AUD Notes Chapter 2

AUD - Notes Chapter 2

Other Engagements, Reports and Accounting Services Special Purpose Frameworks

Financial statement audits are normally done with the financial reporting framework being GAAP or IFRS. However, special purpose framework can also be used. What are examples of special purpose frameworks?

1. Cash basis = basis of accounting that the entity uses to record cash receipts and disbursements 2. Tax basis = basis of accounting that the entity uses to file its income tax return3. Regulatory basis = basis of accounting used to comply with the requirements of a regulatory agency having

jurisdiction over the reporting entityo Certain regulators require that the f/s be prepared in accordance with GAAP, but it does not comply with

ALL the requirements of GAAP4. Contractual basis = basis of accounting that the entity uses to comply with an agreement between the entity and

one or more third parties other than the auditor

The cash, tax, and regulatory bases of accounting are commonly referred to as what? Other comprehensive bases of accounting (OCBOA)

When applying auditing standards to do an audit of f/s prepared in accordance with a special purpose framework, the auditor should do what?

1. Obtain an understanding of…o The purpose for which the f/s are preparedo The intended userso The steps taken by management to determine if the framework is acceptable in the circumstances

2. Obtain the agreement of management that it acknowledges and understands their responsibility3. Obtain an understanding of any significant interpretations of the contract that management made in the

preparation of the f/s

What type of assurance is given on special purpose framework reports? Positive

What is positive assurance? The auditor can state an opinion that the f/s are presented fairly

o "There is nothing that came to our attention with..."

What are the elements of a special purpose framework auditor’s report? (Describe each component)1. Title: “Independent Auditor’s Report” and address2. Introduction paragraph:

o Identify the special purpose f/s being audited along with the entity name and dates of each f/s Use non-GAAP titles (stmt of assets & liabilities —cash basis, stmt of rev & exp—income tax basis)

3. Management’s Responsibility paragraph: they’re responsible…o For the preparation and fair presentation of the special purpose f/s o To determine that the framework is acceptable in the circumstanceso The design, implementation, and maintenance of internal controls relevant to the f/s

4. Describe the purpose for which the f/s were prepared (regulatory or contractual only)5. Auditor’s Responsibility paragraph: they’re responsible…

o To express an opinion on the special purpose f/so Describe the scope of the audit

6. Basis for Modification paragraph: State why a modified opinion was issued7. Auditor’s Opinion:

o Contains an opinion on if the special purpose f/s are presented fairly or…o Contains an opinion on whether the special purpose f/s are presented fairly AND if GAAP is presented fairly

(only for regulatory basis for general use) 8. Emphasis-of-Matter paragraph can also be called “Basis of Accounting”

o Indicate that the f/s are prepared in accordance with the special purpose frameworko Refer to the notes of the f/s that describe the frameworko State that the special purpose framework is a basis of accounting other than GAAP

Don’t do this paragraph when prepared using regulatory basis and they’re intended for general use9. Other-Matter paragraph

o Use to restrict the use of the auditor’s report to those within the entity, the parties to the contract or agreement or the regulatory agencies to which the entity is subject (regulatory or contractual only)

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AUD - Notes Chapter 2 Don’t do this paragraph when prepared using regulatory basis and they’re intended for general use

10. Signature of the auditor, auditor’s address and date of the auditor’s reportWhen a special purpose framework is being used and the auditor discovers that the f/s is not suitably titled (they did not use non-GAAP titles), what happens?

The auditor should express a qualified opinion

When the special purpose f/s are prepared in accordance with a regulatory basis and they’re intended for general use, the auditor should not include and E-O-M or O-M paragraph. Instead what should they do?

The auditor should express an opinion about whether the f/s are…1. Fairly presented in all material respects in accordance with GAAP2. Prepared in accordance with the special purpose framework

What should the auditor do when the prescribed specific layout, form, or wording of the auditor’s report is not acceptable?

The auditor should reword the report or attach an appropriately worded separate report

Where would a description be located that details how a cash, tax, regulatory, or contractual basis is different from GAAP?

In the notes to the f/s

Summary—What are traits related to the cash basis framework in terms of 1) type of opinion, 2) if a description of purpose for which special purpose f/s are prepared is needed, 3) if an E-O-M paragraph alerting the readers about the preparation in accordance with the special purpose framework is needed and 4) if an O-M paragraph restricting the use of the auditor’s report is needed?

Opinion = Single opinion on special purpose framework Description of purpose = No E-O-M = Yes O-M = No

Summary—What are traits related to the tax basis framework in terms of 1) type of opinion, 2) if a description of purpose for which special purpose f/s are prepared is needed, 3) if an E-O-M paragraph alerting the readers about the preparation in accordance with the special purpose framework is needed and 4) if an O-M paragraph restricting the use of the auditor’s report is needed?

Opinion = Single opinion on special purpose framework Description of purpose = No E-O-M = Yes O-M = No

Summary—What are traits related to the regulatory basis framework in terms of 1) type of opinion, 2) if a description of purpose for which special purpose f/s are prepared is needed, 3) if an E-O-M paragraph alerting the readers about the preparation in accordance with the special purpose framework is needed and 4) if an O-M paragraph restricting the use of the auditor’s report is needed?

Opinion = Single opinion on special purpose framework Description of purpose = Yes E-O-M = Yes O-M = Yes

Summary—What are traits related to the regulatory basis for general use framework in terms of 1) type of opinion, 2) if a description of purpose for which special purpose f/s are prepared is needed, 3) if an E-O-M paragraph alerting the readers about the preparation in accordance with the special purpose framework is needed and 4) if an O-M paragraph restricting the use of the auditor’s report is needed?

Opinion = Dual opinion on special purpose framework AND GAAP Description of purpose = Yes E-O-M = No O-M = No

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AUD - Notes Chapter 2Summary—What are traits related to the contractual basis framework in terms of 1) type of opinion, 2) if a description of purpose for which special purpose f/s are prepared is needed, 3) if an E-O-M paragraph alerting the readers about the preparation in accordance with the special purpose framework is needed and 4) if an O-M paragraph restricting the use of the auditor’s report is needed?

Opinion = Single opinion on special purpose framework Description of purpose = Yes E-O-M = Yes O-M = Yes

Audits of Single F/S or Specific Elements, Accounts, or Items of a F/S

An auditor may be engaged to audit and express an opinion on a single f/s or on a specific element, account, or item of a f/s. How can the audit be performed on these situations?

Can be a separate engagement or in conjunction with an audit of an entity’s complete set of f/so Single F/S:

Balance Sheet, Statement of Income, Statement of Cash Flows, Statement of assets and liabilitieso Specific Elements/Items

Accounts receivable, allowance for doubtful accounts, inventory, employee bonuses, schedule of disbursements of leased property, etc.

When auditing a single f/s or a specific element, the auditor should do what?1. Obtain an understanding of…

o The purpose for which the f/s are preparedo The intended userso The steps taken by management to determine if the framework is acceptable in the circumstances

These are the exact same items an auditor should do for a special purpose framework2. Perform procedures on any interrelated items as necessary

o Ex = sales and receivables, inventory and payables, or depreciation and fixed assetso Ex = If based on the stockholders equity, you need to do that AND the balance sheet accountso Ex = If based on net income, you need income statement accounts AND the balance sheet

What type of assurance is given on reports for a single f/s or specific elements, accounts, or items? Positive

How should materiality be determined on an audit of a single f/s versus a specific element? Single f/s = determine it based on the single f/s NOT the complete set of f/s Specific element = determine it for each element NOT for the aggregate of all the elements or compete set of f/s

When auditing both a complete set of f/s AND a single f/s or element what should the auditor do? Issue a separate auditor’s report and express a separate opinion for each engagement

What would be different in the auditor’s report when auditing a single f/s or item? Introduction paragraph

o State only the statement or element Opinion

o State that in their opinion, the schedule, f/s or whatever you referred to above was…. Emphasis-of-Matter or Other-Matter paragraph

o If the auditor’s report on the complete set of f/s includes an EOM or OM paragraph that is relevant to the audit of a single f/s or element, include a similar type paragraph.

o If reporting on an incomplete presentation that is accordance with GAAP, state the purpose of the presentation and indicate that the presentation is not intended to be complete

A piecemeal opinion is when the auditor expresses an adverse or disclaimer opinion on the complete set of f/s, but an unmodified opinion on a specific element in the same auditor’s report. What should the auditor do in this type of situation?

Express an unmodified opinion on the specific element only if…1. The opinion on the specific element is not published with and does not accompany the auditor’s report on

the complete set of f/s and…2. The specific element does not constitute a major portion of the entity’s complete set of f/s or the specific

element or it is not based on the stockholders equity or net income

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AUD - Notes Chapter 2 A single f/s = a major portion. So if the complete set of f/s has an adverse opinion, the balance

sheet should not be expressed as unmodified

Compliance with Aspects of Contractual Agreements or Regulatory Requirements

Often an auditor is asked to issue a report on a client’s compliance with contractual agreements or regulatory requirements in connection with a f/s audit. What type of assurance is given for compliance reports?

Negativeo Note: the auditor must have audited the client’s f/s in order to do this

What is negative assurance? It is a statement that means nothing came to the auditor’s attention that caused the auditor to believe that the

entity failed to comply with the specific aspects of the contractual agreement or regulatory requirement. o There are no instances of noncompliance

An unmodified or qualified opinion is expressed on the f/s The reason it is negative assurance is because auditors are not lawyers. A lawyer’s job is

to give assurance if a client is in compliance with a contract.o When the auditor identifies one or more instances of noncompliance, the report on compliance should

describe noncompliance An adverse or disclaimer opinion is expressed on the f/s

What would be different in the auditor’s report when reporting on compliance? A statement that the auditors have audited in accordance with GAAS A paragraph that says nothing came to their attention that caused them to believe that the entity failed to comply

with terms or conditions (negative assurance)o If expressed a modified opinion/ identified noncompliance then they would describe the nature of it

A paragraph that restricts the use of the report to management, those charged with governance, others within the organization, and other parties to the contract or agreement

There is no auditors or management responsibility paragraphs in this report

Engagements to Report on Summary F/S

An auditor may be engaged to report on whether the summary f/s are consistent with the audited f/s from which they have been derived. When should an auditor accept an engagement to report on summary f/s?

Only when they have also been engaged to audit f/s from which the summary f/s are derived Only if the auditor indicates whether the information is consistent in all material respects with the complete set of

financial statements.

What type of assurance is given on engagements to report on summary f/s? Positive

The auditor's report on summary financial statements derived from audited statements should say what? Introduction paragraph

o Identify the summary f/s and audited f/s and their dates Management’s responsibility

o For the preparation of the summary f/s Auditor’s responsibility

o Express an opinion if the information set forth in the summary f/s is consistent, in all material respects, with the audited f/s from which it was derived.

Opiniono The type of opinion expressed

What type of opinion may be issued for a summary f/s engagement? An unmodified A disclaimer An adverse

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Compilation and Review of Financial Statements (nonissuers)Levels of Service

CPAs can perform 2 levels of services with respect to unaudited f/s of a nonissuer, what are they? (describe)1. Compilation = No assurance

o The objective is to present in the form of f/s information that is the representation of management without undertaking to express any assurance on the f/s

o There are no audit or review procedures (inquiries or analytical procedures)o Attest engagement

2. Review = Limited assuranceo The objective is to express limited (negative) assurance that there are no material modification that

should be made to the f/s in order for the statements to be in conformity with the applicable frameworko The review is based on inquiry and analytical procedureso Attest and assurance engagement

What should the accountant do when they perform more than one service, for example a compilation and an audit?

Issue the report that is appropriate for the highest level of service rendered.

Professional Standards

What is the authoritative body designated to issue pronouncements in connection with the unaudited f/s of nonissuers (non-public)? What are the pronouncements known as?

The Accounting and Review Services Committee of the AICPA Statements on Standards for Accounting and Review Services (SSARS)

o Any departures from SSARS requires justification

What does Statements on Standards for Accounting and Review Services (SSARS) apply to V. doesn’t apply to? They apply to…

1. Compilations (generating f/s) and reviews of f/s of nonissuers when an accountant "submits" f/s

Submission is the presenting of f/s to a client or third party that the accountant has prepared, either manually or through use of computer software.

Preparing f/s that are in conformity with another comprehensive basis of accounting constitutes a submission of f/s under SSARS.

2. Engagements to compile or issue a compilation report on specific elements, accounts, or items of a nonissuer’s f/s

3. Pro forma f/s of nonissuers Don’t apply to…

1. Other accounting services provided by accountants such as… Preparing, adjusting or correcting journal entries consulting on financial matters advising type of computer software preparing tax returns processing data reproduction of client-prepared f/s

2. Reviews on interim financial information of nonissuers that are audited (if audited use SAS)

Elements of Compilation and Review Engagements

Compilation and review engagements involve what kind of parties/people?1. Management2. An accountant in public accounting3. Intended users of the f/s or info

Compilation of F/S (nonissuers only)

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In a compilation, the objective is to present in the form of f/s information that is the representation of management without undertaking to express any assurance on the f/s. An accountant generally should decline a compilation engagement when?

The accountant is unable to come to an understanding with representatives of the organization (management) regarding the services to be performed (aka the items in the engagement letter)

What should be included in the engagement letter of a compilation?1. The objectives of the engagement:

o Assist you in preparing financial information in the form of f/s2. Management’s responsibilities

o Same as always = preparation/presentation of f/s, the design, implementation, and maintenance of internal controls

o New = providing auditor access to info, preventing and detecting fraud, and identifying and ensuring that the entity complies with the laws and regulations applicable to its applications

3. Accountant’s responsibilitieso Conducting a review in accordance with SSARS issued by the AICPA

4. A description discussing how a compilation is different from an audit5. Limitations of the engagement which include statements that…

o The engagement cannot be relied upon to disclose errors, fraud, or illegal acts and the accountant is not required to specifically assess or to perform procedures for fraud/illegal acts

o The entity will be informed of any information indicating that fraud or an illegal act may have occurred6. If the auditor is not independent, a statement that they will disclose that in the auditor’s report7. If the f/s are not expected to be used by a third party then restrict the use

What kinds of performance requirements are applicable to a compilation?(Describe) K-RUP

1. Knowledge of industry accounting principles and practices o If an accountant had no previous experience, they’re responsible for gaining the required level of

knowledge. (they can still accept the engagement) This is the same for a review engagement2. Understanding the client’s business and the accounting principles used by the client including…

o S taff qualificationso T ransaction types and frequencyo A ccounting basis used to prepare f/so F orm of the accounting recordso F inancial statements’ form and content

3. Reading the F/So Before issuing a report, accountants should read the compiled f/s and consider whether they are

appropriate in form and free from obvious errors4. Provide documentation for the engagement

o The engagement lettero Any significant findings or issueso Oral or written communications with management regarding fraud or illegal acts that came to the

accountant’s attention

What should an accountant do when they discover info in the f/s that is incorrect, incomplete, or unsatisfactory?

Obtain additional or revised information from the client If the client refuses to provide information, withdraw from the compilation engagement

What should be included in the accountant’s compilation report which accompanies the compiled f/s?1. Title: Accountant’s Compilation Report (note: independent is not used because it is not required)2. Addressee3. Introductory paragraph

o Identify the entityo State that the f/s have been compliedo Identify the f/s o Specify the date or period covered by the f/s

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AUD - Notes Chapter 2o State that the accountant has not reviewed or audited the f/s and expresses no opinion/assurance about

whether the f/s are in accordance with financial reporting framework (disclaim an opinion)4. Management’s responsibility: state that responsible for…

o Preparation and fair presentation of the f/s in accordance with the applicable financial reporting framework

o Designing, implementing, and maintaining internal controls relevant to the f/s5. Auditor’s responsibility: state that…

o Conduct the compilation in accordance with SSARS issued by the AICPAo The objective of a compilation is to assist management in presenting financial info. in the form of f/s

without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the f/s

6. If an accountant is not independent, it is okay because no assurance is given. However, they should disclose their lack of independence in the report. (If they are independent, it is implicitly stated)

7. Signature of accountant (a manual signature is NOT required)8. Date of the accountant’s report: the date the compilation is completed

o Each page of the f/s should have a reference about the restriction if not intended for a 3rd party

When is an accountant allowed to compile f/s that omits substantially all disclosures required by the applicable financial reporting framework?

1. If the accountant’s report clearly indicates the omission by including a 4th paragraph disclosing such omissions.2. The omission are not intended to mislead any person who might be expected to use the f/s3. The f/s are in otherwise in conformity with the framework

When would an auditor withdraw from a compilation? There is a material departure from the framework and management doesn’t revise it There is a material departure from the framework and additional disclosures are not adequate Always withdraw when there is fraudulent, misleading, or false f/s

An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with requirements of SSARS when what conditions exist?

1. The accountant establishes an understanding with the client that the f/s will be used solely to assist the client in developing a financial plan and will not be used to obtain credit, and

2. Nothing comes to the accountant's attention indicating that the f/s will be used to obtain credit.

Summary—If an accountant submits an unaudited f/s to the client that 1) are expected to be used by a third party versus 2) are not expected to be used by a third party, what are some traits/differences?

Expected to be use = A compilation report is required Note expected to be used = Either an engagement letter or compilation report is required

If an engagement letter, then restrict the use to a specific party Each page of the f/s should have a reference about the restriction

Review of F/S (nonissuers only)

In a review, the objective is to express limited (negative) assurance that there are no material modification (they do NOT say the f/s present fairly) that should be made to the f/s in order for the statements to be in conformity with the applicable framework. An accountant may issue a review report on only one f/s (example = balance sheet), but was asked not to report on the others basic f/s, when can they do this?

As long as the scope of the inquiry and analytical procedures has not been restricted.

What should be included in the engagement letter of a review?1. The objectives of the engagement

o Obtain limited assurance that there are no material modifications that should be made to the f/s2. Management’s responsibilities

o Same as always = preparation/presentation of f/s, the design, implementation, and maintenance of internal controls

o New = providing auditor access to info, preventing and detecting fraud, and identifying/ensuring that the entity complies with the laws and regulations applicable to its applications, and providing at the end of the engagement, a management representation letter (mgmt. letter not required in a compilation)

3. Accountant’s responsibilitieso Conducting a review in accordance with SSARS issued by the AICPA

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AUD - Notes Chapter 24. A description discussing how a review is different from an audit5. Limitations of the engagement which include statements that…

o The engagement cannot be relied upon to disclose errors, fraud, or illegal acts and the accountant is not required to specifically assess or to perform procedures for fraud/illegal acts

o The entity will be informed of any information indicating that fraud or an illegal act may have occurred

What kinds of performance requirements are applicable to a review?(Describe) U LIAR CPA U nderstanding with the client with what should be established

o Done through the engagement letter L earn and/or obtain sufficient knowledge of the entity’s business

o Do = Understand the client’s business, accounting principles used by the client, and their product/services

This is the first step in reviewing the f/so Purpose = This helps the auditor to be able to design analytical procedures and inquiries o If an accountant had no previous experience in the industry, they’re responsible for gaining the required

level of knowledge. (they can still accept the engagement) This is the same for a compilation engagement I nquiries should be addressed to appropriate individuals*** A nalytical procedures should be performed*** R eview- other procedures should be performed

o Read the f/s for conformity with the applicable framework and obtain reports C lient representation letter should be obtained from management (mgmt’s representation letter)*** P rofessional judgement should be used to evaluate results A ccountant (CPA) should communicate results

o Done in the Independent Accountant’s Review Report

What kinds of performance are NOT required for a review? Understanding of internal controls Performing audit tests or procedures Assessing fraud or control risk Communicating with the predecessor accountant Obtaining corroborating external evidence

o For interim reviews they do need to do all these items

What type of people should the inquiries be directed to? What are some examples of inquiries? Internal personnel NOT external people or entities

o Member s of management with financial and accounting responsibilities Examples…

o Accounting principles and methodso Procedures for recording, classifying, and summarizing transactionso Significant entries/adjustmentso In conformity with GAAPo Unusual situations o Material or suspected fraudo Actions authorized by stockholders, BOD, or other managemento Subsequent events

Analytical procedures in a review should be designed to do what? What are examples of analytical procedures?

Detect relationships and individual items that appear to be unusual and may indicate material misstatemento Comparing current with prior f/so Comparing actual with budgeted or forecasted f/so Comparing financial and nonfinancial datao Ratio Analysiso Looking for predictable patterns

What should be included in the client representation letter from management (mgmt’s representation letter)? Management….

1. has responsibility for the preparation and fair presentation of the f/s in accordance with GAAP

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AUD - Notes Chapter 22. has responsibility for designing, implementing, and maintaining internal controls for f/s3. has responsibility to prevent/detect fraud4. should disclose any knowledge of material fraud or suspected fraud5. believes significant assumptions used when making accounting estimates are reasonable6. has appropriately disclosed related parties and transactions7. has disclosed information concerning subsequent events8. believes the effect of uncorrected misstatements are immaterial both individually and in aggregate to the f/s9. has accounted for and disclosed all possible litigation and claims10. has made available to the auditor all financial records and related data11. believes all transactions have been recorded and reflected in the f/s (completeness)12. has disclosed all known instances of noncompliance or suspected noncompliance with laws and regulations13. Has disclosed any additional representations related to matters specific to the entity’s business and industry

What are some other traits about management’s representation letter? An accountant is required to obtain a letter from management for all f/s and periods covered by the review period

o Even if current management was not present during all the periods The letter can be from the owner, manager, or CEO, and, if appropriate, the CFO Management’s representation letter is required in a review, but not done in a compilation

When would an auditor withdraw from a review? There is a material departure from the framework and management doesn’t revise it There is a material departure from the framework and additional disclosures are not adequate Always withdraw when there is fraudulent, misleading, or false f/s When management fails to provide a signed representation letter (causes an incomplete review)

When there is a going concern issue or inconsistencies in the application of accounting principles in a review, what is required?

As long as the f/s include adequate disclosure there is no modification necessary If there is a lack of disclosures and management refuses to fix it, then the accountant should disclose this

departure from GAAP in a separate paragraph of the report and modify the report

What type of documentation should be shown for a review engagement? The engagement letter Any significant findings or issues The inquiries the accountant has made and management’s response Analytical procedures performed Unusual matters and their description Communications (oral or written) to management regarding fraud and illegal actions Management representation letter

What should be included in the accountant’s review report?1. Title: Independent Accountant’s Review Report”2. Addressee3. Introductory paragraph

o Identify the entityo State that the f/s have been reviewedo Identify the f/s o Specify the date or period covered by the f/so State that a review includes applying analytical procedures to management’s financial data and making

inquiries of company management o State that a review is substantially less in scope than an audit and no opinion is expressed

4. Management’s responsibility: state that responsible for…o Preparation and fair presentation of the f/s in accordance with the applicable financial reporting

frameworko Designing, implementing, and maintaining internal controls relevant to the f/s

5. Auditor’s responsibility: state that…o Conduct the review in accordance with SSARS issued by the AICPAo State that the standards require the accountant to perform procedures to provide limited assurance that

there are no material modifications that should be made to the f/s6. Engagement Results paragraph:

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AUD - Notes Chapter 2o State that the accountant is not aware of any material modifications that should be made to the f/s in

order for them to be in conformity with applicable reporting framework7. Signature of accountant (a manual signature is NOT required)8. Date of the accountant’s report: the date the review is completed

o Each page of the f/s should be marked “See Independent Accountant’s Review Report”

Summary-- If an auditor is NOT independent, what type of service can they provide? Only compilations

o Any type of direct ownership of a client, even if immaterial, will impair independence for a review

Reporting on Departures from the Applicable Financial Reporting Framework

In a compilation or review, when the accountant becomes aware of a material departure from the applicable reporting framework what happens?

First = recommend that the f/s be revised to conform with the framework If the f/s are not revised …modify the report or withdraw from the review

o Modify = If disclosures in the report would be adequate, then the accountant should include a separate paragraph disclosing the departure and its effects at the end of the report.

o Withdraw = If disclosures in the report would not be adequate to indicate the deficiencies in the f/s

Why would an adverse or qualified opinion not be issued in a compilation or review? Those opinions require an audit In a compilation or review, an accountant would either withdraw from an engagement or modify the report

Change in Engagement

During the course of an engagement, a client might ask to change the audit to a review or compilation. Before agreeing to the change what should an accountant consider?

1. Reason for the request2. Effort required to complete the engagement3. Estimate additional cost to complete the engagement

o If the accountant decides a change in the engagement is justified, they must comply with the standards for a compilation or review and issue an appropriate report

When an accountant changes the type of engagement what would not be included in the auditor’s report? The accountant's review report should not include reference to…

o the original engagemento to any auditing procedures that may have been performed, or o to the scope limitation that resulted in the changed engagement

What would be acceptable and unacceptable reasons for a change in engagement type? Acceptable =

o Change in client requirementso Misunderstanding as to the nature and services to be rendered

Unacceptable = o The engagement would uncover errors or fraudo The client is attempting to create misleading or deceptive f/so The client refuses to provide a signed representation lettero The client refuses to allow correspondence with legal counsel

Reporting on Comparative F/S Period(s) in Question

When the continuing accountant performs a higher level of service in the current period (current period is a review and the prior period was compiled) what should happen?

The report on the prior period should be updated and issued as the last paragraph of the current period’s report

When the continuing accountant performs a lower level of service in the current period (current period is a compilation and the prior period was review) what should happen?

Issue a compilation report and add a paragraph to describe prior period responsibility assumed. Or reissue the prior period review report to overall have both a review report and compilation report

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Other Requirements

Compiled f/s that omit substantially all of the disclosures required by GAAP are not comparable to f/s that include such disclosures. What should the accountant do in this type of situation?

Not issue a report on comparative f/s when statements for one or more, but not all, of the periods presented omit substantially all of the disclosures required by GAAP

Other Accountants Involved in Prior Periods

Predecessor accountants (old CPAs) are sometimes asked to reissue their report (audits, compilation, or reviews) on prior periods. If the predecessor accountant decides to reissue their report, what procedures should the predecessor perform?

1. Read the statements and the report for the current period2. Compare the prior period f/s with the current f/s3. Obtain a representation letter from the current CPA stating that they are not aware of any relevant info that might

have a material effect on the prior period statements

If the predecessor accountant decides NOT to reissue their report, what should the successor auditor do? Make reference to the report of the predecessor accountants in the current report OR Perform that level of service themselves

Reporting When One Period is Audited

When unaudited (compiled or reviewed) f/s are presented in comparative form with audited f/s, the unaudited f/s should be clearly marked and what should the accountant do?

Reissue the prior period report (the unaudited f/s), or Include an additional paragraph in the current report describing the responsibility assumed for the prior period

statements

When the prior period has been audited, but the current period is not audited (downgraded in service) what should the report say in an additional paragraph?

That prior period statements were audited The date of the previous report(s) The opinions expressed (when audited), and, if other than unmodified, the reasons for the modification That no auditing procedures have been performed since the previous report date

When the current period has been audited, but the prior period is not audited (upgraded in service) what should the report say in an additional paragraph?

The service performed in the prior period (compilation or review) The date of the prior period report A description of any material modifications described in the report A statement that the service was less in scope than an audit and did not provide the basis for an opinion

Review of Interim Financial Information (issuers and nonissures)Background

An auditor may conduct a review of interim financial information for a issuer and nonissuer. What kind of standards must each one follow?

Issuer = PCAOB Nonissuer = SAS

What is the objective of a review of interim financial information of a public entity? To determine whether material modifications are necessary for the information to be in conformity with the

applicable financial reporting frameworko This is done through making inquiries and performing analytical procedures

What should be included in the engagement letter of a report of a review of interim f/s for an issuer?1. The objectives of the engagement : which is stated in card 2 of this section2. Management’s responsibilities:

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AUD - Notes Chapter 2o Same as always = preparation/presentation of f/s, the design, implementation, and maintenance of

internal controlso New = providing auditor access to info and providing at the end of the engagement, a management

representation letter (mgmt. letter not required in a compilation)3. Accountant’s responsibilities:

o Conducting a review in accordance with SAS or PCAOB standards (not SSARS)4. A description discussing how an interim review is different from an audit5. Limitations of the engagement which include statements that…

o A review does not provide a basis for expressing an opiniono Does not provide the auditor with a basis for obtaining reasonable assurance that the auditor will become

aware of the significant issues and findings that would be identified in an audit and is not designed to provide assurance regarding internal controls

Communication is required if significant deficiencies/material weaknesses in internal controls are noted

6. Financial Reporting Framework: o Identify the applicable financial reporting framework for the preparation of interim financial information

What kinds of performance requirements are applicable to a review of interim f/s?(Describe) U LIAR CPA --- these are exactly the same as a review for a nonissuer except some details are a little different U nderstanding with the client with what should be established

o Before the engagement: Determine if the reporting framework is acceptable and obtain an agreement of management that they understand they’re responsible for internal controls and financial information

o Next: Have an engagement letter L earn and/or obtain sufficient knowledge of the entity’s business and their internal controls

o Do = Read prior audits and reviews, read current f/s, inquiry the predecessor auditor and review their documentation

o Purpose = Determine types and evaluate likelihood of material misstatement. And to help the auditor to be able to design analytical procedures and inquiries

In a regular review, the auditor doesn’t need to have an understanding of internal controls, assess fraud risk, do audit procedures, or communicate with the predecessor accountant

I nquiries should be addressed to appropriate individuals*** A nalytical procedures should be performed*** R eview- other procedures should be performed

o Read the f/s, read other info in documents, read minutes of BOD meeting, obtain evidence, obtain reports C lient representation letter should be obtained from management (mgmt’s representation letter)*** P rofessional judgement should be used to evaluate results A ccountant (CPA) should communicate results

o Done in the Independent Accountant’s Review Report on Interim Financial Information

What type of people should the inquiries be directed to? What are some examples of inquiries? Member s of management with financial and accounting responsibilities

o Inquiry of an entity’s lawyer about litigation/claims can be appropriate (use judgement but not required)o Going concern issues (use judgement, but not required) – this does not require a report modification if

disclosures are adequate These are different when compared to a review of nonissuers

Examples…o In conformity with GAAPo Unusual situationso Material or suspected fraudo Significant transactions , deficiencies or journal entrieso Subsequent eventso Related Parties

What are examples of analytical procedures?o Comparing current with prior financial informationo Compare budgeted versus actualo Comparing financial and nonfinancial datao Ratio Analysis

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AUD - Notes Chapter 2o Looking trendso Benchmark and compare to industry standards

It the auditor sees that a material modification is required, what is the communication order/chain that the auditor should use to communicate the problem(s)?

1. Management2. BOD and audit committee3. Withdraw and get legal advise

What should be included in the accountant’s review report on interim financial information?1. Title: Independent Auditor’s Review Report”2. Addressee3. Introductory paragraph

o Identify the entityo State that the interim financial information has been reviewedo Identify the interim finance information o Specify the date or period covered by the f/s included in the interim financial information

4. Management’s responsibility: state that responsible for…o Preparation and fair presentation of the interim financial information o Designing, implementing, and maintaining internal controls relevant to the f/s

5. Auditor’s responsibility: state that…o Auditor is responsible to conduct the review in accordance with PCAOB (not SSARS)o A review of interim financial information consists of applying analytical procedures and making

inquiries o A review in interim financial information is substantially less in scope than an audito No opinion is expressed

6. Conclusion paragraph:o State that the accountant is not aware of any material modifications that should be made to the interim

financial information in order for them to be in conformity with applicable reporting framework7. Signature of accountant (a manual signature is NOT required)8. City and state where the auditor practices9. Date of the accountant’s report: the date the review is completed

o Each page of the f/s should be marked “unaudited” (or disclaim an opinion)

An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying what?

The Accountant's review report is not apart of the registration statement w/in the meaning of Securities Act 1933.

Summary—What are the traits for a compilation, review, and audit in terms of 1) standards that apply, 2) the level of assurance given, 3) type of entities they apply to, 4) knowledge required, 5) if inquiry and analytical procedures are required, and 6) if having an understanding of internal controls is required.

COMPILATION REVIEW REVIEW REVIEW AUDITStandards SSARS SSARS SAS PCAOB SAS/PCAOB

Level of assuranceNone Limited Limited Limited Fair as to GAAP

EntitiesNonissuers Nonissuers

Nonissuers: Interim F/S

Issuers: Interim F/S

Nonissuers/Issuers

Knowledge required

Accounting principles and practices of

industry

General understanding of client’s business


industry

Increased understanding of client’s business


industry



industry


Extensive understanding of

economy, industry, and client’s

business

Inquiry and analytical procedures required

None Inquiries of internal personnel

Analytical procedures

Inquiries of internal personnel


Inquiries of internal personnel


Inquiries of internal and

external personnel


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AUD - Notes Chapter 2Audit procedures

Understanding of internal controls

Not required Not required Required Required Required

Summary—What are the traits for a compilation, review, and audit in terms of 1) if GAAP disclosures are omitted, 2) if there are GAAP departures, 3) if independence is required, 4) if the engagement letter is required, and 5) if the management representation letter is required.

COMPILATION REVIEW REVIEW REVIEW AUDIT

SSARS SSARS SAS PCAOB SAS/PCAOB

GAAP disclosures omitted

May omit most without restricting use, but warn with ending paragraph

Required or modify review

report


report


report

Required or modify --

qualified/adverse

GAAP departuresDisclosure required

Disclosure required

Disclosure required

Disclosure required

Modify report – qualified/adverse

IndependenceNot required, but disclose if not is

requiredRequired Required Required Required

Engagement letterRequired if no report Required Required Required Required

Representation letterNot required Required Required Required Required

Summary—What are the traits for a compilation, review, and audit in terms of 1) when errors and irregularities are detected, 2) what type of F/S can be reported on, 3) if communication with the predecessor is required, and 4) if subsequent event inquiries are required.

COMPILATION REVIEW REVIEW REVIEW AUDITSSARS SSARS SAS PCAOB SAS/PCAOB

Error and irregularities

detection

Only obvious errors found when reading

f/s

Only errors discovered

through inquiry or analytical procedures





Must be designed to provide reasonable

assurance of detection of

material misstatement

F/S reported on1 or more f/s allowed

to be reported on

1 or more f/s allowed to be

reported on if the scope of

inquiries/analytical procedures has not

been restricted




been restricted




been restricted


reported on if the scope of audit is

not limited and all procedures are

appliedCommunication with

predecessorNot required Not required Not required Required Required

Subsequent events inquiries

Not required Required Required Required Required

Letters for Underwriters Comfort Letter

What is a comfort letter? A letter from the CPA (signed by independent auditor) to the named underwriter (addressed to) The accountants express an opinion concerning the f/s’s compliance with requirements of the SEC.

o Typically negative assurance is given unaudited interim financial information

What are some other traits about comfort letters? When a letter is to be issued, the CPA is required to perform a review of interim financial information in

accordance with auditing standards. The letter must include a statement to restrict the use of the information to the addressee

Positive Assurance

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AUD - Notes Chapter 2A comfort letter provides positive assurance regarding what?

CPA’s independence Compliance of the f/s with the SEC Act, assuming the f/s are audited

Negative Assurance

A comfort letter provides negative assurance regarding what? Unaudited f/s and unaudited condensed interim f/s and capsule financial info Changes in selected financial information during subsequent period Whether non-financial data in the registration statement complies with regulation S-K

Attest Engagements Introduction

What is an attest engagement? A practitioner (CPA) is engaged to issue an examination, a review, a prospective compilation, or an agreed-upon

procedure on a subject matter that is the responsibility of another party (usually management)o Examining something other than historical financial statements

What type of standards does attest engagements follow? Statements on Standards for Attestation Engagements (SSAE)

Summary—What standards apply to both issuers and nonissuers for audits, compilations, reviews, and attest engagements?

Audit engagements o Nonissuers = SAS (Statements on Auditing Standards) o Issuers = PCAOB (Public Company Accounting Oversight Board)

Compilation engagementso Nonissuer = SSARS (Statements on Standards for Accounting and Review Services)

Review engagements o Nonissuer = SSARS (Statements on Standards for Accounting and Review Services)o Nonissuer Interim F/S = SAS (Statements on Auditing Standards)o Issuer Interim F/S = PCAOB (Public Company Accounting Oversight Board)

Attest engagements o SSAE (Statements on Standards for Attest Engagements)

What type of attestation services would follow Statements on Standards for Attestation Engagements (SSAE)?1. Agreed-upon procedures (except letters to underwriters and consulting services)2. Financial forecasts and projections (hypotheticals)3. Pro forma f/s4. Internal control over financial reporting5. Compliance with laws, regulations, and contracts6. Management discussion and analysis as required by the SEC7. Computer systems and software (trust services)

o Examining something other than historical financial statementso Reports can be issued for all these items

What would SSAE not apply to? Audits Compilations and reviews of f/s for nonissuers under SSARS (historical f/s) Advocating for a client Providing consulting and advisory services Preparing tax returns

Trust services are assurance and advisory services, that follow SSAE, and are used to address the risk and opportunities related to information technology. What are the types of engagements related to IT? (describe)

WebTrust = Provides assurance related to e-commerceo The CPA will assesses a client’s web site for predetermined criteria that are designed to measure

transaction integrity, info protection, and disclosure of business practices SysTrust = Provides assurance with respect to the reliability of any defined electronic system

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What are some differences and similarities between attestation standards and Generally Accepted Auditing Standards (GAAS)?

Differences: Attestation standards are much broader in scope than GAASo No reference is made to the f/s or to GAAPo They provide for services tailored to the need of the users who specify the nature/scope of the

engagement o They go beyond historical f/s

Similarities: Both require the CPA to be independent

What are all the attestation standards? TIPPY PASSER

o General Standards – TIPPY T – Training and proficiency I – Independence P – Performance/due professional care in planning and performance P – Professional/adequate knowledge of subject matter Y – Your belief that the assertion and the criteria is objective, measurable, and complete

o Field work Standards – PA P – Planning and supervision A – Appropriate and sufficient evidence to provide reasonable basis for the conclusion

o Reporting Standards – SSER S – Identify the subject matter or assertion being reported on and the character of the engagement S – Disclose significant reservations about the engagement (unresolved problems or concerns) E – Express conclusions about the subject matter in relation to the established or stated criteria R – Restrict use if the report when necessary

The criteria are appropriate for/available to a limited number of parties Reporting on subject matter and a written assertion has not been provided Reporting on an agreed-upon procedures engagement

Restrictions on the scope of an examination engagement may result in the practitioner to do what? Issue a qualified opinion, disclaimer of opinion, or to withdraw

o Material misstatements or deviations from the criteria require modification o Restrictions that prevent necessary procedures from being performed result in a withdraw

Agreed-upon Procedure Engagements

An agreed-upon procedure engagement is one in which the practitioner is engaged by a client to issue a report of findings based on specific agreed-upon procedures. What conditions must exist to provide this type of engmt?

I AM SUREI – Independence of the practitionerA – Agreement of the parties (procedures to be done, materiality limits, etc.) M – Measurability and consistency (subject matter should be capable of these) S – Sufficiency of the proceduresU – Use of the report is restricted to the specified partiesR – Responsibility for the subject matter rests with the client E – Engagements to perform agreed upon procedures on prospective f/s must include a summary of significant assumptions

What are some required elements that should be included in the practitioner’s report for agreed-upon procedures?

1. Title: “Independent Accountant’s Report on Applying Agreed-upon Procedures”2. Identify the specified parties, the subject matter, character of the engagement, and the responsible parties3. State they have performed procedures that were agreed-upon by the audit committee and management4. State that the procedures were performed with attestation standards established by AICPA5. State that the sufficiency of the procedures is the sole responsibility of those parties specified in the report6. Include a paragraph to list procedures and findings7. State that they were not engaged to and did not conduct an examination of the subject matter

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AUD - Notes Chapter 28. State that no opinion was expressed (disclaimer)

o No assurance is given9. Restrict the use of the report

Financial Forecasts and Projections

Financial forecasts and projections are 2 types of prospective f/s that attempt to reflect a company’s expected financial position and expected results of operations. What is the difference between the two?

Financial forecasts = the expected financial result of a future periodo Based on expected conditions and expected courses of action

Financial projection = reflects the financial position and results of operations o Based on a “what if” scenario and hypothetical assumptions

General use means that the f/s issued will be used by parties not negotiating directly with the responsible company (issuer). Limited use means that the f/s will only be used by the responsible party alone or those negotiating directly with the responsible company (issuer). What type of use applies to financial forecast and financial projection?

Forecast = General and limited use Projection = Limited use only

What are the ways that a practitioner is associated with prospective f/s?1. Compilation = independence not required2. Examination = independence required3. Agreed-upon procedures = independence required (talked about above)

o A review is not allowed

When performing a compilation related to a client's prospective f/s, the accountant should do what? Ensure that the client discloses all significant assumptions that are used for the prospective f/s. Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

The purpose of a compilation of prospective f/s is what? To proper assemble the financial data based on the responsible party’s assumption. (no assurance is given)

What would be included in a compilation of financial forecast report? We have compiled the statements in accordance with the attestation standards established by AICPA

o Identify the prospective f/s presented State a compilation does not include evaluation of the support for the assumptions underlying the forecast

o They don’t gather supporting evidence State they do not express an opinion or any form of assurance State there are usually differences between the forecasted and actual results

o limitations on the presentation’s usefulness (scope limitation) State they have no responsibility to update the report for events occurring after the repot

What would be different in the report if it was a compilation of financial projections? A description of the purpose of the projection Include a reference to the hypothetical assumption A paragraph restricting the use

The purpose of an examination of prospective f/s is what?1. To express an opinion about whether the statements are presented in conformity with AICPA and2. Whether the underlying assumptions provide a reasonable basis for the prospective statements (positive

assurance)

What would be included in an examination of financial forecast report? We have examined the forecasted statements in accordance with the attestation standards established by AICPA

o Identify the prospective f/s presented State that the prospective statements are the responsibility of management State that the practitioner’s responsibility is to express an opinion on the prospective f/s based on the examination State the examination included such procedures as we considered necessary to evaluate both the assumptions

used by management and the preparation and presentation of the projection State that the practitioner believes that the examination provides a reasonable basis for their opinion State the opinion

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AUD - Notes Chapter 2 State there are usually difference between the forecasted and the actual results

o limitations on the presentation’s usefulness (scope limitation) State the practitioner has no responsibility to update the report for events that occur after the report

What would be different in the report if it was an examination of financial projections? A description of the purpose of the projection Include a reference to the hypothetical assumption A paragraph restricting the use

What would cause a practitioner to modify their opinion for financial forecasts and projections? What kind of opinion would go with it?

AICPA guidelines are not followedo Qualified or Adverse

Significant assumptions are not disclosed or do not provide a reasonable basiso Adverse

Scope limitationso Disclaimer

Partial presentations are those that omit one or more essential items, for example sales, gross profit, net income, etc. What is another important trait about them?

They have a limited use (not appropriate for general use)

Pro Forma F/S

Pro Forma f/s are not prospective f/s, but they may be used to demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical f/s if it had occurred during the period covered by those f/s. What are some traits about pro forma f/s?

They can be examined or reviewed The report should make a reference to the f/s from which the historical financial information is derived. They do NOT revaluate internal controls They determine that the computations of the pro forma adjustments are mathematically correct

Summary

Summary—Summarize the terms learned including 1) attestation, 2) assurance, 3) audit, 4) compilation, 5) review, and 6) examination

1. Attestation = Attestation is an engagement where a written report is issued on something other than historical f/s. o Examples: agreed upon procedures, prospective f/s, MD&A, reporting on internal controls, and Pro

Forma f/s.2. Assurance = Any engagement that improves the quality of information for decision makers.

o Examples: WebTrust and SysTrust3. Audit = To provide f/s users with positive assurance (an opinion) on whether the f/s are presented fairly, in all

material respects, in accordance with the applicable financial reporting framework4. Compilation = An engagement in which an accountant presents in the form of f/s information that is the

representation of management o There are no audit or review procedures o No assurance

5. Review = An engagement in which an accountant performs inquiry and analytical procedures as a basis for providing limited assurance that there are no material modifications that should be made to the f/s in order for them to be in conformity with the applicable financial reporting framework

o The review is based on inquiry and analytical procedureso Limited assurance

6. Examination = An engagement that provides positive assurance (an opinion) based on procedures such as search, verification, inquiry, and analysis

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Summary—What reports restrict use on who can use them? R SCCCAMPP

o R eports on the Application of the requirements of an Applicable Financial Reporting Framework (A1)o S pecial purpose frameworks (regulatory basis except for general use or contractual basis only) (A2-pg

5)o C ompliance with contractual agreement or regulatory requirements related to audited f/s (A2-pg 19)o C ompilations (nonissuers) if not intended for 3rd party (A2-pg 28)o C omfort letters for underwriters (A2-pg 69)o A greed-upon procedure engagements (A2-78)o M D&A (A2-89)o P rospective f/s (projection compilation and projection examination reports)

note: not forecast compilations or forecast examinationso P artial presentations (A2-85)

Summary—Summarize what negative assurance and positive assurance is. Negative/Limited = the auditor is not aware of material misstatements, but we did not do a full audit

o "We are not aware of ..." Positive = the auditor can state an opinion that the f/s are presented fairly in conformity with GAAP

o "There is nothing that came to our attention with..."

Summary—What are different examples of both positive and negative assurance? Negative/Limited

o Compliance with contractual agreement or regulatory requirements related to audited f/so Review (nonissuers, interim nonissuers and interim issuers)o Comfort letter (mainly)o A review of management's assertion

Positiveo Auditso Special purpose frameworks (cash, tax, regulatory, and contractual basis)o Audits of single f/s or specific elements, accounts, or itemso Engagements to report on summary f/s o Comfort letter (can be)o Financial forecasts/projections = examinationso WebTrust/SysTrust

No Assuranceo Disclaimer of opinion on GAAP f/so Compilation (nonissuers)o Agreed-upon procedures o Financial forecasts/projections = a compilation

Summary—What are different engagement that require independence versus the ones that do not require independence?

Requires independenceo Audits (A1)o Special purpose frameworks (cash, tax, regulatory, and contractual basis)o Audits of single f/s or specific elements, accounts, or itemso Compliance with contractual agreement or regulatory requirements related to audited f/s

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AUD - Notes Chapter 2o Engagements to report on summary F/So Reviews (nonissuers, interim nonissuers and interim issuers)o Letters for underwriters/comfort letterso Attest engagements (agreed-upon procedures, financial forecasts/projections = examination on

prospective f/s, pro forma f/s, compliance with law/contracts, MD&A, trust services, and internal controls)

Basically everything except a compilation on prospective f/s No independence required

o Reports on application of the requirements of an applicable financial reporting framework (A1)o Compilations (nonissuers)o Attest engagements – financial forecasts/projections = a compilation on prospective f/s

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Documents

AUD Notes Chapter 2