Other Assurance Services Chapter 25

Learning Objective 1 Understand the level of assurance and evidence requirements for review and compilation services.

Review and Compilation Services The standards for compilations and reviews of financial statements are called Statements on Standards for Accounting and Review Services (SSARS). This committee has authority equivalent to the Auditing Standards Board for services involving unaudited financial statements of nonpublic companies.

Relationship Between Evidence Accumulation and Assurance Attained High (Audit) Assurance Attained Level of Moderate (Review) None (Compilation) Since review and compilation services provide less assurance than audits, the accountant should establish an understanding with the client about the services to be provided through a written engagement letter. Minimal (Compilation) Significant (Review) Extensive (Audit) Amount of Evidence Accumulated

Review Services A review service (SSARS review) engagement is designed to allow the accountant to express limited assurance that the financial statements are in accordance with GAAP.

Procedures Suggested for Reviews Obtain industry knowledge Know the client Make inquiries of management The accountant can study AICPA industry guides or other sources to obtain industry knowledge. The level of knowledge about he client should be less than the amount of knowledge for an audit; however, the information should be about the nature of the client's business, its accounting records, and the principles and practices used by the client. Management inquiries should include a description of procedures for recording classifying and summarizing transactions Inquire into actions taken at meetings of stockholders and the board of directors. Ask if each account on the financial statements was prepared in conformity with GAAP. Do you have knowledge of actual or suspected fraud? Perform analytical procedures Obtain a representation letter Prepare documentation

Form of Review Report

Compilation Services Defined in SSARS as one in which accountants present to a client or third party, financial statements that the accountant has prepared. The CPA firm does not express any assurance on the statements.

Requirements for Compilation Document services to be performed and a description of the report Know the industry accounting principles and practices Know the client A written engagement letter should be used to document the objectives of the engagement type and limitations of the services to be provided and a description of the report. Know the client including the nature of its business transactions, accounting records, and content of its financial statements.

Requirements for Compilation Determine whether the client’s information is satisfactory Review the compiled financial statements for any obvious omissions or errors in math and GAAP

Form of Compilation Report Full Disclosure No Disclosure Full disclosure is the same as for GAAP statements or some other accounting standard. No disclosure reports are typically used for management purposes. When the accountant lacks independence an additional paragraph must be added as the last paragraph of the report. Compilation without independence

Form of Compilation Report Full Disclosure No Disclosure

Form of Compilation Report (without disclosures) Full Disclosure No Disclosure

Learning Objective 2 Describe special engagements to review interim financial information for public companies.

Review of Interim Financial Information for Public Companies The SEC requires quarterly financial statements to be reviewed by the company’s external auditor prior to the company’s filing of the Form 10-Q. Like reviews under SSARS, a public company interim review includes the five requirements for review service engagements. Industry knowledge Client knowledge Inquiries of management Performa analytical procedures Obtain a rep letter

Review of Interim Financial Information for Public Companies Like reviews under SSARS, a review for a public company does not provide a basis for expressing a positive form opinion. The review is conducted according to the standards of the PCAOB and there is no reference to the SSARS in a review report.

Learning Objective 3 Distinguish AICPA attestation standards from auditing standards and know the type of engagements to which they apply.

Attestation Engagements standards Types of engagements The AICPA has issued 11 attestation standards that parallel the 10 generally accepted auditing standards. To provide additional guidance for doing attestation engagements, the Auditing Standards Board of the AICPA issues Statements on Standards for Attestation Engagements (SSAE). In general auditing standards apply to attestations that deal with providing assurance on historical financial statements including one or more parts of those statements. The ASB decided not to attempt to define the potential boundaries of attestation engagements except in conceptual terms because new services are likely to arise. Three levels of service are examinations, reviews, and agreed-upon procedures. Levels of service

Types of Engagements and Related Reports Type of Engagement Amount of Evidence Level of Assurance Form of Conclusion Distribution Examination Review Agreed-upon procedures Extensive Significant Varying High Moderate Varying Positive Negative Findings General Limited An examination results in a positive conclusion. A review provides a negative assurance conclusion that nothing came to the CPA’s attention that the assertions are not presented in all material respects in conformity with the applicable criteria. In an agreed upon procedures engagement, all procedures the CPA will perform are agreed-upon by the CPA, the responsible party making the assertions and the specific persons who are the intended users of the report.

Learning Objective 4 Understand the nature of WebTrust and SysTrust assurance services.

WebTrust Services In a WebTrust attestation engagement, a client engages a CPA to provide reasonable assurance that a company’s Web site complies with certain Trust Services principles and criteria for one or more aspects of e-commerce activities. The Webtrust service is a specific service developed under the broader trust services principles and criteria jointly issued by the AICPA and CICA. The CPA firm assesses whether the company’s Web site complies with the five trust services principles.

Five Trust Services Principles Security The system is protected against unauthorized access Availability The system is available for operation and use as committed or agreed Processing integrity System processing is complete, accurate, timely, and authorized Online privacy Personal information obtained as a result o e-commerce is collected, used, disclosed, and retained as committed or agreed Confidentiality Information designated as confidential is protected as committed or agreed

SysTrust Services In a SysTrust engagement, the SysTrust licensed CPA evaluates a company’s computer system using Trust Services principles and criteria. The service provides assurance to management, directors, or third parties about the reliability of information systems used to generate real-time information

Learning Objective 5 Describe engagements to report on internal controls at service organizations.

Internal Control Reports at Service Organizations Historically referred to as SAS 70 engagements Two types of reports Type I – report on the design of controls Type II – report on the operating effectiveness Type I addresses suitability of the design of controls Type II tests the operating effectiveness of the controls at the service organization

Learning Objective 6 Describe special engagements to attest to prospective financial statements.

Prospective Financial Statements Forecasts and Projections Use of prospective financial statements Forecasts are prospective financial statements that present an entity’s expected financial position, operating results and cash flows. Projections are prospective financial statements that present an entity’s financial position, operating results and cash flows to the best of the responsible party’s knowledge and belief, given one or more hypothetical assumptions. Prospective financial statements are prepared for one of two audiences: general use statements for any third party and limited use statements solely for third parties with whom the responsible party is dealing directly. Types of engagements include an examination , a compilation, and an agreed-upon procedures engagement Types of engagements

Examinations of Prospective Financial Statements Evaluating the preparation of the prospective financial statements Evaluate the underlying support for assumptions Evaluate the presentation for conformity with AICPA guidelines Issuing an examination report AICPA attestation standards clearly state that CPAs are not attesting to the accuracy of the prospective financial statements. Instead, they examine the underlying assumptions and the preparation and presentation of the forecast or projection. For examinations, there are four elements.

Learning Objective 7 Describe agreed-upon procedures engagements.

Agreed-Upon Procedures Engagements The audit is limited to certain specific audit procedures. These are referred to as procedures and findings engagements. The SASs deal with financial statement items, whereas the SSAEs deal with nonfinancial statement matters.

Learning Objective 8 Describe other audit and limited assurance engagements related to historical financial statements.

Other Comprehensive Basis of Accounting Cash or modified cash basis Regulatory agency basis With cash basis accounting only cash receipts and disbursements are recorded. Under modified cash basis, the cash basis is followed except for certain items such as fixed assets and depreciation. Common examples of the regulatory agency basis include the uniform system of accounts required of railroads, utilities, and some insurance companies. Tax basis uses the same measurement rules used for filing tax returns even though tax rules are not GAAP. An example of a definite set of criteria is the price level basis of accounting. Tax basis Definite set of criteria

Specified Elements, Accounts, or Items Auditors are often asked to audit and issue reports on specific aspects of financial statements. A common example is a report on the audit of sales of a retail store in a shopping center to be used as a basis for rental payments.

Specified Elements, Accounts, or Items Two differences in these types of audits: 1. Materiality is defined by the item audited Materiality is defined in terms of the elements, accounts, or items being audited rather than for the overall statements. The effect is to require more evidence than if the item being verified is one of many parts of the statements. The first standard of reporting under GAAS does not apply because the presentation of elements accounts or terms is not a financial statement prepared in accordance with applicable accounting standards. 2. GAAS (first standard) does not apply.

Debt Compliance Letters and Similar Reports The engagement and report should be limited to compliance matters the auditor is qualified to evaluate. The auditor should provide a debt compliance letter only for a client for whom the auditor has done an audit of the overall financial statements. Auditors may issue reports on debt compliance and similar engagements as separate reports or by adding a paragraph after the opinion paragraph as part of a report that expresses their opinion on the financial statements.

Debt Compliance Letters and Similar Reports The auditor’s opinion is in the form of a negative assurance, stating that nothing came to the auditor’s attention that would lead the auditor to believe there was noncompliance.

End of Chapter 25