Review And Compilation — Determine Appropriate Review Or Compilation Reporting - CPA Aud

SECTION 1

Historical Context & Motivation

Financial statement users have long needed varying degrees of assurance depending on the nature of their decisions, and not every engagement requires the intensive procedures associated with a full audit. As the accounting profession matured throughout the twentieth century, practitioners recognized that many private companies and smaller entities needed a cost-effective way to present financial information to lenders, investors, and other stakeholders. This recognition gave rise to two distinct service levels below the audit: the review engagement and the compilation engagement. Understanding the historical evolution of these engagements is essential because the reporting standards in use today—particularly those governing the form and content of the accountant's report—are direct products of decades of standard-setting activity.

1978 • Birth of SSARS

The AICPA's Accounting and Review Services Committee (ARSC) issued SSARS No. 1, formally establishing compilation and review engagements as distinct service levels for nonpublic entities, providing accountants with a standardized framework for the first time.

2009 • SSARS No. 19 — Clarity

SSARS No. 19 restructured compilation and review standards using a clarity format, aligning with the AICPA's broader clarity project and introducing updated performance and reporting requirements.

2014 • SSARS No. 21 — Modern Framework

SSARS No. 21 (codified as AR-C sections 60, 70, 80, and 90) became effective for periods ending on or after December 15, 2015, fundamentally reshaping compilation and review reporting, including the introduction of preparation engagements.

2020–Present • Ongoing Amendments

Subsequent SSARS amendments have refined independence requirements, addressed going concern considerations in reviews, and harmonized terminology with PCAOB and international standards where practicable.

The central question this lesson addresses is straightforward yet nuanced: given a particular set of engagement circumstances—including the level of assurance required, the accountant's independence, and the needs of financial statement users—how does an accountant determine the appropriate form and content of a review or compilation report? Answering this question demands a solid grasp of the underlying standards, the decision criteria that distinguish each engagement type, and the specific language mandated for each report.

SECTION 2

Core Principles & Definitions

Before selecting the appropriate report, an accountant must internalize the foundational distinctions between the three non-audit financial statement services codified under Statements on Standards for Accounting and Review Services (SSARS). These services exist on a spectrum: preparation provides no assurance, compilation provides no assurance but requires a report, and review provides limited assurance. Each service carries different procedural obligations and, critically, different reporting requirements that the CPA must fulfill. The core principles governing the selection of the appropriate report center on five interrelated concepts.

Level of Assurance

A compilation provides no assurance on the financial statements; the accountant merely assists in presenting information. A review provides limited assurance through inquiry and analytical procedures, expressed as negative assurance.

Independence Requirement

A review engagement requires independence. A compilation may be performed even when the accountant is not independent, but the lack of independence must be disclosed in the compilation report.

Applicable Framework

The accountant must identify whether the financial statements are prepared under GAAP, IFRS, the tax basis, the cash basis, or another special purpose framework, as this affects report language.

Known Departures from Framework

When the accountant becomes aware that the financial statements contain material departures from the applicable framework, the report must either disclose these departures or be modified accordingly.

Going Concern (Reviews)

In a review engagement, the accountant evaluates whether substantial doubt exists about the entity's ability to continue as a going concern and includes an emphasis-of-matter paragraph if warranted.

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KEY TAKEAWAY

Think of the assurance spectrum like a medical checkup continuum. A preparation is like filling out your own medical intake form—no one has checked anything. A compilation is like a nurse organizing your paperwork and noting your vitals without diagnosing anything. A review is like a doctor asking questions, running basic tests, and telling you 'nothing came to my attention that suggests a problem'—limited assurance, not a full diagnostic workup (audit).

SECTION 3

Visual Explanation — The Assurance Spectrum & Decision Flow

The top portion shows the assurance spectrum from no assurance (preparation) through limited assurance (review) to reasonable assurance (audit). The flowchart below guides the accountant through the decision nodes: whether a report is required, whether limited assurance is needed, and whether independence exists—the critical gate for review engagements.

As illustrated in the diagram, the decision to issue a review report versus a compilation report hinges on two primary factors: the level of assurance demanded by users and the accountant's independence. An accountant who is not independent cannot issue a review report; however, the accountant may still perform a compilation and disclose the lack of independence. This distinction is one of the most frequently tested concepts on the CPA exam's AUD section.

SECTION 4

How It Works — Procedures, Report Content & Language

Compilation Report Mechanics (AR-C Section 80)

In a compilation engagement, the accountant assists management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance. The accountant reads the financial statements and considers whether they are appropriate in form and free from obvious material errors. The compilation report under AR-C Section 80 must include: (1) a title that includes the word 'independent' (if the accountant is independent); (2) identification of the entity and the financial statements; (3) a statement that management is responsible for the financial statements; (4) a statement that the accountant performed the compilation in accordance with SSARS; (5) a statement that the accountant did not audit or review and accordingly does not express an opinion or provide any assurance; and (6) the signature and date of the report.

⚠

Independence & Compilation Reports

When the accountant is not independent, the compilation report must include a statement that the accountant is not independent of the entity. The accountant is not required to disclose the reason for the lack of independence but may elect to do so.

Review Report Mechanics (AR-C Section 90)

A review engagement requires the accountant to perform inquiry and analytical procedures as the basis for providing limited assurance that no material modifications are needed for the financial statements to be in conformity with the applicable financial reporting framework. The review report must contain: (1) a title with the word 'independent'; (2) an addressee; (3) identification of the financial statements reviewed; (4) a statement that management is responsible for the financial statements and the accountant's responsibility is to conduct the review in accordance with SSARS; (5) a description of review procedures; (6) a statement that a review is substantially less in scope than an audit; and (7) a conclusion expressed in negative assurance form: 'Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with [applicable framework].'

Report Modifications

Known departures from the framework: The accountant should modify the report to disclose the departure and, if practicable, the effects. If the departure is not disclosed, the accountant should consider withdrawing.
Going concern (review only): When substantial doubt exists about the entity's ability to continue as a going concern, the accountant adds an emphasis-of-matter paragraph.
Scope limitation (review only): If the accountant is unable to perform inquiry or analytical procedures considered necessary, the review is incomplete and no report should be issued.
Supplementary information: When supplementary information accompanies the financial statements, the report may include an other-matter paragraph describing the degree of responsibility taken.

SECTION 5

Detailed Breakdown — Report Elements Compared

This side-by-side comparison highlights the fundamental differences between compilation and review reports. Note the distinct assurance levels, the mandatory independence requirement for reviews, the different procedural bases, and the contrasting report language—compilations disclaim any opinion, while reviews express negative assurance.

Report Element	Compilation (AR-C 80)	Review (AR-C 90)
Title	"Independent Accountant's Compilation Report" (omit 'Independent' if not independent)	"Independent Accountant's Review Report"
Addressee	Required (management, board, or owners)	Required (management, board, or owners)
Management Responsibility	Stated — management is responsible for the F/S	Stated — management is responsible for the F/S and for designing/implementing internal control
Accountant's Responsibility	Performed in accordance with SSARS	Performed in accordance with SSARS; describes inquiry and analytical procedures
Conclusion / Disclaimer	Disclaimer — no opinion, no assurance	Negative assurance conclusion
Signature & Date	Required — date is the date the compilation is completed	Required — date is the date the review procedures are completed
Lack of Independence	Must disclose; reason optional	Cannot issue report — must withdraw or convert to compilation

Comprehensive comparison of compilation and review report elements under current SSARS

SECTION 6

Worked Example — Selecting and Drafting the Appropriate Report

Consider the following scenario: CPA firm Martinez & Associates has been engaged by Greenfield Manufacturing, Inc. (a nonpublic entity) to provide services on its annual financial statements prepared under U.S. GAAP. The engagement partner notes the following facts: (1) the bank lender requires limited assurance on the financial statements; (2) the firm is independent of Greenfield; (3) during analytical procedures, the accountant discovers that inventory is materially overstated due to management's failure to write down obsolete items; and (4) management refuses to adjust the financial statements. Determine the appropriate report.

Determining the Appropriate Review Report with a Known Departure

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Step 1 — Identify the Engagement Type

The bank lender requires limited assurance. This immediately rules out a compilation (no assurance) and a preparation (no report). The appropriate engagement type is a review engagement under AR-C Section 90.

Engagement type → Review (AR-C 90)
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Step 2 — Confirm Independence

The problem states the firm is independent of Greenfield Manufacturing. Independence is a prerequisite for issuing any review report. If the firm were not independent, it would be unable to perform a review and would need to discuss alternative service levels (compilation) with the client.

Independence confirmed → Review may proceed
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Step 3 — Evaluate the Known Departure

The accountant discovered that inventory is materially overstated because management failed to write down obsolete items. This constitutes a known departure from GAAP (specifically, ASC 330 requires inventory to be carried at the lower of cost or net realizable value). Management has refused to make the adjustment. Under AR-C 90.39, when the accountant becomes aware of a material departure, the report should be modified.

Material GAAP departure identified → Modify the review report
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Step 4 — Modify the Review Report

The accountant adds a separate paragraph to the review report disclosing the departure: specifically, that inventory is stated at cost without consideration of obsolescence write-downs. If practicable, the effects of the departure (e.g., the estimated dollar amount of the overstatement) should be disclosed. The accountant modifies the conclusion to state: 'Except for the matter described in the preceding paragraph, I am not aware of any material modifications…' This creates a modified review report with a qualified conclusion.

Final Report → Modified Review Report with qualified negative assurance conclusion
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Step 5 — Consider Withdrawal

If the departure is so pervasive that the financial statements are misleading even with disclosure, the accountant should consider withdrawing from the engagement entirely. In this scenario, because the departure is limited to the inventory line item and can be disclosed with estimated effects, withdrawal is not necessary—but it remains an option the accountant must evaluate.

Withdrawal not warranted → Modified report is appropriate

SECTION 7

Strengths, Limitations & Practical Comparisons

Choosing between a compilation and a review is not merely a technical exercise; it has tangible consequences for the client's relationships with lenders, investors, and regulators. Understanding the practical strengths and limitations of each service helps accountants advise their clients appropriately and helps CPA exam candidates distinguish between the two when presented with scenario-based questions.

Dimension	Compilation	Review
Cost to Client	Lower — fewer procedures required	Higher — inquiry and analytical procedures add time
User Confidence	Minimal — no assurance provided	Moderate — limited (negative) assurance enhances credibility
Independence	Not required (but must disclose impairment)	Strictly required — no exceptions
Detection Risk	Very high — accountant not performing inquiry/analytics	High (lower than compilation, but substantially higher than audit)
Common Use Case	Internal management use, small businesses, tax planning	Bank loan covenants, SBA lending, investor due diligence for smaller entities
Representation Letter	Not required (engagement letter suffices)	Required — management must provide written representations

Practical comparison of compilation and review engagements

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KEY TAKEAWAY

Think of the compilation and review as two tiers of financial due diligence, analogous to the difference between a title search and a home inspection when purchasing real estate. A compilation (like a title search) simply organizes existing information into a standard format—helpful but providing no independent validation. A review (like a home inspection) involves the professional actively looking for red flags through targeted questions and analytical checks, offering a limited but meaningful level of comfort that nothing is materially wrong. Neither replaces a full structural engineering assessment (the audit), but the review clearly offers more value to decision-makers who need some assurance before committing capital.

SECTION 8

Connection to Advanced Theory — Audits, PCAOB, and International Standards

Compilation and review engagements exist within a broader ecosystem of assurance and attestation services. As candidates progress in their CPA exam preparation and professional careers, it is essential to understand how these SSARS-based engagements relate to audit engagements under GAAS (Generally Accepted Auditing Standards), to PCAOB standards for public company audits, and to the international framework under ISRE 2400 (International Standard on Review Engagements).

Feature	SSARS Review (AR-C 90)	Audit (AU-C / GAAS)	ISRE 2400 Review
Assurance	Limited (negative)	Reasonable (positive)	Limited (negative)
Governing Body	AICPA (ARSC)	AICPA (ASB) / PCAOB	IAASB
Entity Type	Nonpublic (non-issuers)	Public and nonpublic entities	Varies by jurisdiction
Procedures	Inquiry and analytical procedures	Risk assessment, testing controls, substantive procedures	Inquiry and analytical procedures (similar to SSARS)
Report Conclusion	"Not aware of material modifications…"	"In our opinion, the financial statements present fairly…"	"Nothing has come to our attention…"

Comparison of SSARS review, audit under GAAS, and international review under ISRE 2400

An important forward-looking consideration is the convergence trend between U.S. and international standards. While SSARS reviews and ISRE 2400 reviews share the same conceptual foundation of limited assurance, subtle differences in language, documentation requirements, and going concern evaluation persist. As global accounting harmonization continues, CPA candidates should be prepared for potential future alignment of these frameworks. Additionally, note that PCAOB standards do not include review or compilation engagements—the PCAOB governs audits and interim reviews of public companies under AU 722 (now AS 4105), which is conceptually similar to a SSARS review but operates under a different authoritative framework.

SECTION 9

Practice Problems

Question 1: CONCEPTUAL

A CPA performs a compilation of a nonpublic entity's financial statements. During the engagement, the CPA realizes that the firm is not independent of the entity. What is the CPA's most appropriate course of action regarding the compilation report?

Show answer

The CPA may still issue the compilation report but must include a statement indicating that the accountant is not independent of the entity. Under AR-C Section 80, independence is not a prerequisite for performing a compilation; however, the lack of independence must be transparently disclosed in the report. The CPA is not required to disclose the specific reason for the independence impairment, though the CPA may choose to do so. This distinguishes compilations from reviews, where independence is mandatory and non-negotiable.

Question 2: BASIC CALCULATION

An accountant is engaged to review the financial statements of Bright Corp., a nonpublic company. During analytical procedures, the accountant notes that the current ratio declined from 2.1 to 0.8 year-over-year, and accounts receivable increased by 45% while revenue increased by only 5%. What type of additional procedures should the accountant perform, and how do these findings potentially affect the report?

Show answer

In a review engagement, the accountant's primary procedures are inquiry and analytical procedures. When analytical procedures reveal unusual fluctuations—such as a disproportionate increase in accounts receivable relative to revenue (suggesting potential collectibility issues or premature revenue recognition) and a significant decline in the current ratio—the accountant should make additional inquiries of management to obtain explanations. The accountant does not perform substantive audit-level testing but must assess whether management's explanations are reasonable. If management's explanations are inadequate and the accountant believes the financial statements may contain material misstatements, the review report should be modified to disclose the known departure. If the implications suggest substantial doubt about going concern, an emphasis-of-matter paragraph may also be warranted.

Question 3: INTERMEDIATE

During a review engagement, the accountant discovers that management has capitalized $500,000 of research costs that should have been expensed under ASC 730. Management refuses to adjust the financial statements. The accountant determines that the departure is material but not pervasive. How should the accountant modify the review report? Provide the specific language that should appear in the report.

Show answer

Because the departure from GAAP is material but not pervasive, the accountant should issue a modified review report with a qualified conclusion. The report should include a separate paragraph before the conclusion describing the departure: 'As discussed with management, the Company has capitalized $500,000 of research costs that, under accounting principles generally accepted in the United States of America (ASC 730), should have been charged to expense when incurred. If these costs had been expensed, net income would have been decreased by $500,000 (before tax effects) and total assets would have been decreased by $500,000.' The conclusion should then be modified to read: 'Based on my (our) review, except for the matter described in the preceding paragraph, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.' If the departure were so pervasive that the financial statements were misleading as a whole, the accountant would need to consider withdrawing from the engagement.

Question 4: APPLIED

Hernandez CPA Firm has three simultaneous engagements: (1) Maple Industries requests a compilation of its GAAP-basis financial statements—the firm provides bookkeeping services to Maple; (2) Cedar Corp. requests a review of its tax-basis financial statements for submission to a bank lender; (3) Pine LLC requests a preparation of its cash-basis financial statements for internal use only. For each engagement, identify the appropriate report type, describe any required modifications or disclosures, and specify the applicable SSARS section.

Show answer

For Maple Industries: Since the firm provides bookkeeping services, it is not independent. However, this does not preclude a compilation under AR-C Section 80. The firm issues a compilation report but must include a statement that it is not independent of Maple Industries. The title should omit the word 'Independent.' For Cedar Corp.: The engagement is a review under AR-C Section 90. Since the financial statements are prepared using the tax basis (a special purpose framework), the review report must identify the special purpose framework and include a paragraph that describes the basis of accounting and refers the reader to the note in the financial statements that discusses the framework. The negative assurance conclusion references conformity with the tax basis of accounting rather than GAAP. Independence must be confirmed. For Pine LLC: A preparation engagement under AR-C Section 70 does not require the accountant to issue a report. Each page of the financial statements should include a legend stating 'no assurance is provided on these financial statements.' No independence is required, and the cash basis should be disclosed on the face of the statements or in notes.

Question 5: CRITICAL THINKING

A bank requires 'reviewed financial statements' from a loan applicant. The applicant's accountant discovers during the engagement that the accountant's spouse recently purchased a material equity interest in the applicant entity. Analyze the ethical and professional obligations of the accountant, discuss the available courses of action under SSARS and the AICPA Code of Professional Conduct, and evaluate whether a compilation could serve as a viable alternative to satisfy the bank's requirements.

Show answer

The discovery that the accountant's spouse holds a material equity interest in the client creates a direct financial interest that impairs independence under the AICPA Code of Professional Conduct (ET Section 1.210 and related interpretations). Because a review engagement under AR-C Section 90 requires independence, the accountant cannot continue with the review engagement. The accountant has several options: First, the accountant could withdraw from the engagement and recommend that the client engage another independent CPA to perform the review. This is the cleanest solution and fully satisfies the bank's requirement. Second, the accountant could discuss with the client whether the bank would accept a compilation report instead. However, this is unlikely to satisfy the bank's needs because a compilation provides no assurance, and the bank specifically requested limited assurance through reviewed financial statements. The accountant could issue a compilation report with the required disclosure of lack of independence, but the bank would likely reject it. Third, if the spousal interest could be divested prior to completing the engagement (and if no other independence threats exist), independence might be restored, but this approach requires careful analysis of the specific facts and applicable interpretation guidance. The most prudent professional course of action is to withdraw from the review engagement, inform the client of the independence impairment, and assist in transitioning to another firm if appropriate—balancing the duty to the client with the overriding obligation to maintain professional standards.

SUMMARY

Summary — Review and Compilation Reporting

Summary

Determining the appropriate review or compilation report requires the accountant to evaluate several interdependent factors. Compilation engagements under AR-C Section 80 provide no assurance and do not require independence (though a lack of independence must be disclosed). Review engagements under AR-C Section 90 provide limited (negative) assurance based on inquiry and analytical procedures and strictly require independence.

Report modifications arise when the accountant identifies known departures from the applicable framework or, in a review, when going concern issues are present. The accountant must also consider the financial reporting framework (GAAP, tax basis, cash basis, etc.) because it directly affects report language. Key decision points include: Does the user need assurance? Is the accountant independent? Are there material departures? Mastering these decision nodes and the corresponding report language is essential for both CPA exam success and professional practice.