Preparation of Financial Statements

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AR-C Section 70

Preparation of Financial Statements

Source: SSARS No. 21
Effective for the preparation of financial statements for periods ending
on or after December 15, 2015.

Introduction
Scope of This Section
.01 This section applies when an accountant in public practice is engaged
to prepare financial statements. This section does not apply when an accountant
prepares financial statements

and is engaged to perform an audit, review, or compilation of those

financial statements,

solely for submission to taxing authorities,

in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or

in conjunction with business valuation services.

for inclusion in written personal financial plans prepared by the

accountant,

This section may also be applied, adapted as necessary in the circumstances, to

the preparation of other historical or prospective financial information. 1 (Ref:
par. .A1)
.02 The determination about whether the accountant has been engaged to
prepare financial statements or merely assist in preparing financial statements
(which is a bookkeeping service that is not subject to this section) is determined
based on services the client requests the accountant to perform and requires
the accountant to apply professional judgment. (Ref: par. .A2)

The Preparation Engagement

.03 An engagement to prepare financial statements is a nonattest service
and does not require a determination about whether the accountant is independent of the entity. (Ref: par. .A3)
.04 In addition, an engagement to prepare financial statements does not
require the accountant to verify the accuracy or completeness of the information
provided by management or otherwise gather evidence to express an opinion
or a conclusion on the financial statements or otherwise report on the financial
statements.

1
The Accounting and Review Services Committee plans to expose for public comment separate
proposed Statements on Standards for Accounting and Review Services that would provide requirements and guidance to accountants with respect to compilation engagements on pro forma or prospective financial information.

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Effective Date
.05 This section is effective for the preparation of financial statements
for periods ending on or after December 15, 2015. Early implementation is
permitted.

Objective
.06 The objective of the accountant is to prepare financial statements pursuant to a specified financial reporting framework.

Definitions
.07 For purposes of Statements on Accounting and Review Standards
(SSARSs), the following terms have the meanings attributed as follows:
Applicable financial reporting framework. The financial reporting
framework adopted by management and, when appropriate, those
charged with governance, in the preparation and fair presentation of
the financial statements that is acceptable in view of the nature of the
entity and the objective of the financial statements or that is required
by law or regulation.
Financial reporting framework. A set of criteria used to determine
measurement, recognition, presentation, and disclosure of all material
items appearing in the financial statements (for example, accounting
principles generally accepted in the United States of America [U.S.
GAAP], International Financial Reporting Standards promulgated by
the International Accounting Standards Board, or a special purpose
framework).
Management. The person(s) with executive responsibility for the conduct
of the entity's operations. For some entities, management includes
some or all of those charged with governance (for example, executive
members of a governance board or an owner-manager).
Special purpose framework. A financial reporting framework other
than GAAP that is one of the following bases of accounting:
a. Cash basis. A basis of accounting that the entity uses to record
cash receipts and disbursements and modifications of the cash
basis having substantial support (for example, recording depreciation on fixed assets).
b. Tax basis. A basis of accounting that the entity uses to file its
tax return for the period covered by the financial statements.
c. Regulatory basis. A basis of accounting that the entity uses
to comply with the requirements or financial reporting provisions of a regulatory agency to whose jurisdiction the entity is
subject (for example, a basis of accounting that insurance companies use pursuant to the accounting practices prescribed or
permitted by a state insurance commission). (Ref: par. .A4)
d. Contractual basis. A basis of accounting that the entity uses
to comply with an agreement between the entity and one or
more third parties other than the accountant.
e. Other basis. A basis of accounting that uses a definite set of
logical, reasonable criteria that is applied to all material items
appearing in financial statements.

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Preparation of Financial Statements

The cash-basis, tax-basis, regulatory-basis, and other-basis of accounting are commonly referred to as other comprehensive bases of accounting (OCBOA).
Those charged with governance. The person(s) or organization(s) (for
example, a corporate trustee) with responsibility for overseeing the
strategic direction of an entity and the obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Those charged with governance may include management
personnel (for example, executive members of a governance board or
an owner-manager).

Requirements
General Principles for Performing Engagements to Prepare
Financial Statements
.08 In addition to complying with this section, an accountant is required
to comply with section 60, General Principles For Engagements Performed in
Accordance With Statements on Standards for Accounting and Review Services.

Acceptance and Continuance of Client Relationships

and Engagements to Prepare Financial Statements
.09 If the accountant is not satisfied with any of the matters set out in
paragraph .25 of section 60 as preconditions for accepting an engagement to
prepare financial statements, the accountant should discuss the matter with
management or those charged with governance. If changes cannot be made to
satisfy the accountant about those matters, the accountant should not accept
the proposed engagement.

Agreement on Engagement Terms

.10 The accountant should agree upon the terms of the engagement with
management or those charged with governance, as appropriate. The agreedupon terms of the engagement should be documented in an engagement letter
or other suitable form of written agreement and should include the following:
(Ref: par. .A5.A9)
a.
b.
c.

d.
e.
f.
g.

The objective of the engagement

The responsibilities of management set forth in paragraph .25c
of section 60
The agreement of management that each page of the financial
statements will include a statement indicating that no assurance
is provided on the financial statements or the accountant will be
required to issue a disclaimer that makes clear that no assurance
is provided on the financial statements. (Ref: par. .A11)
The responsibilities of the accountant
The limitations of the engagement to prepare financial statements
Identification of the applicable financial reporting framework for
the preparation of financial statements
Whether the financial statements are to contain a known departure or departures from the applicable financial reporting framework (including inadequate disclosure) or omit substantially all

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disclosures required by the applicable financial reporting framework.

.11 The engagement letter or other suitable form of written agreement

should be signed by
a.

the accountant or the accountant's firm and

b.

management or those charged with governance, as appropriate.

(Ref: par. .A8)

The Accountants Knowledge and Understanding of the Entitys

Financial Reporting Framework
.12 The accountant should obtain an understanding of the financial reporting framework and the significant accounting policies intended to be used
in the preparation of the financial statements. (Ref: par. .A10)

Preparing the Financial Statements

.13 The accountant should prepare the financial statements using the
records, documents, explanations, and other information provided by management.
.14 The accountant should ensure that a statement is included on each
page of the financial statements indicating, at a minimum, that "no assurance
is provided" on the financial statements. If the accountant is unable to include
a statement on each page of the financial statements, the accountant should
(Ref: par. .A11)

issue either a disclaimer that makes clear that no assurance is

provided on the financial statements or (Ref: par. .A12)

perform a compilation engagement in accordance with section 80,

Compilation Engagements

.15 When preparing financial statements in accordance with a special purpose framework, the accountant should include a description of the financial
reporting framework on the face of the financial statements or in a note to the
financial statements. (Ref: par. .A13)
.16 If, during the preparation of financial statements, the accountant assists management with significant judgments regarding amounts or disclosures
to be reflected in the financial statements, the accountant should discuss those
judgments with management so management understands the significant judgments reflected in financial statements and accepts responsibility for those
judgments. (Ref: par. .A14 and .A18)
.17 If the accountant becomes aware that the records, documents, explanations, or other information, including significant judgments, used in the preparation of the financial statements are incomplete, inaccurate, or otherwise unsatisfactory, the accountant should bring that to the attention of management
and request additional or corrected information.
.18 When, after discussions with management, the accountant prepares
financial statements that contain a known departure or departures from the
applicable financial reporting framework (including inadequate disclosure),
the accountant should disclose the material misstatement or misstatements
in the financial statements. (Ref: par. .A15)

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Preparation of Financial Statements

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Financial Statements That Omit Substantially All the Disclosures

Required by the Applicable Financial Reporting Framework
.19 When, after discussions with management, the accountant prepares
financial statements that omit substantially all disclosures required by the
applicable financial reporting framework, the accountant should disclose such
omission in the financial statements. (Ref: par. .A16)
.20 The accountant should not prepare financial statements that omit substantially all disclosures required by the financial reporting framework if the
accountant becomes aware that the omission of substantially all disclosures was
undertaken with the intention of misleading users of such financial statements.
(Ref: par. .A17)

Documentation in a Preparation Engagement

.21 The accountant should prepare documentation in connection with each
preparation engagement in sufficient detail to provide a clear understanding
of the work performed which, at a minimum, includes the following: (Ref: par.
.A18)
a.

The engagement letter or other suitable form of written documentation with management, as described in paragraphs .10.11
b. A copy of the financial statements that the accountant prepared
.22 If, in rare circumstances, the accountant judges it necessary to depart
from a relevant presumptively mandatory requirement, the accountant must
document the justification for the departure and how the alternative procedures
performed in the circumstances were sufficient to achieve the intent of that
requirement.

Application and Other Explanatory Material

Scope of This Section (Ref: par. .01.02)
.A1 Other historical or prospective financial information to which this section may be applied includes the following:

Specified elements, accounts, or items of a financial statement,

such as schedules of rentals, royalties, profit participation, or provision for income taxes

Supplementary information
Required supplementary information
Pro forma financial information
Prospective financial information, including budgets, forecasts, or
projections

.A2 The appendix, "Preparation of Financial Statements Versus Assistance in Preparing Financial Statements," provides examples of services that
the accountant may be engaged to perform and whether this section would
apply.

The Preparation Engagement (Ref: par. .03)

.A3 The "Nonattest Services" subtopic of the "Independence Rule" (ET sec.
1.295) addresses the accountant's considerations with respect to independence

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when performing nonattest services for attest clients. For example, the accountant may prepare monthly or other interim financial statements and be engaged to perform an audit, review, or compilation engagement with respect to
the annual financial statements. The accountant needs to be aware that the
performance of the preparation services may impair independence unless the
safeguards described in this subtopic are met.

Definitions (Ref: par. .07)

.A4 Certain regulators, including state and local government legislators,
regulatory agencies, or departments, require financial statements to be prepared in accordance with a financial reporting framework that is based on
GAAP but does not comply with all the requirements of GAAP. Such frameworks are regulatory-bases of accounting, as defined in paragraph .07. In some
circumstances, however, the cash- or tax-basis of accounting may be permitted
by a regulator. For purposes of this section, the cash- and tax-bases of accounting are not regulatory-bases of accounting.

Agreement on Engagement Terms (Ref: par. .10.11)

.A5 Both management and the accountant have an interest in documenting the agreed-upon terms of the engagement to prepare financial statements
before the commencement of the engagement to help avoid misunderstandings
with respect to the engagement. For example, it reduces the risk that management may inappropriately rely on or may expect the accountant to protect
management against certain risks or to perform certain functions, including
those that are management's responsibility.
.A6 When a third party has contracted for an engagement to prepare the
entity's financial statements, agreeing the terms of the engagement with management of the entity is necessary in order to establish that the preconditions
for an engagement to prepare financial statements are present.
.A7 A contract is another suitable form of written communication. The
understanding with management regarding the services to be performed for
engagements to prepare financial statements is required by paragraph .10 to be
in a documented form, and, accordingly, a verbal understanding is insufficient.
An engagement letter is the most common, and usually the most convenient,
method for documenting the understanding with management regarding the
services to be performed for engagements to prepare financial statements.
.A8 The roles of management and those charged with governance in agreeing upon the terms of the engagement to prepare financial statements for the
entity depend on the governance structure of the entity and relevant law or
regulation. Depending on the entity's structure, the agreement may be with
management, those charged with governance, or both. Nonetheless, when the
agreement on the terms of engagement is only with those charged with governance in accordance with paragraph .25c of section 60, the accountant is
required to obtain management's agreement that it acknowledges and understands its responsibilities.
.A9 An illustrative example of an engagement letter for an engagement to
prepare financial statements is presented in the exhibit, "Illustrative Engagement Letter."

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The Accountants Knowledge and Understanding of the Entitys

Financial Reporting Framework (Ref: par. .12)
.A10 The requirement that the accountant obtain an understanding of the
financial reporting framework adopted by management intended to be used in
the preparation of the financial statements and the significant accounting policies adopted by management does not prevent the accountant from accepting
an engagement to prepare financial statements for an entity in an industry in
which the accountant has no previous experience. The accountant may obtain
such understanding, for example, by consulting AICPA guides, industry publications, financial statements of other entities in the industry, textbooks and
periodicals, appropriate continuing professional education, or individuals who
are knowledgeable about the industry.

Preparing the Financial Statements (Ref: par. .10, .14.16,

and .18)
.A11 The statement on each page of the financial statements, including related notes, is intended to avoid misunderstanding on the part of users with respect to the accountant's involvement with the financial statements. The statement is made at management's discretion, and the accountant or the accountant's firm name is not required to be included. The accountant is concerned
that the indication is not misleading. Examples of a statement on each page of
the financial statements include the following:

No assurance is provided on these financial statements.

These financial statements have not been subjected to an audit or
review or compilation engagement, and no assurance is provided
on them.

Other statements that convey that no assurance is provided on the financial

statements would also be acceptable.
.A12 An example of a disclaimer that the accountant may issue is as follows:
The accompanying financial statements of XYZ Company as of and for the year
ended December 31, 20XX, were not subjected to an audit, review, or compilation
engagement by me (us) and, accordingly, I (we) do not express an opinion, a
conclusion, nor provide any assurance on them.
[Signature of accounting firm or accountant, as appropriate]
[Accountant's city and state]
[Date]

.A13 A description of the special purpose framework is usually placed next

to or under the title of the financial statements (for example "statement of assets
and liabilitiesmodified cash basis"). However, the description may be placed
elsewhere in the financial statements.
.A14 In the preparation of financial statements, the accountant may provide assistance to management with significant judgments (for example, the
accountant may advise management on alternative accounting policies that
are significant to the financial statements or help management with significant judgments regarding material accounting estimates).

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.A15 The disclosure of the material misstatement or misstatements may

be made on the face of the financial statements or in a note to the financial
statements.

Financial Statements That Omit Substantially All the Disclosures

Required by the Applicable Financial Reporting Framework
(Ref: par. .19.20)
.A16 The disclosure of the omission of substantially all disclosures required by the applicable financial reporting framework may be made on the
face of the financial statements or in a selected note to the financial statements.
.A17 The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements.
Such disclosures may be labeled "Selected InformationSubstantially All Disclosures Required by [the applicable financial reporting framework] Are Not
Included."

Documentation in a Preparation Engagement

(Ref: par. .16 and .21)
.A18 Documentation may include documentation regarding significant
consultations or significant professional judgments made throughout the engagement.

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.A19

AppendixPreparation of Financial Statements

Versus Assistance in Preparing Financial Statements
(Ref: par. .A2)
The determination about whether the accountant has been engaged to prepare
financial statements or merely assist in preparing financial statements (which
is a bookkeeping service that is not subject to this section) is determined based
on the services the client requests the accountant to perform and requires the
accountant to apply professional judgment. The following table provides examples of services that the accountant may be engaged to perform and whether
section 70 would apply. The table is not intended to be all inclusive, and professional judgment would still need to be applied.
Examples of Services for Which
This Section Applies
Preparation of financial
statements prior to audit or
review by another accountant

Preparation of financial
statements for an entity to be
presented alongside the entity's
tax return
Preparation of personal financial
statements for presentation
alongside a financial plan

Preparation of single financial

statements, such as a balance
sheet or income statement or
financial statements with
substantially all disclosures
omitted
Using the information in a general
ledger to prepare financial
statements outside of an
accounting software system

2015, AICPA

Examples of Accountant Services for

Which This Section Does Not Apply
Preparation of financial statements
when the accountant is engaged to
perform an audit, review, or
compilation of such financial
statements
Preparation of financial statements
with a tax return solely for
submission to taxing authorities
Personal financial statements that
are prepared for inclusion in written
personal financial plans prepared by
the accountant
Financial statements prepared in
conjunction with litigation services
that involve pending or potential
legal or regulatory proceedings
Financial statements prepared in
conjunction with business valuation
services
Maintaining depreciation schedules
Preparing or proposing certain
adjustments, such as those
applicable to deferred income taxes,
depreciation, or leases
Drafting financial statement notes

Entering general ledger transactions

or processing payments (general
bookkeeping) in an accounting
software system

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.A20

ExhibitIllustrative Engagement Letter (Ref: par. .A9)

The following is an example of an engagement letter for an engagement to prepare financial statements prepared in accordance with accounting principles
generally accepted in the United States of America. This engagement letter is
intended as an illustration that may be used in conjunction with the considerations outlined in Statements on Standards for Accounting and Review Services.
The engagement letter will vary according to individual requirements and circumstances and is drafted to refer to the preparation of financial statements for
a single reporting period. The accountant may seek legal advice about whether
a proposed letter is suitable.
To the appropriate representative of ABC Company:1
You 2 have requested that we prepare the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, and the
related statements of income, changes in stockholders' equity, and cash flows
for the year then ended and the related notes to the financial statements. 3, 4 We
are pleased to confirm our acceptance and our understanding of this engagement to prepare the financial statements of ABC Company by means of this
letter.
Our Responsibilities
The objective of our engagement is to prepare financial statements in accordance with accounting principles generally accepted in the United States of
America based on information provided by you. We will conduct our engagement in accordance with Statements on Standards for Accounting and Review
Services (SSARSs) promulgated by the Accounting and Review Services Committee of the AICPA and comply with the AICPA's Code of Professional Conduct,
including the ethical principles of integrity, objectivity, professional competence,
and due care.
We are not required to, and will not, verify the accuracy or completeness of
the information you will provide to us for the engagement or otherwise gather
evidence for the purpose of expressing an opinion or a conclusion. Accordingly,
we will not express an opinion or a conclusion or provide any assurance on the
financial statements.
Our engagement cannot be relied upon to identify or disclose any financial
statement misstatements, including those caused by fraud or error, or to identify
or disclose any wrongdoing within the entity or noncompliance with laws and
regulations.
1
The addresses and references in the engagement letter would be those that are appropriate in
the circumstances of the engagement to prepare financial statements, including the relevant jurisdiction. It is important to refer to the appropriate persons. See paragraph .A8.
2
Throughout this engagement letter, references to you, we, us, management, and accountant
would be used or amended as appropriate in the circumstances.
3
If the accountant is to be engaged to prepare financial statements that omit the statement of
cash flows and the related notes, the sentence may be revised to read, "You have requested that we
prepare the financial statements of ABC Company, which comprise the balance sheet as of December
31, 20XX, and the related statements of income and changes in stockholders' equity." The following
additional sentence may then be added: "These financial statements will not include a statement of
cash flows and related notes to the financial statements."
4
The accountant may include other nonattest services to be performed as part of the engagement,
such as income tax preparation and bookkeeping services.

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Management Responsibilities
The engagement to be performed is conducted on the basis that management acknowledges and understands that our role is to prepare financial statements in
accordance with accounting principles generally accepted in the United States
of America. Management has the following overall responsibilities that are fundamental to our undertaking the engagement to prepare your financial statements in accordance with SSARSs:
a.

The selection of accounting principles generally accepted in the

United States of America as the financial reporting framework to
be applied in the preparation of the financial statements

b.

The prevention and detection of fraud

c.

To ensure that the entity complies with the laws and regulations
applicable to its activities

d.

The accuracy and completeness of the records, documents, explanations, and other information, including significant judgments,
you provide to us for the engagement to prepare financial statements

e.

To provide us with:
i. Documentation, and other related information that is relevant to the preparation and presentation of the financial
statements,
ii. Additional information that may be requested for the purpose of the preparation of the financial statements, and
iii. Unrestricted access to persons within ABC Company of
whom we determine necessary to communicate.

The financial statements will not be accompanied by a report. However, you

agree that the financial statements will clearly indicate that no assurance is
provided on them.
[If the accountant expects to issue a disclaimer, instead of the preceding paragraph, the following may be added:
As part of our engagement, we will issue a disclaimer that will state that the
financial statements were not subjected to an audit, review, or compilation engagement by us and, accordingly, we do not express an opinion, a conclusion,
nor provide any assurance on them.]
Other Relevant Information
Our fees for these services. . . .
[The accountant may include language, such as the following, regarding limitation of, or other arrangements regarding, the liability of the accountant or
the entity, such as indemnification to the accountant for liability arising from
knowing misrepresentations to the accountant by management (regulators may
restrict or prohibit such liability limitation arrangements):
You agree to hold us harmless and to release, indemnify, and defend us from
any liability or costs, including attorney's fees, resulting from management's
knowing misrepresentations to us.]
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our engagement

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to prepare the financial statements described herein, and our respective responsibilities.
Sincerely yours,
_______________________
[Signature of accountant or accountant's firm]
Acknowledged and agreed on behalf of ABC Company by:
_______________________
[Signed]
[Name and Title]
_______________________
[Date]
[Revised, February 2015, to include additional required engagement letter
elements.]

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