AR-C 70: The Definitive Guide to Preparations (2023)

Are you aware of the option in the SSARS titled Preparation of Financial Statements (AR-C 70)? Many CPAs still believe the lowest level of service in the SSARS is a compilation, but this is not true. CPAs can and do issue financial statements without a compilation report. Today I provide an in-depth look at AR-70, Preparation of Financial Statements.

Preparation of Financial Statements

Guidance

AR-C 70, Preparation of Financial Statements, is the guidance for the preparation of financial statements.

Applicability - AR-C Section 70

AR-C section 70, Preparation of Financial Statements, is applicable when a public accountant is engaged to prepare financial statements or prospective financial information.

This section can also be applied to the preparation of other historical financial information (e.g., schedule of rents).

AR-C 70 does not apply when the accountant prepares financial statements or prospective financial information:

  • And is engaged to perform an audit, review, or compilation of financial statements
  • Solely for submission to taxing authorities
  • For inclusion in written personal financial plans
  • In conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
  • In conjunction with business valuation services

Are there other times when AR-C 70 is not applicable? Yes. The preparation guidance does not apply when the accountant is merely assisting in the preparation of financial statements; such services are considered bookkeeping.

Examples of bookkeeping services include:

  • Preparing or proposing certain adjustments, such as those applicable to deferred income taxes or depreciation
  • Drafting financial statement notes
  • Entering general ledger transactions or processing payments in the client’s accounting software

When AR-C 70 is applicable, certain compliance actions—such as the creation of a signed engagement letter—are required. If the accountant is merely assisting with bookkeeping services, AR-C 70 is not triggered, and compliance with the standard is not necessary.

If the accountant is only entering transactions into a general ledger and making journal entries, he is merely assisting with bookkeeping. Such assistance is often provided in an online bookkeeping software such as QuickBooks. If this is the only service provided, AR-C 70 is not applicable.

If the accountant is engaged to prepare financial statements and performs any of the following, then AR-C 70 applies.

  • The accountant prepares financial statements that are provided to another accountant (another firm) for audit purposes
  • The accountant prepares financial statements separately from a tax return (e.g., the accountant might prepare a tax return that includes financial statements and then—at the client’s request—creates financial statements separately from the return)
  • The accountant uses the client’s general ledger information to prepare financial statements outside of the accounting software (e.g., the accountant places information from a Quickbooks general ledger into Excel and creates financial statements)

As you can see, the preparation standard makes a distinction between:

  • Preparing financial statements (which triggers AR-C 70) and
  • Merely assisting (which does not trigger AR-C 70)

Are there any other situations where AR-C 70 does not apply? Yes. The AICPA’s Center for Plain English Accounting addressed this question in the following question and answer:

Q: If financial statements are prepared by the accountant as a by-product of another engagement (for example, an engagement to prepare a tax return), is the accountant required to follow section 70 of SSARS No. 21 and include any special disclaimer or “no assurance” statement on those financial statements?

(Video) The ENTIRE Jujutsu Kaisen Perfect Preparation Arc Explained...

A: No. The accountant is only required to perform the preparation engagement in accordance with section 70 of SSARS No. 21 when engaged to prepare financial statements. Therefore, because the accountant was not engaged to prepare the financial statements, there is no requirement to include a statement on each page of the financial statements indicating that no assurance is provided on the financial statements.

The author requested that the AICPA define the word engaged. They responded that a client’s request for the preparation of financial statements service is the trigger for being “engaged.” In other words, a client’s request for the preparation of financial statements means we are “engaged,” provided we accept the work. Once the client makes the request, the accountant will create an engagement letter in compliance with AR-C 70.

If the client does not request the preparation of financial statements and the accountant creates the statements as a byproduct of another service (e.g., tax return), he is not subject to the requirements of AR-C 70.

So when is AR-C 70 applicable? When a public accountant is engagedtoprepare financial statements.

AR-C 70 Objective

The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework.

AR-C 70 Reports

A compilation report from the accountant is not required (and should not be provided) when preparing financial statements under AR-C 70.

Financial Statements

The accountant can prepare financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework such as the following:

  • Cash basis
  • Tax basis
  • Regulatory basis
  • Contractual basis
  • Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items)
  • Generally accepted accounting principles (GAAP)

When preparing financial statements in accordance with a special purpose framework (e.g., tax basis), the accountant is required to include a description of the financial reporting framework either on the face of the financial statements or in a note. Here’s a sample disclosure in a financial statement title: Statement of Assets, Liabilities, and Equity—Tax Basis.

Management determines the financial statements to be prepared. Financial statements normally include the following:

  • Balance sheet
  • Income statement
  • Cash flow statement

The accountant can, if so directed by management, create and issue just one financial statement (e.g., income statement).

The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.

The accountant should also obtain an understanding of the significant accounting policies to be used in the preparation of the financial statements.

In preparing the financial statement, the accountant may need to assist management with judgements regarding amounts or disclosures. The accountant should discuss these judgments with management. Why? So management can understand and accept responsibility for the financial statements.

(Video) 70% PTSD VA Rating: What it Means and How to Qualify

Documentation Requirements - AR-C 70

The accountant should prepare and retain the following documentation:

  • Engagement letter (or contract)
  • The financial statements

Documentation related to significant consultations or professional judgments are to be included in the engagement file. Also, if the accountant departs from a relevant presumptively mandatory requirement, he should document the justification for the departure and how the alternative procedures performed were sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)

AR-C 70 Engagement Letter

Is an engagement letter required for a preparation service? Yes. Moreover, the letter should be signed by the accountant or the firm and management or those charged with governance. A verbal understanding is not sufficient. Though AR-C 70 does not specify how often the engagement letter should be updated, it is best to do so annually.

The engagement letter should specify:

  • The objectives of the engagement
  • The responsibilities of management
  • The responsibilities of the accountant
  • The limitations of the preparation engagement
  • Identification of the applicable financial reporting framework
  • The agreement of management that:
    • Each page of the financial statements will include a statement that no assurance is provided, or
    • The accountant will issue a disclaimer stating that no assurance is provided
  • Whether the financial statements will:
    • Contain known departures from the applicable reporting framework, and
    • Whether substantially all disclosures will be omitted

Preparation of Financial Statements - No Report

As noted above, no compilation report will be issued for a preparation service. The preparation service is considered a nonattest, nonassurance service, and no compilation, review, or audit procedures are required.

The accountant will do one of the following:

  1. On each financial statement page (including the related notes), indicate, at a minimum, that “no assurance is provided,” or
  2. Provide a disclaimer (see example below)

If the accountant uses the first option, wording such as the following should be included on each page of the financial statements (including the related notes):

  • No assurance is provided on these financial statements
  • These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them, or
  • ABC CPAs prepared these financial statements in accordance with professional standards of the AICPA, and no assurance is provided

Other statements can be used to communicate that no assurance is provided, but the minimum wording must include “No assurance is provided.” The “no assurance” wording is made at management’s discretion, and the accountant’s firm name is notrequired to be included. The wording is normally placed at the bottom of each page. If the client does not allow the accountant to include such a statement on each page of the financial statements, the accountant should:

  • Issue a disclaimer (see below)
  • Perform a compilation in accordance with AR-C 80, or
  • Withdraw from the engagement

Preparation of Financial Statements Disclaimer

If the disclaimer option is used, AR-C 70 provides the following language:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

Though not required, the disclaimer can be placed on firm letterhead. Notice that the disclaimer language above has no disclaimer title. While the standard is silent about providing a title, the accountant may add one. For example, Accountant’s Disclaimer. A salutation is not required, but may be added.

Some accountants prefer to provide a disclaimer on letterhead. Why? Any third party reader can see that the accounting firm is involved in the preparation of the statements and that no assurance is provided.

(Video) How to sound smart in your TEDx Talk | Will Stephen | TEDxNewYork

A third party may not know that an external accountant was involved in preparing the statements if the “no assurance is provided” legend is used and the firm’s name is not included. Remember, however, it is the client’s decision as to whether the “no assurance” legend is added or a disclaimer is provided.

Independence

Preparation of financial statements is a nonattest, nonassurance service. When an accountant performs only a preparation engagement, consideration of independence is not necessary.

If an accountant signs client checks and performs bookkeeping services, independence is not required. Moreover, if the accountant prepares financial statements for the same client, independence is not required. Signing checks, bookkeeping, and the preparation of financial statements are all nonattest services.

But what happens if the accountant prepares financial statements and issues a compilation report?

Suppose an accountant issues monthly financial statements for January through November with no compilation report (using the preparation option), but in December issues financial statements with a compilation report. Providing the monthly preparation services and the December compilation service triggers a requirement to consider independence.

Just remember this for now: Independence is not required for preparation engagements, and there are no requirements to disclose a lack of independence in a preparation engagement.

Omission of Substantially All Disclosures

Can the accountant omit all disclosures (notes to the financial statements) in a preparation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:

  1. Omit all disclosures
  2. Provide selected disclosures
  3. Provide full disclosure

Regardless, the engagement letter should describe the level of disclosure to be provided in the financial statements. Also, the omission of substantially all disclosures should be communicated either on the face of the financial statements or in a selected note. There is no provision in the preparation standard to report the omission of disclosures in the accountant’s disclaimer that precedes the financial statements.

The accountant can communicate the omission of disclosures by including wording such as the following at the bottom of each financial statement page or in a note:

  • Substantially all disclosures required by accounting principles generally accepted in the United States are not included.
  • Substantially all disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting are not included.

The accountant can also communicate the omission of disclosures in the title of the financial statements. For example:

ABC Company

Statement of Income

Substantially All Disclosures Omitted

December 31, 2020

Information Provided is Incomplete or Inaccurate

Deficiencies in the information provided to the accountant should be communicated to management, and the inaccuracy or incompleteness of such information should be corrected. Deficiencies in the information include insufficient records, documents, explanations, and judgments.

Reporting Known Departures from the Applicable Financial Reporting Framework

How should a departure from the applicable financial reporting framework be reported? Discuss the departure with management to see if it can be corrected. If it is not corrected, disclose the departure. How?

A departure from the applicable financial reporting framework should be disclosed either on the face of the financial statements or in a note. If it takes more than a few words to describe the departure, note disclosure may be the better option—you’ll have more room there. There is no provision in the preparation standard to disclose departures in the accountant’s disclaimer that precedes the financial statements.

(Video) Jackie Chan's Recent (Bad) Movies - Part 2 | Video Essay

AR-C 70 Other Historical or Financial Information

In addition to historical financial statements, AR-C 70 may be applied to the following:

  • Specified elements, accounts, or items of a financial statement, including schedules of:
    • Rents
    • Royalties
    • Profit participation, or
    • Income tax provisions
  • Supplementary information
  • Required supplementary information
  • Pro forma financial information

AR-C 70 Prospective Financial Information

AR-C 70 can be applied to prospective information.

Prospective financial information is defined as any financial information about the future.

Prospective financial information can be presented as:

  • A complete set of financial statements, or
  • One or more elements, items, or accounts

If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information.

If you prepare a financial projection, you should not exclude:

  • The identification of hypothetical assumptions, or
  • The description of the limitations on the usefulness of the presentation

AR-C 70 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.

AR-C 70 Prescribed Forms

Is it permissible to perform a preparation of financial statement engagement with regard to prescribed forms?

Yes. There is nothing in AR-C 70 that prohibits the accountant from performing a preparation engagement with regard to prescribed forms (e.g., bank personal financial statement). However, the accountant is required to follow all of the preparation guidance. Clients may not want to add wording to the prescribed forms such as “no assurance is provided” or “substantially all disclosures are omitted.” As an alternative to adding such wording, the accountant can provide a disclaimer before the prescribed form.

Selected notes can follow the form if needed. If this option is used, the order of the deliverable is as follows:

  • Disclaimer
  • Prescribed form
  • Selected notes

When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form. In effect, the prescribed form is the reporting framework. Report departures from the prescribed form and its related instructions on the face of the financial statements (the form) or in a note.

Draft Financial Statements

The client may request a draft copy of the financial statements prior to final issuance. To avoid confusion, mark statements with words like:

  • Draft Financial Statements
  • Working Draft
  • Draft - Subject to Change

Preparation of Financial Statements - A Simple Summary

  • AR-C 70 is applicable when the accountant is engaged to prepare financial statements and is not applicable when the accountant is engaged to perform a compilation or if the accountant is merely assisting with bookkeeping
  • The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework
  • The financial statements can be prepared in accordance with GAAP or a special purpose reporting framework
  • The financial statements can be distributed to third parties (and not just management)
  • The accountant must either:
    • State on each financial statement page that “no assurance is provided,” or
    • Provide a disclaimer
  • Documentation requirements include:
    • The engagement letter, and
    • The financial statements
  • An engagement letter must be signed by:
    • The accountant or the accountant’s firm, and
    • Management or those charged with governance
  • No report (e.g., compilation report) is attached to the financial statements
  • Consideration of independence is not required
  • Substantially all disclosures can be omitted
  • The omission of substantially all disclosures should be:
    • Disclosed on the face of the financial statements, or
    • In a note
  • Selected disclosures can be provided
  • Departures from the applicable financial reporting framework should be:
    • Disclosed on the face of the financial statements, or
    • In a note
  • A preparation engagement can be applied to historical financial statements and historical information (e.g., specified items of a financial statement).
  • A preparation engagement can be applied to prospective financial information. The summary of significant assumptions must be included.
  • A preparation engagement can be performed in relation to prescribed forms (e.g., bank personal financial statements)
  • Mark draft financial statements with appropriate wording (e.g., Draft Financial Statements)

Also, see my article The Definitive Guide to Compilations.

Differences in Preparation and Compilation Engagements

How do preparation engagements compare to compilations? Here's a video that explains the differences.

(Video) Cross Field Preparation Guide! What We Should Prepare? 【Ni no Kuni: Cross Worlds】

FAQs

What does Ssars No 21 specifically AR-C Section 70 preparation of financial statements say with respect to a CPA's preparation services? ›

Section 70, Preparation of Financial Statements— Provides requirements and guidance to an accountant who is engaged to prepare financial statements for an entity but not engaged to perform a compilation, review, or audit with respect to those financial statements.

How does AR-C 70 treat the preparation of financial statements? ›

AR-C section 70, Preparation of Financial Statements, is applicable when a public accountant is engaged to prepare financial statements or prospective financial information. This section can also be applied to the preparation of other historical financial information (e.g., schedule of rents).

What does AR-C stand for in auditing? ›

01 This section provides general principles for engagements performed in accordance with Statements on Standards for Accounting and Review Services (SSARSs) issued by the Accounting and Review Services Committee (ARSC) and codified into AR-C sections.

What are the 9 steps in preparing financial statements? ›

Here are the nine steps in the accounting cycle process:
  1. Identify all business transactions. ...
  2. Record transactions. ...
  3. Resolve anomalies. ...
  4. Post to a general ledger. ...
  5. Calculate your unadjusted trial balance. ...
  6. Resolve miscalculations. ...
  7. Consider extenuating circumstances. ...
  8. Create a financial statement.
23 Jul 2021

Can a non CPA prepare financial statements? ›

Only a CPA can prepare an audited financial statement and a reviewed financial statement. However, both CPAs and non-certified accountants, including bookkeepers, can prepare compiled financial statements.

Can a CPA prepare financial statements? ›

Oftentimes, the certified public accountant (CPA) who performs your general accounting and/or bookkeeping and prepares your annual tax return can also prepare your financial statements and, in addition, perform the appropriate service in order to meet your bank's requirements.

What is considered financial statement preparation? ›

The preparation of financial statements involves the process of aggregating accounting information into a standardized set of financials.

Who is are responsible for the preparation of financial statements? ›

Directors prepare financial statements; audit committees monitor the integrity of financial information. 5. Auditors audit the financial statements and perform other procedures on other parts of the annual report. 6.

What is needed to prepare financial statements? ›

Information from your accounting journal and your general ledger is used in the preparation of your business's financial statement. The income statement, the statement of retained earnings, the balance sheet, and the statement of cash flows all make up your financial statements.

What is the difference between preparation and compilation? ›

In a preparation engagement, the accountant is literally preparing the financial statements based on information management provides (e.g. trial balances). In a compilation engagement, management prepares the financial statements, and the accountant will read and help finalize the financial statements.

What is AR 60 cesarean? ›

General Principles for Engagements. Performed in Accordance With Statements. on Standards for Accounting. and Review Services.

How do I write a compilation report? ›

The compilation report should:
  1. Include a statement that management (owners) is (are) responsible for the financial statements.
  2. Identify the financial statements.
  3. Identify the entity.
  4. Specify the date or period covered.
  5. Include a statement that the compilation was performed in accordance with SSARS.

What are the 5 types of financial statements? ›

The 5 types of financial statements you need to know
  • Income statement. Arguably the most important. ...
  • Cash flow statement. ...
  • Balance sheet. ...
  • Note to Financial Statements. ...
  • Statement of change in equity.

What are golden rules of accounting? ›

Take a look at the three main rules of accounting: Debit the receiver and credit the giver. Debit what comes in and credit what goes out. Debit expenses and losses, credit income and gains.

What are the four phases of accounting? ›

The first four steps in the accounting cycle are (1) identify and analyze transactions, (2) record transactions to a journal, (3) post journal information to a ledger, and (4) prepare an unadjusted trial balance.

Is a CPA better than an accountant? ›

A CPA is better qualified than an accountant to perform some accounting duties, and recognized by the government as someone who is credible and an expert in the field. Individuals who have received a CPA designation are trained in generally accepted accounting principles and best practices (including online tools).

Can a bookkeeper call themselves an accountant? ›

Bookkeeper credentials

Usually, the bookkeeper's work is overseen by either an accountant or the small business owner whose books they are doing. So a bookkeeper can't call themselves an “accountant.”

Do I need a CPA or accountant? ›

Choose a CPA if you want business and accounting advice in addition to tax support. Do you require specialized accounting? If you need extra insight regarding business strategy, management accounting is the way to go. If you require advanced cost analysis, consider a cost accountant.

Can your accountant also be your auditor? ›

Your accountant can act as the company's auditors if they: don't fall into one of the disallowed categories (see 'Who can my company appoint as an auditor?' above); don't take part in the management of the company at all; and.

What do non-CPA accountants do? ›

What is a Non-CPA (General Accountant)? A general accountant is an accounting professional entitled to record, examine, analyze, and report financial transactions. Their key responsibility is to ensure the accuracy of financial records and compliance to accounting principles. read more.

Can bookkeepers prepare financial statements? ›

Typically bookkeepers are responsible for preparing four key financial statements: Income statement (also called a profit & loss statement), which shows your revenue and your expenses over a specified time period. Balance sheet, which is just a snapshot of your financial position at one point in time.

What are the four financial statements and how they are prepared? ›

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.

Which financial statement is prepared first? ›

The income statement, which is sometimes called the statement of earnings or statement of operations, is prepared first. It lists revenues and expenses and calculates the company's net income or net loss for a period of time. Net income means total revenues are greater than total expenses.

Do auditors prepare financial statements? ›

For many audit engagements, the auditors prepare financial statements. It is a common misconception that this is a part of the audit. However, preparation of financial statements is an additional service that is not a part of the audit.

What are the nine accounting process? ›

Nine Steps of Accounting Cycle

Journalizing the information. Posting the transactions to the ledger. Preparing an un-adjustable trial balance. Adjusting any necessary trial balance data.

What is the eight step in the nine step accounting cycle? ›

The eight steps of the accounting cycle are as follows: identifying transactions, recording transactions in a journal, posting, the unadjusted trial balance, the worksheet, adjusting journal entries, financial statements, and closing the books.

How do you prepare financial statements for a business? ›

How Do I Write a Financial Plan for My Business?
  1. Step 1: Make A Sales Forecast. ...
  2. Step 2: Create A Budget for Your Expenses. ...
  3. Step 3: Develop Cash Flow Statement. ...
  4. Step 4: Project Net Profit. ...
  5. Step 5: Deal with Your Assets and Liabilities. ...
  6. Step 6: Find the Breakeven Point.
18 Mar 2019

What are the 4 main financial statements and what is the purpose of each? ›

They are: (1) balance sheets; (2) income statements; (3) cash flow statements; and (4) statements of shareholders' equity. Balance sheets show what a company owns and what it owes at a fixed point in time. Income statements show how much money a company made and spent over a period of time.

Videos

1. Basic Hamster Care 🐹 2021
(Victoria Raechel)
2. Tips For Shooting Sports Videography & How To Prepare | Canon C70
(BELRIE)
3. How to Grow Broccoli - Complete Guide - Seed to Harvest
(Next Level Gardening)
4. 90 Days DSA Roadmap ! 🔥 | DSA Conquered! 💯 | Beginner to Advanced Level!
(Nishant Chahar)
5. HOW TO CROCHET FOR ABSOLUTE BEGINNERS | EPISODE ONE | Bella Coco Crochet
(Bella Coco)
6. Do This Before Level 70 in WoW TBC Classic
(GuideMMO)
Top Articles
Latest Posts
Article information

Author: Reed Wilderman

Last Updated: 10/26/2022

Views: 6206

Rating: 4.1 / 5 (72 voted)

Reviews: 95% of readers found this page helpful

Author information

Name: Reed Wilderman

Birthday: 1992-06-14

Address: 998 Estell Village, Lake Oscarberg, SD 48713-6877

Phone: +21813267449721

Job: Technology Engineer

Hobby: Swimming, Do it yourself, Beekeeping, Lapidary, Cosplaying, Hiking, Graffiti

Introduction: My name is Reed Wilderman, I am a faithful, bright, lucky, adventurous, lively, rich, vast person who loves writing and wants to share my knowledge and understanding with you.