A2-Other Reports Flashcards
“Name the elements of a CPA firm’s system of quality control for its auditing, attest, and accounting and review services.
HELP ME.”
"Human resources Engagement Client acceptance and continuance Leadership responsibilities Performance of the engagement Monitoring Ethical requirements"
What are the objectives of an auditor when implementing quality control procedures at the engagement level?
“The objectives of the auditor are to provide reasonable assurance:
~ That the audit complies with professional standards and any legal or regulatory requirements.
~ That the report issued by the auditor is appropriate for the engagement.”
Explain the relationship between quality control standards and GAAS standards.
“Quality control standards pertain to the conduct of all professional activities of an entity’s practice as a whole.
GAAS standards relate to the conduct of each individual audit engagement.”
Which four areas do auditors address in special consideration engagements?
“Special consideration engagements include:
~ Audits of financial statements prepared in accordance with a special purpose framework
~ Audits of single financial statements and specific elements, accounts, or items of a financial statement
~ Reporting on compliance with aspects of contractual or regulatory requirements associated with audited finanicals
~ Engagements to report on summary financial statements”
Give examples of special purpose frameworks.
”~ Cash basis
~ Tax basis
~ Regulatory basis
~ Contractual basis”
What type of information should an auditor gather prior to auditing a single financial statement or a specific element of a financial statement?
“The auditor should obtain an understanding of the:
~ purpose for preparing the single financial statement or specific element of a financial statement;
~ intended users; and
~ steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances.”
What are some of the limitations surrounding an auditor’s report on a single financial statement, or a specified element, account, or item of a financial statement?
”~ If the item is based on stockholder’s equity, the auditor should perform procedures necessary to express an opinion about the financial position.
~ If the item is based on net income, the auditor should perform procedures necessary to express an opinion about financial position and results of operations.
~ If an adverse opinion or disclaimer or opinion was issued, the auditor may not report on items that constitute a major portion of the financial statements. (The auditor may report on nonmajor items, but such reports should not accompany the report on the financial statements.)”
Under U.S. auditing standards, when may an auditor issue a special report on a client’s compliance with contractual agreements or regulatory requirements?
“Under U.S. auditing standards, the auditor:
~ must have audited the client’s financial statements and expressed an unmodified or qualified opinion(i.e., no adverse opinion or disclaimer); and
~ may only give negative assurance on the compliance.”
What type of opinion can an auditor issue on summary financial statements and when is that opinion appropriate?
“The auditor may issue either a unmodified opinion or an adverse opinion on the summary financial statements, but cannot issue a qualified opinion due to the summarized nature of the financials.
An unmodified opinion is appropriate when the auditor’s concludes that the summary financial statements are consistent, in all material respects, with the corresponding audited financial statements.
An adverse opinion is appropriate when the summary financial statements are not consistent, in all material respects, with the audited financial statements, and management does not make the necessary changes.”
Name the five elements of compilation and review engagements.
”~ A three-party relationship (management, the accountant, and the intended users)
~ Financial reporting framework
~ Financial statements or financial information
~ Sufficient, appropriate evidence (review only)
~ Written communication or report”
Compilation and review standards require that an accountant establish an understanding with the client as to the services to be performed. What should be included in this understanding?
“An engagement letter is presumptively mandatory and should include:
~ A description of the specific compilation or review services to be performed.
~ The objectives of the engagement.
~ Management’s responsibilities and the accountant’s responsibilities.
~ An explanation of the limitations of the service, including a statement that:
~ the engagement cannot be relied upon to disclose errors, fraud, or illegal acts; and
~ the entity will be informed of any information indicating that fraud or an illegal act may have occurred.
~ A description of other accounting services, if any, to be performed.”
Identify the performance requirements that are necessary when engaged in a compilation.
“When performing a compilation, the accountant must:
~ 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 financial statements to determine if appropriate in form and free from obvious material errors.
~ Follow up with management when aware of fraud of illegal acts, going concern issues, or subsequent events. The accountant should consider he impact of the follow-up on the financial statements, evaluate management conclusions, and consider the effect on the compilation report.
“
How does the expected use of compiled financial statements affect reporting requirements?
”~ When financial statements are expected to be used by third parties, a compilation report is required.
~ When financial statements are not expected to be used by third parties, a written communication (either a compilation report or an engagement letter) is required.”
What should be included in an accountant’s report on a compilation of a nonissuer’s financial statements?
”~ Title (““Accountant’s Compilation Report”” or ““Accountant’s Independent Compilation Report””), addressee, signature, and date.
~ Introductory Paragraph:
~ The entity, financial statements, and dates.
~ The financial statements have been compiled.
~ The accountant has not audited or reviewed and does not express an opinion.
~ Management’s Responsibility Paragraph:
~ Management is responsible for the financial statements and internal controls.
~ Accountant’s Responsibility Paragraph:
~ Conducting the engagement in accordance with SSARS.
~ Assisting management in presenting financial statements without providing assurance.”
“What are the reporting requirements with respect to compiled financial statements when:
~ Substantially all disclosures are omitted?
~ Only limited disclosures are included?
~ The auditor lacks independence?”
“Statements that omit substantially all disclosures:
~ 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 fourth paragraph disclosing the omissions.
Statements that include only limited disclosures:
~ Notes should be labeled ““Selected Information–Substantially All Disclosures Required by GAAP are Not Included.””
Statements when the accountant lacks independence:
~ 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.”
“What are the performance requirements applicable to a review engagement?
U LIAR CPA”
“The performance requirements applicable to a review are:
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 representation letter should be obtained from management.
P–Professional judgment should be used to evaluate results.
A–Accountant should communicate results.
Remember the mnemonic ““U LIAR CPA.”””
What should be included in an accountant’s report on a review of a nonissuer’s financial statements?
”~ Title (““Independent Accountant’s Review Report””), addressee, signature, and date.
~ Introductory Paragraph:
~ The entity, financial statements, and dates.
~ The financial statements have been reviewed.
~ A review includes inquiry and analytical procedures.
~ A review is less in scope than an audit and the accountant does not express an opinion.
~ Management’s Responsibility Paragraph:
~ Management is responsible for the financial statements and internal controls.
~ Accountant’s Responsibility Paragraph:
~ Conducting the engagement in accordance with SSARS.
~ Perform procedures to obtain limited assurance.
~ Procedures provide a reasonable basis for report.
~ Engagement Results Paragraph:
~ The accountant is not aware of any material modifications that should be made to the financial statements (other than any indicated in the report).”
If during the course of an engagement the client requests a change in the engagement (i.e., audit to review), what are some acceptable and unacceptable reasons for the change?
“Acceptable reasons for change:
~ Change in client requirements
~ Misunderstanding as to the nature of services being performed
~ Scope limitation but accountant determines change reasonable
Unacceptable reasons for change:
~ Current engagement would uncover errors or fraud
~ Client is attempting to create misleading or deceptive financial statements
~ Scope limitations (client refusing to provide a signed representation letter or not allowing correspondence with client legal counsel)”
If an accountant has reviewed the prior period statements but compiled the current period statements, what are his or her reporting options?
“The accountant has provided a lower level or service: review to compilation. Reporting options include:
~ 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 the added paragraph (from the first option above) or the reissued report (in the second option) should include the original date and state that no review procedures have been performed since that date.”
If an accountant has audited prior period statements, but compiled or reviewed current period statements, what are his or her reporting options?
“When the level of service decreases from an audit to a review or compilation, the accountant should either reissue the prior period report or include an additional paragraph in the current period report. Such as additional paragraph should indicate:
~ that prior period statements were audited;
~ the date of the previous report(s);
~ the opinions expressed, an dif other than unqualified, the reasons for the modification; and
~ that no auditing procedures have been performed since the previous report date.”
“What procedures should be performed in a review of the interim financial information of a publicly held company?
U LIAR CPA”
“Auditing standards require the accountant to perform the following:
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 representation letter should be obtained from management.
P–Professional judgment should be used to evaluate results.
A–Accountant should communicate results.
Remember the mnemonic ““U LIAR CPA.”””
What should be included in an auditor’s report on the review of interim financial statements of a publicly held entity?
”~ Title (includes the word ““independent””), addressee, signature, location, date
~ Introduction Paragraph:
~ The entity, financial statements, and dates
~ The interim financial statements have been reviewed
~ Management’s Responsibility Paragraph
~ Fair presentation of the interim financial information and internal controls are the responsibility of management
~ Auditor’s Responsibility Paragraph
~ Conduct the interim financial review in accordance with U.S. GAAS
~ The review consists principally of analytical procedures and inquiry
~ A review of interim financial statements is less in scope than an audit, which expresses an opinion on the financial statements as a whole, whereas an interim financial review expresses no such opinion
~ Concluding Section Paragraph (with appropriate heading)
~ A statement about whether the auditor is aware of any material modifications that should be made for the interim financial information to be in accordance with the applicable financial reporting framework”
What type of information should an auditor promptly communicate to management during a review of interim financial information and what action should the auditor take if management fails to appropriately respond?
“The auditor should promptly communicate to management if:
~ Material modifications need to be made to interim financial information to be in accordance with the applicable financial reporting framework.
~ The issuer filed quarterly reports (10-Q or 10-QSB) prior to the review being completed.
~ The nonissuer issued interim financial information prior to the completion of the review (when the review is required).
When management does not appropriately respond, the auditor should:
~ Inform those responsible for corporate governance, and, if they fail to adequately respond, consider resigning or consulting legal counsel.”
What is a comfort letter and what types of assurance are provided within it?
“A comfort letter is a letter from the CPA to underwriters. It provides:
~ Positive assurance regarding the CPA’s independence and whether the financial statements comply as to form in all material respects with the applicable requirements of the SEC Act.
~ Negative assurance regarding unaudited financial statements, capsule financial information, changes in certain financial statement items, and compliance of certain nonfinancial statement information with SEC requirements.
~ A list of procedures and findings (no assurance) regarding pro forma financial information, forecasts, and other financial information.”
