1. Additional Assurance Services: Historical Financial Information Chapter 19 McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 19-2 Engagements that involve historical information  Issuing special reports.  Auditing financial statements prepared for use in other countries.  Auditing personal financial statements.  Reviewing historical information.  Issuing comfort letters.  Auditing condensed financial statements.  Performing accounting services. 1

3. 19-3 Types of Attestation Services  Examinations  Review  Agreed-upon procedures

4. 19-4 Professional Literature Terms  Auditor is used for most engagements under the generally accepted auditing standards, although accountant is used for interim review and for agreed-upon procedure engagements.  Accountant is also used for financial statement review and compilation engagements of nonpublic companies.  Practitioner is the term used in the attestation standards and in most other assurance services.

5. 19-5 Special Reports  Reports on financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.  Reports on specified elements, accounts, or items of financial statements.  Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.  Reports on financial presentations to comply with contractual or regulatory provisions.  Reports on audited financial information presented in prescribed forms or schedules that require a prescribed form of auditors’ report.

6. 19-6 Other Comprehensive Bases of Accounting  Comprehensive basis of accounting other than GAAP Any basis required by a governmental regulatory agency The income tax basis The cash basis A definite set of criteria having substantial support, such as price-level adjusted financial statements

7. 19-7 Introductory Paragraph We have audited the accompanying statement of assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. Audit Report--Cash Basis Audit Report--Cash Basis

8. 19-8 Scope Paragraph We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Audit Report--Cash Basis Audit Report--Cash Basis

9. 19-9 Basis of Accounting and Opinion Paragraphs As described in Note 1, these financial statements were prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles. In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the revenue collected and expenses paid during the year then ended, on the basis of accounting described in Note 1. Audit Report--Cash Basis Audit Report--Cash Basis

10. 19-10 Specified Elements, Accounts or Items of Financial Statements  Engaged to attest only to specified elements, accounts or items of a financial statement Example: Report on lessee’s revenue requested by lessee. May be required by provisions of lease agreement.  Materiality is generally less than would be in audit - in relation to other information presented  Report restricted to specified party and lists procedures performed. Disclaimer of opinion

11. 19-11 Compliance Reports  Regulatory requirements and debt agreements Example: Report prepared for bond trustees as evidence of company’s compliance with restrictions contained in bond indenture.  To provide this service auditor must have first performed an audit of related financial statements  Report provides negative assurance

12. 19-12 Special-Purpose Financial Statements  Audit level of service for financial statements prepared to comply with either a contractual agreement or regulatory provisions  Statements prepared following either GAAP or other comprehensive bases of accounting A prescribed basis of accounting  Example: Statement of net assets sold may be prepared following GAAP

13. 19-13 Report on Special-Purpose Presentation Standard Introductory and Scope Paragraphs The accompanying statement was prepared to present the net assets of Warren Company sold to Easton Corporation pursuant to the purchase agreement described in Note 7, and is not intended to be a complete presentation of Warren Company's assets and liabilities. In our opinion, the accompanying statement of net assets sold presents fairly, in all material respects, the net assets of Warren Company as of June 8, 20X1 sold pursuant to the purchase agreement referred to in Note 7, in conformity with generally accepted accounting principles. This report is intended solely for the information and use of the boards of directors and management of Warren Company and Easton Corporation and should not be used for any other purpose.

14. 19-14 Prescribed Forms or Schedules  Audit fairness of information supplied by client on a prescribed form Example: Loan application  Language of form may not conform to professional standards Auditor should reword form to company with GAAS or Mark form “see attached” for audited financial statements as an attachment

15. 19-15 Audit of Financial Statements for use in other countries  US company prepare financial statements for use in other countries Example: US company with subsidiary in Germany may prepare financial statements for that subsidiary  Auditors follow general and fieldwork standards of AICPA to the extent appropriate  Report depends on primary use Outside the US Issue a US report modified to reflect accounting principles of other country Issue a report form of the other country Use in US US standard report with modifications for departures from US GAAP

16. 19-16 Audits of Personal Financial Statements  Examples: Politicians or large loan applications  GAAP to personal financial statements Assets shown at estimated current values Liabilities presented at estimated current amounts Balance sheet = statement of financial condition shown individual net worth Income statement = statement of changes in net worth  Completeness of statements is audit concern

17. 19-17 Review of Public Companies  Public companies required to file quarterly financial information with SEC on 10-Q  Auditor reviews not audits information  Objective of review Provide accountants a basis for communicating whether they are aware of any material modifications to conform with GAAP  Steps in review Engagement letter to document understanding Understand the client’s business and internal control This required understanding of internal control for public company reviews is not required for nonpublic company reviews. Review procedures--next slide

18. 19-18 Review Procedures  Types Analytical procedures Inquiries of top management Whether financial statements follow GAAP Unusual or complex situations Significant transactions occurring around end of period Subsequent events Whether management has knowledge of fraud Whether allegations of fraudulent financial reporting have been made Certain other procedures Reading available minutes of meetings Reading interim financial information Obtain reports from other accountants who have reviewed significant components

19. 19-19 Other Steps  Communicate results Client decides whether accountant should issue a review report If issued, report indicates limited assurance provided If CPA believes financial information materially misstated, communicate to management as soon as practicable, then to audit committee  Document the review Document any findings or significant issues plus results of procedures performed Examples: Review programs, analyses, memoranda, representation letters

20. 19-20 Review Report for Public Companies--First Paragraph We have reviewed the balance sheet and related statements of income, retained earnings, and cash flows of ABC Company and consolidated subsidiaries as of September 30, 20X2 and 20X1, and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the company’s management.

21. 19-21 Review Report for Public Companies-- Second Paragraph We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

22. 19-22 Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Review Report for Public Companies--Third Paragraph

23. 19-23 Reviews for Nonpublic Companies  Nonpublic companies may not need an audit of annual financial information  CPAs follow Statement on Standards for Accounting and Review Services (SSARS)  Review Attest service in which the accountants Perform analytical procedures Make inquiries of management and others Obtain representation from management relating to financial statements Report provides limited (negative) assurance

24. 19-24 Review Steps for a Nonpublic Company  Screen clients  Engagement letters  Review Procedures No knowledge of client’s internal control required Analytical procedures Inquiries of management  Obtain representation letter in which management acknowledges Responsibility for financial statements conformity with GAAP Responsibility to prevent and detect fraud and to divulge knowledge of actual or suspected fraud Responsibility to respond fully and truthfully to all inquiries

25. 19-25 Review Report for Nonpublic Companies--First Paragraph We have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Company.

26. 19-26 Review Report for Nonpublic Companies--Second Paragraph A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

27. 19-27 Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Review Report for Nonpublic Companies--Third Paragraph

28. 19-28 Nonpublic Company Review Report Modifications  Departure from GAAP Modify third paragraph and describe departure in separate paragraph  No modifications required for: Lack of consistent application of GAAP Existence of major uncertainties including going-concern uncertainties Scope limitation – no review report

29. 19-29 Letters for Underwriters  Comfort Letter Investment banking firms that underwrite a securities issue request letter from independent auditors who audited financial statements in registration statement Includes 1. The independence of the auditors. 2. Whether the audited financial statements and financial statement schedules included in the registration statement comply with the accounting requirements of the Securities Act of 1933 and related regulations. 3. Unaudited financial statements, condensed interim financial information, and pro forma financial information. 4. Changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement. 5. Tables, statistics, and other financial information included in the registration statement. 6. Negative assurance as to whether certain nonfinancial statement information included in the registration statement complies with SEC regulations.

30. 19-30 Accounting Services  Reports provide no explicit assurance that the information constitutes a fair presentation  Types Compilation of financial statement for nonpublic companies Association with financial statements of public companies Compilations of prospective financial information  Compilation Nonattest service in which accountants assist in the preparation of financial statements without providing any assurance on them Must at least read compiled statements for appropriate format and obvious material misstatements

31. 19-31 Compilation Report--First Paragraph We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

32. 19-32 Compilation Report--Second Paragraph A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

33. 19-33 Association with Financial Statements of Public Companies  Assist public company in preparing financial statements or submitting statements to client or another third party  No responsibility to perform investigative procedures except to read statements for obvious material misstatements  Each page of statement marked “unaudited”  No need to be independent

34. 19-34 Comparison of Audits, Reviews and Compilations Compilation Agreed-Upon ProceduresReviewExamination Type of ServiceAccountingAttest Explicit assuranceNoneState findings or negative assurance Limited (negative) assurance Opinion Distribution of reportGeneralLimited to specified parties involved General, unless based on agreed- upon criteria Minimum procedures Read statementsAgreed-upon procedures Limited procedures, such as inquiry and analytical procedures Collection of sufficient evidence to support opinion CommentsReferred to as “unaudited statements” for public companies Referred to as “audits” for financial statements