What Is a Preparation Engagement in Accounting?
Demystify preparation engagements: an accounting service for financial statements, distinct from audits or reviews, offering no assurance.
A preparation engagement offers a valuable service for businesses needing financial statements without the extensive procedures of an audit or review. An accountant assists clients by preparing financial statements based on client-provided information. It is particularly useful for organizations that require financial statements for internal management, basic lending purposes, or compliance with certain non-assurance regulatory requirements.
Understanding Preparation Engagements
A preparation engagement is a non-attest service where an accountant takes client-provided financial data and compiles it into formal financial statements. The accountant’s role is to present the financial information in a suitable format, such as a balance sheet, income statement, and statement of cash flows. Unlike other financial services, the accountant does not express an opinion or conclusion, nor do they provide any form of assurance regarding the accuracy or completeness of the financial statements.
The accountant is not required to verify the underlying information supplied by the client or to perform any procedures to corroborate its accuracy. These engagements are guided by professional standards, specifically the Statements on Standards for Accounting and Review Services (SSARS), with AR-C Section 70, “Preparation of Financial Statements,” providing the relevant framework.
Key Aspects of a Preparation Engagement
A defining characteristic of a preparation engagement is that no assurance is provided. This differentiates it from services like audits or reviews, where the accountant offers an opinion or conclusion on the financial statements. The financial statements are simply “prepared,” not “audited” or “reviewed,” meaning the accountant does not vouch for their reliability.
This service is considered a non-attest engagement, which signifies that the accountant does not express a conclusion or opinion on the financial statements. Consequently, the accountant is not required to be independent of the client to perform a preparation engagement. This lack of an independence requirement is a significant aspect, allowing an accountant to prepare financial statements for a client for whom they also provide other services, such as bookkeeping or tax preparation. To prevent any misunderstanding about the level of service provided, each page of the financial statements must include a legend or disclaimer stating that “no assurance is provided” on the statements. Management retains the responsibility for the accuracy and completeness of the financial statements, even though an accountant assists in their preparation.
Who Uses and Provides Preparation Engagements
Small to medium-sized businesses (SMBs), sole proprietorships, partnerships, and non-profit organizations frequently utilize preparation engagements. These entities often need professionally prepared financial statements for various purposes but do not require the higher levels of assurance found in audits or reviews due to cost or regulatory reasons. For instance, a small business might use prepared financial statements to apply for a basic loan where the lender does not mandate an audit.
Other common scenarios include providing financial information to stakeholders who do not require assurance, using the statements for internal management decision-making, or fulfilling specific regulatory requirements that do not necessitate a formal audit or review. Certified Public Accountants (CPAs) and other qualified accounting professionals perform these engagements. While a CPA license is not strictly mandated for preparation engagements, many clients prefer working with CPAs due to their professional credentials and adherence to ethical standards.
Preparation Engagements Versus Other Financial Services
A preparation engagement differs from a compilation, which is also a non-attest service that provides no assurance. A compilation engagement, governed by AR-C Section 80, requires the accountant to issue a formal report, whereas a preparation engagement does not.
A review engagement, outlined in AR-C Section 90, offers limited assurance. In a review, the accountant performs inquiries and analytical procedures to determine whether any material modifications are needed for the financial statements to conform with the applicable financial reporting framework. This level of service is more extensive than a preparation engagement but less rigorous than an audit, and importantly, the accountant must be independent of the client to perform a review.
An audit, guided by AU-C Section 700, provides the highest level of assurance, known as reasonable assurance. An audit involves extensive procedures, including detailed testing of transactions, internal controls, and confirmations with third parties, culminating in an opinion on whether the financial statements are presented fairly in all material respects. Independence is a strict requirement for an auditor. The key differentiating factors among these services are the level of assurance provided, the requirement for accountant independence, and the type of report issued, if any.