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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 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..."
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What are the elements of a special purpose framework auditors report? (Describe each component)

1. Title: Independent Auditors 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 & expincome tax basis)
3. Managements Responsibility paragraph: theyre 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. Auditors Responsibility paragraph: theyre 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. Auditors 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
Dont do this paragraph when prepared using regulatory basis and theyre intended for general use
9. Other-Matter paragraph
o Use to restrict the use of the auditors 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)

AUD - Notes Chapter 2


Dont do this paragraph when prepared using regulatory basis and theyre intended for general use

10. Signature of the auditor, auditors address and date of the auditors 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 theyre 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 auditors 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
SummaryWhat 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 auditors report is needed?

Opinion = Single opinion on special purpose framework


Description of purpose = No
E-O-M = Yes
O-M = No

SummaryWhat 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 auditors report is needed?

Opinion = Single opinion on special purpose framework


Description of purpose = No
E-O-M = Yes
O-M = No

SummaryWhat 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 auditors report is needed?

Opinion = Single opinion on special purpose framework


Description of purpose = Yes
E-O-M = Yes
O-M = Yes

SummaryWhat 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 auditors report is needed?

Opinion = Dual opinion on special purpose framework AND GAAP


Description of purpose = Yes
E-O-M = No
O-M = No

AUD - Notes Chapter 2

SummaryWhat 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 OM paragraph restricting the use of the auditors 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 entitys complete set of f/s
o Single F/S:
Balance Sheet, Statement of Income, Statement of Cash Flows, Statement of assets and liabilities
o 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 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. Perform procedures on any interrelated items as necessary
o Ex = sales and receivables, inventory and payables, or depreciation and fixed assets
o Ex = If based on the stockholders equity, you need to do that AND the balance sheet accounts
o 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 auditors report and express a separate opinion for each engagement
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What would be different in the auditors 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 auditors 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 auditors report. What should the auditor do in
this type of situation?
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AUD - Notes Chapter 2

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 auditors report on
the complete set of f/s and
2. The specific element does not constitute a major portion of the entitys 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. 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 clients compliance with contractual agreements or regulatory
requirements in connection with a f/s audit. What type of assurance is given for compliance reports?
Negative
o Note: the auditor must have audited the clients f/s in order to do this
What is negative assurance?

It is a statement that means nothing came to the auditors 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 lawyers 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
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What would be different in the auditors 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
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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
Managements responsibility
o For the preparation of the summary f/s
Auditors 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.
Opinion
o The type of opinion expressed

What type of opinion may be issued for a summary f/s engagement?

An unmodified

AUD - 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, 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 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, 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. doesnt 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
nonissuers f/s
3. Pro forma f/s of nonissuers
Dont 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?
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AUD - Notes Chapter 2

1. Management
2. An accountant in public accounting
3. Intended users of the f/s or info

Compilation of F/S (nonissuers only)


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)
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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/s
2. Managements 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. Accountants responsibilities
o Conducting a review in accordance with SSARS issued by the AICPA
4. A description discussing how a compilation is different from an audit
5. 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
6. If the auditor is not independent, a statement that they will disclose that in the auditors report
7. 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, theyre responsible for gaining the required level of
knowledge. (they can still accept the engagement) This is the same for a review engagement
2. Understanding the clients 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. Reading the F/S
o Before issuing a report, accountants should read the compiled f/s and consider whether they are
appropriate in form and free from obvious errors
4. 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
accountants 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

AUD - Notes Chapter 2


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What should be included in the accountants compilation report which accompanies the compiled f/s?

1. Title: Accountants Compilation Report (note: independent is not used because it is not required)
2. Addressee
3. 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. Managements 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/s
5. Auditors 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. 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 accountants 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. If the accountants report clearly indicates the omission by including a 4 th paragraph disclosing such omissions.
2. The omission are not intended to mislead any person who might be expected to use the f/s
3. 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 doesnt 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.

SummaryIf 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.
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What should be included in the engagement letter of a review?


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AUD - Notes Chapter 2

1. The objectives of the engagement


o Obtain limited assurance that there are no material modifications that should be made to the f/s
2. Managements 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. Accountants responsibilities
o Conducting a review in accordance with SSARS issued by the AICPA
4. A description discussing how a review is different from an audit
5. 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
Understanding with the client with what should be established
o Done through the engagement letter
Learn and/or obtain sufficient knowledge of the entitys business
o Do = Understand the clients business, accounting principles used by the client, 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, theyre responsible for gaining the required
level of knowledge. (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- 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 (mgmts representation letter)***
Professional judgement should be used to evaluate results
Accountant (CPA) should communicate results
o Done in the Independent Accountants 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, classifying, 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, BOD, or other management
o Subsequent events

AUD - 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
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What should be included in the client representation letter from management (mgmts representation letter)?

Management.
1. has responsibility for the preparation and fair presentation of the f/s in accordance with GAAP
2. has responsibility for designing, implementing, and maintaining internal controls for f/s
3. has responsibility to prevent/detect fraud
4. should disclose any knowledge of material fraud or suspected fraud
5. believes significant assumptions used when making accounting estimates are reasonable
6. has appropriately disclosed related parties and transactions
7. has disclosed information concerning subsequent events
8. believes the effect of uncorrected misstatements are immaterial both individually and in aggregate to the f/s
9. has accounted for and disclosed all possible litigation and claims
10. has made available to the auditor all financial records and related data
11. 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 regulations
13. Has disclosed any additional representations related to matters specific to the entitys business and industry

What are some other traits about managements 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
Managements 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 doesnt 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 managements response
Analytical procedures performed
Unusual matters and their description
Communications (oral or written) to management regarding fraud and illegal actions
Management representation letter
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What should be included in the accountants review report?


1. Title: Independent Accountants Review Report
2. Addressee
3. Introductory paragraph
o Identify the entity
o State that the f/s have been reviewed

AUD - 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 managements 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
Managements 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/s
Auditors 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 accountants report: the date the review is completed
o Each page of the f/s should be marked See Independent Accountants Review Report
o
o
o

4.

5.

6.
7.
8.

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 request
2. Effort required to complete the engagement
3. 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 auditors 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, 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 =

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AUD - 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 periods 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

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 period
2. Compare the prior period f/s with the current f/s
3. 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

11

AUD - 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. 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. The objectives of the engagement : which is stated in card 2 of this section


2. Managements 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 and providing at the end of the engagement, a management
representation letter (mgmt. letter not required in a compilation)
3. Accountants 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 audit
5. 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. 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 theyre responsible for internal controls and financial information
o Next: Have an engagement letter
Learn and/or obtain sufficient knowledge of the entitys 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 doesnt need to have an understanding of internal controls, assess
fraud risk, do audit procedures, or communicate with the predecessor accountant
Inquiries should be addressed to appropriate individuals***
Analytical procedures should be performed***
Review- other procedures should be performed
o Read the f/s, read other info in documents, read minutes of BOD meeting, obtain evidence, obtain reports
Client representation letter should be obtained from management (mgmts representation letter)***
Professional judgement should be used to evaluate results
Accountant (CPA) should communicate results
o Done in the Independent Accountants Review Report on Interim Financial Information

12

AUD - 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 entitys 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 GAAP
o Unusual situations
o Material or suspected fraud
o Significant transactions , 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, what is the communication order/chain that the
auditor should use to communicate the problem(s)?
1. Management
2. BOD and audit committee
3. Withdraw and get legal advise
A
R

What should be included in the accountants review report on interim financial information?

1. Title: Independent Auditors Review Report


2. Addressee
3. 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. Managements 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. Auditors 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. 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. Signature of accountant (a manual signature is NOT required)
8. City and state where the auditor practices
9. Date of the accountants 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.

13

AUD - Notes Chapter 2

SummaryWhat 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.
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
clients business

Increased
understanding of
clients business

Increased
understanding of
clients business

General
understanding of
clients business

None

Nonissuers/Issuers
Extensive
understanding of
economy, industry,
and clients
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

SummaryWhat 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.

GAAP disclosures
omitted
GAAP departures
Independence
Engagement letter
Representation letter

COMPILATION
SSARS
May omit most
without restricting
use, 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, but


disclose if not is
required

Required

Required

Required

Required

Required if no report

Required

Required

Required

Required

Not required

Required

Required

Required

Required

SummaryWhat 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
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

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/ss 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
A comfort letter provides positive assurance regarding what?

CPAs 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)

SummaryWhat 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 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

AUD - Notes Chapter 2

1.
2.
3.
4.
5.
6.
7.

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, regulations, 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, 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-commerce


o The CPA will assesses a clients 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

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, 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

16

AUD - Notes Chapter 2

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 SURE
I Independence of the practitioner
A 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 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 practitioners report for agreed-upon
procedures?
1.
2.
3.
4.
5.
6.
7.
8.

Title: Independent Accountants Report on Applying Agreed-upon Procedures


Identify the specified parties, the subject matter, character of the engagement, 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. 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 companys expected
financial position and expected results of operations. 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). 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 required
2. Examination = independence required
3. 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 partys assumption. (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

AUD - 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 dont 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 presentations 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. To express an opinion about whether the statements are presented in conformity with AICPA and
2. 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 practitioners 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 presentations 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, 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

18

AUD - Notes Chapter 2

They determine that the computations of the pro forma adjustments are mathematically correct

Summary
SummarySummarize 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 SysTrust
3. 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 framework
4. 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 procedures
o Limited assurance
6. Examination = An engagement that provides positive assurance (an opinion) based on procedures such as search,
verification, inquiry, and analysis

SummaryWhat 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)

SummarySummarize 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..."

SummaryWhat 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, interim nonissuers and interim issuers)

19

AUD - Notes Chapter 2

o Comfort letter (mainly)


o A review of management's assertion
Positive
o Audits
o Special purpose frameworks (cash, tax, regulatory, and contractual basis)
o Audits of single f/s or specific elements, accounts, 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

SummaryWhat are different engagement that require independence versus the ones that do not require
independence?

Requires independence
o Audits (A1)
o Special purpose frameworks (cash, tax, regulatory, and contractual basis)
o Audits of single f/s or specific elements, accounts, 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, interim nonissuers and interim issuers)
o Letters for underwriters/comfort letters
o 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

20