Acceptance and Continuance of Client Relationships and Compilation
Engagements (Ref: Para. 23(b)(i))
A25. SQC 1 requires the firm to obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client. Information that assists the engagement partner in determining whether acceptance or continuance of client relationships and compilation engagements is appropriate may include information concerning the integrity of the principal owners, key management and those charged with governance. If the engagement partner has cause to doubt management’s integrity to a degree that is likely to affect proper performance of the engagement, it may not be appropriate to accept the engagement.
Compliance with Relevant Ethical Requirements in Conducting the
Engagement (Ref: Para. 23(b)(iii))
A26. SQC 1 sets out the responsibilities of the firm for establishing policies and procedures designed to provide it with reasonable assurance that the firm and its personnel comply with relevant ethical requirements. This SRS sets out the engagement partner’s responsibilities with respect to the engagement team’s compliance with relevant ethical requirements.
Engagement Acceptance and Continuance
Identifying the Intended Use of the Financial Information (Ref: Para. 24(a))
A27. The intended use of the financial information is identified with reference to applicable law, regulation, or other arrangements established concerning the provision of financial information of the entity, bearing in mind the financial information needs of parties internal or external to the entity who are the intended users. Examples are financial information required to be provided by an entity in connection with undertaking transactions or financing applications with external parties such as suppliers, banks or other providers of finance or funding.
A28. The practitioner’s identification of the intended use of the financial information also involves understanding such factors as the particular purpose(s) of management, or those charged with governance, where applicable, that are intended to be served through requesting the compilation engagement, and those of the engaging party where different. For example, a grant funding body may require the entity to provide financial information compiled by a professional accountant to obtain information about certain aspects of an entity’s operations or activities, prepared in a specified form, to support provision of a grant or continuation of an existing grant. Identification of the Applicable Financial Reporting Framework (Ref: Para. 17(a), 24(b))
A29. The decision about the financial reporting framework that management adopts for the financial information is made in the context of the intended use of the information as described in the agreed terms of engagement, and the requirements of any applicable law or regulation.
A30. The following are examples of factors that indicate it may be relevant to consider whether the financial reporting framework is acceptable: The nature of the entity, and whether it is a regulated form of entity, for example, whether it is a profit-oriented business enterprise, a public sector entity or a not-for-profit organization. The intended use of the financial information and the intended users. For example, the financial information could be intended to be used by a wide range of users or, alternatively, could be for use by management or by certain external users in the context of a particular purpose specified as part of agreeing the terms of the compilation engagement.
Whether the applicable financial reporting framework is prescribed or
specified, either in applicable law or regulation, or in a contract or other form of agreement with a third party, or as part of governance or accountability arrangements adopted voluntarily by the entity. The nature and form of the financial information that is to be prepared and presented under the applicable financial reporting framework, for example, a complete set of financial statements, a single financial statement, or financial information presented in another format agreed between parties to a contract or other form of agreement. Relevant Factors When Financial Information is Intended for a Particular
Purpose (Ref: Para. 24(a) –(b))
A31. The engaging party generally agrees the nature and form of financial information that is intended for a particular purpose with the intended users, for example as specified under the financial reporting provisions of a contract or a project grant or as needed to support the entity’s transactions or activities. The relevant contract may require use of an established financial reporting framework, such as a general purpose financial reporting framework established by an authorized or recognized standard-setting body or by law or regulation. Alternatively, the parties to the contract may agree on the use of a general purpose framework with modifications or adaptions that fit their particular needs. In that case, the applicable financial reporting framework may be described in the financial information and in the practitioner’s report as being the financial reporting provisions of the specified contract rather than with reference to the modified financial reporting framework. In such cases, notwithstanding that the compiled financial information may be made more broadly available, the applicable financial reporting framework is a special purpose framework, and the practitioner is required to comply with the relevant reporting requirements of this SRS.
A32. When the applicable financial reporting framework is a special purpose financial reporting framework, the practitioner is required by this SRS to record any restrictions on either the intended use or distribution of the financial information in the engagement letter, and to state in the practitioner’s report that the financial information is prepared using a special purpose financial reporting framework, and as a result may not be suitable for other purposes.
Responsibilities of Management (Ref: Para. (24(e))
A33. Under this SRS, the practitioner is required to obtain the agreement of management, or where applicable those charged with governance, on management’s responsibilities in relation to both the financial information and the compilation engagement as a condition precedent to accepting the engagement. In smaller entities, management, or those charged with governance where applicable, may not be well-informed about what those responsibilities are, including those arising in applicable law or regulation. In order to obtain management’s agreement on an informed basis, the practitioner may find it necessary to discuss those responsibilities with management in advance of seeking management’s agreement on its responsibilities.
A34. 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 circumstances where the practitioner is nevertheless required to accept the engagement, the practitioner may need to communicate with management about the importance of these matters and the implications for the engagement.
A35. The practitioner is entitled to rely on management to provide all relevant information for the compilation engagement on an accurate, complete and timely basis. The form of the information provided by management for the purpose of the engagement will vary in different engagement circumstances. In broad terms, it will comprise records, documents, explanations and other information relevant to the compilation of the financial information using the applicable financial reporting framework. The information provided may include, for example, information about management assumptions, intentions or plans underlying development of accounting estimates needed to compile the information under the applicable financial reporting framework. Engagement Letter or Other Form of Written Agreement (Ref: Para. 25)
A36. It is in the interest of both management, and the engaging parties where different, and the practitioner that the practitioner sends an engagement letter to management and, where applicable, to the engaging parties prior to performing the compilation engagement, to help avoid misunderstanding with respect to the compilation engagement. An engagement letter confirms the practitioner’s acceptance of the engagement and confirms such matters as: The objectives and scope of the engagement, including the understanding of the parties to the engagement that the engagement is not an assurance engagement. The intended use and distribution of the financial information, and any restrictions on its use or distribution (where applicable).
The responsibilities of management in relation to the compilation
The extent of the practitioner’s responsibilities, including that the
practitioner will not express an audit opinion or a review conclusion on the financial information. The form and content of the report to be issued by the practitioner for the engagement.
Form and Content of the Engagement Letter
A37. The form and content of the engagement letter may vary for each engagement. In addition to the matters required by this SRS, an engagement letter may make reference to, for example:
Arrangements concerning the involvement of other practitioners and
experts in some aspects of the compilation engagement. Arrangements to be made with the predecessor practitioner, if any, in the case of an initial engagement.
The possibility that management or those charged with governance, as
appropriate, may be requested to confirm in writing certain information or explanations conveyed orally to the practitioner during the engagement.
Ownership of the information used for purposes of the compilation
engagement, distinguishing between documents and information of the entity provided for the engagement and the practitioner’s engagement documentation, having regard to applicable law and regulation. A request for management, and the engaging party if different, to acknowledge receipt of the engagement letter and to agree to the terms of the engagement outlined therein.
Illustrative Engagement Letter
A38. An illustrative engagement letter for a compilation engagement is set out in Appendix 1 to this SRS.
Recurring Engagements (Ref: Para. 26)
A39. The practitioner may decide not to send a new engagement letter or other written agreement each period. However, the following factors may indicate that it is appropriate to revise the terms of the compilation engagement, or to remind management or the engaging party, where applicable, of the existing terms of the engagement: Any indication that management or the engaging party, where applicable, misunderstands the objective and scope of the engagement. Any revised or special terms of the engagement. A recent change of senior management of the entity. A significant change in ownership of the entity. A significant change in nature or size of the entity’s business. A change in legal or regulatory requirements affecting the entity. A change in the applicable financial reporting framework.
Communication with Management and Those Charged with
Governance (Ref: Para. 27)
A40. The appropriate timing for communications will vary with the circumstances of the compilation engagement. Relevant circumstances include the significance and nature of the matter and any action expected to be taken by management or those charged with governance. For example, it may be appropriate to communicate a significant difficulty encountered during the engagement as soon as practicable if management or those charged with governance are able to assist the practitioner to overcome the difficulty.
Performing the Engagement
The Practitioner’s Understanding (Ref: Para. 28)
A41. Obtaining an understanding of the entity’s business and its operations, including the entity’s accounting system and accounting records, is an ongoing process that occurs throughout the compilation engagement. The understanding establishes a frame of reference within which the practitioner exercises professional judgment in compiling the financial information.
A42. The breadth and depth of the understanding the practitioner has or obtains about the entity’s business and operations is less than that possessed by management. It is directed at the level that is sufficient for the practitioner to be able to compile the financial information under the terms of the engagement.
A43. Examples of matters the practitioner may consider in obtaining an understanding of the entity’s business and operations and the applicable financial reporting framework include: 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, whether they exist under applicable laws and regulation, under the provisions of a contract or other form of agreement with a third party, or in the context of voluntary financial reporting arrangements.
The level of development of the entity’s management and governance
structure regarding management and oversight of the entity’s accounting records and financial reporting systems that underpin the preparation of financial information of the entity. The level of development and complexity of the entity’s financial accounting and reporting systems and related controls. The nature of the entity’s assets, liabilities, revenues and expenses.
Compiling the Financial Information
Significant Judgments (Ref: Para.30)
A44. In some compilation engagements, the practitioner does not provide assistance to management with significant judgments. In other engagements, the practitioner may provide such assistance, for example, in relation to a required accounting estimate or helping management with its consideration of appropriate accounting policies or estimating the useful life of fixed assets or ascertaining the condition of inventory. Where assistance is provided, discussion is needed so that management and those charged with governance, as appropriate, understand the significant judgments reflected in the financial information, and accept their responsibility for those judgments.
Reading the Financial Information (Ref: Para. 31)
A45. The practitioner’s reading of the financial information is intended to assist the practitioner in fulfilling the practitioner’s ethical requirements relevant to the compilation engagement. (Also refer Para. A19)
Proposing Amendments to the Financial Information
Reference to or description of the applicable financial reporting framework (Ref:
A46. There may be circumstances when the applicable financial reporting framework is an established financial reporting framework with significant departures therefrom. If the description of the applicable financial reporting framework in the compiled financial information makes reference to the established framework with significant departures, the practitioner may need to consider whether the reference to the established framework is misleading in the circumstances of the engagement. Amendment for material misstatements, and for the information not to be misleading (Ref: Para. 34(b)–(c))
A47. The practitioner’s consideration of materiality is made in the context of the applicable financial reporting framework. Some financial reporting frameworks discuss the concept of materiality in the context of the preparation and presentation of financial information. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial information;
Judgments about materiality are made in light of surrounding
circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and Judgments about matters that are material to users of the financial information are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered. For example, in case of companies, the Schedule III to the Companies Act, 2013 gives the following materiality threshold: A company shall disclose by way of notes additional information regarding aggregate expenditure and income on any item of income or expenditure which exceeds one percent of the revenue from operations or Rs. 1,00,000 whichever is higher.
A48. If present in the applicable financial reporting framework, such a discussion provides a frame of reference for the practitioner in understanding materiality for the purpose of the compilation engagement. If not present, the above considerations provide the practitioner with a frame of reference.
A49. The practitioner’s perception of the needs of users of the financial information affects the practitioner’s view of materiality. In this context, it is reasonable for the practitioner to assume that users:
Have a reasonable knowledge of business and economic activities and
accounting, and a willingness to study the financial information with reasonable diligence; Understand that financial information is prepared and presented to levels of materiality;
Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of future events; and Make reasonable economic decisions on the basis of the information in the financial information.
A50. The applicable financial reporting framework may include the premise that the financial information is prepared on the going concern basis. If the practitioner becomes aware that uncertainties exist regarding the entity’s ability to continue as a going concern, the practitioner may, as appropriate, suggest a more appropriate presentation under the applicable financial reporting framework, or appropriate disclosures concerning the entity’s ability to continue as a going concern, in order to be in compliance with that framework, and to avoid the financial information being misleading. Conditions that Require the Practitioner to Withdraw from the Engagement (Ref:
A51. In circumstances addressed by the requirements of this SRS where withdrawal from the engagement is necessary, the responsibility to inform management and those charged with governance of the reasons for withdrawing provides an opportunity to explain the practitioner’s ethical obligations.
A52. The professional and legal responsibilities of the practitioner may include, for example: Reporting to the appointing authority, Reporting to the regulatory authority, Seeking legal advice, Describing the facts in the compilation report.
Documentation (Ref: Para. 38)
A53. The documentation required by this SRS serves a number of purposes, including the following: Providing a record of matters of continuing relevance to future compilation engagements. Enabling the engagement team, as applicable, to be accountable for its work, including recording the completion of the engagement.
A54. The practitioner may consider also including in the engagement documentation a copy of the entity’s trial balance, summary of significant accounting records or other information that the practitioner used to perform the compilation.
A55. In recording how the compiled financial information reconciles with the underlying records, documents, explanations and other information provided by management for the purpose of the compilation engagement, the practitioner may, for example, keep a schedule showing the reconciliation of the entity’s general ledger account balances to the compiled financial information, including any adjusting journal entries or other amendments to the financial information that the practitioner has agreed with management in the course of the engagement.
The Practitioner’s Report (Ref: Para. 40)
A56. The written report encompasses reports issued in hard copy format and those issued using an electronic medium.
A57. When the practitioner is aware that the compiled financial information and the practitioner’s report will be included in a document that contains other information, such as a financial report, the practitioner may consider, if the form of presentation allows, identifying the page numbers on which the financial information is presented. This helps users to identify the financial information to which the practitioner’s report relates.
Addressees of the Report (Ref: Para. 40(b))
A58. Law or regulation may specify to whom the practitioner’s report is to be addressed in the particular jurisdiction. The practitioner’s report is normally addressed to the party who engaged the practitioner under the terms of the engagement, ordinarily the management of the entity.
Financial Information Prepared Using a Special Purpose Financial
Reporting Framework (Ref: Para. 40(j))
A59. Under this SRS, if the financial information is prepared using a special purpose financial reporting framework, the practitioner’s report is required to draw the attention of readers of the report to the special purpose financial reporting framework used in the financial information, and to state that the financial information may therefore not be suitable for other purposes. This may be supplemented by an additional clause that restricts either the distribution or use, or both, of the practitioner’s report to the intended users only.
A60. Financial information prepared for a particular purpose may be obtained by parties other than the intended users, who may seek to use the information for purposes other than those for which the information was intended. For example, a regulator may require certain entities to provide financial statements prepared using a special purpose financial reporting framework, and those financial statements to be on public record. The fact of the wider availability of those financial statements to parties other than the intended users does not mean the financial statements would then become general purpose financial statements. The practitioner’s statements required to be included in the practitioner’s report are needed to draw readers’ attention to the fact that the financial statements are prepared under a special purpose financial reporting framework, and may not, therefore, be suitable for other purposes.
Restriction on Distribution and Use of the Practitioner’s Report
A61. The practitioner may consider it appropriate to indicate that the practitioner’s report is intended solely for the specified intended users of the financial information. Depending on the law or regulation of the particular jurisdiction, this may be achieved by restricting either the distribution or use, or both, of the practitioner’s report to the intended users only.
Completion of the Compilation Engagement and Dating of the
Practitioner’s Report (Ref: Para. 37, 38, 41)
A62. The process that exists within the entity for the approval of the financial information by management, or by those charged with governance as appropriate, is a relevant consideration for the practitioner when completing the compilation engagement. Depending on the nature and purpose of the financial information, there may be an established approval process that management or those charged with governance are required to follow, or that is prescribed in applicable law and regulation, for the preparation and finalization of financial information or financial statements of the entity.
Illustrative Reports (Ref: Para. 40)
A63. Appendix 2 to this SRS contains illustrations of practitioners’ compilation reports incorporating the required elements of the report. Material Modifications vis-a-vis ISRS 4410 (Revised), “Compilation Engagements” There are no material modifications in SRS 4410 (Revised) vis-a-vis ISRS 4410 (Revised), ‘Compilation Engagements’ except addition of the following bullet point in paragraph 24(e):
Design, implementation and maintenance of such internal control as
management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Illustrative Engagement Letter for a Compilation Engagement
The following is an example of an engagement letter for a compilation engagement that illustrates the relevant requirements and guidance contained in this SRS. This letter is not authoritative but is intended only to be a guide that may be used in conjunction with the considerations outlined in this SRS. It will need to be adapted according to the requirements and circumstances of individual compilation engagements. It is drafted to refer to the compilation of financial statements for a single reporting period and would require adaptation if intended or expected to apply to a recurring engagement as described in this SRS. It may be appropriate to seek legal advice that any proposed letter is suitable. This engagement letter illustrates the following circumstances: The financial statements are to be compiled for sole use by the management of a company (ABC Company), and use of the financial statements will be restricted to management. Use and distribution of the practitioner’s report is also restricted to management. The compiled financial statements will comprise only the balance sheet of the company as at March 31, 20XX and the Statement of Profit and Loss for the year then ended, without notes. Management has determined that the financial statements be prepared on an accrual basis as described. *** To the Management6 of ABC Company: [The objective and scope of the compilation engagement] You have requested that we provide the following services: On the basis of information that you will provide, we will assist you in the preparation and presentation of the following financial statements for ABC Company: the balance sheet of ABC Company as at March 31, 20XX and the Statement of Profit and Loss for the year then ended These financial statements will not include explanatory notes, other than a note describing the basis of accounting as set out in this engagement letter. 6 Throughout this illustrative engagement letter, references to “you,” “we,” “us,” “management,” “those charged with governance” and “practitioner” would be used or amended as appropriate in the circumstances. The purpose for which the financial statements will be used is to provide full-year financial information showing the entity’s financial position at the financial reporting date of March 31, 20XX and financial performance for the year then ended. The financial statements will be solely for your use, and will not be distributed to other parties.
A compilation engagement involves applying expertise in accounting and
financial reporting to assist you in the preparation and presentation of financial information. Since a compilation engagement is not an assurance engagement, we are not required to verify the accuracy or completeness of the information you provide to us for the compilation engagement, or otherwise to gather evidence to express an audit opinion or a review conclusion. Accordingly, we will not express an audit opinion or a review conclusion on whether the financial statements are prepared in accordance with the basis of accounting you have specified, as described above. We will perform the compilation engagement in accordance with the Standard on Related Services (SRS) 4410 (Revised), Compilation Engagements. SRS 4410 (Revised) requires that, in undertaking this engagement, we comply with relevant ethical requirements. For that purpose, we are required to comply with the ICAI’s
The compilation engagement to be performed is conducted on the basis that you acknowledge and understand that our role is to assist you in the preparation and presentation of the financial statements in accordance with the financial reporting framework you have adopted for the financial statements. Accordingly, you have the following overall responsibilities that are fundamental to our undertaking the compilation engagement in accordance with SRS 4410 (Revised):
