Chapter 9: Related Services (SRS 4400 & SRS 4410)

ICAI Model Answer:

As per SRS 4410, financial information that is the subject of a compilation engagement may be required for various purposes, including:

1. Mandatory Reporting: To comply with mandatory periodic financial reporting requirements established in relevant law or regulation, if any (e.g. regulatory submissions by trusts, societies, or non-corporate entities).
2. Unrelated to Mandatory Reporting:
   • Internal Management Use: For management or those charged with governance (TCWG), prepared on a basis appropriate for their particular internal purposes (e.g., periodic management accounts, operational cash flows).
   • Contractual External Reporting: For periodic financial reporting undertaken for external parties under a contract or agreement — such as financial information provided to a funding body to support the provision or continuation of a government grant or credit facility.
   • Transactional Purposes: For transactional purposes, for example to support a transaction involving changes to the entity’s ownership or financing structure (such as for a merger, acquisition, or restructuring).

ICAI Model Answer:

As per Para 3.3 of SRS 4410, the practitioner SHALL COMPLY with relevant ethical requirements established in the ICAI Code of Ethics:

• Fundamental Principles: The practitioner must adhere to Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Conduct. Threats to compliance must be identified and appropriately addressed.
• Independence Nuance: Being in the nature of a non-assurance engagement, independence requirements DO NOT apply to compilation engagements under SRS 4410. However, if specific laws, regulations, or client agreements specify independence rules, they must be complied with.
• Integrity Principle Crux: Non-applicability of independence does not permit the practitioner to compromise on Integrity. A practitioner cannot knowingly be associated with materially false or misleading information.

ICAI Model Answer:

ICAI Model Answer:

As per Para 3.9 of SRS 4410, the practitioner shall include in the engagement documentation:

1. Significant Matters: Significant matters arising during the compilation engagement and how those matters were addressed by the practitioner.
2. Reconciliation Record: A record of how the compiled financial information reconciles with the underlying records, documents, explanations, and other information provided by management.
3. Final Acknowledged Copy & Report: A copy of the final version of the compiled financial information for which management or TCWG has acknowledged their responsibility, and a copy of the practitioner’s compilation report.

Additional Inclusions: The practitioner may also include a copy of the entity’s trial balance, summary of significant accounting records, or schedules used to perform the compilation.

ICAI Model Answer:

1. Characteristics of a Compilation Engagement (Para 3):
A compilation engagement is an engagement in which a practitioner applies accounting and financial reporting expertise to assist management in preparing and presenting financial information under an applicable framework and issues a report. It is NOT an assurance engagement. It does not require CA P to verify accuracy or completeness of data provided, or gather evidence to express an audit opinion.

2. CA P’s Approach for Performing the Engagement (Para 3.5):
CA P should NOT apply audit procedures (like vouching, verification, debtor circularisation). Instead, CA P's approach must comprise:

• Obtain Understanding: Gain knowledge of X Limited’s business, operations, accounting systems/records, and the applicable financial reporting framework.
• Compile from Records: Compile financial statements using records, documents, explanations, and judgments provided by management.
• Discuss Judgments: Discuss significant accounting judgments with management where assistance was provided.
• Read Financial Statements: Prior to completion, read the compiled statements in light of understanding of entity and framework to assess if they appear sensible.
• Address Deficiencies: If records are incomplete/inaccurate, request additional information. If statements are materially misstated or misleading, propose amendments. If management refuses, WITHDRAW from the engagement!

ICAI Model Answer:

1. Key Guidance to Team Members:
CA Lalit should guide his team on the fundamental differences between audit and compilation under SRS 4410:

• Assistance vs. Verification: The role is to assist management using accounting expertise, not to audit or verify accuracy/completeness of management records.
• Intended Purposes: Explain that compilation may be for internal management use, funding grant support, or transactional M&A purposes.
• No Opinion Expressed: Highlight that the report explicitly states that no audit opinion or review conclusion is expressed.

2. Applicability of SQC 1:
SQC 1 is fully applicable to this engagement! SQC 1 applies to all Engagement Standards issued by ICAI. Since SRS 4410 is an Engagement Standard within the ICAI framework, the firm's quality control policies regarding leadership, ethics, human resources, engagement performance, and monitoring strictly govern CA Lalit's compilation engagement.

ICAI Model Answer:

(a) Propriety of Acceptance under SRS 4400:
The engagement involves performing specified procedures on specified subject matter (trade receivables) and issuing a report of factual findings. This falls squarely within the purview of SRS 4400 ("Engagements to Perform Agreed-Upon Procedures Regarding Financial Information").
Acceptance is completely proper! SRS 4400 clarifies that the reference to "auditor" in the Standard does not mean that the practitioner performing related services must be the statutory auditor of the entity’s financial statements. A non-statutory auditor can lawfully accept an agreed-upon procedures engagement.

(b) Reporting Precautions to Avoid Misunderstanding (The 4 Disclaimers):
To prevent readers from misunderstanding the scope of the report, CA Kamna must include the following mandatory precautions in her report of factual findings:

1. No Audit/Review Disclaimer: A statement that the procedures performed do not constitute either an audit or a review, and as such, no assurance is expressed.
2. Additional Procedures Disclaimer: A statement that had the auditor performed additional procedures, an audit or a review, other matters might have come to light that would have been reported.
3. Restricted Distribution: A statement that the report is strictly restricted to those parties that have agreed to the procedures to be performed (management).
4. Relates Only to Specified Elements: A statement that the report relates only to trade receivables specified and does not extend to the financial statements of Brown Enterprises Limited taken as a whole.

ICAI Model Answer:

1. Evaluation of Partners' Contention:
The contention of the partners that the matter is "outside scope" because it is a compilation and not an audit is COMPLETELY UNTENABLE AND REJECTED under professional standards.

2. Legal & Professional Duty under SRS 4410 (Para 3.5):
Under SRS 4410, if the practitioner becomes aware during the engagement that:

• The compiled financial information does not adequately refer to or describe the applicable framework;
• Amendments to compiled information are required for it not to be materially misstated; or
• The compiled financial information is otherwise misleading,

The practitioner SHALL PROPOSE APPROPRIATE AMENDMENTS to management.

3. Mandatory Action on Refusal:
If the partners decline or do not permit the practitioner to make the proposed amendments to rectify the understated inventory, THE PRACTITIONER SHALL WITHDRAW FROM THE ENGAGEMENT and inform management and TCWG of the reasons for withdrawing. A Chartered Accountant cannot be associated with misleading financial statements as it violates the Fundamental Principle of Integrity under the Code of Ethics.

ICAI Model Answer:

1. Independence Requirements View:
Yes, we agree with CA X. Under SRS 4410, being in the nature of a non-assurance engagement, independence requirements do not apply to compilation engagements. (However, if specific laws, regulations, or bank lending terms prescribe independence disclosure, those rules must be honored).

2. Focus Points on Management Responsibilities in Engagement Letter (Para 3.4):
CA X must record management's explicit agreement to the following four core responsibilities:

1. Financial Information Preparation: Responsibility for the financial information, and for preparation/presentation thereof in accordance with Ind AS (acceptable in view of intended bank use).
2. Internal Control: Responsibility for design, implementation, and maintenance of internal controls necessary to ensure statements are free from material misstatement from fraud or error.
3. Accuracy & Completeness of Data: Responsibility for accuracy and completeness of records, documents, explanations, and other information provided to CA X.
4. Management Judgments: Responsibility for judgments needed in preparation/presentation, including those where CA X provides compilation assistance.

ICAI Model Answer:

As per Para 2.3.1 of SRS 4400, the auditor should ensure with representatives of the entity and specified parties who will receive copies that there is a clear understanding regarding agreed procedures and conditions of engagement.

Matters to Include in the Engagement Letter Addressed to ATP Limited:

1. Nature & Objective: Clear statement of the nature of the engagement, confirming it is an agreed-upon procedures engagement regarding accounts receivable and inventory.
2. Subject Matter Specified: Specific identification of the accounts receivable ledger balances and inventory physical counts/valuation sheets of RS Ltd to which procedures will be applied.
3. Specific Procedures: An exhaustive, detailed listing of the specific procedures agreed to be performed (e.g. circularisation of debtors above ₹ 10 lacs, test counting 20% inventory lines).
4. Anticipated Format of Report: The anticipated format and content of the report of factual findings.
5. Non-Assurance Statement: Explicit statement that the procedures performed will not constitute an audit or review and accordingly, no assurance will be expressed.
6. Restricted Distribution: Statement that the distribution of the report will be strictly restricted to ATP Limited and management, and cannot be used by or disclosed to other third parties.

ICAI Model Answer:

As per Para 3.9 of SRS 4410, CA Pawan must ensure that his engagement working papers document the following core elements:

1. Significant Matters Resolved: CA Pawan must specifically document the doubt regarding inventory valuation adjustments, the clarifications sought from management, the rationale provided, and how the matter was satisfactorily addressed before finalisation.
2. Reconciliation Record: A comprehensive record showing how the compiled financial statements reconcile with underlying records, books of account, trial balances, and inventory adjustment schedules provided by RK Industries.
3. Management Acknowledgement & Final Report: A copy of the final version of compiled financial statements on which management has acknowledged their responsibility, together with a copy of CA Pawan's signed Practitioner's Compilation Report.
4. Supporting Schedules: Copy of the firm's trial balance and inventory valuation sheets used to execute the compilation.

ICAI Model Answer:

(i) Purposes of Compilation (Para 3):
• Mandatory statutory reporting requirements under relevant law or regulation.
• Internal management / TCWG use prepared on a specialized basis.
• External reporting under contract (e.g. funding body grants/subsidies).
• Transactional purposes (mergers, acquisitions, restructuring).

(ii) Elements of Practitioner’s Compilation Report (Para 3.7):
The written report shall include:
1. Title ("Practitioner’s Compilation Report"); 2. Addressee; 3. Statement that practitioner compiled based on info provided by management; 4. Management's responsibilities; 5. Identification of applicable framework (and special purpose alert); 6. Identification of financial info elements and dates; 7. Practitioner’s responsibilities and ethics compliance; 8. Description of compilation under SRS 4410; 9. Non-assurance explanations (no verification of accuracy/completeness; no audit opinion or review conclusion); 10. Special purpose framework warning paragraph if applicable; 11. Date; 12. Signature; 13. Place.

ICAI Model Answer:

As per Para 3.4 of SRS 4410, before commencing, the practitioner must record the agreed terms in a formal written engagement letter covering:

1. Intended Use & Distribution: Specific identification of the external stakeholder group and restrictions on distribution.
2. Applicable Framework: Identification of the accounting framework acceptable to those stakeholders.
3. Scope & Objective: Technical compilation assistance without assurance.
4. Practitioner Responsibilities: Compliance with SRS 4410 and Code of Ethics.
5. Management 4 Responsibilities: Responsibility for financial statements, internal controls, data accuracy/completeness, and required judgments.
6. Expected Report Form: Non-assurance report format.

On Recurring Engagements: Evaluate if circumstances require terms to be revised, and remind management of existing terms.

ICAI Model Answer:

1. Responsibilities of CA L as Engagement Partner (Para 3.8):
The engagement partner shall take personal responsibility for:

• Overall Quality: The overall quality of each compilation engagement to which the partner is assigned; and
• Firm QC Procedures: Ensuring the engagement is performed in strict compliance with the CA firm’s quality control policies and procedures established under SQC 1.

2. Documentation Compliance by CA L (Para 3.9):
CA L must ensure engagement documentation contains:

1. Significant matters arising during compilation and their resolution.
2. Reconciliation record linking compiled financial statements with underlying records.
3. Final acknowledged copy of compiled statements signed/acknowledged by management & the signed compilation report.

ICAI Model Answer:

Under Para 3.4 of SRS 4410, Mr. Agam SHALL NOT ACCEPT the compilation engagement unless he has agreed upon the following 6 mandatory terms with management in a written engagement letter:

1. Intended Use & Distribution: Intended use and distribution of the financial information, and any restrictions thereon.
2. Financial Reporting Framework: Identification of the applicable financial reporting framework (e.g. Accounting Standards).
3. Objective & Scope: Objective and scope of compilation engagement.
4. Practitioner’s Responsibilities: Responsibilities including compliance with relevant ethical requirements and SRS 4410.
5. Management's 4 Core Responsibilities:
   (i) Financial information preparation under acceptable framework;
   (ii) Design & maintenance of internal controls;
   (iii) Accuracy and completeness of records & documents provided;
   (iv) Judgments needed in preparation and presentation.
6. Expected Form of Report: Expected form and content of the practitioner's compilation report.