AUD · Forming Conclusions & Reporting · 8 practice questions
Compilation Report Wording for Lack of Independence
A compilation may proceed without independence, but the report must state that the accountant is not independent. Below, sort proposed reporting choices for Hart Co., whose CPA has a direct financial interest and also prepared source documents.
Try one first
Hint
For a compilation, analyze the omitted-disclosures issue separately from the independence issue, then determine what the report must say about each.
Answer A. Under SSARS, a compilation may omit substantially all disclosures if the omission is not intended to mislead, but the compilation report must inform users that disclosures were omitted. A lack of independence does not prohibit issuing a compilation; however, the report must state that the CPA is not independent. The accountant is not required to describe the reasons for impaired independence, and if reasons are disclosed they must be complete rather than selective.
Why not B: This option correctly recognizes the need to address omitted disclosures and to state lack of independence, but it is wrong because SSARS does not permit selective disclosure of only one reason for impairment; the accountant may omit reasons or, if reasons are given, must disclose all of them.
Why not C: This distractor appeals to candidates who conflate higher-assurance rules with compilations. In fact, SSARS permits omission of substantially all disclosures in a compilation if not intended to mislead and if the report includes the required language. Independence impairment does not prohibit a compilation.
Why not D: This option may seem plausible because compilations provide no assurance, but it is incorrect: when the accountant is not independent in a compilation engagement, the compilation report must explicitly state that lack of independence.
Sort it
The report states nonindependence and describes either no reasons or all reasons.
The report never states that the accountant is not independent.
The report states nonindependence but explains only some of the reasons.
| Item | Goes to |
|---|---|
| The report states, “We are not independent with respect to Hart Co.” It gives no reasons. | Meets the ruleThe required statement is present. Explaining the reasons is optional. |
| The report states that the CPA is not independent because of a direct financial interest. It says nothing about preparing source documents. | Incomplete reasonsOnce the CPA explains reasons, both impairments must be described. |
| The report states that no assurance is provided but makes no reference to independence. | Missing nonindependence statementNo assurance does not eliminate the required statement that the CPA is not independent. |
| The report states nonindependence and explains both the direct financial interest and preparation of source documents. | Meets the ruleThe CPA chose to explain the reasons and included both. |
| The report states that the CPA is not independent because the CPA prepared source documents. It omits the direct financial interest. | Incomplete reasonsExplaining the source-document impairment does not permit withholding the financial-interest impairment. |
| The report says, “Independence is not required for a compilation,” without stating whether the CPA is independent. | Missing nonindependence statementA general statement about compilation requirements does not disclose the CPA's actual lack of independence. |
| The report describes the direct financial interest and preparation of source documents but never states that the CPA is not independent. | Missing nonindependence statementListing impairments does not replace the required statement of nonindependence. |
| Management requests disclosure of only the financial interest. Instead, the CPA states nonindependence and omits all reasons. | Meets the ruleManagement's preference does not change the test. Omitting all reasons remains allowed; selectively describing them does not. |
| The report says, “We are not independent because we prepared source documents and because of another undisclosed matter.” | Incomplete reasonsAcknowledging another impairment is not the same as describing it. The financial-interest reason is still missing. |
| The CPA tells management about both impairments privately, then issues a report that says nothing about independence. | Missing nonindependence statementManagement's knowledge does not replace disclosure in the compilation report. |
Key points
- Remember: State nonindependence, then explain all reasons or none.
- Providing no assurance does not excuse leaving out the required independence statement.
- Management's knowledge or preferences cannot replace the required report disclosure.
How the exam traps you
- Omitting the independence statement because a compilation provides no assurance. The report must still state that the accountant is not independent.
- Assuming the report must explain every impairment. Reasons are optional. A statement of nonindependence without reasons satisfies the rule.
- Naming one impairment while withholding another. If the report explains reasons, include all reasons, not a selected subset.
Question 2
Hint
Start with two questions: Is a report being issued, and does the service require independence?
Answer C. This fact pattern calls for a compilation because management wants a report to accompany the financial statements but has requested no assurance. Under SSARS, a compilation may be performed even when the accountant's independence is impaired provided the compilation report discloses the lack of independence. Reviews and audits, in contrast, require the accountant to be independent, and preparation engagements do not include an accompanying report.
Why not A: Preparation engagements provide no assurance and typically do not result in a report that accompanies the financial statements; because management requested a report to accompany the statements, a preparation is not the appropriate service.
Why not B: A review provides limited assurance and requires independence. Disclosing a lack of independence does not permit performing a review while impaired, so this option is incorrect.
Why not D: This overgeneralizes the independence requirement: while impairment does bar reviews and audits, SSARS allows compilations to be performed when independence is impaired if the compilation report discloses the lack of independence.
Question 3
Hint
Focus first on which SSARS engagements require independence and which ones still require a report.
Answer B. Independence is not required to perform a compilation under SSARS; however, the accountant must disclose the lack of independence in the compilation report. A compilation engagement requires issuing a compilation report, unlike a preparation engagement where no report is issued if the client includes the required legend. Because there are no other reporting issues, issuing the compilation report with the independence disclosure is the appropriate action.
Why not A: This confuses compilations with preparation engagements. In a preparation engagement no report is issued if the client includes the required legend, but the scenario specifies a compilation, which does require a compilation report.
Why not C: Candidates may assume third-party use requires independence; however, SSARS does not require independence for a compilation. The correct action is to disclose the lack of independence in the compilation report, not automatically decline.
Why not D: A review provides limited assurance and does require independence. Since Lopez is not independent, converting to a review would not be appropriate and would create a different compliance issue under SSARS.
Question 4
Hint
Focus on which SSARS engagements require independence and which engagements can still be performed with a lack-of-independence disclosure.
Answer C. A review engagement under SSARS requires independence. If independence is impaired, the accountant may not perform a review or issue a review report. The firm therefore must decline the requested review unless the independence impairment is eliminated before acceptance or performance (the firm could, as a separate engagement, offer a compilation with a lack-of-independence disclosure if the client agrees).
Why not A: Tempting because disclosure of lack of independence is allowed in a compilation. However, a review provides limited assurance and requires independence, so simply disclosing nonindependence does not permit issuing a review report.
Why not B: This confuses review and compilation reporting. A review provides limited assurance and cannot be converted into a no-assurance report solely because independence is impaired; the accountant must decline the review.
Why not D: A compilation with a disclosed lack of independence can be performed as a separate engagement, which makes this distractor realistic. But the appropriate response to the requested review is to decline the review unless independence is restored; substituting a compilation would change the engagement and requires client agreement.
Question 5
Hint
Focus on two facts: whether a report will be issued and whether the accountant is providing any assurance.
Answer C. This is a compilation engagement because the accountant will issue a report presenting financial statements without providing assurance. Independence is not required for a compilation, but when the accountant is not independent the compilation report must disclose that lack of independence.
Why not A: Tempting because preparation engagements also provide no assurance and do not require independence, but a preparation ordinarily does not include a CPA report. Because Hart requested a report to accompany the financial statements, the engagement is a compilation, not a preparation.
Why not B: Reviews provide limited assurance and require independence plus inquiry and analytical procedures; the facts state those procedures will not be performed and the firm is not independent, so a review is not appropriate.
Why not D: This overgeneralizes the independence requirement for reviews and audits. Lack of independence does not prohibit a compilation engagement; the accountant may compile the statements provided the compilation report discloses the lack of independence.
Question 6
Hint
Separate the issue into two questions: can the compilation still be performed, and what specific reporting modifications are required once it is performed?
Answer B. Under SSARS, a compilation engagement may be performed even when the accountant is not independent, but the compilation report must disclose the lack of independence. When substantially all disclosures are omitted and the omission is not intended to mislead, the accountant must include an omitted-disclosures paragraph describing the omission. The accountant need not disclose the reason for the lack of independence unless they choose to do so.
Why not A: Tempting because independence is not required to perform a compilation; however, the reporting consequence remains: if the accountant is not independent, the compilation report must state that fact. Omitting that disclosure is incorrect.
Why not C: This overapplies audit and review withdrawal rules. Lack of independence in a compilation does not require withdrawal; it requires disclosure. Likewise, omission of substantially all disclosures does not preclude a compilation when the omission is not intended to mislead and the report is properly modified.
Why not D: While the lack of independence must be disclosed (and the reason may be optionally disclosed), the general no-assurance language in a compilation report does not replace the specific omitted-disclosures paragraph required when substantially all disclosures are omitted.
Question 7
Hint
Treat the independence disclosure and the omitted-disclosures modification as separate reporting decisions under SSARS; management's request to selectively disclose a single reason is relevant to how you present nonindependence.
Answer B. Under SSARS, an accountant may perform a compilation even if not independent, but the compilation report must include a statement that the accountant is not independent. Separately, when substantially all disclosures are omitted (and the omission is not intended to mislead), the compilation report must be modified to state that substantially all disclosures have been omitted. Because selectively stating only one reason for nonindependence at management's request can be misleading, it is generally safer to state lack of independence without giving partial reasons (or to provide a complete explanation).
Why not A: Tempting because it addresses nonindependence, but incorrect: omission of substantially all disclosures requires a specific modification to the compilation report; additionally, disclosing only one independence reason at management's request risks incomplete or misleading disclosure.
Why not C: Appealing as a conservative response, but incorrect: neither lack of independence nor omission of substantially all disclosures alone automatically requires withdrawal; SSARS permits issuing a compilation with an explicit lack-of-independence statement and, when appropriate, a modification for omitted disclosures.
Why not D: Partly plausible because it acknowledges both independence impairments, but wrong because failing to modify the report for omission of substantially all disclosures does not satisfy SSARS reporting requirements.
Question 8
Hint
Handle each issue separately first: what does a compilation report do when disclosures are omitted, and what does it do when the accountant is not independent?
Answer B. Omission of substantially all disclosures may be permitted in a compilation if the omission is not intended to mislead; the compilation report must include a separate omitted-disclosures paragraph to alert users. Independence is not required to perform a compilation, but when the accountant is not independent the compilation report must include a statement that the accountant is not independent. Thus Lane may issue the compilation report that disclaims assurance, includes the omitted-disclosures paragraph, and separately states lack of independence.
Why not A: This is tempting because both issues sound serious, but for compilations omission of substantially all disclosures is allowed if not intended to mislead and lack of independence does not prohibit the engagement; the remedy is report disclosure, not mandatory withdrawal.
Why not C: Although a compilation provides no assurance, SSARS requires the accountant to disclose lack of independence in the compilation report. The absence of assurance does not eliminate the reporting requirement to state nonindependence.
Why not D: A qualified conclusion is a review/audit concept, not a compilation concept. Omitted substantially all disclosures in a compilation are handled by a specific omitted-disclosures paragraph, and lack of independence must be disclosed in the report itself, not only upon user request.
Common questions
Can a CPA issue a compilation report without being independent?
Yes. Lack of independence does not prohibit a compilation, but the report must state that the accountant is not independent.
Does a compilation report have to explain why the CPA is not independent?
No. For Hart, “We are not independent with respect to Hart Co.” satisfies the independence reporting requirement without explaining either impairment.
Can a compilation report disclose only one reason for lack of independence?
Not when multiple reasons exist. Hart's CPA may omit reasons entirely, but choosing to explain them requires describing both the direct financial interest and preparation of source documents.
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