Guidance Note on Members' Duties regarding Engagements involving
Compilation of Financial Statements
Introduction
1. The purpose of this Guidance Note on Members'
Duties regarding Engagements Involving Compilation of Financial Statements
is to provide guidance on the professional responsibilities of the members
of the Institute of Chartered Accountants of India, when an engagement to
compile financial statements or other financial information is undertaken
and the form and content of the report issued in connection with such a
compilation so that the association of the name of the member with the
financial statements is not misconstrued by a user of the statements as
the same having been audited by him. This Guidance Note supersedes
paragraph 9.1 of the Guidance Note on Audit Reports and Certificates for
Special Purposes, issued by the Institute of Chartered Accountants of
India.
Objective of a Compilation Engagement
2. For the member, the objective of a compilation
engagement is to use accounting expertise, as opposed to auditing
expertise, to collect, classify and summarise financial information. This
ordinarily entails reducing detailed data to a manageable and
understandable form without the requirement to test the assertions
underlying that information. The procedures employed are not designed and
do not enable the member to express any opinion on the financial
information. However, users of the compiled financial information derive
some benefit as a result of the member's involvement because the service
has been performed with professional competence and due care.
3. A compilation engagement would ordinarily include
the preparation of financial statements (which may or may not be a
complete set of financial statements) but may also include the collection,
classification and summarisation of other financial information.
Engagements to provide limited assistance to a client in the preparation
of financial statements (for example, on the selection of an appropriate
accounting policy) do not constitute an engagement to compile financial
information.
General Principles of a Compilation Engagement
4. As in any other professional assignment, the member
should comply with the "Code of Conduct" issued by the Institute of
Chartered Accountants of India.
5. In all circumstances when a member's name is
associated with financial information compiled by him the member should
issue a report.
Defining the Terms of the Engagement
6. The member should ensure that there is a clear
understanding between the client and the member regarding the terms of the
engagement. Matters to be considered include the:
- Nature of the engagement, including the fact that neither an audit
nor a review will be carried out and accordingly no opinion will be
expressed.
- Fact that the engagement cannot be relied upon to disclose frauds or
defalcations or illegal acts that may exist.
- Nature of the information to be supplied by the client.
- Fact that management is responsible for the accuracy and
completeness of the information supplied to the member and for the
completeness and accuracy of the compiled financial information.
- Basis of accounting on which the financial information is to be
compiled and the fact that it, and any known departures therefrom, will
be disclosed.
- Intended use and distribution of the information compiled.
7. An engagement letter will be of assistance in
planning the compilation work. It is in the interest of both the member
and the entity that the member should send an engagement letter
documenting the key terms of the appointment. An engagement letter
confirms the member's acceptance of the appointment and helps to avoid
misunderstanding regarding such matters as the objectives and scope of the
engagement, the extent of the member's responsibilities and the form of
report to be issued. An example of an engagement letter for a compilation
engagement appears in Appendix 1.
Planning
8. The member should plan the work so that an effective
engagement will be performed.
Documentation
9. The member should document matters which are
important in providing evidence that the engagement was carried out in
accordance with this Guidance Note and the terms of engagement.
Procedures
10. The member should obtain general knowledge of the
business and operations of the entity and should be familiar with the
accounting principles and practices of the industry in which the entity
operates and with the form and content of the financial information that
is appropriate in the circumstances.
11. If the member becomes aware that information
supplied by management is incorrect, incomplete, or otherwise
unsatisfactory, the member should request management to provide such
information as is in consonance with the objective of the compilation
engagement. If management refuses to provide the information, the member
should consider withdrawing from the engagement.
12. The member should ensure that the compiled
information is in appropriate form and prima facie in accordance with
accounting standards and other recognised accounting principles and
practices (e.g., necessary provisions have been made and the bank
reconciliation statement has been prepared) and it does not contain
apparent inconsistencies and material misstatements. Where the member is
not satisfied, he should persuade the entity to agree to make appropriate
amendments. If such amendements are not made and the financial information
is considered to be misleading, he should consider withdrawing from the
engagement.
Responsibility of Management
13. The member should obtain an acknowledgement from
management of its responsibility for the accuracy and completeness of the
underlying accounting data and the complete disclosure of all material and
relevant information to the member.
14. The word 'audit' should not be used in describing
the nature of services involving compilation of financial statements, nor
the fee for these services be described as 'auditors' fee', or
remuneration in the accounts, correspondence or any other document.
Reporting on the Compilation Engagement
15. It is essential that the member clearly brings out
the nature of association with the financial statements and the nature of
the work performed by him. The following recommendations are made in this
regard :-
- The title of the report should be "ACCOUNTANT'S REPORT ON UNAUDITED
FINANCIAL STATEMENTS" and not "AUDITOR'S REPORT".
- The report should be addressed to the appointing authority.
- The report should identify the financial information compiled, also
stating that it is based on the information provided by the management.
- The report should clearly state that the financial statements are
not audited.
- In describing the engagement, ambiguous terms such as 'review',
'general review', 'check' etc., should not be used.
- Date of the report should be mentioned.
- Name and address of the firm of the member appointed for carrying
out the compilation engagement should be mentioned.
- Signatures and the designation (sole proprietor/partner) and
membership number should appear in the report.
An example of the report is given in Appendix 2.
16. Reference should be made on the face of the
financial statements to the report of even date.
APPENDIX-1
EXAMPLE OF AN ENGAGEMENT LETTER FOR A COMPILATION
ENGAGEMENT
The following letter is for use as a guide in
conjunction with the considerations outlined in paragraph 6 of this
Guidance Note and will need to be varied according to individual
requirements and circumstances. This example is for the compilation of
financial statements.
(Date)
To M/s. XYZ (Client)
This is in reference
to your letter dated _______ appointing us to compile the balance sheet
and the statement of profit and loss for the year _______.
This letter is to confirm our understanding of the
terms of our engagement and the nature of the services we will provide.
You have requested that we perform the following
services:
On the basis of information you provide, we will
compile, the balance sheet of _____________(M/s. XYZ) as of March 31, XXXX
and the statement of profit and loss for the year then ended. As no audit
or review engagement procedures are carried out, no opinion on the
financial statements will be expressed. Our engagement cannot be relied
upon to disclose whether frauds or defalcations, or illegal acts exist.
As management you are responsible for both the accuracy
and completeness of the information supplied to us and are responsible to
users of the financial statements to be compiled by us. This includes the
maintenance of adequate accounting records and internal controls and the
selection and application of appropriate accounting policies.
You will confirm that events and transactions are
recorded in accordance with accounting standards and other recognised
accounting principles and practices and inform us of any departures
therefrom.
We understand that the intended use and distribution of
the information we have compiled is _________________ (specify).
For A & Co.
Signature
(Name of the partner and membership number)
Partner
Chartered Accountants
Address:
Acknowledged on behalf of
M/s. XYZ by
(signed)
----------------
Name and Designation
Date
APPENDIX -2
EXAMPLE OF AN Accountant's Report on Unaudited
Financial Statements
TO...
On the basis of information provided by management we
have compiled the balance sheet of __________ (name of the entity) as of
March 31, XXXX and the statement of profit and loss for the period then
ended. The balance sheet and the statement of profit and loss are in
agreement with the books of account. We have not audited or reviewed these
financial statements and accordingly express no opinion thereon.
Date:
Address:
For A & Co.
Signature
(Name of the partner and membership number)
Partner
Chartered Accountants
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