What is the difference between the assurance engagement to report on compilation of pro forma financial information and compilation engagement?

 Assurance engagement to report on compilation of pro forma financial information and compilation engagement.

Services provided by audit companies could be divided into two groups - assurance engagements and non-assurance engagements.

An assurance engagement is an engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria.

A non-assurance engagement is an engagement which does not involve obtaining evidence for the purpose of the practitioner (auditor) expressing an opinion or an assurance conclusion in any form. In non-assurance engagements the practitioner executes an engagement in accordance with the agreed terms and provides the engaging party with a report on the work done.

Assurance engagement to report on compilation of pro forma financial information is reasonable assurance attestation engagements undertaken by a practitioner to report on the responsible party’s compilation of pro forma financial information included in a prospectus.

Compilation engagement is an engagement in which a practitioner applies accounting and financial reporting expertise to assist management in the preparation and presentation of financial information of an entity in accordance with an applicable financial reporting framework, and reports to the management (or engaging party) as required by the applicable standard for the related services (for example, ISRS 4410).

A compilation engagement may be needed for various purposes including:

(a) To comply with mandatory periodic financial reporting requirements established in law or regulation; or

(b) For purposes unrelated to mandatory financial reporting, for example, for financial information provided to a funding body to support provision or continuation of a grant, for a merger or acquisition purposes).

A compilation engagement is not an assurance engagement, a compilation engagement does not require the practitioner to verify the accuracy or completeness of the information provided by management for the compilation, or otherwise to gather evidence to express an audit opinion or a review conclusion on the preparation of the financial information. In compilation engagement the practitioner assists management in the preparation and presentation of financial information of an entity and reports to the engaging party as required by the applicable standard for the related services (for example, ISRS 4410).

In compilation engagement the practitioner assists management in the preparation and presentation of financial information of an entity and reports to the management (or other party, as fixed in the engagement) about the compilation engagement provided as required by the applicable standard for the related services (for example, ISRS 4410).

Acceptance or continuation of compilation engagement

Compilation engagement should not be accepted until the terms of engagement have been agreed with the management or engaging parties (if different).

The terms of engagement may include the following:

·        The intended use and distribution of the financial information, and any restrictions on either its use or its distribution.

·        Identification of the applicable financial reporting framework.

·        The objective and scope of the compilation engagement.

·       The responsibilities of the practitioner (auditor), including the requirement to comply with relevant ethical requirements.

·        The responsibilities of management for the preparation and presentation of financial statements, for the accuracy and completeness of the records, documents, explanations and other information provided, for judgments needed in the preparation and presentation of the financial information.

·        The expected form and content of the practitioner’s report.

The agreed terms of compilation engagement usually are recorded in an engagement letter or other suitable form of written agreement, prior to performing the engagement.

Performance of compilation engagement

Performance of compilation engagement involves the following steps:

-Obtaining an understanding of the following matters:

(a)The entity’s business and operations, including the entity’s accounting system and accounting records; and

(b) The applicable financial reporting framework, including its application in the entity’s industry.

-Compiling the Financial Information which includes:

·   compiling the financial information using the records, documents, explanations and other information, including significant judgments, provided by management.

·     discussing with management, or those charged with governance as appropriate, those significant judgments, for which the practitioner has provided assistance in the course of compiling the financial information.

·        prior to completion of the compilation engagement, reading the compiled financial information in light of the understanding of the entity’s business and operations, and of the applicable financial reporting framework.

-Preparing the report on compiled financial statement.

Obtaining an understanding of the entity’s business and its operations when performing compilation engagement

Examples of matters to be considered in obtaining an understanding of the entity’s business and operations including the entity’s accounting system and accounting records consists of the following:

·        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.

Compilation engagement report

A compilation report is needed to communicate the nature of the compilation engagement, and the practitioner’s role and responsibilities in the engagement. It does not contain either an opinion or conclusion on financial statements. Compilation report includes the following elements:

a) The report title.

(b)  The addressee(s).

c) A statement that the practitioner has compiled the financial information based on information provided by management.

(d) A description of the responsibilities of management in relation to the compilation engagement, and in relation to the financial information.

e) Identification of the applicable financial reporting framework.

f) Identification of the financial information, including the title of each element of the financial information if it comprises more than one element, and the date of the financial information.

g) A description of the practitioner’s responsibilities in compiling the financial information.

h) Explanations that the practitioner is not required to verify the accuracy or completeness of the information provided by management for the compilation and the practitioner does not express an audit opinion or a review conclusion on financial statements.

i) The date of the practitioner’s report.

(l) The practitioner’s signature; and

(m) The practitioner’s address.

In conclusion, a compilation engagement is not an assurance engagement, the practitioner is not required to verify the accuracy or completeness of the information provided by the management for the compilation engagement and does not express an audit opinion or a review conclusion on whether the financial statements are prepared in accordance with the basis of accounting has been specified in the engagement letter.