/E), debt-to-equity, and return on equity (ROE). Most ratios are best used in combination with others, rather than singly, for a comprehensive picture of company financial health.
What are the five 5 financial statements prepared in accounting? ›They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.
What is the most common type of IRS audit? ›Correspondence audits are the most common IRS audit types. The Internal Revenue Service conducts this audit to request additional documentation from taxpayers.
What is the difference between GAAP and gas? ›Since GAAP defines financial reporting standards and GAS defines how government entities are audited, you may think that the two frameworks are closely related. However, GAAP does not apply to government entities.
What are the two main types of audits? ›An audit may also be classified as internal or external, depending on the interrelationships among participants. Internal audits are performed by employees of your organization. External audits are performed by an outside agent.
What is AR-C-section 60? ›AR-C Section 60 establishes a framework and provides guidance for the performance of all SSARS engagements. Specific requirements for performing and reporting on SSARS engagements are in other AR-C sections.
What is AR-C 90? ›Review Engagement Guidance
The guidance for reviews can be found in AR-C 90, Review of Financial Statements. AR-C 90 is part of the AICPA's Statements on Standards for Accounting and Reporting Services (SSARS)..
What is C-section code? ›
Introduction. A caesarean section (C-section) is a procedure in which a baby is surgically extracted (removed) from the uterus, rather than being born vaginally.
What is a Category C-section? ›Category 1 caesarean birth is when there is immediate threat to the life of the woman or fetus, and category 2 caesarean birth is when there is maternal or fetal compromise which is not immediately life-threatening.
Can a patient refuse C-section? ›You Have a right to decline medical procedures
If a doctor tells you you have to have a c-section, you have the option to tell the doctor you will decline the procedure. You can also simply go to the hospital when you are in labor and decline the c-section then.
As you might expect, the difference between an unplanned Cesarean and an emergency Cesarean is urgency. Generally, this means there is an immediate safety concern for you or your baby, and immediate intervention is needed to keep you both as healthy and safe as possible.
Can you be denied ac section? ›It's the question birth advocates hear more often than any other. The short answer is that no, in almost all cases, a doctor cannot force you to have a c-section. Hospital policy does not trump the law, and the law protects your right to decline medical care.
How much is a review engagement? ›Review Engagement - The range for this type of engagement is $2,000 to $15,000. Audit Engagement - The range for this type of engagement is $5,000 to $30,000+.
Is a review engagement the same as an audit? ›While an audit is meant to give some assurance that the financial statements are free of material misstatements, a review engagement is only meant to ascertain whether or not the financial statements are believable or plausible.
What is the difference between a review and an audit? ›As with all levels of service the financial statements are the responsibility of the NPO's management. The primary difference between a review and an audit is that in an audit, the auditor verifies management's amounts and disclosures with evidence provided by third parties.
Does your cervix open during C-section? ›The progressive opening, or dilatation, of the cervix occurs with uterine contractions during labour. Mechanical dilatation of the cervix at caesarean section, before onset of labour, is the artificial opening of the cervix.
How many C-section can a woman have? ›However, from the current medical evidence, most medical authorities do state that if multiple C-sections are planned, the expert recommendation is to adhere to the maximum number of three.”
Do doctors take out intestines during C-section? ›
During a C-section, your organs are usually just moved aside so that the doctor can see your uterus better. But the organs stay within the abdominal cavity and aren't taken out. In rare cases, the intestines may be temporarily lifted out for better visualization and space to operate, but not permanently.
How long should my husband stay home after C-section? ›A c-section is major surgery and your partner will need time to recover. It can take at least 6 weeks, but they may have discomfort for much longer than this. They will feel sore and find it hard to move around.
When can I start walking after C-section? ›Walking within the first 24 hours of your procedure. While uncomfortable at first, walking is a great way to lower the risk of post-op complications such as blood clots and jump start normal bodily functions (like getting the bowels moving).