AUD - Notes Chapter 2Other 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 return 3. Regulatory basis = basis of accounting used to comply with the requirements of a regulatory agency having jurisdiction over the reporting entity o Certain regulators require that the f/s be prepared in accordance with GAAP, but it does not comply with ALL the requirements of GAAP 4. 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 prepared o The intended users o 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 responsibility 3. 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..." A R What are the elements of a special purpose framework auditor’s report? (Describe each component) 1. Title: “Independent Auditor’s Report” and address 2. 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 circumstances o 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/s o Describe the scope of the audit 6. Basis for Modification paragraph: State why a modified opinion was issued 7. 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 framework o Refer to the notes of the f/s that describe the framework o 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 use 9. 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) 1 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 report When 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 GAAP 2. 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 OM 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 2 Accounts. or item of a f/s. 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. or depreciation and fixed assets o Ex = If based on the stockholders equity. the auditor should do what? 1. Obtain an understanding of… o The purpose for which the f/s are prepared o The intended users o 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 framework 2. f/s or whatever you referred to above was…. etc. 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 A R 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. 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 OM 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. 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.Notes Chapter 2 Summary—What are traits related to the contractual basis framework in terms of 1) type of opinion. inventory and payables. Statement of assets and liabilities o Specific Elements/Items Accounts receivable. Statement of Income. you need to do that AND the balance sheet accounts o Ex = If based on net income. 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/s o Single F/S: Balance Sheet. What should the auditor do in this type of situation? 3 . but an unmodified opinion on a specific element in the same auditor’s report. accounts. account. 2) if a description of purpose for which special purpose f/s are prepared is needed. inventory. Perform procedures on any interrelated items as necessary o Ex = sales and receivables. 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. the schedule. employee bonuses. schedule of disbursements of leased property. 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. allowance for doubtful accounts. When auditing a single f/s or a specific element. Statement of Cash Flows. include a similar type paragraph. o If reporting on an incomplete presentation that is accordance with GAAP.AUD . the report on compliance should describe noncompliance An adverse or disclaimer opinion is expressed on the f/s A R 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. o When the auditor identifies one or more instances of noncompliance. A lawyer’s job is to give assurance if a client is in compliance with a contract. those charged with governance. What type of assurance is given for compliance reports? Negative o 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. in all material respects. So if the complete set of f/s has an adverse opinion. 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 A single f/s = a major portion. What type of assurance is given on engagements to report on summary f/s? Positive A R 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. with the audited f/s from which it was derived. others within the organization. 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.AUD . 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. 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. Opinion o The type of opinion expressed What type of opinion may be issued for a summary f/s engagement? An unmodified 4 . 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.Notes Chapter 2 Express an unmodified opinion on the specific element only if… 1. accounts.AUD . 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? 5 . or items of a nonissuer’s f/s 3. 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. Other accounting services provided by accountants such as… Preparing. doesn’t apply to? They apply to… 1. Review = Limited assurance o 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 framework o The review is based on inquiry and analytical procedures o Attest and assurance engagement What should the accountant do when they perform more than one service. Engagements to compile or issue a compilation report on specific elements. 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. 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. 2.Notes Chapter 2 A disclaimer An adverse 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. 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. Pro forma f/s of nonissuers Don’t apply to… 1. for example a compilation and an audit? Issue the report that is appropriate for the highest level of service rendered. 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. what are they? (describe) 1. 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. and maintenance of internal controls o New = providing auditor access to info. Management 2. Intended users of the f/s or info Compilation of F/S (nonissuers only) In a compilation. fraud. preventing and detecting fraud. accountants should read the compiled f/s and consider whether they are appropriate in form and free from obvious errors 4. implementation. Knowledge of industry accounting principles and practices o If an accountant had no previous experience. The objectives of the engagement: o Assist you in preparing financial information in the form of f/s 2.AUD . Understanding the client’s business and the accounting principles used by the client including… o Staff qualifications o Transaction types and frequency o Accounting basis used to prepare f/s o Form of the accounting records o Financial statements’ form and content 3. Provide documentation for the engagement o The engagement letter o Any significant findings or issues o 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. a statement that they will disclose that in the auditor’s report 7. incomplete.Notes Chapter 2 1. or unsatisfactory? Obtain additional or revised information from the client If the client refuses to provide information. 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. Management’s responsibilities o Same as always = preparation/presentation of f/s. Reading the F/S o Before issuing a report. A description discussing how a compilation is different from an audit 5. the design. (they can still accept the engagement) This is the same for a review engagement 2. Accountant’s responsibilities o Conducting a review in accordance with SSARS issued by the AICPA 4. 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 6. If the auditor is not independent. 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) A R What should be included in the engagement letter of a compilation? 1. Limitations of the engagement which include statements that… o The engagement cannot be relied upon to disclose errors. they’re responsible for gaining the required level of knowledge. withdraw from the compilation engagement 6 . An accountant in public accounting 3. and identifying and ensuring that the entity complies with the laws and regulations applicable to its applications 3. 2. Title: Accountant’s Compilation Report (note: independent is not used because it is not required) 2. Addressee 3. it is okay because no assurance is given. they should disclose their lack of independence in the report. and maintaining internal controls relevant to the f/s 5.AUD . it is implicitly stated) 7. implementing. Nothing comes to the accountant's attention indicating that the f/s will be used to obtain credit. 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 3 rd party When is an accountant allowed to compile f/s that omits substantially all disclosures required by the applicable financial reporting framework? 1. 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. when can they do this? As long as the scope of the inquiry and analytical procedures has not been restricted. 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. 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. 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. and 2. 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. An accountant may issue a review report on only one f/s (example = balance sheet). If the accountant’s report clearly indicates the omission by including a 4 th paragraph disclosing such omissions. 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. 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. Auditor’s responsibility: state that… o Conduct the compilation in accordance with SSARS issued by the AICPA o The objective of a compilation is to assist management in presenting financial info.Notes Chapter 2 A R What should be included in the accountant’s compilation report which accompanies the compiled f/s? 1. but was asked not to report on the others basic f/s. However. If an accountant is not independent. 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. A R What should be included in the engagement letter of a review? 7 . misleading. Introductory paragraph o Identify the entity o State that the f/s have been complied o Identify the f/s o Specify the date or period covered by the f/s o 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. (If they are independent. 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. The omission are not intended to mislead any person who might be expected to use the f/s 3. and identifying/ensuring that the entity complies with the laws and regulations applicable to its applications.AUD . the design. and providing at the end of the engagement.other procedures should be performed o Read the f/s for conformity with the applicable framework and obtain reports Client representation letter should be obtained from management (mgmt’s representation letter)*** Professional judgement should be used to evaluate results Accountant (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 methods o Procedures for recording. A description discussing how a review is different from an audit 5. accounting principles used by the client. classifying. 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 Understanding with the client with what should be established o Done through the engagement letter Learn and/or obtain sufficient knowledge of the entity’s business o Do = Understand the client’s business. or other management o Subsequent events 8 .Notes Chapter 2 1. they’re responsible for gaining the required level of knowledge. Limitations of the engagement which include statements that… o The engagement cannot be relied upon to disclose errors. and maintenance of internal controls o New = providing auditor access to info. The objectives of the engagement o Obtain limited assurance that there are no material modifications that should be made to the f/s 2. a management representation letter (mgmt. Management’s responsibilities o Same as always = preparation/presentation of f/s. and summarizing transactions o Significant entries/adjustments o In conformity with GAAP o Unusual situations o Material or suspected fraud o Actions authorized by stockholders. preventing and detecting fraud. BOD. Accountant’s responsibilities o Conducting a review in accordance with SSARS issued by the AICPA 4. letter not required in a compilation) 3. and their product/services This is the first step in reviewing the f/s o 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 can still accept the engagement) This is the same for a compilation engagement Inquiries should be addressed to appropriate individuals*** Analytical procedures should be performed*** Review. fraud. implementation. and maintaining internal controls for f/s 3. or CEO. the CFO Management’s representation letter is required in a review. 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. has responsibility for designing. 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 A R What should be included in the accountant’s review report? 1. believes significant assumptions used when making accounting estimates are reasonable 6. implementing. 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. Title: Independent Accountant’s Review Report” 2.Notes Chapter 2 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 misstatement o Comparing current with prior f/s o Comparing actual with budgeted or forecasted f/s o Comparing financial and nonfinancial data o Ratio Analysis o Looking for predictable patterns A R What should be included in the client representation letter from management (mgmt’s representation letter)? Management…. has responsibility to prevent/detect fraud 4. and. has accounted for and disclosed all possible litigation and claims 10. misleading. has appropriately disclosed related parties and transactions 7.AUD . 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. manager. Introductory paragraph o Identify the entity o State that the f/s have been reviewed 9 . has made available to the auditor all financial records and related data 11. has disclosed all known instances of noncompliance or suspected noncompliance with laws and regulations 13. has disclosed information concerning subsequent events 8. 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. should disclose any knowledge of material fraud or suspected fraud 5. believes the effect of uncorrected misstatements are immaterial both individually and in aggregate to the f/s 9. has responsibility for the preparation and fair presentation of the f/s in accordance with GAAP 2. if appropriate. 1. Addressee 3. believes all transactions have been recorded and reflected in the f/s (completeness) 12. Summary-. an accountant would either withdraw from an engagement or modify the report Change in Engagement During the course of an engagement. 7.Notes Chapter 2 Identify the f/s Specify the date or period covered by the f/s 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 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. 6. 8.AUD . a client might ask to change the audit to a review or compilation.If an auditor is NOT independent. Estimate additional cost to complete the engagement o If the accountant decides a change in the engagement is justified. even if immaterial. 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. 5. 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 requirements o Misunderstanding as to the nature and services to be rendered Unacceptable = 10 . Effort required to complete the engagement 3. implementing. Reason for the request 2. then the accountant should include a separate paragraph disclosing the departure and its effects at the end of the report. Before agreeing to the change what should an accountant consider? 1. 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 engagement o to any auditing procedures that may have been performed. 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. will impair independence for a review Reporting on Departures from the Applicable Financial Reporting Framework In a compilation or review. and maintaining internal controls relevant to the f/s Auditor’s responsibility: state that… o Conduct the review in accordance with SSARS issued by the AICPA o 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/s Engagement Results paragraph: o 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 framework Signature of accountant (a manual signature is NOT required) 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” o o o 4. what type of service can they provide? Only compilations o Any type of direct ownership of a client. the reasons for the modification That no auditing procedures have been performed since the previous report date When the current period has been audited. What should the accountant do in this type of situation? Not issue a report on comparative f/s when statements for one or more. 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. or reviews) on prior periods.Notes Chapter 2 o o o o The engagement would uncover errors or fraud The client is attempting to create misleading or deceptive f/s The client refuses to provide a signed representation letter 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. Read the statements and the report for the current period 2. if other than unmodified. If the predecessor accountant decides to reissue their report. and. 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. Compare the prior period f/s with the current f/s 3. but not all. the unaudited f/s should be clearly marked and what should the accountant do? Reissue the prior period report (the unaudited f/s). 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 11 . 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). compilation. what procedures should the predecessor perform? 1. 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.AUD . 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. Or reissue the prior period review report to overall have both a review report and compilation report 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. letter not required in a compilation) 3. a management representation letter (mgmt. do audit procedures. read other info in documents. read current f/s. 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 framework o This is done through making inquiries and performing analytical procedures A R What should be included in the engagement letter of a report of a review of interim f/s for an issuer? 1. inquiry the predecessor auditor and review their documentation o Purpose = Determine types and evaluate likelihood of material misstatement. obtain evidence. the design. read minutes of BOD meeting. the auditor doesn’t need to have an understanding of internal controls.other procedures should be performed o Read the f/s. obtain reports Client representation letter should be obtained from management (mgmt’s representation letter)*** Professional judgement should be used to evaluate results Accountant (CPA) should communicate results o Done in the Independent Accountant’s Review Report on Interim Financial Information 12 .Notes Chapter 2 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. and maintenance of internal controls o New = providing auditor access to info and providing at the end of the engagement. or communicate with the predecessor accountant Inquiries should be addressed to appropriate individuals*** Analytical procedures should be performed*** Review. 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 Understanding 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 Learn and/or obtain sufficient knowledge of the entity’s business and their internal controls o Do = Read prior audits and reviews. assess fraud risk. Management’s responsibilities: o Same as always = preparation/presentation of f/s.AUD . The objectives of the engagement : which is stated in card 2 of this section 2. implementation. A description discussing how an interim review is different from an audit 5. Accountant’s responsibilities: o Conducting a review in accordance with SAS or PCAOB standards (not SSARS) 4. And to help the auditor to be able to design analytical procedures and inquiries In a regular review. Limitations of the engagement which include statements that… o A review does not provide a basis for expressing an opinion o 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. 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 GAAP o Unusual situations o Material or suspected fraud o Significant transactions . City and state where the auditor practices 9. Title: Independent Auditor’s Review Report” 2. 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 framework 7. what is the communication order/chain that the auditor should use to communicate the problem(s)? 1. Introductory paragraph o Identify the entity o State that the interim financial information has been reviewed o 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. deficiencies or journal entries o Subsequent events o Related Parties What are examples of analytical procedures? o o o o o o Comparing current with prior financial information Compare budgeted versus actual Comparing financial and nonfinancial data Ratio Analysis Looking trends Benchmark and compare to industry standards It the auditor sees that a material modification is required. Management 2.AUD . implementing. 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. Withdraw and get legal advise A R What should be included in the accountant’s review report on interim financial information? 1. 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. and maintaining internal controls relevant to the f/s 5.Notes Chapter 2 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. If this report is presented in a registration statement. 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 audit o No opinion is expressed 6. 13 . Signature of accountant (a manual signature is NOT required) 8. BOD and audit committee 3. Addressee 3. 3) if communication with the predecessor is required. and audit in terms of 1) when errors and irregularities are detected. Standards Level of assurance Entities Knowledge required Inquiry and analytical procedures required COMPILATION SSARS REVIEW SSARS REVIEW SAS REVIEW PCAOB AUDIT SAS/PCAOB None Limited Limited Limited Fair as to GAAP Nonissuers Nonissuers Accounting principles and practices of industry Accounting principles and practices of industry Nonissuers: Interim F/S Accounting principles and practices of industry Issuers: Interim F/S Accounting principles and practices of industry Increased understanding of client’s business Increased understanding of client’s business Increased understanding of client’s business General understanding of client’s business None Nonissuers/Issuers Extensive understanding of economy. 2) if there are GAAP departures. and client’s business Inquiries of internal personnel Inquiries of internal personnel Inquiries of internal personnel Inquiries of internal and external personnel Analytical procedures Analytical procedures Analytical procedures Analytical procedures Audit procedures Understanding of internal controls Not required Not required Required Required Required Summary—What are the traits for a compilation. 5) if inquiry and analytical procedures are required. review. GAAP disclosures omitted GAAP departures Independence Engagement letter Representation letter COMPILATION SSARS May omit most without restricting use. COMPILATION SSARS REVIEW SSARS REVIEW SAS REVIEW PCAOB Error and irregularities detection Only obvious errors found when reading f/s Only errors discovered through inquiry or analytical procedures Only errors discovered through inquiry or analytical procedures Only errors discovered through inquiry or analytical procedures F/S reported on 1 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 1 or more f/s allowed to be reported on if the scope of inquiries/analytical 1 or more f/s allowed to be reported on if the scope of inquiries/analytical 14 AUDIT SAS/PCAOB Must be designed to provide reasonable assurance of detection of material misstatement 1 or more f/s allowed to be reported on if the scope of audit is not limited and all . review. 4) if the engagement letter is required.Notes Chapter 2 Summary—What are the traits for a compilation. 3) if independence is required. 2) the level of assurance given. and audit in terms of 1) if GAAP disclosures are omitted.AUD . and 6) if having an understanding of internal controls is required. 3) type of entities they apply to. and 4) if subsequent event inquiries are required. review. 2) what type of F/S can be reported on. and 5) if the management representation letter is required. but warn with ending paragraph REVIEW SSARS REVIEW SAS REVIEW PCAOB AUDIT SAS/PCAOB Required or modify review report Required or modify review report Required or modify review report Required or modify -qualified/adverse Disclosure required Disclosure required Disclosure required Disclosure required Modify report – qualified/adverse Not required. and audit in terms of 1) standards that apply. industry. 4) knowledge required. but disclose if not is required Required Required Required Required Required if no report Required Required Required Required Not required Required Required Required Required Summary—What are the traits for a compilation. The letter must include a statement to restrict the use of the information to the addressee Positive Assurance A comfort letter provides positive assurance regarding what? CPA’s independence Compliance of the f/s with the SEC Act. a review. 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 prospective compilation. the CPA is required to perform a review of interim financial information in accordance with auditing standards.AUD .Notes Chapter 2 procedures has not procedures has not been restricted been restricted Communication with predecessor Subsequent events inquiries procedures has not been restricted procedures are applied Not required Not required Not required Required Required 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. reviews. compilations. 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. and attest engagements? Audit engagements o Nonissuers = SAS (Statements on Auditing Standards) o Issuers = PCAOB (Public Company Accounting Oversight Board) Compilation engagements o 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)? 15 . Notes Chapter 2 1. Agreed-upon procedures (except letters to underwriters and consulting services) Financial forecasts and projections (hypotheticals) Pro forma f/s Internal control over financial reporting Compliance with laws. that follow SSAE. 7.AUD . info protection. regulations. 3. 2. and disclosure of business practices SysTrust = Provides assurance with respect to the reliability of any defined electronic system What are some differences and similarities between attestation standards and Generally Accepted Auditing Standards (GAAS)? Differences: Attestation standards are much broader in scope than GAAS o No reference is made to the f/s or to GAAP o 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. 5. and contracts Management discussion and analysis as required by the SEC Computer systems and software (trust services) o Examining something other than historical financial statements o 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. 6. 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. What are the types of engagements related to IT? (describe) WebTrust = Provides assurance related to e-commerce o The CPA will assesses a client’s web site for predetermined criteria that are designed to measure transaction integrity. 4. disclaimer of opinion. measurable. and are used to address the risk and opportunities related to information technology. or to withdraw o Material misstatements or deviations from the criteria require modification 16 . the accountant should do what? Ensure that the client discloses all significant assumptions that are used for the prospective f/s. Examination = independence required 3.Notes Chapter 2 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. etc. 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. 2. 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).AUD . 6. The purpose of a compilation of prospective f/s is what? To proper assemble the financial data based on the responsible party’s assumption. 5. and the responsible parties State they have performed procedures that were agreed-upon by the audit committee and management State that the procedures were performed with attestation standards established by AICPA State that the sufficiency of the procedures is the sole responsibility of those parties specified in the report Include a paragraph to list procedures and findings State that they were not engaged to and did not conduct an examination of the subject matter State that no opinion was expressed (disclaimer) o No assurance is given 9. Compilation = independence not required 2. What conditions must exist to provide this type of engmt? I AM SURE I – Independence of the practitioner A – Agreement of the parties (procedures to be done. materiality limits. 7. (no assurance is given) A R 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 17 . 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. character of the engagement. the subject matter. 4. 3. Make inquiries about the accounting principles used in the preparation of the prospective financial statements.) M – Measurability and consistency (subject matter should be capable of these) S – Sufficiency of the procedures U – Use of the report is restricted to the specified parties R – 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 A R What are some required elements that should be included in the practitioner’s report for agreed-upon procedures? 1. 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. What is the difference between the two? Financial forecasts = the expected financial result of a future period o 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). Title: “Independent Accountant’s Report on Applying Agreed-upon Procedures” Identify the specified parties. 8. 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.Notes Chapter 2 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 A R 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. etc. 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. net income. Whether the underlying assumptions provide a reasonable basis for the prospective statements (positive assurance) A R 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 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 A R 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 followed o Qualified or Adverse Significant assumptions are not disclosed or do not provide a reasonable basis o Adverse Scope limitations o Disclaimer Partial presentations are those that omit one or more essential items. 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. They do NOT revaluate internal controls 18 . gross profit.AUD . To express an opinion about whether the statements are presented in conformity with AICPA and 2. for example sales. o Examples: agreed upon procedures. interim nonissuers and interim issuers) 19 . prospective f/s. 2) assurance. o Examples: WebTrust and SysTrust 3." 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/s o Review (nonissuers.Notes Chapter 2 They determine that the computations of the pro forma adjustments are mathematically correct Summary Summary—Summarize the terms learned including 1) attestation. and analysis Summary—What reports restrict use on who can use them? R SCCCAMPP o Reports on the Application of the requirements of an Applicable Financial Reporting Framework (A1) o Special purpose frameworks (regulatory basis except for general use or contractual basis only) (A2-pg 5) o Compliance with contractual agreement or regulatory requirements related to audited f/s (A2-pg 19) o Compilations (nonissuers) if not intended for 3rd party (A2-pg 28) o Comfort letters for underwriters (A2-pg 69) o Agreed-upon procedure engagements (A2-78) o MD&A (A2-89) o Prospective f/s (projection compilation and projection examination reports) note: not forecast compilations or forecast examinations o Partial presentations (A2-85) Summary—Summarize what negative assurance and positive assurance is. and 6) examination 1. MD&A. 3) audit.. inquiry.AUD .. in all material respects. 5) review. verification. Attestation = Attestation is an engagement where a written report is issued on something other than historical f/s. reporting on internal controls." 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. and Pro Forma f/s. Negative/Limited = the auditor is not aware of material misstatements. 4) compilation. 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. 2. 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 procedures o Limited assurance 6. but we did not do a full audit o "We are not aware of ... in accordance with the applicable financial reporting framework 4. Examination = An engagement that provides positive assurance (an opinion) based on procedures such as search. Assurance = Any engagement that improves the quality of information for decision makers. Audit = To provide f/s users with positive assurance (an opinion) on whether the f/s are presented fairly. accounts. pro forma f/s. regulatory. or items o Engagements to report on summary f/s o Comfort letter (can be) o Financial forecasts/projections = examinations o WebTrust/SysTrust No Assurance o Disclaimer of opinion on GAAP f/s o 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 independence o Audits (A1) o Special purpose frameworks (cash.Notes Chapter 2 o Comfort letter (mainly) o A review of management's assertion Positive o Audits o Special purpose frameworks (cash. tax. MD&A.AUD . accounts. compliance with law/contracts. and contractual basis) o Audits of single f/s or specific elements. tax. or items o Compliance with contractual agreement or regulatory requirements related to audited f/s o Engagements to report on summary F/S o Reviews (nonissuers. regulatory. and contractual basis) o Audits of single f/s or specific elements. interim nonissuers and interim issuers) o Letters for underwriters/comfort letters o Attest engagements (agreed-upon procedures. 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 20 . financial forecasts/projections = examination on prospective f/s.