Preparation of financial statements
Compilation of financial statements
The preparation of financial statements for a company by an independent, professional accountant involves the compilation of financial statements. Compilation of financial statements is often presented in the list of services of an accounting firm and involves, without the accountant, processing client data, preparing financial statements based on them to provide any degree of assurance and without making any markings on the audit services.
The compilation report is attached to the financial statements and reflects the management’s responsibility for the information presented and also clearly indicates that the financial information presented is not audited and the compilation report does not imply any form of expression by the auditor.
Complicated transaction
A compilation transaction helps companies that do not have an internal reporting system to obtain financial statements prepared by an independent professional, instead of a relatively expensive audit service.
Examples in which a company might use a compilation transaction:
The company has an accountant-operator who records daily business operations and records in the accounting system and always prepares profit and loss statements for management. However, under the terms of the loan agreement with the bank, the company is required to submit annual financial statements to the bank. The Bank does not require reporting or auditing. In this case, it is ideal for the company to use a compilation transaction.
The company has a parent enterprise that wants to receive information prepared by an independent subsidiary. However, the parent company wants to be able to do this at a lower cost.
In this case, too, the ideal solution is to compile financial statements. In this way it is possible to submit information at a lower cost.
Financial reporting prepared in accordance with international standards
The Company performs all accounting operations but requires financial statements prepared in accordance with International Standards, which in turn include all annual adjustments that are not reflected in the day-to-day operations performed by the Accountant. In such a case, the best option is compilation, during which the annual adjustments provided by the relevant international standard are reflected, such as: depreciation, creation of reserves, etc.
There are steps required to complete the compilation
- Search for detailed transactions and home journal, loan agreements and schedules, asset register, sales journal. Finding an inventory document. Identify obvious errors in the financial statements.
- According to international standard, a compilation transaction does not require the accountant to verify any information or contradict the facts. The accountant is not required to confirm loans, balances, or receivables; instead, the accountant is required to verify the financial data for obvious errors and for any errors that may be identified during the compilation process.
- Performing corrective journal handling. If an independent accountant finds obvious errors in the compilation process, he or she should perform the appropriate corrective action in such a way that the error is corrected. In the case of relevant financial statements compiled in accordance with generally accepted accounting principles, the content of the adjustments will depend on the principles under which the financial statements were prepared.
What is the difference between an audit, a review, and a compilation?
In preparing financial statements, business owners and executives need to agree on a method of preparing financial statements so that decisions can be made based on sound financial reporting.
A compilation is a basic summary of a company’s financial data performed by a professional accountant. Unlike reviews and audits, the result of the compilation does not constitute an opinion or belief of any kind. During the compilation, the accountant uses the information received from the management and is not obliged to compare it with other additional documents because as a result of the compilation no opinion or conclusion is issued, independence is not mandatory. In addition, it is advisable not to prepare financial statements for the company’s internal accountant, as this would be more likely to reveal obvious errors.
Limited Audit of Financial Statements
An overview is a limited review of financial statements performed by a professional. Provides only limited assurance regarding the materiality of the above financial statements. Analytical procedures are mainly used during the review.
An audit is an in-depth review of financial statements and provides sound assurance in the form of an auditor’s opinion.
The question of deciding which service is most suitable for a company goes before identifying the needs of the company. An important factor is the issue of costs, although this should not be given a decisive role. An in-depth review of the financial statements may help the company’s management to make the right decisions as professional auditors have the knowledge and experience needed to complete a financial statement review.
The report prepared as a result of the compilation transaction should include the following information:
- Statement that the Company’s management is responsible for the financial statements
- Financial statements
- Customer information
- Reporting period
- An application to ensure that the compilation is performed to the appropriate standard
- A statement that a professional practitioner has not audited or audited financial statements and has not used procedures to verify the information provided to him / her
- Signature of a professional practitioner
- The report date that should coincide with the date when the professional completed the compilation work
The result of a compilation transaction is a financial statement that serves the following purposes
- Preparation and declaration of tax information by management
- Creating a unified vision of the company’s financial condition and health before the relevant decision is made by the management
- Provide a better picture of the company before deciding whether to lend to financial institutions.
Accounting and Compilation Transaction
Conducting a compilation transaction by an experienced accountant is of the utmost importance, as a result of his many years of practice and qualifications he will be able to easily respond to obvious errors and communicate effectively with management. An inexperienced and unqualified accountant may make many mistakes so that the financial statements do not contain valuable information which is critical to making the right decisions, filing tax returns and finding additional finance.
It is important for the management of the company, for the banks, as well as for the state that the presented information be informative, so that they can make decisions that are relevant to the economic situation in the country and, if appropriate, the situation of the company.
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