BA 427 – Assurance and Attestation Services Lecture 18 The Types of Services Offered by Public Accounting Firms

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services  Accounting and Bookkeeping Services  Tax Services  Management Consulting Services

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services  Accounting and Bookkeeping Services  Tax Services  Management Consulting Services

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services Independent professional services that improve the quality of information for decision-making. There are numerous providers of some of these services. Examples include the Better Business Bureau, Consumers Union, organizations that certify whether growers satisfy organic food standards.

Lecture 18 – Services Offered by Public Accounting Firms  Types of Assurance Services Attestation services  Auditor is attesting to another party’s assertion  Auditor must issue a written report Other assurance services  The auditor need not issue a report  There might not be an assertion by another party  Accounting firms compete with other providers

Lecture 18 – Services Offered by Public Accounting Firms  Attestation Services The practitioner is engaged to issue an examination report, a review report, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party.

Lecture 18 – Services Offered by Public Accounting Firms  Types of Attestation Services Audits of financial statements Reviews of financial statements Attestation related to internal controls over financial reporting Attestation related to prospective financial statements WebTrust, for web-based business transactions assurance SysTrust, for assurance on I/S reliability Many other types of attest services

Lecture 18 – Services Offered by Public Accounting Firms  Attestation Services 11 Attestation Standards  Issued by the Auditing Standards Board  Analogous to the ten Generally Accepted Auditing Standards (GAAS) Additional guidance provided by SSAE’s (Statements on Standards for Attestation Engagements)  Audit Services 10 Generally Accepted Auditing Standards

Lecture 18 – Services Offered by Public Accounting Firms  Audits of Financial Statements The objective of an independent, external audit in accordance with GAAS is to express an opinion on whether an entity’s financial statements present fairly, in all material respects, its financial position, results of operations, and cash flows in conformity with GAAP. The auditor’s responsibility for the financial statements is confined to the expression of an opinion.

Lecture 18 – Services Offered by Public Accounting Firms  Reviews of Financial Statements A Review provides limited assurance concerning GAAP for nonpublic companies. The scope of a review is significantly less than the scope of an audit. The opinion is in the form of negative assurance. Review procedures consist of inquiries and analytical procedures. The auditor should obtain a Letter of Representations

Lecture 18 – Services Offered by Public Accounting Firms  Reviews of Financial Statements A Review typically would not include any of the following procedures:  An evaluation of internal controls  An assessment of control risk  Testing of accounting records  Obtaining evidence that corroborates management’s representations

Lecture 18 – Services Offered by Public Accounting Firms  Reviews of Financial Statements If the auditor becomes aware that information being provided for the F/S is incorrect or incomplete, the auditor should obtain additional or corrected information, or withdraw from the engagement.

Lecture 18 – Services Offered by Public Accounting Firms  Attestation related to internal controls over financial reporting Required for large financial institutions by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). Required for public companies under Section 404 of Sarbanes-Oxley. “Auditing Standards” for this attest engagement are established by the PCAOB.  Auditing Standard No. 2 (AS #2)

Lecture 18 – Services Offered by Public Accounting Firms  Attestation Related to Prospective Financial Statements Financial Forecast: prospective F/S based on management’s best guess of the future. Financial Projection: prospective F/S based on one or more hypothetical assumptions.  Might provide point estimates or ranges.  Projections are Limited Use, not General Use statements.

Lecture 18 – Services Offered by Public Accounting Firms  Attestation Related to Prospective Financial Statements These types of services are viewed as a significant market opportunity, but at high risk for creating an “expectations gap.” The only permissible services for Prospective Financial Statements are:  An Examination  A Compilation  Agreed-upon Procedures

Lecture 18 – Services Offered by Public Accounting Firms  Other Assurance Services Could cover almost anything, including the reliability of  the determination of lottery and contest winners  controls over data security and data back-up procedures  customer survey data; mystery shopping  Fraud and illegal acts risk assessment  Compliance with entertainment royalty agreements

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services  Accounting and Bookkeeping Services  Tax Services  Management Consulting Services

Lecture 18 – Services Offered by Public Accounting Firms  Accounting and Bookkeeping Services Preparation of financial statements for small clients (including compilation services) AICPA independence standards allow auditors to provide these services to attest clients; SEC independence rules do not.

Lecture 18 – Services Offered by Public Accounting Firms  Auditors’ Services Related to Financial Statements Hence, auditors can be associated with the dissemination of a set of financial statements in one of three ways:  An Audit  A Review  A Compilation

Lecture 18 – Services Offered by Public Accounting Firms  Compilations Also called “write-up services” The auditor should obtain a general understanding of the nature of the client’s business, industry, and the accounting principles and practices used in the industry. The auditor does not have to make inquiries or perform other procedures to verify, corroborate, or review information.

Lecture 18 – Services Offered by Public Accounting Firms  Compilations If the auditor becomes aware that information being provided for the F/S is incorrect or incomplete, the auditor should obtain additional or corrected information, or withdraw from the engagement.

Lecture 18 – Services Offered by Public Accounting Firms  Compilations The auditor should read the compiled financial statements and consider whether the statements appear to be in appropriate form and free of obvious material errors, such as clerical mistakes or mistakes in the application of GAAP.

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services  Accounting and Bookkeeping Services  Tax Services  Management Consulting Services

Lecture 18 – Services Offered by Public Accounting Firms  Tax Services Tax Preparation Tax Planning Accounts for 25% to 40% of revenue for most medium to large accounting firms. Many large companies maintain their own tax planning and tax compliance departments.

Lecture 18 – Services Offered by Public Accounting Firms  Assurance Services  Accounting and Bookkeeping Services  Tax Services  Management Consulting Services

Lecture 18 – Services Offered by Public Accounting Firms  Management Consulting Services Also called Management Advisory Services, or MAS Examples:  Financial systems design and implementation  Risk management advising  Mergers and acquisitions (M&A) work  Actuarial benefit consulting services  Internal audit services

Lecture 18 – Services Offered by Public Accounting Firms  Management Consulting Services AICPA independence standards allow auditors to provide these services to attest clients; Sarbanes-Oxley and SEC independence rules generally do not.

Lecture 18 – Services Offered by Public Accounting Firms  Governmental Audits The GAO issues government auditing standards (the Yellow Book)  Also called GAGAS for Generally Accepted Government Auditing Standards.  Originally issued in 1972, updated as recently as  Includes the ten GAAS standards, with extensive additional guidance and requirements.

Lecture 18 – Services Offered by Public Accounting Firms  Types of Governmental Engagements: Financial statement audits  Scope is greater, and auditor’s responsibility is greater, than for a conventional business audit. Other financial audits  E.g.: special reports, interim financial information Attestation engagements Performance audits

Lecture 18 – Services Offered by Public Accounting Firms  Single Audit Act 1984, amended in 1996 Applies to nonfederal entities that receive federal awards in excess of $500,000 from multiple federal programs. Allows all federal agencies to rely on a single audit of the grant recipient.