2. Chapter 16 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Topics Beyond the Integrated Audit

3. Learning Objectives 1. Describe forensic accounting and contrast it with ICFR and financial statement audits. 2. Understand internal audit activities and the role of the internal audit function within organizations. 3. Learn the extension of typical audit activities required when auditing state and local government entities. 4. Explain the purposes and activities of compilation and review engagements, applicable standards, and accountants’ reports. 5. Discuss the types of information for which accountants can issue attest reports, list the requirements for an attest service to be possible, and distinguish attest engagements from other services. 6. Identify other auditors’ services provided for public companies, explain the auditors’ work activities, and describe the resulting report. Chapter 16-1

4. FORENSIC ACCOUNTING Learning Objective #1Chapter 16 -2  The term forensic accounting most commonly refers to fraud investigations and accounting work to support legal actions.  The Association of Certified Fraud Examiners (ACFE) is one of the premier organizations for forensic accountants.  Forensic accounting encompasses two major components: investigative forensic services and litigation support.

5. FORENSIC ACCOUNTING Learning Objective #1Chapter 16 -3  Forensic accountants investigate many situations and suspected illegal acts including:  Employee theft  Vendor fraud  Customer fraud  Tax evasion  Conflicts in divorce and bankruptcy proceedings  Insurance claim filings  Identity theft  Organized crime

6. FORENSIC ACCOUNTING Learning Objective #1Chapter 16 -4  During an interview, the forensic accountant may focus on a range of issues, including:  The tone set by top management toward ethical behavior  Management’s values and beliefs  Reward systems  The potential for management override of internal controls  Forensic accountants may rely on evidence obtained from real estate records, court records, corporate and partnership records, and other public records to uncover potential fraud motives.

7. INTERNAL AUDITING Learning Objective #2Chapter 16 -5  Accountants who work within entities as internal auditors also perform important functions for companies, not-for- profit organizations, and government units  The Institute of Internal Auditors (IIA) is the most notable professional organization for internal auditors.  The internal auditor’s goal is to help improve the organization’s operations, risk management, internal controls, and governance.

8. INTERNAL AUDITING Learning Objective #2Chapter 16 - 6  Internal auditors assist in SOX compliance

9. INTERNAL AUDITING Learning Objective #2Chapter 16 -7  Internal auditors assist in SOX compliance

10. STATE AND LOCAL GOVERNMENT AUDITS Learning Objective #3Chapter 16 -8  Financial statement audits of state and local governments are performed by external auditors who work either for public accounting firms or separate government-related units.

11. Single Audit Act Chapter 16 -9Learning Objective #3  This legislation called for audits to be conducted on an entity-wide basis replacing requirements for multiple audits of one entity on a grant-by-grant basis.  When a governmental entity meets the $500,000 expenditure threshold, it is subject to a single audit of both its financial statements and its compliance with the provisions of any federal awards it received.  The schedule of audit findings summarizes the results of the audit.

12. GOVERNMENT AUDITING STANDARDS AND THE YELLOW BOOK Chapter 16 -10Learning Objective #3  Audits of government entities, including those under OMB Circular A-133, are conducted according to generally accepted government auditing standards (GAGAS) issued by the Government Accountability Office (GAO).  The Yellow Book contains standards covering financial statement audits, attestation engagements, and performance audits.  The GAO’s primary role is to support congressional oversight of the executive branch of the U.S. government.

13. Work of the GAO Chapter 16 -11Learning Objective #3

14. COMPILATION AND REVIEW ENGAGEMENTS Chapter 16 -12Learning Objective #4 EXHIBIT 16-1 Hierarchy of Financial Statement Assurance Activities

15. Compilations Learning Objective #4Chapter 16-13  In a compilation engagement, an accountant drafts financial statements of an entity based on information provided by the management or owners.  The accountant needs to establish an understanding with the client about the terms of the engagement, any limitations on the use of the financial statements, and must document the understanding through a written communication with management.

16. Illustrative Compilation Engagement Letter Learning Objective #4Chapter 16-14 EXHIBIT 16-2

17. Illustrative Compilation Engagement Letter Learning Objective #4Chapter 16-15 EXHIBIT 16-2

18. Illustrative Compilation Engagement Letter Learning Objective #4Chapter 16-16 EXHIBIT 16-2

19. Standard Compilation Report Learning Objective #4Chapter 16-17

20. Reviews Learning Objective #4Chapter 16-18  An engagement to review a nonpublic company’s financial statements provides some assurance regarding the fairness of the financial statements.  The level of assurance provided by the accountant’s report falls between an audit and a compilation.

21. Elements of an Engagement Letter for a SSARS Financial Statement Review Engagement Learning Objective #4Chapter 16-19

22. Elements of an Engagement Letter for a SSARS Financial Statement Review Engagement Learning Objective #4Chapter 16-20

23. Inquiries Made During a Review Learning Objective #4Chapter 16-21 EXHIBIT 16-3

24. Independent Accountant’s Review Report Learning Objective #2Chapter 16-22

25. ATTEST ENGAGEMENTS Learning Objective #5Chapter 16-23 Targets of attest engagements include financial forecasts and projections, compliance with laws and regulations, effectiveness of internal controls for nonpublic companies, the accuracy and reliability of reported performance measures, and the compliance with SEC regulations of a company’s management discussion and analysis.

26. Examples of Attest Engagements Learning Objective #5Chapter 16-24

27. Availability of Criteria Learning Objective #5Chapter 16-25 EXHIBIT 16-4

28. Types of Attest Engagements and Reports Learning Objective #5Chapter 16-26 EXHIBIT 16-5

29. Independent Accountant’s Attest Examination-Level Report Learning Objective #5Chapter 16-27

30. SEC-RELATED ENGAGEMENTS Learning Objective #5Chapter 16-28  CPAs perform many services in connection with SEC filings such as issuing comfort letters to underwriters, performing interim reviews, and conducting activities related to registration statements for public offerings of securities.  Letters for underwriters are commonly called comfort letters because of the concept that they provide “comfort” on specific issues in a company’s financial information.

31. Auditor’s Review Report on Interim Financial Statements Learning Objective #5Chapter 16-29

32. Review Question Chapter 16-30 Forensic accounting (a) is best described by the term fraud audit. (b) includes investigative services and litigation support. (c) can only be carried out by CPAs. (d) follows the same approach as traditional auditing except that materiality thresholds are lower.

33. Review Question Chapter 16-31 The independence of internal auditors and the internal audit function is enhanced by (a) avoiding conflicts of interest. (b) being placed high in the organizational hierarchy and having access to the audit committee. (c) conducting their tasks in an objective manner. (d) all of the above.

34. Review Question Chapter 16-32 An examination attest engagement provides: (a) positive assurance. (b) moderate or limited assurance. (c) no assurance. (d) agreed upon procedures assurance.

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