Compilation Engagements. Invitation to Comment. prepared by: Auditing and Assurance Standards Board. Comments are requested by February 1, 2011 AASB

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1 Invitation to Comment Compilation Engagements prepared by: Auditing and Assurance Standards Board Comments are requested by February 1, 2011 AASB

2 INVITATION TO COMMENT COMPILATION ENGAGEMENTS Introduction The Auditing and Assurance Standards Board (AASB) is issuing this Invitation to Comment to encourage Canadian stakeholders to provide input on the Exposure Draft of proposed International Standard on Related Services (ISRS) 4410 (Revised), Compilation Engagements, recently issued by the International Auditing and Assurance Standards Board (IAASB). The IAASB has concluded that extant ISRS 4410 is outdated and in need of revision to better assist practitioners in providing services to small- and medium-sized entities that increasingly are not required to have their financial statements audited. While the AASB is committed to adopting the International Standards on Auditing (ISAs), decisions on whether to adopt other international assurance and related services standards are made on a case-by-case basis. For these standards, the AASB performs an assessment involving consideration of a number of factors related to whether the proposed standard meets the needs of Canadian stakeholders. The AASB is not proposing to adopt ISRS 4410 (Revised) at this time. The AASB will continue to monitor the development of proposed ISRS 4410 (Revised) and the IAASB s discussions and decisions. The AASB will also determine whether a project to revise COMPILATION ENGAGEMENTS, Section 9200, should be initiated in the near term or deferred to a later time, including the possibility of replacing that Section with a new Canadian standard that would essentially adopt ISRS 4410 (Revised). Any proposed revisions to, or replacement of, Section 9200 would be made by the AASB following its due process, including public exposure for comment by stakeholders. Responding to the IAASB Exposure Draft The IAASB s Exposure Draft of proposed ISRS 4410 (Revised) is available on the IAASB website. Canadian stakeholders are encouraged to provide comments to the IAASB on its Exposure Draft since international standards may influence future development of Canadian standards on compilation engagements. Please refer to the Guide for Respondents contained in the IAASB s Exposure Draft and respond to the specific questions asked therein. Comments should be sent directly to the IAASB, with a copy of the response to the AASB. If copies of responses to the IAASB are received before February 1, 2011, the AASB will be able to take Canadian stakeholders comments into account in formulating its own response to the IAASB s Exposure Draft. Comments are most helpful if they are related to a specific paragraph or group of paragraphs, and when expressing disagreement with the Exposure Draft, they clearly explain the problem and include a suggestion for alternative wording, supported by specific reasoning. When a respondent agrees with proposals in the Exposure Draft, it will be helpful for the AASB to be made aware of this view. Stakeholders are asked not to include comments on matters particular to the Canadian environment in their responses to the IAASB. Such comments should be provided only to the AASB. COMPILATION ENGAGEMENTS 1

3 Providing comments to the AASB re: standards for compilations in Canada In 2007, the AASB made limited revisions to Section 9200, which included changes to the wording of the Notice to Reader and a change in the scope of Section 9200 such that it no longer applies to financial information prepared solely for inclusion in income tax returns. At the time of this project, input from Canadian stakeholders and the task force undertaking the work indicated that Section 9200 may need other revisions. Also, anecdotal evidence suggests that there is a wide variation in practice as to how compilation engagements are being performed in Canada with respect to: the basis of preparation of, and the level of disclosure in, financial statements; the nature and extent of work practitioners perform; and the nature and extent of documentation included in working paper files. The AASB is concerned that a wide variation in practice may result in inconsistent financial information entering the public domain. Two practitioners performing similar compilation engagements may compile significantly different sets of financial statements. A further, and related, concern of the AASB is with respect to the communication in the Notice to Reader. Management may distribute the financial statements with the Notice to Reader to external users who, although cautioned that the financial statements may not be appropriate for their purposes, may place undue reliance on them. Such undue reliance may result because the Notice to Reader provides very little information about the nature and extent of work performed by the public accountant or the value he or she brings to a compilation engagement. Taking into account the matters noted above, the AASB wishes to make an informed decision about whether a project to revise or replace Section 9200 should be undertaken in the near term. This Invitation to Comment is a first step in this process. Input from Canadian stakeholders will also be obtained from other sources, such as a survey posted on the AASB website and a series of face-to-face consultations conducted by AASB staff with interested parties. The AASB would appreciate receiving responses to the following questions, in addition to receiving a copy of the response to the IAASB s Exposure Draft. 1. Do you believe the AASB should undertake a Canadian project to revise or replace Section 9200 in the near term? Please provide reasons supporting your response. 2. If your answer to question 1 is yes, and assuming that ISRS 4410 (Revised) is approved as proposed in the Exposure Draft, do you believe that it would be appropriate for the AASB to adopt ISRS 4410 (Revised) to replace Section 9200? Please provide reasons supporting your response, including the types of amendments to ISRS 4410 (Revised) you consider would be necessary for the standard to be appropriate for use in Canada. To assist stakeholders in considering these questions, the Appendix to this Invitation to Comment compares key aspects of proposed ISRS 4410 (Revised) and Section INVITATION TO COMMENT NOVEMBER 2010

4 A PDF response form has been posted with this document to assist you in submitting your comments. Alternatively, you may send comments by (in Word format), to: To be considered, comments must be received by February 1, 2011, addressed to: Greg Shields, CA Director, Auditing and Assurance Standards The Canadian Institute of Chartered Accountants 277 Wellington Street West Toronto, ON. M5V 3H2 COMPILATION ENGAGEMENTS 3

5 Appendix Comparison of Key Aspects of Proposed ISRS 4410 (Revised) and Section 9200 For information purposes, this Appendix compares aspects of proposed ISRS 4410 and Section It is not a complete comparison of the two standards. To fully understand how the two standards compare, readers are encouraged to read the full text of each standard. If proposed ISRS 4410 were to be adopted in Canada, its effect on practice would likely vary. For some practitioners, there might be little change from their current approach and work effort. For other practitioners, the changes might be significant. Identification of the purpose (use) of the financial statements Paragraph 23(a) of proposed ISRS 4410 requires the practitioner to identify the intended use by management of the financial information to be compiled. Identifying the intended use is relevant to the practitioner being satisfied that there is a rational purpose for the engagement and the practitioner s determination of the acceptability of the financial reporting framework to be used for the compilation. The financial statements may be prepared for a general purpose or a special purpose. Paragraph 25 requires the engagement letter to include the intended use and distribution of the compiled financial information, and, where applicable, any restrictions on either its use or its distribution. If the compiled financial information is in the form of special purpose financial statements, paragraph 37(g) requires the practitioner s report to include, under a separate heading, a description of the purpose for which the financial information is prepared and, if necessary, the intended users, or a reference to a note in the compiled financial statements that contains that information. Section 9200 does not require the public accountant to identify intended use. Paragraph (b)(i) states that The public accountant should perform a compilation engagement only if at the time of accepting the engagement and during the conduct thereof the public accountant believes that the client understands that such statements may not be appropriate for general purpose use. Paragraph requires that the Notice to Reader caution readers that the statement may not be appropriate for their purposes. Nevertheless, Section 9200 does not prohibit a practitioner from compiling financial statements for general purposes. Paragraph states that While it is helpful to the public accountant, in doing the compilation, to know the uses to which management expects to put the statements, the public accountant would not normally state a specific intended purpose in the communication. From his or her limited involvement, it is not possible for the public accountant to determine whether the financial statements serve the specified intended purpose. Stating a specific intended purpose might mislead readers as to the nature of the statements and could inappropriately increase the public accountant's responsibility to them. Identification of the applicable financial reporting framework Paragraph 23(b) of proposed ISRS 4410 requires the practitioner to determine, prior to accepting the engagement, that the financial reporting framework to be used for the compilation is acceptable 4 INVITATION TO COMMENT NOVEMBER 2010

6 (in the practitioner s judgment) in view of the intended use of the financial information. The financial reporting framework used may be a general purpose framework (for example, International Financial Reporting Standards or accounting standards for private enterprises) or a special purpose framework (for example, a tax basis of accounting for a set of financial statements that accompany an entity s tax return, or the cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors). The practitioner is required to identify the applicable financial reporting framework 1 in the engagement letter (paragraph 25(d)) and in the practitioner s report (paragraph 37(c)(ii)). If a special purpose financial reporting framework is used, paragraph 37 requires the practitioner s report to: describe or refer to the description of that special purpose financial reporting framework in the financial information; and contain an alert to users of the practitioner s report that the financial statements are prepared in accordance with a special purpose framework and that, as a result, the financial statements may not be suitable for another purpose. Section 9200 does not include requirements regarding the financial reporting framework used in compiling the financial statements. Paragraph states that the financial statements need not necessarily be in accordance with generally accepted accounting principles. Paragraph (a) states that The public accountant should perform a compilation engagement only if at the time of accepting the engagement and during the conduct thereof there is no reason to believe that the financial statements the public accountant has been engaged to compile are false or misleading. Acknowledgment by management of its responsibilities Paragraph 23(c) of proposed ISRS 4410 highlights management s overall responsibilities that are fundamental to the practitioner undertaking the compilation engagement. This paragraph requires the practitioner to obtain management s acknowledgment of its responsibilities before accepting the engagement since this is viewed as an important factor in mitigating the risk of the practitioner being associated with information that is materially false or misleading. Paragraph requires the public accountant to reach an understanding and agreement with the client as to the services to be provided but has no specific requirement that the practitioner obtain an acknowledgment by management of its responsibilities. AASB understands that in many parts of Canada an engagement letter confirming, among other things, management s responsibilities in a compilation engagement is considered good practice. Paragraphs note that the agreement with the client would normally specify that management will provide the information necessary to permit the public accountant to compile financial statements and that 1 Paragraph 15(a) of proposed ISRS 4410 (Revised), and the Glossary of Terms in the CICA Handbook - Assurance that is applicable to the Canadian Standards on Quality Control and the Canadian Auditing Standards defines applicable financial reporting framework as The financial reporting framework adopted by management and, where appropriate, those charged with governance in the preparation of the financial information that is acceptable in view of the nature of the entity and the objective of the financial information, or that is required by law or regulation. COMPILATION ENGAGEMENTS 5

7 management is responsible for the accuracy and completeness of the representations in the financial statements. Applicability of quality control standards Paragraph 3 of proposed ISRS 4410 indicates that the provisions of this ISRS is premised on the basis that a firm is subject to the requirements of International Standards on Quality Control (ISQC 1), Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance Engagements and Related Services Engagements, or requirements that are at least as demanding. Section 9200 is not premised on the basis that a firm is subject to the requirements of Canadian Standards on Quality Control (CSQC 1), Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance Engagements. Documentation Paragraph 36 of proposed ISRS 4410 requires the practitioner to include in the engagement documentation: a brief description of significant matters discussed with management and requiring their agreement; the sources from which the financial information was compiled including a record of how the compiled financial information reconciles with the underlying records, documents, explanations and other information provided by management for the compilation; and a copy of the compiled financial information and the practitioner s compilation report. Section 9200 does not include any recommendations that address documentation. Practitioner s compilation report Paragraph 37 of proposed ISRS 4410 requires the practitioner s compilation report to contain elements such as: an addressee(s); a description of the nature and scope of the work undertaken for the engagement, including its limitations; an explicit statement of the value contributed by the practitioner s involvement with the compiled financial information, including emphasis on the practitioner s obligation to comply with relevant ethical principles; identification of the applicable financial reporting framework by describing or referring to the description in the financial information; and an alert to users when the financial statements are prepared in accordance with a special purpose framework. These requirements are more detailed and comprehensive than those in paragraph INVITATION TO COMMENT NOVEMBER 2010