Accounting and Review Services Flashcards
What level of assurance is provided for reviews and for audits?
Reviews have limited (negative) assurance
Audits provide reasonable assurance
Accountants never provide absolute assurance
Audit > Review > Compilations (in order of assurance level)
REVIEW: What activities are included in a review? What procedures are usually performed by the accountant in a review engagement?
A review is less scope than an audit and includes inquiry and analytical procedures (such as analysis of inventory turnover).
Reading of FS, writing an engagement letter to establish an understanding of services to be performed, and issuing a report stating that the review was performed in accordance with standards established by AICPA are required.
When is internal control considered?
For audits of public companies
REVIEW: What does SSARS require?
An accountant is required to obtain written representations from mgmt for the FS for all periods covered by the accountant’s review report (AR 100). The standards do not require an assessment of control risk, confirmation of account balances, or performance of a physical inventory observation.
COMPILATION
An auditor who is not independent may issue a compilation.
The information is the representation of mgmt, not the accountant.
A compilation report is dated as of the completion of the compilation.
A compilation report should not ordinarily describe any procedures performed.
REVIEW:What is the first step in reviewing the FS of a nonpublic entity?
An accountant first needs to obtain a general understanding of the organization so as to determine which procedures are possible and appropriate for the review.
Next steps would include comparing FS, inquiries, and analytical procedures.
REVIEW: What happens when the mgmt of client informs auditor that the FS is for mgmt use only?
The restriction may either be documented in an engagement letter or through issuance of a compilation report. The restriction must be indicated on each page of the FS such as “Restricted for management’s use only.”
An accountant may rely on mgmt’s representation without further inquiry, unless info contradicting mgmt’s rep comes to the accountant’s attention.
COMPILATION: What must the accountant do if not independent?
The accountant may accept the engagement but MUST disclose the lack of independence and MAY disclose the reason for it.
REVIEW: What examples of inquiries does it include?
A review includes inquiries on significant journal entries and other adj, on subsequent events, and on unusual or complex situations affecting FS. It does not ordinarily include communications with related parties.
COMPILATION: What should the accountant’s standard report state after compilation of FS of nonpublic?
A compilation is limited to presenting in the form of FS info that is the representation of mgmt.
Note compilation has no assurance and does not refer to an audit.
REVIEW: What is accountant’s responsibility when evaluating mgmt’s responses to inquiries in a review?
The accountant is not ordinarily required to corroborate mgmt’s responses with other info. However, the accountant should consider the reasonableness and consistency of mgmt’s responses.
COMPILATION: What statement is included on compilation on financial forecast?
The attestation standards require a caveat on the fact that there will be differences between the forecasted and actual results.
The report must also indicate that 1 - the prospective FS are presented by the responsible party (usu mgmt), 2 - the practitioner compiled the info in accordance with AICPA standards, 3- compilation is limited in scope and practitioner does not provide an opinion or any form of assurance, 4- practitioner has no responsibility to update the report, 5 - firm signature and date of the compilation report.
Note not to be confused with a projection which includes hypothetical assumptions whereas forecast has reasonable assumptions.
When does SSARS apply?
SSARS applies when FS are compiled regardless of the use of computers, but does not apply when reproducing client prepared FS (making copies).
REVIEW: Nonpublic company, what must the representation letter acknowledge for mgmt’s responsibility?
Mgmt must acknowledge responsibility for the FS conforming with GAAP, responsibility to prevent and detect fraud, and any info it has on actual or suspected fraud that is material.
REVIEW: Review on BS, not other statements. Scope has not been restricted, but client has failed to provide representation letter. What is issued?
No report issued. Reviews cannot involve scope limitations.
AT1–.53 prohibits issuance of a review report in this circumstance.
What does the term “SHOULD” indicate on a accountant’s responsibility to perform a procedure?
Refers to a presumptively mandatory requirement.
It does not mean optional or advisory.
Must or is required means unconditionally required.
What does the term disclaimer of opinion related to? REV/AUD/COMP
Related to audits, not reviews
REVIEW: When is a withdrawal appropriate?
AR90 - when departures from GAAP exist which mgmt is unwilling to correct and accountant does not believe the modification of the std review report is adequate to communicate deficiencies.
AUDIT: What are examples of activities does it include?
Substantive procedure - Physical inspection of inventory
Vouching of inventory purchase transactions
Evaluation of internal control over inventory
When does an auditor need to be independent?
Independent only when providing attestation services - reviews and audits and agreed upon procedures engagements.
Preparing tax returns, and compiling forecasts or FS are not considered attestation.
When are opinions expressed?
Only when an audit (examination) is performed.
COMPILATION: What happens when a third party is reasonably expected to use?
A compilation report is required in this case, and an engagement letter while desirable is not required.
Notes can be omitted if indicated in compilation report.
COMPILATION: What is stated in report?
Required that accountant expresses no opinion or any other form of assurance, disclose that compilation has been performed, compilation is limited to presenting in the form of FS info that is representation of mgmt.
What does Standards for Accounting and Review Services (SSARS) require?
Accountant must obtain knowledge of the client’s industry
Independence is required for
attestation - audit and review
comfort letter
NOT needed for compilations, mgmt advidory services, tax practice
A compilation/review should indicate what on each page of the FS
Compilation - See accountant’s compilation report
Review - Each pg should include a reference such as “See accountant’s review report”
What does SSARS apply to
Applies when a CPA either compiles or reviews the FS of a NONpublic entity
REVIEW objective?
AR100 - provide a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the FS in order for them to be in conformity with GAAP
An engagement letter is not required for a review
Prescribed forms used in reviews - CPA to compile FS on prescribed form that omits disclosure required by GAAP. The prescribed form is a standard used by the industry trade association and sent to the association
The info required by a prescribed form is sufficient to meet the needs of the body that designed or adopted it - thus, there is no need for that body to be advised of departures from GAAP
What does the standard report issued by CPA after reviewing the FS of a nonpublic entity state
Indicate that a review consists of inquiries of company personnel and analytical procedures applied to financial data
What does the standard compilation report state
Limited to presenting in the form of FS info that is the representation of mgmt
NOT stated for reviews
When do SSARS standards apply
Apply to situations in which an accountant submits unaudited FS (compiled or reviewed) of a nonissuer to the client or third parties- so this would not include reproducing client prepared FS or preparing standard monthly journal entries
What letters are required for a review
A review requires BOTH an engagement letter and a representation letter
What is the predecessor required to do before reissuing a compilation report on the FS of a nonissuer for the prior year?
Predecessor should read the statements, compare them with those previously issued and those of the current period, and obtain a letter from the successor relating to the statements.
When is it reasonable to change the engagement from audit to compilation?
Before agreeing to a change, the accountants should consider the reasonableness of the reason for the request, the additional work to complete the audit, and the additional cost involved. A reasonable reason is that the entity’s principal creditors no longer require audited FS. Unreasonable reasons are if there is client imposed scope restriction - does not sign representation letter, not allowed to examine minutes, or correspond with legal
Analytical procedures in a review engagement
Can involve both financial and nonfinancial data - ex: sales per square foot of sales space to be calculated
APs are not a requirement for a review
APs involve comparisons of recorded amounts to expected
APs are not specifically considered to be substantive procedures
Analytical Procedures - when is it used in an audit
Are required during the final review stage of an audit
What happens if the audit has been asked by client to change to a review as the cost was significant
The auditor is to consider the reasonableness of the request and when reasonable justification exists (significant cost savings), the request can be honored.
What is materiality
Applies to nonpublic reviews and audits, it is an amount that could reasonably be expected to influence user economic decisions.
Tolerable misstatement amounts are ordinarily less than materiality amounts.
Materiality should be considered both in an individual misstatement and an aggregate sense.
Review is considered what type of engagement
Assurance and attest
When do reviews require an understanding of internal controls
Under AU 722, but not under SSARS
When does a compilation report have to indicate an issue?
When there is a material departure from GAAP
Not required to indicate a lack of consistency in applying GAAP, ability to continue as going concern, and major uncertainty facing the FS
Comparative FS
Not allowed to report if lack of comparability. Example - if one lacks disclosures required by GAAP and other has disclosures
REVIEW: if accountant has immaterial direct financial interest in nonpublic entity
Reviews are an attestation service, and the auditor is not independent. Review report cannot be issued.
COMPILATION: what is stated explicitly in standard report
Explicitly states that the FS have not been audited and that the accountant has compiled them
How does auditor review interim FS?
Interim reviews are not undertaken to express an opinion on the FS - it consists primarily of inquiries and APs concerning significant accounting matters relating to the financial data being reported.
Note review is more than scanning and reviewing FS.
Tests of accounting records and other procedures to obtain corroborating evidential matter are generally not performed.
COMPILATION: FS omits substantially all disclosures required by GAAP, what is indicated in compilation report
SSARS requires report indicate that the FS are not designed for those who are uninformed about the omitted disclosures.
REVIEW: when is the report modified for a review of interim FS of public entity
Inconsistent accounting principle application does not require report mod
Inadequate disclosure requires mod
COMPILATION - what procedure is performed for nonissuer
A compilation includes a consideration of whether FS are free from obvious material misstatements.
