Scope and objectives
The SRS 4410 applies specifically to “compilation engagements,” which are engagements where the practitioner helps management with financial information without providing any assurance on that information. In other words, the practitioner is not verifying the accuracy or completeness of the information, but rather is simply compiling it in a way that is consistent with generally accepted accounting principles.
The SRS 4410 applies to compilation engagements for historical financial information, but it may also be applied to other types of financial information (such as pro forma or prospective financial information) or even non-financial information (such as environmental reporting). The decision to apply the SRS should be based on various factors, including whether the financial information is required under applicable law or regulation and whether external parties are likely to associate the practitioner with the financial information.
SRS 4410 also discusses the relationship between the SRS and another document called SQC 1, which deals with quality control systems for professional accounting firms. The SRS assumes that the firm has established and maintained a quality control system in accordance with SQC 1, and the engagement team is responsible for implementing quality control procedures within that system.
The objectives of a practitioner in a compilation engagement are to apply accounting and financial reporting expertise to assist management in preparing financial information in accordance with an applicable financial reporting framework, and to report in accordance with the requirements of the SRS. The applicable financial reporting framework is the financial reporting framework adopted by management, which 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.
The SRS 4410 includes definitions of terms such as “applicable financial reporting framework”, “compilation engagement”, “engagement partner”, “engagement team”, “misstatement”, and “practitioner”. The Glossary of Terms is included to ensure consistent interpretation of these terms. The SRS 4410 is effective for compilation engagements undertaken after March 31, 2016.
The SRS 4410 also provides guidance for carrying out the requirements and further explanation of the requirements, but this guidance does not impose a requirement in itself. Relevant ethical requirements for the engagement team are also included in the SRS, comprising the Code of Ethics issued by ICAI together with other relevant pronouncements issued by ICAI.
Overall, SRE 4410 provides guidance for practitioners who are engaged to help prepare and present financial information, and it emphasizes the importance of maintaining high standards of quality control throughout the engagement process.
The Compilation Engagement
The value of a compilation engagement results from the application of the practitioner’s professional expertise in accounting and financial reporting, compliance with professional standards, and clear communication of the nature and extent of their involvement with the compiled financial information.
The respective responsibilities of management and those charged with governance vary depending on the entity’s structure, resources, and roles. In many small entities, there is often no separation of the management and governance roles, while in larger entities, those charged with governance have oversight of management, and often a subgroup of those charged with governance, such as an audit committee, is charged with certain oversight responsibilities.
A compilation engagement involves assisting management in the preparation and presentation of the entity’s financial information in accordance with the financial reporting framework, based on information provided by management. However, the practitioner is not required to verify the accuracy or completeness of the information or to gather evidence to express an audit opinion or review conclusion.
Management retains responsibility for the financial information and its basis of preparation and presentation, including the selection and application of appropriate accounting policies and developing reasonable accounting estimates. The financial reporting framework adopted by management will depend on the nature of the entity and the intended use of the information.
Finally, SRE 4410 explains that financial information that is the subject of a compilation engagement may be required for various purposes, including compliance with mandatory financial reporting requirements, preparation of financial information for internal use, periodic financial reporting for external parties, or transactional purposes. Different financial reporting frameworks can be used to prepare and present financial information, ranging from a simple entity-specific basis of accounting to established financial reporting standards.
Conduct of a Compilation Engagement in Accordance with this SRS
The practitioner is required to have a comprehensive understanding of the entire SRS, including its application and other explanatory material, in order to properly apply its requirements and meet its objectives.
The practitioner must comply with each requirement outlined in this SRS unless a specific requirement is not relevant to the compilation engagement. For example, if a particular requirement does not apply to the engagement due to the specific circumstances of the engagement, the practitioner is not required to comply with that requirement.
Finally, the practitioner must not represent that they have complied with this SRS unless they have complied with all relevant requirements of this SRS for the compilation engagement. This ensures that the practitioner adheres to the standards and guidelines set out in the SRS and accurately represents their compliance with it.
Ethical Requirements
The Practitioners must adhere to relevant ethical requirements, which are established in the ICAI’s Code of Ethics. The Code of Ethics establishes fundamental principles of professional ethics that practitioners must follow, including integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.
Chapter 2 of the Code of Ethics illustrates how practitioners should apply the fundamental principles in specific situations. Practitioners must identify and address any threats to compliance with ethical requirements while applying the Code of Ethics.
In addition to complying with the Code of Ethics, practitioners must be cautious not to be associated with reports, returns, communications, or other information that they believe contain materially false or misleading statements or furnished negligently. If information omits or obscures any information required to be included, it would be misleading, and practitioners must not be associated with it.
Although Section 290, Independence – Assurance Engagements of the ICAI’s Code of Ethics does not apply to compilation engagements, practitioners must comply with any laws or regulations that may specify independence requirements or disclosure rules.
Professional Judgment
The Professional judgment is essential in the proper conduct of a compilation engagement because the interpretation of relevant ethical requirements and the requirements of the SRS require the application of relevant knowledge and experience to the facts and circumstances of the engagement. The practitioner must exercise professional judgment, in particular, when the engagement involves assisting management of the entity in decisions about the acceptability of the financial reporting framework, the application of the applicable financial reporting framework, selection of appropriate accounting policies, development of accounting estimates, and preparation and presentation of financial information.
Professional judgment involves the application of relevant training, knowledge and experience, within the context provided by the SRS and accounting and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the compilation engagement.
The exercise of professional judgment is based on the facts and circumstances that are known to the practitioner up to the date of the practitioner’s report on the engagement, including knowledge acquired from other engagements undertaken for the entity, understanding of the entity’s business and operations, including its accounting system, and of the application of the applicable financial reporting framework in the industry in which the entity operates.
Engagement Level Quality Control
The engagement partner is responsible for the overall quality of each compilation engagement they are assigned to and ensuring that the engagement is performed in accordance with the firm’s quality control policies and procedures. The engagement partner is expected to take appropriate actions and communicate messages to the other members of the engagement team to achieve the quality of the engagement.
The engagement partner’s responsibilities include following appropriate procedures regarding the acceptance and continuance of client relationships and engagements, ensuring that the engagement team collectively has the necessary competence and capabilities to perform the compilation engagement, and being alert for indications of non-compliance by members of the engagement team with relevant ethical requirements. The engagement partner is also responsible for directing, supervising, and performing the engagement in compliance with professional standards, applicable legal and regulatory requirements, and for ensuring appropriate engagement documentation is maintained.
In addition, the firm is required to establish policies and procedures designed to provide reasonable assurance that the firm and its personnel comply with relevant ethical requirements. The engagement partner is responsible for ensuring that the engagement team complies with these ethical requirements, as outlined in this SRS. Overall, this section emphasizes the importance of quality control at the engagement level and the engagement partner’s critical role in ensuring the quality of the compilation engagement.
Engagement Acceptance and Continuance
In order to accept the engagement, the practitioner must first agree on the terms of engagement with management and any other engaging party involved. This includes identifying the intended use and distribution of the financial information and any restrictions that may apply. The intended use of the financial information should be identified based on the financial information needs of parties internal or external to the entity who are the intended users. For example, if the financial information is being provided for financing applications with external parties, the intended use may be to support the entity’s ability to obtain funding.
The practitioner must also identify the applicable financial reporting framework, which is the set of standards and guidelines used to prepare and present financial information. The decision about which financial reporting framework to use is made in the context of the intended use of the information and any applicable laws or regulations. The nature of the entity and the intended users of the financial information are also relevant factors to consider. For example, if the financial information is being provided for a specific contract or grant, the financial reporting framework may be specified in the contract or grant.
The practitioner must agree on the objective and scope of the compilation engagement and the responsibilities of both the practitioner and management. The practitioner must also comply with relevant ethical requirements. The practitioner is entitled to rely on management to provide all relevant information for the compilation engagement on an accurate, complete, and timely basis.
If management does not acknowledge its responsibilities in the context of a compilation engagement, the practitioner is not able to undertake the engagement, and it is not appropriate for the practitioner to accept the engagement unless required to do so under applicable law or regulation. In these circumstances, the practitioner may need to communicate with management about the importance of their responsibilities and the implications for the engagement.
Communication with Management and Those Charged with Governance
A compilation engagement involves preparing financial statements based on information provided by the client, without providing any assurance or opinion on those statements.
The practitioner is required to communicate with both management and those charged with governance (such as a board of directors or trustees) as appropriate, in a timely manner throughout the course of the engagement. They must communicate any matters that are important enough to merit the attention of management or those charged with governance in the practitioner’s professional judgment.
The appropriate timing for these communications will depend on the specific circumstances of the engagement. Factors such as the significance and nature of the matter, as well as any expected action by management or those charged with governance, will determine when the communication should take place. For example, if a significant difficulty is encountered during the engagement that may impact the financial statements, it may be necessary to communicate it as soon as possible to obtain assistance from management or those charged with governance in addressing the issue.
Overall, the purpose of this requirement is to ensure that the practitioner maintains open and transparent communication with management and those charged with governance throughout the engagement, to facilitate a successful outcome and to address any issues that may arise in a timely and effective manner.
Performing the Engagement
A compilation engagement involves the practitioner taking financial information provided by management of an organization and using it to prepare financial statements in accordance with a specific financial reporting framework, such as GAAP or IFRS.
To perform the engagement, the practitioner must obtain an understanding of the entity’s business and its operations, including its accounting system and accounting records. This understanding is an on-going process throughout the compilation engagement and provides a frame of reference for the practitioner to exercise professional judgment when compiling the financial information.
The practitioner must also consider the legal and regulatory requirements applicable to the entity, the size and complexity of the entity and its operations, the complexity of the financial reporting framework, the entity’s financial reporting obligations or requirements, the level of development of the entity’s management and governance structure regarding accounting records and financial reporting systems, the level of development and complexity of the entity’s financial accounting and reporting systems and related controls, and the nature of the entity’s assets, liabilities, revenues, and expenses.
The practitioner then uses the records, documents, explanations, and other information provided by management to compile the financial information, including any significant judgments made by management. If the practitioner provided assistance to management with significant judgments, they must discuss those judgments with management and ensure that they understand and accept responsibility for them.
Prior to completing the engagement, the practitioner must read the compiled financial information in light of their understanding of the entity’s business and operations and the applicable financial reporting framework. If the practitioner becomes aware that the information provided by management is incomplete, inaccurate, or unsatisfactory, they must inform management and request additional or corrected information. If management fails to provide the required information, the practitioner must withdraw from the engagement.
If the practitioner becomes aware that the compiled financial information does not adequately refer to or describe the applicable financial reporting framework or that amendments are required to prevent material misstatements or misleading information, they must take appropriate action. The practitioner’s consideration of materiality is made in the context of the applicable financial reporting framework, and they must ensure that the financial information is not materially misstated. The practitioner must also consider the materiality threshold set out in the applicable financial reporting framework and disclose any information required by the framework.
The practitioner has several responsibilities when performing a compilation engagement, including obtaining an understanding of the entity’s business and operations, using the information provided by management to compile the financial information, ensuring the information is not materially misstated, and complying with the applicable financial reporting framework.
Documentation
The purpose of this documentation is to provide a record of matters that will be relevant to future compilation engagements, and to enable the engagement team to be accountable for their work.
The practitioner may also consider including additional information, such as a copy of the entity’s trial balance or summary of significant accounting records that were used in the compilation process. The documentation should also record how the compiled financial information reconciles with the underlying records and other information provided by management, and any adjustments or amendments made by the practitioner during the engagement.
The specific information that must be included in the engagement documentation includes significant matters arising during the compilation engagement and how they were addressed, a record of how the compiled financial information reconciles with the underlying records and other information provided by management, and a copy of the final version of the compiled financial information for which management or those charged with governance have acknowledged their responsibility, along with the practitioner’s report.
The Practitioner’s Report
The practitioner’s report is not used to express an opinion or conclusion on the financial information in any form.
The report should be in writing and include certain elements, such as the report title, addressee(s), a statement that the practitioner compiled the financial information based on information provided by management, a description of management’s responsibilities in relation to the compilation engagement and financial information, identification of the applicable financial reporting framework, and the practitioner’s responsibilities in compiling the financial information. The report should also contain explanations of what a compilation engagement entails, that the practitioner is not required to verify the accuracy or completeness of the information provided by management, and that the practitioner does not express an audit opinion or a review conclusion on whether the financial information is prepared in accordance with the applicable financial reporting framework.
If the financial information is prepared using a special purpose financial reporting framework, the report must draw the attention of readers to the special purpose financial reporting framework used in the financial information and state that the financial information may not be suitable for other purposes. The practitioner may also consider restricting the distribution or use of the report to intended users only.
The practitioner must date the report on the date of completion of the compilation engagement, and the report should include the practitioner’s signature and place of signature. The process for approval of financial information by management or those charged with governance is also a relevant consideration for the practitioner when completing the compilation engagement.
Compilation Engagements
SRS 4410 (Revised) is a standard for “Compilation Engagements”, the requirements for a chartered accountant to compile financial information provided by their client into a financial statement without conducting an audit or review. It is stating that there have been no significant changes in the revised SRS 4410 compared to the previous standard (ISRS 4410). Which requires the chartered accountant to assist management in designing, implementing, and maintaining internal controls to ensure that the financial statements prepared are free from material misstatement due to fraud or error? This means that the chartered accountant must ensure that the financial statements compiled are accurate and reliable by working with the client’s management to establish appropriate internal controls.
Quiz: Compilation Engagements
1. Compilation engagements involve assisting management in preparing financial information without providing any:
a) Assurance
b) Opinion
c) Verification
d) Conclusion
Answer: a)
2. The SRS 4410 may be applied to which types of financial information?
a) Historical financial information only
b) Pro forma financial information only
c) Non-financial information only
d) Historical financial information and other types of financial information
Answer: d)
3. The SRS 4410 assumes that the firm has established and maintained a quality control system in accordance with which document?
a) SQC 1
b) IFRS
c) GAAP
d) SRS 4410
Answer: a)
4. The objectives of a practitioner in a compilation engagement include:
a) Verifying the accuracy of financial information
b) Providing assurance on financial information
c) Assisting management in preparing financial information
d) Expressing an audit opinion on financial information
Answer: c)
5. The applicable financial reporting framework in a compilation engagement is determined by:
a) External parties
b) Practitioner’s expertise
c) Management’s selection and application
d) Regulatory authorities
Answer: c)
6. Which of the following is one of the fundamental principles of professional ethics that practitioners must follow in compilation engagements?
a) Materiality
b) Transparency
c) Professional competence and due care
d) Independence
Answer: c)
7. Professional judgment is essential in a compilation engagement for making decisions related to:
a) Quality control procedures
b) Engagement acceptance and continuance
c) Selection of the applicable financial reporting framework
d) Compliance with ethical requirements
Answer: c)
8. The engagement partner in a compilation engagement is responsible for:
a) Verifying the accuracy of financial information
b) Determining the applicable financial reporting framework
c) Maintaining high standards of quality control
d) Preparing the practitioner’s report
Answer: c)
9. Engagement documentation in a compilation engagement should include:
a) Evidence of fraud or error
b) Adjustments made by the practitioner during the engagement
c) Management’s responsibilities for the financial information
d) External parties’ feedback on the financial statements
Answer: b)
10. The practitioner’s report in a compilation engagement is used to express:
a) An opinion on the financial information
b) An audit conclusion on the financial information
c) An assurance on the financial information
d) No opinion or conclusion on the financial information
Answer: d)
Additional questions:
11. In a compilation engagement, the practitioner is responsible for:
a) Verifying the accuracy and completeness of financial information
b) Providing assurance on the financial information
c) Designing internal controls for the entity
d) Compiling the financial information in accordance with the applicable financial reporting framework
Answer: d)
12. The SRS 4410 applies to which type(s) of financial information?
a) Pro forma financial information only
b) Non-financial information only
c) Historical financial information only
d) Historical financial information and other types of financial information
Answer: d)
13. The applicable financial reporting framework in a compilation engagement is determined by:
a) External auditors
b) Regulatory authorities
c) The engagement team
d) Management
Answer: d)
14. The engagement partner in a compilation engagement is responsible for:
a) Developing the financial reporting framework
b) Preparing the financial statements
c) Ensuring compliance with quality control policies
d) Providing assurance on the financial information
Answer: c)
15. Professional judgment is required in a compilation engagement for:
a) Selecting the applicable financial reporting framework
b) Determining materiality thresholds
c) Conducting an audit of the financial statements
d) Verifying the accuracy of the financial information
Answer: b)
16. The purpose of engagement documentation in a compilation engagement is to:
a) Provide evidence of compliance with ethical requirements
b) Document the practitioner’s opinion on the financial information
c) Assist future compilation engagements and ensure accountability
d) Assess the internal controls of the entity
Answer: c)
17. Which of the following is not one of the fundamental principles of professional ethics in compilation engagements?
a) Integrity
b) Objectivity
c) Confidentiality
d) Materiality
Answer: d)
18. In a compilation engagement, the practitioner’s report is used to:
a) Provide an assurance opinion on the financial information
b) Express conclusions on the effectiveness of internal controls
c) Disclose any fraud or misappropriation of assets
d) Describe the nature and extent of the practitioner’s involvement with the financial information
Answer: d)
19. The SRS 4410 requires the practitioner to comply with all relevant requirements unless:
a) The engagement team is understaffed
b) The financial information is provided by an external party
c) A specific requirement is not relevant to the engagement
d) The engagement partner approves an exception
Answer: c)
20. The engagement partner’s responsibilities in a compilation engagement include:
a) Selecting the applicable financial reporting framework
b) Maintaining appropriate engagement documentation
c) Making significant accounting estimates for the entity
d) Ensuring the engagement team has the necessary competence and capabilities
Answer: b)
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