A5/M4 Agreed-upon Procedures and Prospective Financial Statements

Question 1

What are the types of engagements in audit?

Answer 1

1. Agreed-up procedures engagement (SSAE - No assurance): engage in performing specific procedures on subject matters/assertions and report the findings and description of any specified materiality threshold established for reporting exceptions
2. Preparation engagement (SSARS - No assurance): engage in prepare FS
3. Compilation engagement (SSARS - No assurance): engage in assembling of financial data
4. Examination engagement (SSAE - Reasonable assurance): engage in evaluating FS and express opinion (unmodified; modified/qualified when not follow AICPA guidelines; adverse when not disclose several significant assumptions, or did not provide reasonable basis for assumptions; disclaimer when not able to perform necessary procedures)
5. Review engagement (SSAE - Limited assurance): engage in reviewing FS and report the conclusion

Question 2

what are the conditions for accepting and performing an agreed-upon procedures engagement?

Answer 2

I AM SURE I can perform these agreed-upon procedures

I - Independent of the practitioner

A - Agreement of the parties: both parties agree procedures to be performed and set criteria to be used in determination of findings

M - Measurability and consistency

S - Sufficiency of the procedures: responsibility’s of CLIENT

U - Use of the report can be general or restricted to specified parties

R - Responsibility for the subject matter: CLIENT is responsible for subject matter and also responsible for being able to provide evidence that if any 3rd party is responsible for subject matter

E - Engagements to perform AUP procedures on prospective FS: must include a summary of significant assumptions

Question 3

what are the 2 types of prospective FS?

Answer 3

1. Financial forecast: to the best of the responsible party (client)’s knowledge, this reflects the expected financial results of a future period
2. Financial projection: based on hypothetical assumptions, this reflects the financial positions/results based on “what-if” scenario

Note: review engagement is NOT allowed for prospective FS
- only financial forecast is suitable for GENERAL use
- both financial forecast and projection are suitable for LIMITED use

Question 4

what is pro forma FS and its audit procedures?

Answer 4

• Pro forma FS are NOT prospective FS but may be used to demonstrate the effect of a future/hypothetical events based on how it affected the HISTORICAL FS
• Pro forma FS is based on management’s assumptions. It may be examined or reviewed
• Practitioner should obtain written representation from management
• Practitioner should make reference to the FS from which historical financial data is derived and if they were audited or reviewed.
• Is not required to contain a restricted use paragraph