IN THIS weekly column, the seventh in our series, we continue to look at non audit services;
Compilation Engagements & Reviews
Compilation engagements have previously been seen as private arrangements between an entity and a practitioner. However, as the compiled financial information is often used by a third party, application of a rigorous compilation process adds to the perceived reliability of the financial information produced. Rigor in the process will be achieved when a compilation is conducted in accordance with the (proposed revised) international standard International Standard for Review Engagement (ISRE) 4410 in relation to financial statement compilation engagements.
There is also anecdotal evidence that third parties place reliance on the compilation report provided by a practitioner. For smaller entities compilation engagements enable access to professional expertise in a cost effective manner, and replace the need to employ a highly skilled professional employee. Transaction recording is likely to be maintained by a book-keeper, and financial information for decision-making is prepared by a practitioner.
In our experience, these engagements extend beyond a “pure” exercise in compilation, as practitioners will also explain the significance of the accounting measures used and their impact on decision-making to promote “good economic health”. This service is critical to a smaller entity who may not otherwise understand the impact of future transactions on their cash flows and liquidity, whether this is settlement of a tax liability or necessary capital expenditure to support expansion of business activity.
Review Conducted by a Practitioner Rather than an Auditor
An independent review, rather than an independent audit, is another assurance service that is being developed by the IAASB for financial statements. Review procedures comprise mainly analytical review and inquiry. Analytical review procedures include examination of expected outcomes based on past history and the relationships between various transactions and account balances. ISA 520 “Analytical Procedures” contains the following definition:
“For purposes of the Australian Auditing Standards, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data. Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount”.
However, prerequisite conditions for a review are reliability in the information produced and the ability for owner/managers to respond appropriately to queries raised by the reviewer. It is often difficult to predict the “plausible relationships” as anticipated above, when entities experience rapid growth and past history does not necessarily provide appropriate indicators for the future. Therefore an SME with an established business that is not actively seeking growth opportunities is likely to present the prerequisite conditions for an external review. In contrast, an SME with a growing business, which is still in the process of establishing good internal controls and reliable reporting practices, is less likely to be able to demonstrate that these preconditions exist.
Perhaps of more significance, a small but growing entity that has a review rather than an audit, will not receive the benefit of an annual structured examination of its business risks and reporting practices.
ABOUT BAKER TILLY INTERNATIONAL
Baker Tilly International is the world’s 8th largest accountancy and business advisory network by combined fee income of its independent members. It is represented by 126 independent firms in 147 countries with combined fee income of US$3.8bn and 28,000 people worldwide. Its members are high quality, independent accountancy and business advisory firms, all of whom are committed to providing the best possible service to their clients, both in their own marketplace and across the world. Our key services include Auditing, Advisory, Tax and Accounting.
Baker Tilly is the representative member firm of Baker Tilly International in Zambia
For more information, visit us at
8,13 Reedbuck Road
Telephone. +260 211 269 416 +260 967 207 506
Practice Director: Priscilla S. Mpundu Priscilla.Mpundu@bakertilly.co.zm
Audit Manager: Richard Mandeya Richard.Mandeya@bakertilly.co.zm