Compilation and preparation engagements

At the bottom of the assurance ladder are engagements that provide no assurance at all. A practitioner helps management prepare financial statements or other financial information from the entity's records, and reports, or in some cases does not report, without expressing any conclusion on whether the information is fairly presented. These engagements are among the most common work in small practices, and they carry their own risks: users may assume that a professional accountant's name means the numbers have been checked, and practitioners can drift into making management's decisions for them. This lesson uses Larch Street Bakery, a small family bakery that Hollis Ward's small business group serves, and returns to Kestrel Landscaping from lesson 9.

The standards

In the United States, two SSARS engagements provide no assurance. A preparation engagement under AR-C 70, Preparation of Financial Statements, applies when an accountant is engaged to prepare financial statements but not to report on them. A compilation engagement under AR-C 80, Compilation Engagements, applies when an accountant is engaged to perform a compilation and issue a compilation report. AR-C 60 sets general principles for both. SSARS 27, issued in 2025, clarified that AR-C 70 does not apply when financial statements are prepared as part of a consulting services engagement under the AICPA's consulting standard, which matters for firms offering client advisory and outsourced accounting services. Firms performing these engagements are subject to SQMS 1.

What the practitioner does

In an AR-C 80 compilation, the accountant: agrees the terms of the engagement in an engagement letter signed by the accountant and management; obtains an understanding of the financial reporting framework and the significant accounting policies; reads the financial statements in light of that understanding and the accountant's knowledge of the entity; considers whether the statements appear appropriate in form and free from obvious material misstatements; and, if aware that records or information are incorrect, incomplete or otherwise unsatisfactory, requests additional or corrected information. In a preparation engagement under AR-C 70, the accountant performs similar steps but issues no report. In neither does the accountant verify information, test controls or obtain evidence.

A key limit applies in both countries. If the practitioner becomes aware that information provided by management is incorrect, incomplete or otherwise unsatisfactory, or that the compiled statements are materially misstated or misleading, the practitioner must ask management to correct it, and if management refuses, withdraw from the engagement. A professional accountant must not be associated with information he or she knows or ought to know is false or misleading, even when no assurance is given.

Basis of accounting and the intended use

AR-C 70 and AR-C 80 apply to financial statements prepared under a general purpose framework such as US GAAP or a special purpose framework such as the tax basis, cash basis or a contractual basis. When a special purpose framework is used, the statements must include a description of the framework and how it differs from GAAP, and the accountant considers whether the statements are suitably titled, such as statement of assets, liabilities and equity, income tax basis. The accountant also considers whether the framework is acceptable for the intended use: tax-basis statements are common for small businesses and accepted by many banks, but a user who expects GAAP may be misled.

Larch Street Bakery needs annual statements for its income tax filing and, this year, for a landlord who is considering extending its lease and wants to see two years of results. The owner, Mira Santos, keeps her books in an accounting package; Hollis Ward's staff accountant makes year-end adjustments for amortization, accrued payroll and inventory, and prepares the statements.

Choosing the engagement

The decision about which engagement to perform depends on the assurance users need, whether the practitioner prepares the statements, whether a report is wanted, and independence. The program encodes a simplified version of that decision for the four situations Hollis Ward meets with its small clients.

# Which engagement and report? A decision aid for small-entity financial statement work (US).
def engagement(assurance_needed, practitioner_prepares, report_wanted, independent):
    if assurance_needed == "limited":
        return "Review under AR-C 90", "accountant's review report; independence required"
    if assurance_needed == "reasonable":
        return "Audit under AU-C", "auditor's report; independence required"
    if practitioner_prepares and not report_wanted:
        return "Preparation engagement under AR-C 70", "no report; each page states 'No assurance is provided'"
    notes = ["compilation report (no assurance)"]
    if not independent:
        notes.append("last paragraph of the report must state that the accountant is not independent")
    return "Compilation under AR-C 80", "; ".join(notes)

cases = [
    ("Bank lender wants assurance on Kestrel's statements", "limited", False, True, True),
    ("Bakery owner needs statements for tax filing", None, True, False, True),
    ("Bakery's landlord asks for a compilation report", None, True, True, True),
    ("Bakery: accountant also keeps the books and has a family loan", None, True, True, False),
    ("Shareholder agreement requires an audit", "reasonable", False, True, True),
]
for label, a, prep, rep, ind in cases:
    kind, report = engagement(a, prep, rep, ind)
    print(f"{label}\n  -> {kind}: {report}")

Bank lender wants assurance on Kestrel's statements
  -> Review under AR-C 90: accountant's review report; independence required
Bakery owner needs statements for tax filing
  -> Preparation engagement under AR-C 70: no report; each page states 'No assurance is provided'
Bakery's landlord asks for a compilation report
  -> Compilation under AR-C 80: compilation report (no assurance)
Bakery: accountant also keeps the books and has a family loan
  -> Compilation under AR-C 80: compilation report (no assurance); last paragraph of the report must state that the accountant is not independent
Shareholder agreement requires an audit
  -> Audit under AU-C: auditor's report; independence required

For Kestrel, the bank wants assurance, so a review is required, and Hollis Ward must be independent. For the bakery's tax filing, where the owner does not need a report, a preparation engagement under AR-C 70 is efficient; each page of the statements will state that no assurance is provided. When the landlord asks for a report, the engagement becomes a compilation under AR-C 80. If the firm is not independent, for example because a partner has lent money to the owner's family, the compilation report must say so in its last paragraph; the accountant may, but is not required to, describe the reasons. Performing bookkeeping does not by itself impair independence for a compilation if the AICPA's requirements for nonattest services are met, including that management accepts responsibility and the firm does not make management decisions.

The report

An AR-C 80 compilation report states that management is responsible for the financial statements, that the accountant performed a compilation engagement in accordance with SSARS, that the accountant did not audit or review the statements or verify the information provided, and that the accountant does not express an opinion, a conclusion or any form of assurance. If the statements omit substantially all disclosures, which is permitted when the omission is not intended to mislead, the report says so. If the accountant is not independent, the last paragraph states that fact. For a preparation engagement, there is no report, but each page must include a statement such as No assurance is provided on these financial statements.

Changing the level of service

Clients sometimes ask to change the engagement after it has started. A request to move from an audit or review to a compilation, for example because a lender has dropped its requirement for assurance, is acceptable if there is a reasonable justification, such as a genuine change in users' needs or a misunderstanding about the service required. It is not acceptable if the real reason is to avoid an expected modified opinion or conclusion, or because management has refused to provide information or representations the practitioner needs. A practitioner who agrees to the change does not refer in the new report to the original engagement or to procedures already performed, because doing so would imply an assurance the new engagement does not provide.

The reverse change, from a compilation to a review or audit, usually happens when a new user arrives, such as a buyer conducting due diligence or a lender for a larger facility. The practitioner must then satisfy the stricter requirements from the start of the period, which may be impossible for some matters: opening inventory that was never counted by anyone independent, for instance, can force a qualified opinion in the first audited year. Small business clients who expect to grow benefit from advice about this early, and the practitioner should explain in plain language, at acceptance and in the engagement letter, what each level of service does and does not provide. For Larch Street Bakery, Hollis Ward explains that if the landlord later insists on assurance, a review of the following year would be possible, but the current compiled statements would remain unreviewed.

Related services and responsibilities that never go away

Compilation engagements sit within a broader family of related services that also includes agreed-upon procedures engagements, covered in lesson 11. All of them share an important principle: the professional accountant's ethical obligations apply in full even when no assurance is given. The practitioner must be competent, must not accept an engagement for which the firm lacks the resources, must not assume management's responsibilities, and must not be associated with misleading information. Inspection findings in compilation practices often concern exactly these points: compiled statements with obvious errors, such as negative inventory or unbalanced equity reconciliations, that should have been caught by reading them, or practitioners who effectively ran the client's finances.

Compilation work also brings practical risks for small firms. Clients often provide incomplete records at the last minute; the practitioner must ask for what is missing rather than fill gaps with guesses presented as management's numbers. Year-end adjustments the practitioner proposes must be explained to and approved by management. And documentation should show the understanding obtained, the significant judgments discussed, the reading of the statements and management's acknowledgment, so that the file supports the report if questioned by a practice inspector, a lender or a court.