1. Copyright © 2016 South-Western/Cengage Learning OTHER SERVICES PROVIDED BY AUDIT FIRMS CHAPTER 17 Auditing A Risk-Based Approach To Conducting A Quality Audit 10 th edition Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg

2. Copyright © 2016 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 for audit clients 4. Discuss special reporting considerations for unique financial statement audit situations

3. Copyright © 2016 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 are 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

4. Copyright © 2016 South-Western/Cengage Learning 17-4 PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS KPMG Internal audit services Risk and compliance services Financial and business due diligence Private equity solutions IT Attestation CliftonLarsonAllen Reviews Forecasting Performance and forensic audits Compliance audits Fraud control and risk investigations

5. Copyright © 2016 South-Western/Cengage Learning 17-5 PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS What nonaudit attestation services are 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) 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)

6. Copyright © 2016 South-Western/Cengage Learning IDENTIFY AND DESCRIBE NONAUDIT ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS AND DISCUSS THE RELEVANT PROFESSIONAL STANDARDS LEARNING OBJECTIVE 1

7. Copyright © 2016 South-Western/Cengage Learning 17-7 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

8. Copyright © 2016 South-Western/Cengage Learning 17-8 SUBJECT MATTER OF AN ATTESTATION ENGAGEMENT Statement of greenhouse gas emissions Privacy of personal informationSchedule of investment returns Effectiveness of controls over the security of a system Capacity of a facility Compliance with human resource practices

9. Copyright © 2016 South-Western/Cengage Learning 17-9 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

10. Copyright © 2016 South-Western/Cengage Learning 17-10 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

11. Copyright © 2016 South-Western/Cengage Learning 17-11 EXHIBIT 17.2 - UNITED STATES AND INTERNATIONAL ATTESTATION (ASSURANCE) STANDARDS

12. Copyright © 2016 South-Western/Cengage Learning EXPLAIN REVIEW AND COMPILATION ENGAGEMENTS, RELEVANT PROCEDURES PERFORMED, AND REPORTS ISSUED LEARNING OBJECTIVE 2

13. Copyright © 2016 South-Western/Cengage Learning 17-13 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 Obtain limited assurance that there are no material modifications to be made to financial statements

14. Copyright © 2016 South-Western/Cengage Learning 17-14 REVIEW PROCEDURES (SEE EXHIBIT 17.4) 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 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

15. Copyright © 2016 South-Western/Cengage Learning 17-15 REVIEW PROCEDURES (SEE EXHIBIT 17.4) Trace financial statement amounts to trial balancePerform basic analytical 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

16. Copyright © 2016 South-Western/Cengage Learning 17-16 STANDARD REVIEW REPORT Identifies what was reviewed and describes a review First paragraph Describes management’s responsibility Second paragraph Refers to review standards that were followed Third paragraph Fourth paragraph – Expresses limited assurance

17. Copyright © 2016 South-Western/Cengage Learning 17-17 COMPILATION ENGAGEMENTS 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

18. Copyright © 2016 South-Western/Cengage Learning 17-18 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

19. Copyright © 2016 South-Western/Cengage Learning EXPLAIN THE PROCEDURES AND REPORTING REQUIREMENTS FOR PROVIDING ASSURANCE ON INTERIM FINANCIAL INFORMATION FOR AUDIT CLIENTS LEARNING OBJECTIVE 3

20. Copyright © 2016 South-Western/Cengage Learning 17-20 REVIEWS OF INTERIM FINANCIAL INFORMATION FOR AUDIT CLIENTS 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

21. Copyright © 2016 South-Western/Cengage Learning 17-21 REVIEW PROCEDURES FOR INTERIM FINANCIAL INFORMATION Contained in annual report to shareholders Issued at end of each of first three quarters of fiscal year when engaged to do so Performed on quarterly information: Making inquiries Performing analytical procedures Reading minutes of board of directors’ meetings Reading interim information to conform to GAAP Include:

22. Copyright © 2016 South-Western/Cengage Learning 17-22 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

23. Copyright © 2016 South-Western/Cengage Learning DISCUSS SPECIAL REPORTING CONSIDERATIONS FOR UNIQUE FINANCIAL STATEMENT AUDIT SITUATIONS LEARNING OBJECTIVE 4

24. Copyright © 2016 South-Western/Cengage Learning 17-24 AU-C 800 - 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

25. Copyright © 2016 South-Western/Cengage Learning 17-25 AU-C 800 - 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

26. Copyright © 2016 South-Western/Cengage Learning 17-26 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

27. Copyright © 2016 South-Western/Cengage Learning 17-27 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

28. Copyright © 2016 South-Western/Cengage Learning 17-28 CONSIDERATIONS WHEN FORMING AN OPINION ON SPECIAL-PURPOSE FINANCIAL STATEMENTS Consider whether 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

29. Copyright © 2016 South-Western/Cengage Learning 17-29 EXHIBIT 17.8 - OVERVIEW OF REPORTING REQUIREMENTS FOR SPECIAL-PURPOSE FINANCIAL STATEMENTS

30. Copyright © 2016 South-Western/Cengage Learning 17-30 AU-C 805 Addresses special considerations in application of AU-C 100–700 to the audit of a single financial statement or of a(n): Specific element Account Item of a financial statement

31. Copyright © 2016 South-Western/Cengage Learning 17-31 AU-C 806 - 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

32. Copyright © 2016 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 ARE ISSUED FOR THESE ENGAGEMENTS LEARNING OBJECTIVE 5

33. Copyright © 2016 South-Western/Cengage Learning 17-33 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 agreed-upon procedures report

34. Copyright © 2016 South-Western/Cengage Learning 17-34 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

35. Copyright © 2016 South-Western/Cengage Learning 17-35 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

36. Copyright © 2016 South-Western/Cengage Learning 17-36 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

37. Copyright © 2016 South-Western/Cengage Learning 17-37 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

38. Copyright © 2016 South-Western/Cengage Learning 17-38 EXAMINATION OF PROSPECTIVE FINANCIAL STATEMENTS Evaluating preparation of such statementsEvaluating support underlying the assumptions Evaluating presentation for conformity with AICPA presentation guidelines Issuing an examination report

39. Copyright © 2016 South-Western/Cengage Learning 17-39 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

40. Copyright © 2016 South-Western/Cengage Learning 17-40 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

41. Copyright © 2016 South-Western/Cengage Learning 17-41 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

42. Copyright © 2016 South-Western/Cengage Learning 17-42 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

43. Copyright © 2016 South-Western/Cengage Learning 17-43 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

44. Copyright © 2016 South-Western/Cengage Learning DESCRIBE FORENSIC ACCOUNTING AND DISTINGUISH BETWEEN FORENSIC ACCOUNTING AND AUDITING LEARNING OBJECTIVE 6

45. Copyright © 2016 South-Western/Cengage Learning 17-45 EXHIBIT 17.19 - DIFFERENCES BETWEEN FORENSIC ACCOUNTING AND ACCOUNTING

46. Copyright © 2016 South-Western/Cengage Learning DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON MANAGEMENT SUSTAINABILITY REPORTS LEARNING OBJECTIVE 7

47. Copyright © 2016 South-Western/Cengage Learning 17-47 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

48. Copyright © 2016 South-Western/Cengage Learning 17-48 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

49. Copyright © 2016 South-Western/Cengage Learning 17-49 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

50. Copyright © 2016 South-Western/Cengage Learning 17-50 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