A U D I T I N G A RISK-BASED APPROACH TO CONDUCTING A QUALITY AUDIT 9 th Edition Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg Copyright © 2014 South-Western/Cengage Learning CHAPTER 17 OTHER SERVICES PROVIDED BY AUDIT FIRMS
Copyright © 2014 South-Western/Cengage Learning 17-2 LEARNING OBJECTIVES 1. Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant professional standards 2. Explain review and compilation engagements, relevant procedures performed, and reports issued 3. Explain the procedures and reporting requirements for providing assurance on interim financial information 4. Discuss special reporting considerations for unique financial statement audit situations
Copyright © 2014 South-Western/Cengage Learning 17-3 LEARNING OBJECTIVES 5. Describe attestation engagements relating to agreed-upon procedures, financial forecasts and projections, and pro forma financial information, and the types of reports that will be issued for these engagements 6. Describe forensic accounting and distinguish between forensic accounting and auditing 7. Describe sustainability reporting and articulate the auditor’s role in providing assurance on management sustainability reports
Copyright © 2014 South-Western/Cengage Learning 17-4 PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS Accounting advisory services Sustainable business solutions Valuation services Debt-offering services PwC Accounting compliance and reporting Climate change and sustainability services Financial accounting advisory services Ernst & Young Finance operations and controls transformation Reporting and accounting advisory services Financial instrument valuation and securitization Deloitte Employee benefit plan audits Private equity audits Management consulting Mergers and acquisitions Baker Tilly
Copyright © 2014 South-Western/Cengage Learning 17-5 PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS What are nonaudit attestation services provided by external auditors, and what standards govern the conduct of such services? (LO 1) What are compilation and review services, and what standards govern conduct of such services? (LO 2) What reports would an audit firm issue when performing nonaudit attestation services? (LO 5)
Copyright © 2014 South-Western/Cengage Learning 17-6 PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS What is forensic accounting, and how does it differ from auditing? (LO 6) What is sustainability reporting, and what is the auditor’s role in providing assurance on management sustainability reports? (LO 7)
Copyright © 2014 South-Western/Cengage Learning IDENTIFY AND DESCRIBE NONAUDIT ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS AND DISCUSS THE RELEVANT PROFESSIONAL STANDARDS LEARNING OBJECTIVE 1
Copyright © 2014 South-Western/Cengage Learning 17-8 ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS Practitioner engaged to issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is, responsibility of another party Attestation engagement - AICPA 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 Assurance engagement - IAASB
Copyright © 2014 South-Western/Cengage Learning 17-9 TOPICS COVERED IN SUBJECT MATTER OF AN ATTESTATION ENGAGEMENT Prospective financial information, performance measurements, or backlog data Physical characteristics Historical events Analyses Corporate governance, compliance with law and regulations, or human resource practices Adequacy of process for capturing and reporting medical data
Copyright © 2014 South-Western/Cengage Learning TOPICS COVERED IN SUBJECT MATTER OF AN ATTESTATION ENGAGEMENT Adequacy and reasonableness of economic plans to build a new convention center in a major city Reliability of sustainability disclosures in an organization’s financial statements Accuracy of: Compliance assertions about grants, contracts, and regulations Reliability assertions about information technology systems, internal control, and corporate governance regulations
Copyright © 2014 South-Western/Cengage Learning COMPONENTS OF ATTESTATION SERVICES AND PARTIES INVOLVED IN ATTESTATION SERVICES Information or a process on which assurance service is provided Criteria for evaluation Sufficient appropriate evidence Written attestation report Parties involved Responsible party Practitioner Intended users
Copyright © 2014 South-Western/Cengage Learning EXHIBIT PARTIES INVOLVED IN ATTESTATION ENGAGEMENTS
Copyright © 2014 South-Western/Cengage Learning LEVELS OF ASSURANCE PROVIDED IN AN ATTESTATION ENGAGEMENT Objective is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner’s conclusion Reasonable assurance engagement Objective is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than that for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner’s conclusion Limited assurance engagement
Copyright © 2014 South-Western/Cengage Learning LEVELS OF ASSURANCE PROVIDED IN AN ATTESTATION ENGAGEMENT Designed to address assurance engagement risk to differing degrees Assurance engagement risk: Practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated
Copyright © 2014 South-Western/Cengage Learning PROFESSIONAL STANDARDS FOR ATTESTATION ENGAGEMENTS Attestation standards: Professional standards that provide guidance about: Gathering evidence regarding specific assertions Communicating an opinion on fairness of presentation to a third party
Copyright © 2014 South-Western/Cengage Learning EXHIBIT UNITED STATES AND INTERNATIONAL ATTESTATION (ASSURANCE) STANDARDS
Copyright © 2014 South-Western/Cengage Learning EXHIBIT AICPA’S GENERAL, FIELDWORK, AND REPORTING STANDARDS FOR ATTESTATION ENGAGEMENTS
Copyright © 2014 South-Western/Cengage Learning EXPLAIN REVIEW AND COMPILATION ENGAGEMENTS, RELEVANT PROCEDURES PERFORMED, AND REPORTS ISSUED LEARNING OBJECTIVE 2
Copyright © 2014 South-Western/Cengage Learning REVIEW ENGAGEMENT Enables a practitioner to state whether anything has come to the practitioner’s attention that causes the practitioner to believe that financial statements are not prepared, in all material respects, in accordance with applicable financial reporting framework Based on procedures which do not provide all evidence that would be required in an audit
Copyright © 2014 South-Western/Cengage Learning REVIEWS Obtain limited assurance that there are no material modifications to be made to financial statements Do not involve: Obtaining an understanding of entity’s internal control Assessing fraud risk Testing accounting records by obtaining appropriate evidence Obtaining assurance that a practitioner will become aware of all significant matters that would be investigated in an audit
Copyright © 2014 South-Western/Cengage Learning REVIEW PROCEDURES Obtain a written engagement letter Inquire about actions taken at meetings of board of directors and other decision-making bodies Inquire whether financial statements have been consistently prepared in conformity with the comprehensive basis of accounting
Copyright © 2014 South-Western/Cengage Learning REVIEW PROCEDURES Inquire about changes in business activities or accounting principles and practices and events Obtain or prepare a trial balance of general ledger and foot and reconcile it to general ledger Trace financial statement amounts to trial balance Perform basic analytical procedures
Copyright © 2014 South-Western/Cengage Learning REVIEW PROCEDURES Obtain explanations from management for any unusual results and consider the need for further investigation Read financial statements to determine whether they appear to conform to GAAP Obtain a management representation letter about important assertions that management has made
Copyright © 2014 South-Western/Cengage Learning EXHIBIT REVIEW ENGAGEMENT: INQUIRIES AND ANALYTICAL PROCEDURES FOR REVENUE CYCLE
Copyright © 2014 South-Western/Cengage Learning STANDARD REVIEW REPORT Identifies what was reviewed First paragraph Describes a review Second paragraph Expresses what is referred to as limited assurance Third paragraph
Copyright © 2014 South-Western/Cengage Learning COMPILATION ENGAGEMENT OR BOOKKEEPING SERVICES Accountant uses accounting expertise to collect, classify, and summarize financial information Assists management in presenting financial information in the form of financial statements Does not undertake to obtain any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework
Copyright © 2014 South-Western/Cengage Learning COMPILATION PROCEDURES Practitioner is not required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client Additional or revised information should be obtained if practitioner believes that client-provided information may be: Incorrect Incomplete Unsatisfactory Practitioner should withdraw from engagement if client refuses to provide information
Copyright © 2014 South-Western/Cengage Learning POTENTIAL MODIFICATIONS TO THE STANDARD COMPILATION REPORT Situations in which the practitioner will modify the report Omission of disclosures for compilations Compilation report not required Practitioner’s lack of independence
Copyright © 2014 South-Western/Cengage Learning EXPLAIN THE PROCEDURES AND REPORTING REQUIREMENTS FOR PROVIDING ASSURANCE ON INTERIM FINANCIAL INFORMATION LEARNING OBJECTIVE 3
Copyright © 2014 South-Western/Cengage Learning REVIEWS OF INTERIM FINANCIAL INFORMATION FOR PUBLIC COMPANIES SEC requires public companies to: File quarterly financial information with SEC on Form 10-Q within 40 to 45 days and provide shareholders with quarterly reports Include quarterly information in annual reports to SEC (Form 10-K) and in annual reports to shareholders Have quarterly financial information reviewed by independent auditors Review report not required to be included in quarterly information
Copyright © 2014 South-Western/Cengage Learning REVIEW PROCEDURES FOR INTERIM FINANCIAL INFORMATION Performed on quarterly information: Contained in annual report to shareholders Issued at end of each of first three quarters of fiscal year when engaged to do so Include: Making inquiries Performing analytical procedures Reading minutes of board of directors’ meetings Reading interim information to conform to GAAP
Copyright © 2014 South-Western/Cengage Learning REVIEW PROCEDURES FOR INTERIM FINANCIAL INFORMATION Auditor should obtain: Written representations from management concerning things as its responsibility for financial information Completeness of minutes Subsequent events
Copyright © 2014 South-Western/Cengage Learning REPORTING ON INTERIM FINANCIAL STATEMENTS Standard report on a review of separately issued interim financial statements of public companies: Identifies the information reviewed Indicates whether the standards of PCAOB were followed in performing the review Explains nature of a review Disclaims an opinion Provides negative assurance that auditor is not aware of any material departures from GAAP
Copyright © 2014 South-Western/Cengage Learning REPORTING ON INTERIM FINANCIAL STATEMENTS Disclosure and reporting requirements for interim financial statements differ from those for annual financial statements Negative assurance should be modified when there is a known material departure from GAAP
Copyright © 2014 South-Western/Cengage Learning DISCUSS SPECIAL REPORTING CONSIDERATIONS FOR UNIQUE FINANCIAL STATEMENT AUDIT SITUATIONS LEARNING OBJECTIVE 4
Copyright © 2014 South-Western/Cengage Learning AU-C SECTION AUDITS OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH SPECIAL-PURPOSE FRAMEWORKS Special purpose framework: Financial reporting framework other than GAAP Other comprehensive bases of accounting Cash basis: Records cash receipts and disbursements and modifications of the cash basis having substantial support Tax basis: Used to file income tax return for a period covered by financial statements
Copyright © 2014 South-Western/Cengage Learning AU-C SECTION AUDITS OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH SPECIAL-PURPOSE FRAMEWORKS Regulatory basis: Used to comply with requirements of financial reporting provisions of a regulatory agency to whose jurisdiction entity is subject Contractual basis: Used to comply with an agreement between the entity and one or more third parties other than auditor Special-purpose financial statements: Prepared in accordance with a special-purpose framework
Copyright © 2014 South-Western/Cengage Learning CONSIDERATIONS WHEN ACCEPTING AN ENGAGEMENT OF AUDIT OF SPECIAL-PURPOSE FINANCIAL STATEMENTS Obtain an understanding of: Purpose for which financial statements are being prepared Intended users Steps taken by management to ensure that the framework is acceptable under the circumstances Obtain an agreement from management of its understanding of and acknowledgement for its responsibility to include all appropriate disclosures
Copyright © 2014 South-Western/Cengage Learning CONSIDERATIONS WHEN PLANNING AND PERFORMING AN ENGAGEMENT OF AUDIT OF SPECIAL- PURPOSE FINANCIAL STATEMENTS Be sure to comply with all AU-C sections relevant to the audit Adapt and apply all AU-C sections relevant to audit as necessary in circumstances Obtain an understanding of organization’s selection and application of accounting policies
Copyright © 2014 South-Western/Cengage Learning CONSIDERATIONS WHEN FORMING AN OPINION ON SPECIAL-PURPOSE FINANCIAL STATEMENTS Do management’s financial statements: Adequately describe applicable financial reporting framework Have an appropriate title Include a summary of significant accounting policies Describe how special-purpose framework differs from GAAP Result in fair presentation of entity’s financial results
Copyright © 2014 South-Western/Cengage Learning EXHIBIT OVERVIEW OF REPORTING REQUIREMENTS FOR SPECIAL-PURPOSE FINANCIAL STATEMENTS
Copyright © 2014 South-Western/Cengage Learning AU-C SECTION 805 Addresses special considerations in application of AU-C Sections 100–700 to the audit of a single financial statement or of a(n): Specific element Account Item of a financial statement
Copyright © 2014 South-Western/Cengage Learning CONSIDERATIONS WHEN ACCEPTING, PLANNING, AND PERFORMING AN ENGAGEMENT UNDER AU-C 805 Obtain further evidence to corroborate audit evidence acquired from management and the accounting records Consider whether it is appropriate to apply applicable financial reporting framework to a single financial statement or a specific element, account, or item of a financial statement Evaluate whether disclosures in footnotes for single financial statement or specific element, account, or item are adequate
Copyright © 2014 South-Western/Cengage Learning CONSIDERATIONS WHEN FORMING AN OPINION AND REPORTING ON AN ENGAGEMENT OF THE AUDIT UNDER AU-C 805 Disclosures enable the intended users to understand: Information conveyed in financial statement or specific element Effect of material transactions and events on information conveyed in financial statement or specific element
Copyright © 2014 South-Western/Cengage Learning AU-C SECTION REPORTING ON COMPLIANCE WITH ASPECTS OF CONTRACTUAL AGREEMENTS OR REGULATORY REQUIREMENTS Auditor is requested to report on an entity’s compliance with certain contractual agreements or regulatory requirements Such reports can be issued if the covenants of the agreement are based on information from audited financial statements Compliance report contains limited or negative assurance
Copyright © 2014 South-Western/Cengage Learning DESCRIBE ATTESTATION ENGAGEMENTS RELATING TO AGREED- UPON PROCEDURES, FINANCIAL FORECASTS AND PROJECTIONS, AND PRO FORMA FINANCIAL INFORMATION, AND THE TYPES OF REPORTS THAT WILL BE ISSUED FOR THESE ENGAGEMENTS LEARNING OBJECTIVE 5
Copyright © 2014 South-Western/Cengage Learning SSAES NO. 10 AND 11, AT SECTION AGREED-UPON PROCEDURES ENGAGEMENTS Agreed-upon procedures engagement: Practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter Report should be in the form of a description of procedures and associated findings Report should indicate that it is restricted in its use to specified parties Specified parties: Individuals who will receive the practitioner’s agree-upon procedures report
Copyright © 2014 South-Western/Cengage Learning AGREED-UPON PROCEDURES Responsibility of practitioner Conduct procedures Report the findings Practitioner is not required to determine if a difference exists between: Agreed-upon procedures requested by parties Procedures conducted to perform another form of engagement
Copyright © 2014 South-Western/Cengage Learning SSAES NO. 10 AND 17, AT SECTION FINANCIAL FORECASTS AND PROJECTIONS Prospective financial statements: Forecasts or projections including summaries of assumptions and accounting policies Financial forecast: Prospective financial statements that present, to the best of the responsible party’s knowledge, an entity’s: Expected financial position Results of operations Cash flows
Copyright © 2014 South-Western/Cengage Learning SSAES NO. 10 AND 17, AT SECTION FINANCIAL FORECASTS AND PROJECTIONS Financial projection: Prospective financial statements that present, to the best of the responsible party’s knowledge, given one or more hypothetical assumptions, an entity’s: Expected financial position Results of operations Cash flows
Copyright © 2014 South-Western/Cengage Learning COMPILATION OF PROSPECTIVE FINANCIAL STATEMENTS Assembling prospective financial statements Assembling: Manual or computer processing of mathematical or clerical functions for presentation of prospective financial statements Performing compilation procedures Issuing a compilation report
Copyright © 2014 South-Western/Cengage Learning COMPILATION OF PROSPECTIVE FINANCIAL STATEMENTS The following are required for a compilation of prospective financial statements Performed by a person having adequate technical training and proficiency Due professional care should be exercised Work should be adequately planned Applicable compilation procedures should be performed Report should conform to the applicable guidance
Copyright © 2014 South-Western/Cengage Learning EXAMINATION OF PROSPECTIVE FINANCIAL STATEMENTS Evaluating preparation of such statements Evaluating support underlying the assumptions Evaluating presentation for conformity with AICPA presentation guidelines Issuing an examination report
Copyright © 2014 South-Western/Cengage Learning AGREED-UPON PROCEDURES OF PROSPECTIVE FINANCIAL STATEMENTS May be limited or extensive depending on requirements of responsible party Must involve more than a simple reading of prospective financial statements
Copyright © 2014 South-Western/Cengage Learning SSAE NO. 10, AT SECTION REPORTING ON PRO FORMA FINANCIAL INFORMATION Pro forma financial information: Shows what significant effects on historical financial information might have been had a consummated or proposed transaction occurred at an earlier date Illustrates effects of following types of transactions Business combinations Disposing of a significant segment of a business Changing the form of organization of business or its status as an autonomous entity
Copyright © 2014 South-Western/Cengage Learning GUIDELINES FOR PRESENTATION OF PRO FORMA FINANCIAL INFORMATION Describe the: Transaction that is reflected Source of historical financial information Assumptions used to develop pro forma adjustments Uncertainties about those assumptions Indicate that information should be considered in conjunction with historical financial information Make clear that information not necessarily indicative of results that would have been achieved had transaction taken place earlier
Copyright © 2014 South-Western/Cengage Learning PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION Obtain: Understanding of the underlying transaction Knowledge of each part of combined organization in a business combination Discuss management’s assumptions regarding effects of transaction or event Evaluate whether pro forma adjustments are completely recorded
Copyright © 2014 South-Western/Cengage Learning PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION Obtain appropriate evidence to support any pro forma adjustments Evaluate whether management’s assumptions are described in a clear and comprehensive fashion Determine that computations underlying pro forma adjustments are mathematically correct Obtain from management written representations Their responsibility for assumptions used in making pro forma adjustments
Copyright © 2014 South-Western/Cengage Learning PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION Assertion that assumptions provide a reasonable basis for presenting effects related to transaction Assertion that significant effects related to transaction are appropriately disclosed Read such information and evaluate: Underlying transaction Pro forma adjustments Significant assumptions Uncertainties Evaluate source of historical financial information
Copyright © 2014 South-Western/Cengage Learning DESCRIBE FORENSIC ACCOUNTING AND DISTINGUISH BETWEEN FORENSIC ACCOUNTING AND AUDITING LEARNING OBJECTIVE 6
Copyright © 2014 South-Western/Cengage Learning FORENSIC ACCOUNTING Involves detailed investigation of situations where fraud has already been identified or where fraud is highly suspected Builds support for legal action against the person committing the fraud by: Identifying the fraud Calculating damages caused Building both factual and testimonial evidence of fraud
Copyright © 2014 South-Western/Cengage Learning FORENSIC ACCOUNTING Forensic accountants: Examine 100% of fraud-related documents for accurately measuring cost of the fraud Are often asked to provide litigation support Work on reconstructing account balances
Copyright © 2014 South-Western/Cengage Learning EXHIBIT DIFFERENCES BETWEEN FORENSIC ACCOUNTING AND ACCOUNTING
Copyright © 2014 South-Western/Cengage Learning DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON MANAGEMENT SUSTAINABILITY REPORTS LEARNING OBJECTIVE 7
Copyright © 2014 South-Western/Cengage Learning SUSTAINABILITY-RELATED TERMS Non-financial reporting: Practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward goal of sustainable development Corporate social responsibility reporting: Continuing commitment by business to behave ethically and contribute to economic development while improving quality of life of the workforce, their families, local community, and society at large
Copyright © 2014 South-Western/Cengage Learning COMMON SUSTAINABILITY-RELATED TERMS Triple bottom-line reporting Reporting on: Financial performance Environmental performance Social performance Sustainability reporting: Voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes Sustainability: Actions taken at corporate level to ensure economic, environmental, and social responsibility
Copyright © 2014 South-Western/Cengage Learning REPORTING ON SUSTAINABILITY ACTIVITIES AND OUTCOMES Global Reporting Initiative (GRI) G3 Reporting Framework Used by companies to determine what to and how to report Enables sustainability report users to: Assess sustainability performance with respect to laws, norms, codes, performance standards, and voluntary initiatives
Copyright © 2014 South-Western/Cengage Learning REPORTING ON SUSTAINABILITY ACTIVITIES AND OUTCOMES Create a continuous platform for dialogue about expectations for responsibility and performance Understand the impacts that organizations can have on sustainable development Compare performance within an organization and between different organizations over time to inform decisions
Copyright © 2014 South-Western/Cengage Learning G3 FRAMEWORK Principles emphasize: Sustainability report content Sustainability report quality Sustainability report boundaries Elements Strategic approach Management approach Performance indicators
Copyright © 2014 South-Western/Cengage Learning EXHIBIT STANDARDS FOR SUSTAINABILITY REPORTING
Copyright © 2014 South-Western/Cengage Learning PROVIDING ASSURANCE ON SUSTAINABILITY REPORTING Independent assurance enhances the credibility of sustainability reporting External assurance is preferable to internal assurance because it is: More objective Independent from the management
Copyright © 2014 South-Western/Cengage Learning PROVIDING ASSURANCE ON SUSTAINABILITY REPORTING According to GRI Reporting Framework, external assurance over sustainability reports should: Be conducted by those with competence in the subject matter and assurance practices Be performed in a systematic manner that is evidence- based and includes adequate documentation Assess whether the sustainability report is reasonable, balanced, and appropriately inclusive Be issued by organizations that are independent of company issuing the report
Copyright © 2014 South-Western/Cengage Learning PROVIDING ASSURANCE ON SUSTAINABILITY REPORTING Assess the extent to which report preparer has applied GRI Reporting Framework in reaching its conclusion Result in a report that is: Publicly available Written in form States the relationship between preparer of and issuer of report
Copyright © 2014 South-Western/Cengage Learning GENERAL TYPES OF ASSURANCE Reasonable assurance - Assurance provider’s opinion is stated in positive form, indicating that: Information subject to audit is materially correct High level of assurance has been achieved Limited assurance - Assurance provider’s opinion is stated in negative form, indicating that: Information has not been found to be materially incorrect Nothing has come to their attention based on limited scope procedures Less than a high level of assurance has been achieved