A compilation engagement under SRS 4410 (Revised) is not an audit and it is not a review. The practitioner uses accounting and financial-reporting expertise to help management prepare and present financial information, but does not obtain assurance on that information. This matters because users may wrongly assume that a CA has verified the figures merely because the CA's name appears with them.
ICAI's current Engagement and Quality Control Standards repository lists SRS 4410 (Revised) under Standards on Related Services. The detailed requirements are in the official SRS 4410 (Revised) text, which applies to compilation engagements undertaken after 31 March 2016.
What a compilation engagement actually does
SRS 4410 covers engagements in which a practitioner assists management with preparing and presenting historical financial information under an applicable financial reporting framework and issues the report required by the standard. The service derives value from the practitioner's accounting expertise, ethical responsibilities and clear communication of the practitioner's involvement.
Because a compilation is a related service rather than an assurance engagement, the practitioner is not required to verify the accuracy or completeness of management's information for the purpose of expressing an audit opinion or review conclusion. Management remains responsible for the financial information, accounting policies and estimates, and the accuracy and completeness of the records and explanations it provides.
When can SRS 4410 be useful?
A compilation can be relevant when management wants a professional accountant to turn accounting records and management information into financial information prepared under an identified framework. The standard gives examples involving information for management or governance, information supplied to an external party under a contract such as a funding arrangement, and information prepared for a transaction such as a change in ownership or financing structure.
Step 1: agree the terms before doing the work
SRS 4410 requires the practitioner to agree the engagement terms with management and, where different, the engaging party. The written terms should identify the intended use and distribution, applicable reporting framework, objective and scope, practitioner responsibilities, management responsibilities and expected form and content of the report.
Management's responsibilities include the financial information, appropriate internal control, the accuracy and completeness of records and explanations supplied, and the judgments used in preparing and presenting the information. The terms must be recorded in an engagement letter or other suitable written agreement before the engagement is performed.
Step 2: understand the entity and reporting framework
The practitioner must obtain enough understanding of the entity's business and operations, including its accounting system and records, and of the applicable financial reporting framework to perform the compilation. This is not the same as an audit risk assessment, but it prevents compilation from becoming a mechanical export from a ledger.
For example, if a manufacturer asks a CA to compile year-end financial information, the practitioner may need to understand how inventory, revenue, borrowings and major estimates are recorded so that the information can be presented appropriately. The practitioner does not turn the engagement into an audit, but must understand enough to apply accounting and reporting expertise properly.
Step 3: compile from management's information and discuss significant judgments
The financial information is compiled using records, documents, explanations and other information supplied by management, including significant judgments. Where the practitioner assists management with significant judgments, those judgments must be discussed with management or those charged with governance as appropriate. Assistance does not transfer responsibility for the judgment to the practitioner.
Step 4: read the completed information and act on problems
Before completing the engagement, the practitioner must read the compiled financial information in light of the understanding of the entity and the applicable reporting framework. A compilation therefore is not a no-questions-asked data-entry service.
If records, explanations or other information appear incomplete, inaccurate or otherwise unsatisfactory, the practitioner must request additional or corrected information. If the practitioner becomes aware that the compiled information does not adequately describe the reporting framework, needs amendment to avoid material misstatement, or is otherwise misleading, appropriate amendments must be proposed.
If management fails to provide information needed to complete the engagement, or refuses necessary amendments to materially misstated or misleading compiled information, the standard requires the practitioner to withdraw and inform management and those charged with governance of the reasons. If withdrawal is not possible, the practitioner determines the applicable professional and legal responsibilities.
Worked example: financial information for a lender
Assume a business asks its CA firm to compile annual financial information for a lender from the trial balance, fixed-asset schedule, inventory records and management explanations. During compilation, the practitioner notices that a material loan has been classified inconsistently with the terms supplied by management and the selected reporting framework.
The practitioner should discuss the issue, propose the appropriate amendment and ensure management takes responsibility for the final version. The resulting statements should not be described as audited or reviewed, because the compilation engagement provides no audit or review assurance.
Step 5: document the engagement and obtain management acknowledgement
SRS 4410 requires documentation of significant matters and how they were addressed, a record showing how the compiled financial information reconciles with the underlying records and other information supplied by management, and a copy of the final financial information together with the practitioner's report. Management or those charged with governance must acknowledge responsibility for the final version.
What the compilation report should make clear
The written report identifies the compiled financial information and applicable framework, explains management's responsibilities, describes the practitioner's role and states that the engagement was performed under SRS 4410. It must explain that a compilation is not an assurance engagement, that the practitioner is not required to verify management's information for assurance purposes, and that no audit opinion or review conclusion is expressed.
If a special-purpose reporting framework is used, the report also explains the purpose of the financial information and draws attention to the fact that it may not be suitable for another purpose.
Practical SRS 4410 checklist
- Identify the intended users, intended use and distribution of the information.
- Identify the applicable financial reporting framework.
- Agree scope, responsibilities and expected reporting in writing before work starts.
- Obtain sufficient understanding of the business, accounting records and reporting framework.
- Compile using information supplied by management and discuss significant judgments where assistance is provided.
- Read the final information in light of that understanding and framework.
- Request corrected information and propose amendments when required by the standard.
- Obtain management's acknowledgement of responsibility for the final version.
- Document the reconciliation to underlying records, significant matters and final report.
- Make the no-assurance nature of the engagement unmistakable in the report.
Common mistakes
- Calling compiled financial information audited merely because a CA prepared it.
- Using engagement terms that do not clearly identify management's responsibilities or the applicable framework.
- Assuming no assurance means the practitioner can ignore information known to be materially misstated or misleading.
- Failing to document how the final information reconciles with records supplied by management.
- Omitting management's acknowledgement of responsibility for the final compiled information.
Practical takeaway
SRS 4410 is a disciplined preparation-and-reporting engagement, not a smaller audit. The practitioner contributes accounting expertise, understands the entity and framework, compiles from management's information, addresses problems that come to attention and reports transparently that no assurance is provided. Management owns the information and judgments; the practitioner remains responsible for performing the compilation and reporting in accordance with SRS 4410.
