A2: Other Engagements, Reports, and Accounting Services

Question 1

Which four areas do auditors address in special consideration engagements?

Answer 1

• Audits of F/S prepared in accordance w/ a special purpose framework
• Audits of single F/S and specific elements, accounts, or items of a F/S
• Reporting on compliance w/ aspects of contractual or regulatory requirements associated w/ audited F/S
• Engagements to report on summary F/S

Question 2

Give examples of special purpose frameworks.

Answer 2

• Cash basis
• Tax basis
• Regulatory basis
• Contractual basis
• Any other basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in the F/S

Question 3

What type of info. should an auditor gather prior to auditing a single F/S or a specific element of a F/S?

Answer 3

• purpose for preparing the single F/S or specific element of a F/S
• intended users; and
• steps taken by MGT to ensure that the applicable financial reporting framework is acceptable under the circumstances

Question 4

Under U.S. auditing standards, when may an auditor issue a special report on a client’s compliance with contractual agreements or regulatory requirements?

Answer 4

The auditor:

• must have audited the client’s F/S and expressed an unmodified opinion or qualified opinion; and
• may only give negative assurance on the compliance.

Question 5

What type of opinion can an auditor issue on summary F/S and when is that opinion appropriate?

Answer 5

The auditor may issue either an unqualified opinion or an adverse opinion on the summary F/S, but cannot issue a qualified opinion due to the summarized nature of the financials.

An unmodified opinion is appropriate when the auditor concludes that the summary F/S are consistent, in all material respects, with the corresponding audited F/S.

An adverse opinion is appropriate when the summary F/S are not consistent, in all material respects, with the audited F/S, and MGT does not make the necessary changes

Question 6

Name the 5 elements of compilation and review engagements.

Answer 6

1. A three-party relationship (mgt, the accountant, and the intended users)
2. Financial reporting framework
3. F/S or financial info.
4. Sufficient, appropriate evidence (review only)
5. Written communication or report

Question 7

ID the performance requirements that are necessary when engaged in a compilation.

Answer 7

• Possess knowledge of the accounting principles and practices of the client’s industry
• Have a general understanding of the client’s business
• Read the compiled F/S to determine if appropriate in form and free from obvious material errors
• Follow up with MGT when aware of fraud or illegal acts, going concern issues, or subsequent events.

Question 8

How does the expected use of compiled F/S affect reporting requirements?

Answer 8

• When F/S are expected to be used by third parties, a compilation report is required.
• When F/S are not expected to be used by 3rd parties, a written communication (either compilation report or an engagement letter) is required.

Question 9

What should be included in an accountant’s report on a compilation of a nonissuer’s F/S?

Answer 9

• Title
• Intro. Paragraph:
  
  • The entity, F/S, and dates
  • The F/S have been compiled
  • The accountant has not audited or reviewed and does not express an opinion.
• MGT’s responsibility
• Accountant’s responsibility

Question 10

What are the reporting requirements with respect to compiled F/S when substantially all disclosures are omitted?

Answer 10

• The accountant can only report if the omission is not intended to mislead expected users
• The report must clearly indicate the omission
• The compilation report should be modified by a 4th paragraph disclosing the omissions

Question 11

What are the reporting requirements with respect to compiled F/S when only limited disclosures are included?

Answer 11

• Notes should be labeled “Selected Information–Substantially All Disclosures Required by GAAP Are Not Included.”

Question 12

What are the reporting requirements with respect to complied F/S when the auditor lacks independence?

Answer 12

The last paragraph of the report should disclose the lack of independence. The auditor is permitted, but not required, to disclose the reason(s) for the independence impairment.

Question 13

What are the performance requirements applicable to a review engagement?

Answer 13

(U) Understanding with client must be established
(L) Learn and/or obtain sufficient knowledge of the entity’s business
(I) Inquiries should be addressed to the appropriate individuals
(A) Analytical procedures should be performed
(R) Review–other procedures should be performed
(C) Client rep letter should be obtained from MGT
(P) Professional judgment should be used to evaluate results
(A) Accountant should communicate results

“U LIAR CPA”

Question 14

What should be included in an accountant’s report on a review of a nonissuer’s F/S?

Answer 14

• Title
• Intro.
• MGT responsibility
• AUD responsibility
• Engagement Results paragraph

Question 15

If during the course of an engagement the client requests a change in the engagement (i.e., audit to review), what are some acceptable reasons for the change?

Answer 15

• Change in client requirements
• Misunderstanding as to the nature of services being performed
• Scope limitation but accountant determines change reasonable

Question 16

If during the course of an engagement the client requests a change in the engagement (i.e., audit to review), what are some unacceptable reasons for the change?

Answer 16

• Current engagement would uncover errors or fraud
• Client is attempting to create misleading or deceptive F/S
• Scope limitation (client refusing to provide a signed rep letter or not allowing correspondence with client legal counsel)

Question 17

If an accountant has reviewed the prior period statements but compiled the current period statements, what are his or her reporting options?

Answer 17

• Issuing a compilation report on the current period statements with a paragraph added to describe the responsibility assumed for the prior period statements; or
• Reissuing (not updating) the review report on the prior period.

The reissued report may be combined with or presented separately from the compilation report on the current period.

Either option should include the original date and state that no review procedures have been performed since that date.

Question 18

If an accountant has audited prior period statements, but compiled or reviewed current period statements, what are his or her reporting options?

Answer 18

The accountant should either reissue the prior period report or include an additional paragraph in the current period report. Such an additional paragraph should include:

• that prior period statements were audited;
• the date of the previous report(s)
• the opinions expressed, and if other than unqualified, the reasons for the modification; and
• that no auditing procedures have been performed since the previous report date.

Question 19

What procedures should be performed in a review of the interim financial info. of a publicly held company?

Answer 19

(U) Understanding with client must be established
(L) Learn and/or obtain sufficient knowledge of the entity’s business
(I) Inquiries should be addressed to the appropriate individuals
(A) Analytical procedures should be performed
(R) Review–other procedures should be performed
(C) Client rep letter should be obtained from MGT
(P) Professional judgment should be used to evaluate results
(A) Accountant should communicate results

“U LIAR CPA”

Question 20

What should be included in an auditor’s report on the review of interim F/S of a publicly held entity?

Answer 20

• Title
• Intro.
• MGT’s responsibility
• Auditor’s responsibility
• Concluding section paragraph

Question 21

What type of info. should an auditor promptly communicate to MGT during a review of interim financial info. and what action should the auditor take if MGT fails to appropriately respond?

Answer 21

• Material modifications need to be made to interim financial info. to be in accordance with the applicable financial reporting framework
• The issuer filed quarterly reports (10Q or 10-QSB) prior to the review being completed
• The nonissuer issued interim financial info. prior to the completion of the review (when the review is required).

Question 22

What is a comfort letter and what types of assurance are provided within it?

Answer 22

A comfort letter is a letter from the CPA to underwriters. It provides:

• Positive assurance regarding the CPA’s independence and whether the F/S comply as to form in all material respects with the applicable requirements of the SEC Act.
• Negative assurance regarding unaudited F/S, capsule financial info., changes in certain F/S items, and compliance of certain non-F/S info. with SEC requirements
• A list of procedures and findings (no assurance) regarding pro forma financial info., forecasts, and other financial info.

Question 23

A comfort letter should not comment or provide assurance on what type of information?

Answer 23

• Market risk sensitive instruments

- Qualitative disclosures

Question 24

Define an attestation engagement.

Answer 24

An attestation engagement is one in which a practitioner (CPA) is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on a subject matter, or on an assertion about the subject matter, that is the responsibility of another party (usually MGT).

Question 25

List 6 major attestation services.

Answer 25

Reports on:

• Agreed-upon procedures
• Financial forecasts and projections
• Pro forma F/S
• Internal control over financial reporting
• Compliance with statutory, regulatory, or contractual requirements
• MD&A

Question 26

What are 5 general attestation standards?

Answer 26

(T) Training
(I) Independence
(P) Performance (due professional care)
(P) Professional knowledge of subject matter
(Y) Your belief that the assertion is capable of evaluation against criteria that are suitable and available to users.

Question 27

What are two fieldwork attestation standards?

Answer 27

• Planning and supervision

- Appropriate, sufficient evidence

Question 28

What are 4 reporting attestation standards?

Answer 28

(S) ID the Subject matter or the assertion being reported on and the character of the engagement
(S) Disclose Significant reservations about the engagement
(E) Express conclusions about the subject matter or the assertion in relation to the established or stated criteria
(R) Restrict use of the report to specified parties

Question 29

How are attestation standards different from GAAS?

Answer 29

• Attestation standards are broader in scope than GAAS
• Attestation standards have a different conceptual focus: No reference is made to GAAP or to F/S
• Attestation standards provide a level of assurance below that provided by a GAAS audit
• Attestation standards provide for services tailored to the needs of the user, who may directly participate in specifying either the nature and scope of the engagement or the criteria against which the assertions are measured

Question 30

What levels of assurance may be provided by attestation engagements?

Answer 30

• Examination: A positive opinion, high level of assurance, generally based on a variety of procedures, including search, verification, inquiry, and analysis.
• Review (“negative assurance”): Moderate level of assurance, generally based on inquiry and analytical procedures
• Agreed-Upon Procedures: No assurance, but procedures and findings are listed

Question 31

ID the 7 conditions that must exist in order to perform an agreed-upon procedures attestation engagement.

Answer 31

(I) Independence of the practitioner
(A) Agreement of the parties
(M) Measurability and consistency of subject matter
(S) Sufficiency of the procedures
(U) Use of report restricted to specified parties
(R) Responsibility of subject matter is with client
(E) Engagements to perform agreed-upon procedures on prospective F/S must include a summary of significant assumptions

Question 32

What is the difference between a financial forecast and a financial projection?

Answer 32

A financial forecast reflects, to the best of the responsible party’s knowledge, the expected financial results of a future period based on expected conditions and expected courses of action. A forecast is appropriate for general or limited use.

A financial projection is based on hypothetical assumptions and reflects a “what if” scenario. A projection is appropriate for limited use only.

Question 33

In what 3 ways might the CPAs be associated with prospective F/S?

Answer 33

Practitioner may:
- Compile prospective F/S
- Apply agreed-upon procedures to prospective F/S
- Examine prospective F/S
Note that a review of prospective F/S is not allowed