Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Auditing & Assurance Services, 6e

Module A Other Public Accounting Services Mod A-2

Learning Objectives 1.Explain and provide examples of attestation engagements. 2.Describe reviews and compilations of unaudited financial statements and prepare appropriate reports given specific factual circumstances. 3.Explain auditors’ responsibilities related to reporting on interim financial information. 4.Define, explain, and give examples of other special reports provided by auditors, including specified elements of financial statements, special purpose frameworks and application of requirements of appropriate financial reporting frameworks. 5.Explain and provide examples of assurance services engagements. Mod A-3

Attestation Engagements Report on subject matter or assertion about subject matter. Responsibility of another party Responsible party—acknowledge responsibility Mod A-4

Types of Attestation Engagements— Levels of Assurance Examination –Similar to an audit –High level of assurance Review –Moderate (“negative”) level of assurance –Not allowed on certain engagements Agreed upon procedures –Assurance depends on procedures Mod A-5

Attestation Standards Statements on Standards for Attestation Engagements (SSAEs) from the Auditing Standards Board (ASB) of the AICPA Similar to fundamental auditing principles –Practitioner’s knowledge about subject matter –Suitable criteria –Evaluation of internal control not required –Restricted distribution Mod A-6

Agreed-Upon Procedures Engagements Consists of performing procedures normally associated with an audit or special engagement –Inventory observation –Confirmation of receivables –Summarize customer comment cards Scope less than in an audit (responsibility of user) Accountant reports procedures and findings –No opinion or negative assurance provided Must restrict distribution of report to users who established scope of engagement Mod A-7

Financial Forecasts and Projections (AT 301) Prospective Financial Information (PFI) –Financial information representing the financial position, results of operations, and cash flows for some period of time in the future. Types of PFI –Financial projection: PFI based on the occurrence of one or more hypothetical events that change existing business structure –Financial forecast: PFI based on expected conditions and courses of action (e.g., no new distribution center). The company may be negotiating directly with a single user who has requested prospective financial information for use in economic decisions. –This is referred to as limited use. –Any PFI can be used for limited purposes. The company may be preparing prospective financial statements that it intends to present to a large number of users, none of whom it is negotiating with at the current time. – This type of situation is referred to as general use. Mod A-8

Reporting on Pro Forma Financial Information (AT 401) Reporting "AS IF" a transaction had occurred by a specific date (retrospectively). Basic engagement objectives –Management's assumptions on significant effects of transactions are reasonable –Management's assumptions are properly reflected in pro forma adjustments –The adjustments are properly made in the pro forma results Mod A-9

Examination of an Entity’s Internal Control over Financial Reporting (AT 501) Necessary Conditions –Management accepts responsibility –Management’s evaluation of control is based on suitable and available criteria –Management’s evaluation of control is supported by sufficient evidence –Management presents its assertion in a written report that accompanies the auditors’ report Mod A-10

Compliance Attestation (AT 601) Examples –dividend limitations –loan limitations –prescribed debt/equity ratios –limitations on geographic operations Examination made in conjunction with F/S audit Mod A-11

Mod A-12

Management Discussion and Analysis (AT 701) Management Discussion and Analysis (MD&A) accompanies audited financial statements in the annual report. Auditors are required to read the MD&A to ensure that information is consistent with the audited financial statements. Auditors may accept an engagement to perform an examination or review of the MD&A. Mod A-13

Service Organizations (AT 801) Third-parties often process transactions for other entities. Many companies use third-parties to –process payroll. –handle dividend distribution. –handle investments (banks, brokerage houses). The controls exist at the third-party provider –The auditors for the users of these services must ensure that those controls at the service provider are adequate. –Providers engage auditors to issue a special report concerning the controls. Types of Reports –Type 1—Description of controls placed in operation –Type 2—operating effectiveness (required for AS 5) Included with Service Organization Reports (SOCs) Mod A-14

Unaudited Financial Statements Reviews—moderate (negative) assurance Compilations—no assurance Statements on Standards for Accounting and Review Services (SSARs) from the AICPA’s Accounting and Review Services Committee Mod A-15

Review Engagements Review engagement procedures: –Written engagement letter –Understanding of the client’s business. –Analytical procedures. –Inquiry of management –Written management representations Audit documentation must include: –Analytical procedures –Procedures used in response to results of analytical procedures –Inquiries –Unusual matters considered in the engagement –Written representations Mod A-16

Review Reports Reports should include –Statement that information is representation of management –A description of the scope of a review engagement –Level of assurance provided --Moderate assurance. –The date of completion should be used as the date of the accountant's review report. –Each page of the Financial Statements reviewed should include: “SEE ACCOUNTANTS' REVIEW REPORT". Mod A-17

Mod A-18

Compilation Engagements Do not have to include footnotes. Accountants do not have to be independent. No assurance provided. The date of completion=the date of the accountant's report. Each page of the compiled financial statements should include: “SEE ACCOUNTANTS' COMPILATION REPORT". Mod A-19

Mod A-20

Other Issues Reviews, compilations and fraud Comparative financial statements Different levels of service Prescribed forms Predecessor accountants Additional paragraphs Personal financial plans Mod A-21

Mod A-22

Review of Interim Financial Information Financial information that covers a period ending on a date other than the entity’s fiscal year end. SEC companies are required to have a review of the interim financial information filed with the SEC. Need to gain sufficient knowledge of the entity’s business and internal control. May have a report on interim financial information –Separate from the audited financial statements. –Presented as a supplement to audited financial statements. Mod A-23

Mod A-24

Special Reports Special reports refers to auditors' reports issued in connection with the following: –Specified elements, accounts, or items of a financial statement –Financial statements that are prepared in conformity with a special purpose framework (SPF) –Reporting on the requirements of appropriate financial reporting frameworks Mod A-25

Reports on Elements of Financial Statements (AU 805) Independent auditors may be requested to express an opinion on one or more specified elements, accounts, or items of a financial statement. GAAS audit performed. Report similar to audit report –Instead of financial statements, specified elements, accounts, or items are audited. –Auditors express an opinion on whether the account, element, or item is fairly stated in accordance with the appropriate framework. If adverse opinion or disclaimer is issued for the financial statements taken as a whole, the auditors may not accept engagement (i.e., the auditors may not reduce scope of service). Mod A-26

Special Purpose Frameworks (SPFs) (AU 800) Types of bases that may be used –Statements conforming to regulatory agency accounting rules –Basis used for income tax purposes –Cash basis or Modified cash basis –Some other method required for contractual purposes A GAAS audit is still performed Limited distribution Mod A-27

Assurance Services Assurance Services are independent professional services that improve the quality of information, or its context, for decision makers. Extensible Business Reporting Language (XBRL) Enhanced Business Reporting Trust Services –WebTrust –SysTrust Sustainability Mod A-28