1. 23 - 1 Copyright  2003 Pearson Education Canada Inc. CHAPTER 23 Assurance Services: Attest Engagements

2. 23 - 2 Copyright  2003 Pearson Education Canada Inc. Special Reports GAAS identifies “special audit-based engagements” for which a public accountant may be engaged.

3. 23 - 3 Copyright  2003 Pearson Education Canada Inc. Special Reports: financial information other than financial statements An auditor may be engaged to report on a specific aspect of the financial statements, e.g., sales, accounts receivable, costs of a capital project. accounts receivable

4. 23 - 4 Copyright  2003 Pearson Education Canada Inc. An auditor may be engaged to report on a specific aspect of the financial statements, e.g., sales, accounts receivable, costs of a capital project. Materiality must be defined in terms of the element/account/item rather than the overall financial statements. Special Reports: financial information other than financial statements

5. 23 - 5 Copyright  2003 Pearson Education Canada Inc. Materiality must be defined in terms of the element/account/item rather than the overall financial statements. The auditor should comply with the general and examination standards of GAAS. Special Reports: financial information other than financial statements

6. 23 - 6 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph -audit performed -any relevant portions of any agreements statutes,etc. -basis of accounting if other than GAAP -any lack of consistent application or interpretation -responsibilities of management and auditor Special Reports: financial information other than financial statements

7. 23 - 7 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph Scope Paragraph -similar but refers to financial information Special Reports: financial information other than financial statements

8. 23 - 8 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph Scope Paragraph Opinion Paragraph -whether information is presented fairly in accordance with accounting basis and any interpretations Special Reports: financial information other than financial statements

9. 23 - 9 Copyright  2003 Pearson Education Canada Inc. Special Reports: Applying specified auditing procedures Client specifies audit procedures to be applied and form of report. Distribution of report is normally restricted

10. 23 - 10 Copyright  2003 Pearson Education Canada Inc. Special Reports: Applying specified auditing procedures Client specifies audit procedures to be applied and form of report. Distribution of report is normally restricted. The public accountant should comply with the general and first examination standard of GAAS.

11. 23 - 11 Copyright  2003 Pearson Education Canada Inc. Special Reports: Applying specified auditing procedures Report specifies: -financial information -procedures -factual results of the procedures -audit not performed - disclaimer -any restrictions

12. 23 - 12 Copyright  2003 Pearson Education Canada Inc. Special Reports: compliance with agreements, statutes, regulations In this type of engagement, the auditor determines whether a client is in compliance with accounting and reporting requirements in contract, statutes, regulations, e.g., a debt covenant.

13. 23 - 13 Copyright  2003 Pearson Education Canada Inc. Special Reports: compliance with agreements, statutes, regulations In this type of engagement, the auditor determines whether a client is in compliance with accounting and reporting requirements in contract, statutes, regulations, e.g., a debt covenant. The auditor should comply with the general and examination standards of GAAS.

14. 23 - 14 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph -compliance is as audited -relevant provisions of agreement, statute or regulation and any interpretations -any lack of consistent interpretation -responsibilities of management and auditor Special Reports: compliance with agreements, statutes, regulations

15. 23 - 15 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph Scope Paragraph -similar but refers to compliance with relevant agreement, statute, regulation Special Reports: compliance with agreements, statutes, regulations

16. 23 - 16 Copyright  2003 Pearson Education Canada Inc. Introductory Paragraph Scope Paragraph Opinion Paragraph -whether entity has complied with the established criteria Special Reports: compliance with agreements, statutes, regulations

17. 23 - 17 Copyright  2003 Pearson Education Canada Inc. Special Reports: Opinion on control procedures at a service organization Service organizations may provide custodial, data-processing, or asset management services

18. 23 - 18 Copyright  2003 Pearson Education Canada Inc. Special Reports: Opinion on control procedures at a service organization Types of engagements: 1. design and existence of control procedures at point in time 2. design, effective operation and continuity of control procedures during a period of time

19. 23 - 19 Copyright  2003 Pearson Education Canada Inc. Special Reports: Opinion on control procedures at a service organization Service auditor should comply with the general standard, and the first and third examination standards.

20. 23 - 20 Copyright  2003 Pearson Education Canada Inc. Special Reports: Opinion on control procedures at a service organization Steps: 1. plan scope 2. review design of internal control 3. perform tests of control 4. evaluate results 5. obtain written management representation 6. prepare report

21. 23 - 21 Copyright  2003 Pearson Education Canada Inc. What is a Review of Financial Statements?

22. 23 - 22 Copyright  2003 Pearson Education Canada Inc. What is a Review of Financial Statements? A review is an engagement in which the accountant expresses limited assurance as a result of a few auditing procedures.

23. 23 - 23 Copyright  2003 Pearson Education Canada Inc. What is a Review of Financial Statements? A review is an engagement in which the accountant expresses limited assurance as a result of a few auditing procedures (enquiry, analysis, discussion). Assessing plausibility of the financial information - is it worthy of belief?

24. 23 - 24 Copyright  2003 Pearson Education Canada Inc. Review Standards General Standards - performed by person(s) having adequate technical training and proficiency in conducting reviews, with due care and an objective state of mind

25. 23 - 25 Copyright  2003 Pearson Education Canada Inc. Review Standards General Standards Review Standards - adequate planning, proper execution and proper supervision - possess sufficient knowledge of the business for intelligent enquiry and assessment of information - assess whether information is plausible using -enquiry, analysis, discussion -additional procedures if necessary

26. 23 - 26 Copyright  2003 Pearson Education Canada Inc. Review Standards General Standards Review Standards Reporting Standards - indicate scope, clearly indicate nature of review and distinguish from an audit - indicate whether anything causes you not to believe information is in accordance with criteria or no assurance -explain any reservations and, if determinable, their effect

27. 23 - 27 Copyright  2003 Pearson Education Canada Inc. Review Procedures - gain sufficient knowledge of accounting principles and practices of the client and the industry A C E

28. 23 - 28 Copyright  2003 Pearson Education Canada Inc. Review Procedures - gain sufficient knowledge of accounting principles and practices of the client and the industry - enquire of management/other personnel to determine fairness of statements and management integrity EXAMPLES: - accounting practices - actions at board and share- holder meetings - accounting methods used

29. 23 - 29 Copyright  2003 Pearson Education Canada Inc. Review Procedures - gain sufficient knowledge of accounting principles and practices of the client and the industry - enquire of management/other personnel to determine fairness of statements and management integrity - perform analytical procedures to identify unusual items and relationships

30. 23 - 30 Copyright  2003 Pearson Education Canada Inc. Review Procedures - gain sufficient knowledge of accounting principles and practices of the client and the industry - enquire of management/client personnel to determine fairness of statements and management integrity - perform analytical procedures to identify unusual items and relationships - discuss with management/client personnel the results of analytical procedures, the financial statements, and other matters

31. 23 - 31 Copyright  2003 Pearson Education Canada Inc. Is an Engagement Letter Required on a Review Engagement?

32. 23 - 32 Copyright  2003 Pearson Education Canada Inc. Is an Engagement Letter Required on a Review Engagement? NO! But it is strongly advised as agreement as to nature and extent of services is required

33. 23 - 33 Copyright  2003 Pearson Education Canada Inc. What Should an Engagement Letter Cover?

34. 23 - 34 Copyright  2003 Pearson Education Canada Inc. What Should an Engagement Letter Cover? -public accountant’s services -client’s responsibilities -audit not to be performed; no opinion to be expressed -any restrictions on distribution -each page of financial statements should be marked “unaudited” -expected content of the report -engagement can’t be relied on to detect fraud, error or other irregularities -statements don’t satisfy any statutory requirements (if applicable)

35. 23 - 35 Copyright  2003 Pearson Education Canada Inc. Is a Representation Letter Required on a Review Engagement?

36. 23 - 36 Copyright  2003 Pearson Education Canada Inc. Is a Representation Letter Required on a Review Engagement? NO! But it is strongly advised

37. 23 - 37 Copyright  2003 Pearson Education Canada Inc. Review Engagement Report We have reviewed the balance sheet of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended. Our review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the Company.

38. 23 - 38 Copyright  2003 Pearson Education Canada Inc. Review Engagement Report We have reviewed the balance sheet of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended. Our review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the Company. A review does not constitute an audit and consequently we do not express an audit opinion on these financial statements.

39. 23 - 39 Copyright  2003 Pearson Education Canada Inc. Review Engagement Report We have reviewed the balance sheet of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended. Our review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to us by the Company. A review does not constitute an audit and consequently we do not express an audit opinion on these financial statements. Based on our review, nothing has come to our attention that causes us to believe that these financial statements are not, in all material respects, in accordance with generally accepted accounting principles.

40. 23 - 40 Copyright  2003 Pearson Education Canada Inc. Review Procedures If a reservation is necessary: - separate reservation paragraph before negative assurance paragraph - revise negative assurance paragraph, inclu- ding a reference to reservation paragraph - if due to scope limitation, scope paragraph should refer to reservation paragraph

41. 23 - 41 Copyright  2003 Pearson Education Canada Inc. Special Review Engagements 1. financial information other than financial statements - parallel with S. 5805 2. compliance with agreements - parallel with S. 5815

42. 23 - 42 Copyright  2003 Pearson Education Canada Inc. What is a compilation?

43. 23 - 43 Copyright  2003 Pearson Education Canada Inc. What is a compilation? In a compilation engagement, the public accountant prepares the client’s finan- cial statements without expressing any assurance on the statements. assurance

44. 23 - 44 Copyright  2003 Pearson Education Canada Inc. Compilation Procedures - assemble the information and ensure it is arithmetically correct

45. 23 - 45 Copyright  2003 Pearson Education Canada Inc. Compilation Procedures - assemble the information and ensure it is arithmetically correct - before issuing the report, read the compiled statements and consider whether such statements appear obviously false or misleading

46. 23 - 46 Copyright  2003 Pearson Education Canada Inc. Should an Engagement Letter and a Representation Letter be Obtained on a Compilation Engagement?

47. 23 - 47 Copyright  2003 Pearson Education Canada Inc. Should an Engagement Letter and a Representation Letter be Obtained on a Compilation Engagement? YES! It is always advised to do so

48. 23 - 48 Copyright  2003 Pearson Education Canada Inc. Notice to Reader We have compiled the balance sheet of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended from information provided by management.

49. 23 - 49 Copyright  2003 Pearson Education Canada Inc. Compilation Report We have compiled the balance sheet of Ace Company as at December 31, 2004 and the statements of income, retained earnings, and changes in financial position for the year then ended from information provided by management. We have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Readers are cautioned that these statements may not be appropriate for their purposes. disclaimer

50. 23 - 50 Copyright  2003 Pearson Education Canada Inc. Compilation Procedures - each page of the compiled statements should be marked: “unaudited - see Notice to Reader” why?

51. 23 - 51 Copyright  2003 Pearson Education Canada Inc. Compilation Procedures - if the statements include a departure from GAAP, no reference to this is made in the report - each page of the compiled statements should be marked: “unaudited - see Notice to Reader”

52. 23 - 52 Copyright  2003 Pearson Education Canada Inc. Compilation Procedures - if the statements include a departure from GAAP, no reference to this is made in the report - a compilation engagement may be performed by a public accountant who lacks independence. An additional paragraph should state: “We are not independent with respect to Ace Company.” - each page of the compiled statements should be marked: “see accountant’s compilation report”

53. 23 - 53 Copyright  2003 Pearson Education Canada Inc.Prospectuses Auditor comments to securities regulatory authorities: 1. Inclusion of auditor’s report - five year comparative statements 2. Inclusion of unaudited or pro forma financial information - negative assurance 3. Entire prospectus read and it contains no misrepresentations

54. 23 - 54 Copyright  2003 Pearson Education Canada Inc. Pro forma Financial Information A public accountant may be engaged to review or examine pro forma financial information. This information reflects adjustment of historical financial information for an actual or proposed transaction, e.g., a business combination.

55. 23 - 55 Copyright  2003 Pearson Education Canada Inc. Pro forma Financial Information The resulting review report indicates that the engagement was less in scope than an examination and provides negative assurance.

56. 23 - 56 Copyright  2003 Pearson Education Canada Inc. Pro forma Financial Information The resulting review report indicates that the engagement was less in scope than an examination and provides negative assurance. The resulting examination report in- cludes an opinion regarding the reason- ableness of management’s assumptions.

57. 23 - 57 Copyright  2003 Pearson Education Canada Inc. Letters for Underwriters When an audit client issues new securities, the underwriters will request a “comfort” letter from the auditor regarding information in the prospectus that is not covered in the accountant’s report.

58. 23 - 58 Copyright  2003 Pearson Education Canada Inc. Letters for Underwriters When an audit client issues new securities, the underwriters will request a “comfort” letter from the auditor regarding information in the prospectus that is not covered in the accountant’s report. The auditor’s letter will include: - positive assurance regarding the audit and auditor independence - negative assurance or summary information on other information in the prospectus

59. 23 - 59 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards A public accountant may be asked by a client of another accountant: - to report on certain actual or hypothetical transactions

60. 23 - 60 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards A public accountant may be asked by a client of another accountant: - to report on certain actual or hypothetical transactions - the type of opinion which would be rendered based on certain facts opinion?

61. 23 - 61 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards A public accountant may be asked by a client of another accountant: - to report on certain actual or hypothetical transactions - the type of opinion which would be rendered based on certain facts - the appropriate application of accounting principles to hypothetical situations

62. 23 - 62 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards A public accountant may be asked by a client of another accountant: - to report on certain actual or hypothetical transactions - the type of opinion which would be rendered based on certain facts - the appropriate application of accounting principles to hypothetical situations - the appropriate application of auditing of review standards

63. 23 - 63 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards In completing this type of engagement, a public accountant must: - get permission from the client

64. 23 - 64 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards In completing this type of engagement, a public accountant must: - get permission from the client - contact the client’s current accountant/auditor (predecessor/successor rules are applicable)

65. 23 - 65 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards In completing this type of engagement, a public accountant must: - obtain the client’s permission - contact the client’s current accountant/auditor (predecessor/successor rules are applicable) - get a written statement of all relevant facts and assumptions

66. 23 - 66 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards In completing this type of engagement, a public accountant must: - obtain the client’s permission - contact the client’s current accountant/auditor (predecessor/successor rules are applicable) - get a written statement of all relevant facts and assumptions - comply with the general standard, and the first and third examination standards of GAAS

67. 23 - 67 Copyright  2003 Pearson Education Canada Inc. Application of accounting principles, auditing standards, review standards In completing this type of engagement, a public accountant must: - obtain the client’s permission - contact the client’s current accountant/auditor (predecessor/successor rules are applicable) - get a written statement of all relevant facts and assumptions - comply with the general standard, and the first and third examination standards of GAAS - report in writing

68. 23 - 68 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections How does a forecast differ from a projection?

69. 23 - 69 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections A forecast is a prediction of a company’s future financial position and results. A projection considers the effects of one or more hypotheses.

70. 23 - 70 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections A forecast is a prediction of a company’s future financial position and results. A projection considers the effects of one or more hypotheses. A public accountant may be engaged to compile or examine these reports.

71. 23 - 71 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections Professional standards -adequate technical training and proficiency in auditing -due care -adequate planning and supervision -obtain sufficient evidence -document important matters

72. 23 - 72 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections Contents of engagement letter: -form of forecast -time period covered -management to comply with CICA accounting standards and any relevant securities requirements -management is responsible for the forecast -management is responsible for assumptions being reasonable -any need for accountant to have access to outside specialists and third party reports -form and content of report -no responsibility to update

73. 23 - 73 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections - a public accountant should not be associated with these reports if the assumptions are not disclosed critically important

74. 23 - 74 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections - a public accountant should not be associated with these reports if the assumptions are not disclosed - forecasts may be for general OR limited use, BUT projections are for limited use ONLY

75. 23 - 75 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections - forecasts may be for general OR limited use, BUT projections are for limited use ONLY - the compilation report expresses no assurance, the examination report provides assurance regarding reasonableness of assumptions

76. 23 - 76 Copyright  2003 Pearson Education Canada Inc. Financial Forecasts and Projections Both the compilation and examination reports end with the following: Since this forecast is based on assumptions regarding future events, actual results will vary from the information presented and the variations may be material...

77. 23 - 77 Copyright  2003 Pearson Education Canada Inc. What is an attestation engagement?

78. 23 - 78 Copyright  2003 Pearson Education Canada Inc. What is an attestation engagement? In an attestation engagement, the public accountant forms an opinion regarding the reliability of someone’s assertion using appropriate criteria. examples?

79. 23 - 79 Copyright  2003 Pearson Education Canada Inc. What is a direct reporting engagement? An engagement where the auditor directly expresses a conclusion on the evaluation using appropriate criteria. There are 15 professional standards which are somewhat similar to GAAS, and are categorized into general, performance, and reporting standards.

80. 23 - 80 Copyright  2003 Pearson Education Canada Inc. General Standard -ensure engagement can be completed in accordance with assurance standards -adequate proficiency -collectively possess adequate knowledge of the subject matter -due care -objective statement of mind Professional Standards

81. 23 - 81 Copyright  2003 Pearson Education Canada Inc. General Standard Performance Standard -adequate planning and proper supervision -consider risk and materiality during planning and performance -gather sufficient evidence Professional Standards

82. 23 - 82 Copyright  2003 Pearson Education Canada Inc. General Standards Performance Standards Reporting Standards -identify audience -describe objective -identify management’s assertion in attest engagement -distinguish between responsibilities of management and the practitioner -identify criteria used -provide conclusion -specify date -identify practitioner -identify place Professional Standards