Preparation Engagements and No Assurance Provided

16.4 Preparation Engagements and No Assurance Provided

Preparation engagements are increasingly common in today’s business environment, especially for small and mid-sized entities. Under Statements on Standards for Accounting and Review Services (SSARS), specifically AR-C Section 70, a CPA may prepare financial statements for a client while clearly indicating that they provide “no assurance.” This streamlined service helps management present financial information in a professional, standardized manner without incurring the additional cost or complexity of a compilation, review, or audit engagement. In this section, we will explore the key facets of preparation engagements: their scope, responsibilities of the CPA, differences from compilations, and best practices.

1. Overview of Preparation Engagements

A preparation engagement involves a CPA formally preparing financial statements based on information and records provided by the client. Unlike an audit, review, or even a compilation, no form of assurance or opinion is expressed or implied. The primary framework governing these engagements is AR-C Section 70.

From a practical standpoint, companies that opt for a preparation engagement often do so to obtain: • Well-formatted financial statements in accordance with the chosen reporting framework (e.g., GAAP, cash basis, or tax basis).
• A cost-effective solution where no third-party reliance or accountability beyond basic statement preparation is required.

In other words, a preparation engagement streamlines the financial statement presentation process for entities that do not need (or want) an accountant’s report or assurance.

2. Key Features of AR-C Section 70

AR-C Section 70, “Preparation of Financial Statements,” outlines the professional standards and requirements for CPAs who prepare financial statements and provide them to clients without issuing a report.

1. ■ No Assurance Provided:
   As mandated by AR-C Section 70, the CPA must include a legend or statement on each page of the prepared financial statements to indicate that “no assurance is provided.”

2. ■ No Accountant’s Report:
   In contrast to a compilation (under AR-C Section 80), the CPA does not issue a formal report describing the engagement or disclaiming an opinion. The only communication of significance is the legend on the face of each financial statement page.

3. ■ Basic Understanding of Financial Reporting Framework:
   The CPA should be familiar with the accounting or financial reporting framework used—be it GAAP, IFRS, cash basis, or other special-purpose frameworks—and ensure that the presentation reasonably conforms to that framework.

4. ■ Client-Provided Data:
   Management is responsible for providing accurate and complete data. The CPA arranges and formats this information into financial statements; however, the CPA does not audit, review, or compile the data in any attestation sense.

5. ■ No Requirement to Verify Data:
   The CPA is not obligated to investigate or verify the completeness or accuracy of the information, beyond addressing obvious errors or omissions if they appear incomplete or inaccurate. When such errors are identified, the CPA should discuss them with management, but the extent of follow-up is minimal compared to compilation or higher-level engagements.

3. Differences from Compilation Engagements

Preparation engagements and compilation engagements are both governed by the SSARS framework, but they diverge significantly in terms of documentation, reporting, and scope of CPA responsibility:

4. Responsibilities of the CPA

Even though a preparation engagement does not provide assurance, the CPA still has certain responsibilities:

1. ■ Understanding of the Reporting Framework
   The CPA has to ensure that the stated basis of accounting aligns with the business’s needs and is applied correctly in the statements. Although minimal testing or verification is performed, the CPA should apply specialized knowledge to format the statements accurately.

2. ■ Addressing Obvious Errors or Omissions
   If data is clearly incorrect or incomplete, the CPA should inform management. For instance, if total assets do not match the sum of individual line items or if major categories of expenses are missing, these issues should be escalated back to management. However, the CPA does not conduct extensive procedures to detect such errors—such oversight is management’s responsibility.

3. ■ Legends and Disclosures
   Each page of the prepared financial statements must include an indication that no assurance is provided. If it is not feasible to place the legend on each page, the CPA may attach a separate written disclaimer, ensuring that the recipient understands the accountant’s limited role.

4. ■ Documentation
   While less extensive than in compilation engagements, the CPA needs to retain documentation that is sufficient to show compliance with AR-C Section 70, including: • The engagement letter.
   • A record of final financial statements provided to management.
   • Any significant discussions about incomplete or erroneous data.

5. Comparisons with Bookkeeping

Preparation engagements can sometimes overlap with traditional bookkeeping services. However, there are notable distinctions:

• Bookkeeping often involves day-to-day recording of transactions, reconciliation of bank statements, and maintenance of accounting records.
• Preparation engagements specifically focus on presenting financial data in a statement format in accordance with a chosen financial reporting framework.

The same CPA firm might perform both tasks, but the engagement scope under AR-C Section 70 remains centered on drafting the financial statements without offering any assurance or performing any assurance procedures.

6. Common Pitfalls and Best Practices

Despite the relatively simple nature of preparation engagements, several pitfalls can arise:

1. ■ Failing to Include the Required Legend
   Forgetting or neglecting to put the “no assurance is provided” legend on each page of the financial statements can lead to confusion about the level of involvement or assurance. This omission also constitutes non-compliance with AR-C Section 70.

2. ■ Unclear Understanding of the Chosen Framework
   Inadequate consideration of the client’s reporting framework (e.g., GAAP vs. tax basis) can result in financial statements that are misleading or inaccurate. The CPA should confirm that the framework is suitable for the intended use.

3. ■ Mixing Services Unintentionally
   Sometimes, clients request a “simple” engagement but later ask for CPA insights that border on review or audit-level procedures. CPAs must clarify the scope and maintain documentation to distinguish it from higher-level services.

4. ■ Relying on Incomplete or Incorrect Financial Data
   While the CPA does not verify data comprehensively, any glaring inaccuracies must be addressed. Failing to do so can compromise the engagement’s integrity.

Below is a Mermaid.js diagram illustrating a simplified workflow of a preparation engagement:

    flowchart TB
	    A(Client Provides Data) --> B(Assess Presentation Requirements)
	    B --> C(Format Financial Statements)
	    C --> D(Check for Obvious Errors)
	    D --> E(Legend: "No Assurance Provided")
	    E --> F(Deliver Statements to Client)

• A(Client Provides Data): Management provides financial records and other relevant information.
• B(Assess Presentation Requirements): The CPA identifies relevant professional standards (e.g., AR-C 70) and appropriate accounting frameworks.
• C(Format Financial Statements): The CPA presents data in standard financial statement formats (Balance Sheet, Income Statement, etc.).
• D(Check for Obvious Errors): The CPA looks for any incomplete or glaringly incorrect data.
• E(Legend: “No Assurance Provided”): Each page of the statements must contain this statement.
• F(Deliver Statements to Client): Final financial statements are provided to the client with no separate compilation or review report.

7. Practical Example

Imagine a small medical clinic that operates on a cash basis and needs financial statements for internal use each quarter. The clinic’s management supplies a spreadsheet with all receipts and disbursements, as well as a record of outstanding payables. The clinic engages a CPA under a preparation engagement to format these figures into a standard Balance Sheet, Income Statement, and Statement of Cash Flows. Each page displays “no assurance is provided.” The CPA notices the total expenses are missing a large category of rent expense according to prior statements. They contact the clinic’s office manager, confirm the omission, and add the rent data. No other procedures are performed, and the CPA does not opine or verify the correctness of other income or expense accounts beyond rectifying the obvious missing rent item.

8. References and Resources

• Official Reference:
• AR-C Section 70, “Preparation of Financial Statements”

• Additional Resources:
• AICPA, “FAQ on Preparation Engagements” – a practical guide responding to common queries.
• AICPA Comparisons Chart – details distinctions among audits, reviews, compilations, and preparation engagements.

These references provide deeper dives into specific scenarios and address frequently encountered challenges in preparation engagements.

Conclusion

Preparation engagements are an effective means for small- to mid-sized organizations to produce formally structured financial statements at a lower cost and with minimal CPA involvement. By including the necessary legends, ensuring accurate presentation under the chosen framework, and differentiating from compilation or review engagements, CPAs can add significant value while maintaining clarity about the scope and nature of the service rendered.

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