Chapter 5 AUDIT RELATED SERVICES LESSON PLAN Review Financial Statements ( ISRE 2400) (text book pg 722) Agreed Upon Procedures (ISRS 4400) ( text book pg 735) Compilation of financial information (ISRS 4410) (text book pg 735) Read Text Book – Chapter 21 (page 712 – 738) Class Exercise @Dr.Kalsom/AUD721 28 April 2017

Introduction: Relationship among Assurance Services Non - Assurance Services Other Management Consulting Attestation Services Accounting and Bookkeeping Accounting and Bookkeeping Audits Review Certain Management Consulting Audit Related Services Internal Control Tax Services & Secretarial Other Assurance services (e-commerce, risk assessment, etc) @Dr.Kalsom/AUD721 28 April 2017

Assurance Services Assurance services are independent professional services that improve the quality of information, or its context, for decision makers. @Dr.Kalsom/AUD721 28 April 2017

Attest Engagements Attest services occur when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. @Dr.Kalsom/AUD721 28 April 2017

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Introduction Example of assurance services : Audit of historical financial statements Examination of prospective financial information Review Services: Review financial statements (Chapter 5) Review of interim financial information Review on the effectiveness of internal controls Example of non-assurance services/ audit related services: Agreed Upon procedures (Chapter 5) Compilation of financial information (Chapter 5) Consulting engagements (e.g. accounting, tax) @Dr.Kalsom/AUD721 28 April 2017

Assurance / Non – Assurance Engagements Auditors are sometimes requested by clients to provide assurance services other than statutory audit of historical financial statements. The services can be divided into:- Assurance services – are related to improve the quality of information or its context for decision makers egs 1) examination of prospective financial information (ISAE) or 2) review financial statements (ISRE) Non-Assurance services /audit related services - are related to generate recommendations/providing services to management in discharge their duties egs 1) agreed upon procedures and 2) compilation of financial information (ISRS). An assurance engagement is defined as an independent professional service in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria (Text Bk – diagram in pg 717). The objective of an assurance engagement is to evaluate or measure a subject matter against identified criteria and to express a conclusion about the subject matter Types of Assurance Engagements (other than historical financial information) provided by public accounting firms which may have significant market potential – risk assessment, information system reliability, business performance measurement, electronic commerce, due diligence engagement, corporate policy compliance, WWW assertions, etc ( refer later to chapter 8 – Assurance Services). @Dr.Kalsom/AUD721 28 April 2017

Two Types of Assurance Services/Engagements A Reasonable Assurance Engagement In a reasonable assurance engagement such as an audit of financial statements, the practitioner reduces engagement risk to an acceptably low level to obtain reasonable assurance to express a conclusion in a positive form. The procedures for obtaining the evidence to support the conclusion would include inspection, confirmation, calculation, re-performance, observation, inquiry and analytical procedures A Limited Assurance Engagement In a limited assurance engagement such as a review of financial statements, the practitioner will also reduce the engagement risk to an acceptably low level, but in such engagements, the engagement risk is higher than in a reasonable assurance engagement because of the reduced and limited nature of evidence gathering procedures. In a limited assurance engagement, the evidence gathering procedures are deliberately limited relative to a reasonable assurance engagement, and the practitioner does not apply all the procedures used in a reasonable assurance engagement. Consequently, the conclusion in the assurance report is expressed in a negative form. @Dr.Kalsom/AUD721 28 April 2017

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Introduction Audit of historical financial statements Is a form of attestation service in which the auditor issues a written report expressing an opinion about whether the financial statements are fairly stated in accordance with financial reporting framework . Review of historical financial information Statutory audit of financial statements provides high level of assurance but review of historical financial information provides moderate level of assurance on the financial statements due to limited audit evidences to support the opinion. Non-Assurance Engagements / Audit related Services that may be applied to a broad range of subject matter. to generate fact findings & recommendations examples agreed upon procedures or compilation of financial information @Dr.Kalsom/AUD721 28 April 2017

Introduction Characteristic of assurance engagements There must be a three party engagement: Practitioner (chartered accountant) Responsible party (the management) An intended user (person who rely on the conclusion) Subject matter such as:- Data (historical financial information, performance indicator) Systems and process (internal control, IT control) Behaviour (corporate governance, compliance with regulation, HR practices) @Dr.Kalsom/AUD721 28 April 2017

Introduction Characteristic of assurance engagements Suitable criteria or standards The basis for which the subject matter is being evaluated or measured by the practitioner (Chartered Accountants) in order to form an independent opinion. For examples: approved accounting standards, generally accepted industry criteria and established internal control framework. An engagement process / evidence gathering procedures Involves the signing of engagement letter which stated and agreed about scope and method of the engagement Conclusion and Report @Dr.Kalsom/AUD721 28 April 2017

Framework of auditing assurance and other related services Nature of Service Audit Review Agreed-Upon Procedures Compilation Comparative level of assurance provided by the auditor High assurance, but not absolute Moderate assurance No assurance Report provided Positive assurance on assertion (s) “In our Opinion” Negative assurance on assertion (s) “Nothing has come to our attention” Factual findings of procedures Identification of information complied. Not attempt to verify 28 April 2017 @Dr.Kalsom/AUD721

CHAPTER 5 REVIEW SERVICES ISRE 2400: Engagement to Review Financial Statement @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement In a review engagement, the auditor provides a moderate level of assurance that the financial information subject to review is free of material misstatement. Review comprises inquiry and analytical procedures which are designed to review the reliability of management assertions of financial statements which are under the responsibility of one party and to be used by another party. Review of financial statements will involve the application of audit skills and techniques and the gathering evidence BUT it does not involve the assessment of accounting and internal control systems and other procedures in auditing such as obtained third party confirmation and physical observation. Therefore, the moderate level of assurance is expressed due to to the scope of work and lower fees received. @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement Objective of a Review Engagement To enable the practitioner (Chartered Accountant) to state whether, in all material respects, the financial statements are prepared in accordance with an identified financial reporting framework. General Principles of a Review Engagement Professional behaviour whereby the accountant should comply with the “Code of Ethics for Professional Accountants” issued by MIA i.e. integrity, objectivity. professional standards, etc Auditor should plan and perform the review with an attitude of professional skepticism to identify circumstances which can cause the financial statement to be materially misstated. For the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient evidence through inquiry and analytical procedures to be able to draw conclusion.. @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement Terms of the Engagement: The auditor should ensure that there is a clear understanding between the client and the auditor regarding the engagement. i.e. clear engagement letter.. Procedures Obtain an understanding of the entity’s business and the industry in which the entity operates Obtain understanding of the accounting systems and the nature of the entity’s assets, liabilities, revenues and expenses Inquires of the entity’s personnel responsibility for the financial reporting about all the material assertions in the financial statements and whether all the transactions have been recorded and any changes in accounting policies and practice @Dr.Kalsom/AUD721 28 April 2017

Procedures to review financial statements (Example: Table 21-1 pg 723) The procedures involve: Inquire about the actions taken at meetings of the BOD, shareholders and other relevant board committees Perform analytical procedures to identify relationships and individual items that appear to be unusual Read financial statements to determine if they conform to the identified financial reporting framework For every balance sheet items, perform certain level of audit technique but not extent to getting confirmation from third party or physical observation. If appropriate, obtain written representations from management…pertaining all matter including subsequent events. @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement Reporting: A review engagement provide a moderate level of assurance that the information subject to review is free of material misstatement, this is expressed in the form of negative form of report. Example Report (After the scope paragraph): Form of Unqualified Review Report: Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respect) in accordance with International Accounting Standards. Also qualified report (with except for) if no pervasiveness effect Also adverse report of pervasive effect @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement Reporting( see exhibit 21-1 & 21-2 pg 724): Also qualified report (with except for) if no pervasiveness effect “Management has informed us that inventory has stated at its cost which is in excess of its net realisable value. Management’s computation which we have reviewed shows that inventory, if valued at the lower of cost and net realisable value as required by Approved Accounting Standards, would been decreased by RMXXXX.” Based on our review, except for the effects of the overstatement of inventory described in the previous paragraph, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respect) in accordance with International Accounting Standards. @Dr.Kalsom/AUD721 28 April 2017

Review Financial Statement Reporting: Also adverse report of pervasive effect “ As noted in the note 23 of financial statements, these financial statement do not deflect the consolidation of the financial statement of subsidiary companies, the investment in which is accounted for on a cost basis. Under the Approved Accounting Standards, the financial statements of the subsidiaries are required to be consolidated. Based on our review, because of the pervasive effect on the financial statements of the matter discussed in the preceding paragraph, the accompanying financial statements are not presented fairly, in all material respects, in accordance with Approved Accounting Standards..” @Dr.Kalsom/AUD721 28 April 2017

Review of Financial Statements A review is defined as the performance of inquiry and analytical procedures to provide the accountant with a reasonable basis for expressing limited assurance that no material modifications should be made to the statements in order for them to conform to GAAP or other comprehensive basis of accounting. @Dr.Kalsom/AUD721 28 April 2017

Review of Financial Statements Review Work Involves Obtain knowledge of the accounting principles and practices of the industry and an understanding of the entity’s business. Obtain a general understanding of the entity’s organization, its operating characteristics, and the nature of its assets, liabilities, revenues and expenses. Ask the entity’s personnel questions. Perform analytical procedures. Read the financial statements to determine if they conform to GAAP. Obtain reports from other accountants, if any. Obtain a representation letter from management. @Dr.Kalsom/AUD721 28 April 2017

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CHAPTER 5 AUDIT RELATED SERVICES ISRS 4400: Engagement to perform Agreed- Upon Procedures Regarding Financial Information @Dr.Kalsom/AUD721 28 April 2017

Agreed upon procedures Chartered accountant is engaged by a client to issue a report of actual findings based on specific procedures performed on financial or other information and no assurance is expressed. Agreed upon procedures is an non assurance engagement that involves the auditor in performing certain procedures concerning individual items of financial data (for example, account payable, account receivable, purchase from related parties and sales and profits of a segment of an entity) or financial statements (for example, a balance sheet or even a complete set of financial statements. @Dr.Kalsom/AUD721 28 April 2017

Agreed upon procedures Objective of an Agreed-upon Procedures Engagement The objective of an agreed-upon procedures engagement is for the auditors to carry out procedures of an audit nature to which the auditor and the responsible entity and any appropriate third parties have agreed and to report on factual finding and no assurance is expressed. General Principles of an Agreed-upon Procedures Engagement: The accountant should comply with the “Code of Ethics for Professional Accountants” issued by IFAC. i.e. integrity, objectivity.. Terms of the Engagement: The auditor should ensure that there is a clear understanding between the client and the auditor regarding the agreed-upon procedures and the condition of the engagement. i.e. clear engagement letter.. @Dr.Kalsom/AUD721 28 April 2017

Agreed upon procedures Documentation The auditor should document matters which are important in providing evidence to support the report of factual finding. Procedures and Evidence, Include: Inquiry and analysis Re-computation, comparison, and other clerical accuracy clerk Observation, Inspection and obtaining confirmation.. Depends on what has been agreed with client.. Reporting: The report on an agreed-upon procedures engagement need to describe the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed. @Dr.Kalsom/AUD721 28 April 2017

Agreed upon procedures Reporting (example): REPORT OF ACTUAL FINDINGS To ……. We have performed the procedures agreed with you about the account payable of ABC Company….. The procedures were performed solely to assist you in evaluating the validity of the account payable and are summarized as follows:- We obtained suppliers’ statement OR if statement not available, we should requested suppliers to confirm balances owing as at 31 December 2007.. We report our finding below:- With respect to item 1, we found there were suppliers’ statement for all such suppliers and the amount owing is in agreement with the creditors listing. @Dr.Kalsom/AUD721 28 April 2017

CHAPTER 5 AUDIT RELATED SERVICES ISRS 4410: Engagements to Compile Financial Information @Dr.Kalsom/AUD721 28 April 2017

Compilation of financial information For Example: Business entities registered as partnership or sole proprietorship are not required to have annual audit of their financial statements under the Malaysian Law However, these entities may sometimes engage an accountant to assist them with the preparation of their accounts, tax returns or other financial documents Compilation services include the collecting, classifying and summarizing of financial information. No assurance expression is made on the financial statements @Dr.Kalsom/AUD721 28 April 2017

Compilation of financial information The objective of a Compilation Engagement: is for accountant to use accounting expertise, as opposed to auditing expertise, to collect, classify and summarize financial information, produce a report and no assurance is expressed. General Principles of a Compilation Engagement: The accountant should comply with the “Code of Ethics for Professional Accountants” issued by MIA. Integrity, objectivity, professional competence, due care, confidentiality, professional behavior and technical standards….. Terms of the Engagement: The accountant should ensure that there is a clear understanding between the client and the accountant regarding the terms of engagement. i.e. clear engagement letter for a compilation engagement @Dr.Kalsom/AUD721 28 April 2017

Compilation of financial information Procedures: Obtained general knowledge of the business and operations of the entity Obtained knowledge about the accounting policies and practices of the industry in which the entity operates. E.g. Petronas Petrol Station. A general understanding of the nature of the entity’s business transactions, the form of its accounting records and the qualifications of its accounting personnel The accounting basis on which the financial statements are to be presented and the form and content of the financial statements The accountant should obtain an acknowledgment from management of its responsibility for the appropriate presentation of the financial information. @Dr.Kalsom/AUD721 28 April 2017

Compilation of financial information Reporting on a Compilation Engagement ( exhibit 21 - 6 pg 737): COMPILATION REPORT TO…. On the basis of information provided by management we have compiled, in accordance with the International Standard on Auditing applicable to compilation engagements, the balance sheet of ABC Company as of 31 December 2007 and statements of income and cash flows for the year then ended. Management is responsible for these financial statements. We have not audited or reviewed these financial statements and accordingly express no assurance thereon… With modified report, if any.. We draw attention to Note 10 to the financial statement because management has elected not to capitalise the leases on plant and machinery which is departure from approved accounting standards. @Dr.Kalsom/AUD721 28 April 2017

Compilation of Financial Statements A compilation is defined as presenting, in the form of financial statements, information that is the representation of management or owners without undertaking to express any assurance on the statements. Compilation with Full Disclosure Compilation that Omits Disclosures Compilation when CPA is not Independent @Dr.Kalsom/AUD721 28 April 2017

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Framework of auditing assurance and other related services Audit Related Services Nature of Service Audit Review Agreed-Upon Procedures Compilation Comparative level of assurance provided by the auditor High assurance, but not absolute Moderate assurance No assurance Report provided Positive assurance on assertion (s) “In our Opinion” Negative assurance on assertion (s) “Nothing has come to our attention” Factual findings of procedures Identification of information complied. Not attempt to verify 28 April 2017 @Dr.Kalsom/AUD721