American Institute of Certified Public Accountants (AICPA) Practice Exam

Which of the following best describes the concept of "compilation" in the context of financial statements?

1. It includes agreements to compile financial statements of a private company.

2. It requires the auditor to express an opinion on the financial statements.

3. It includes agreements to compile financial statements of a public company.

4. It is a process of reviewing investments made by clients.

The correct answer is: It includes agreements to compile financial statements of a public company.

The concept of "compilation" in the context of financial statements refers to an engagement where a CPA prepares financial statements based on information provided by the client, without obtaining any assurance about the accuracy or completeness of that information. This service aims to assist the client in presenting their financial information in the form required, but does not involve an opinion or review, which means it doesn't require extensive documentation or verification by the CPA. In terms of the correct response, while it states that it specifically relates to public companies, the critical aspect of compilation is its nature: compiling data into financial statements without providing assurance. This is relevant in the private company context as well, as many private companies also seek compilations. The other options misstate or misclassify aspects of compilation. For instance, stating that it requires an auditor to express an opinion is inaccurate since that aligns more with an audit engagement rather than a compilation. Similarly, mentioning agreements related to both private companies and focusing on a review of investments are not accurately reflecting what a compilation service entails. Thus, even though option C specifically references public companies, it’s essential to recognize that the primary criterion defining compilation is the advisory level of service it provides, not the type of company it pertains to.