What is a compilation?
A compilation is said to be the result of write-up work, which is an accounting service involving the preparation of financial statements. A compilation is done by an external accountant who transforms the data given by the client into financial statements, but without performing any audit or review services. A compilation is also said to have the lowest level of assurance because the accountant simply compiles and does not give any assurance or opinion as to the fairness of the financial statements. Compilations do not include any analytical procedures or inquiries of management and therefore are the least expensive form of attestation service provided by a CPA. The accountant merely relies on information provided by the client along with his general understanding of the accounting principles.
The Compilation Report
When the financial statements are compiled, a compilation report accompanies them. It should be stated in the report that the financial statements have not been audited or reviewed, and the accountant does not offer any assurance or opinion regarding whether or not the financial statements are fairly stated. It should also be stated in the report that the financial statements are only representations from the management of the client or organization.
The reason why the accountant does not offer any assurance in the compilation report is that he or she is not required to check the completeness or accuracy of the data given by the organization. The accountant is also not required to gather any evidence for the purpose of verifying the information provided. Aside from presenting the financial condition and results of operations of the organization, a compilation is useful in that it provides the organization’s financial statements a level of credibility from an independent certified accountant. Although no assurance is given by the accountant, third parties will still appreciate an organization who hires an accountant for compilation services based on the professionalism, reputation, and skills of the accountant involved.
Standard Procedures in Creating a Compilation Report
In order to provide financial statements and compilation report, an accountant must follow the Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. These standards stipulate that financial statements include a balance sheet or statement of financial position, an income statement and a statement of cash flows. The balance sheet is a snapshot of the business at a given point in time. The balance sheet presents the assets, liabilities, and equity of the organization.
On the other hand, an income statement, also called a profit and loss statement, presents operating results over a period of time, usually 12 months. The statement of cash flows, on the other hand, presents the sources and uses of cash along with the cash balance at the end of the period.
Having compiled financial statements is the first step in establishing financial credibility for start-ups and/or smaller organizations. Compilations provide financial transparency in an organization and allow the organization to make better decisions involving financial matters.