AUD 2 Attest Engagements

Question 1

Attestation services

Answer 1

CPA issues an examination, a review, a compilation, or an agreed-upon prcedures report on subject matter or on an assertion about the subject matter.

Question 2

Attest engagements may result in reports related to:

Answer 2

• compliance with laws and regulations
• compliance with contracts
• internal control
• computer sustems and software
• information supplemental to FS
• prospective info
• performance, physical characteristics, historical events, analyses

Question 3

Trusts Services

Answer 3

• assurance and advisory sevices used to address the risks and opportunities related to information technology.
• security
• availability
• processing intergrity
• online privacy
• confidentiality

Question 4

Trust Services - types

Answer 4

• WebTrust Engagements - assurance related to e-commerce
• SysTrust Engagements - reliability of eletronic system

Question 5

Statements on Standards for Attestation Engagements SSAE

Answer 5

• agreed upon procedures
• financial forecasts and projections
• pro forma financial statements
• internal control over financial reporting
• compliance
• management’s discussion and analysis

Question 6

Attestation standards

Answer 6

• General standards

TRaining and proficiency

independence

performance/due profesional care

professional, adequate knowledge of subject

pfessional judgement

• Fieldwork standards

planning and supervision

appropriate, sufficient eveidence

• Reporting standards

identify subject matter

disclose significant reservations

express conclusion

restrict use of the report

Question 7

Examination vs Review vs Agreed upon procedures

Answer 7

• Examination - positive assurance - high level of assurance based on searchm verification, inquiry and analyis.
• if scope restriction - disclaimer of opinion/qualified opinion or withdrawal
• needs written assertion from mgt
• Review - negative assurance based on inquiry and analytical procedures
• if scope restriction - withdrawal
• written assertion
• Agreed upon procedures - no assurance, a report of findings
• restrictred use

Question 8

Financial Forecast vs Financial Projection

Answer 8

• Financial Forecast - based on expected conditions
• ok for general use
• Financial Projection - based on hypothetical assumptions
• not good gor general use (limited use)

Question 9

Association with Prospective FS

Answer 9

• Compilation engagement
• examination engagement
• agreed upon procedures

REVIEW - not allowed!

Question 10

Compilation of Prospective FS

Answer 10

• assembling of the financial data based on mgt’s assumptions
• no assurance
• no gathering of supporting evidence
• CPA may not issue the report if the entity fails to disclose a summary of the significant assumptions

Report includes:

• state in the report that CPA complied in accordance with attestation standards AICPA
• a compliation is limited in scope and opinion expressed or any other assurance
• ceaviat that the results may not be achieved
• no responsibility to update the report for new events

Question 11

Compilation of a Financial Projection

Answer 11

• description of purpose
• reference to the hypothetical assumptions
• limited use

Question 12

Examination of Prospective FS

Answer 12

• express an opinion if the FS are presented in comformity with AICPA guidelines
• and underlying assumptions provide a reasonable basis for the prospective statements
• independence required
• evidence required
• examination conduct in accordance with AICPA
• an opinion
• results may not be achieved
• projection should mention projection purpose and restict use of it
• Modification of opinion: not followed AICPA, significant assumptions not disclosed, basis not reasonable

Question 13

Examination of a Financial Projection

Answer 13

• description of the purpose of the projection
• mgt responsible
• reference to the hypothetical assumption

Question 14

Pro forma financial statements

Answer 14

• Not prospective FS, but may be used to demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical FS if it had occurred during the period cocered by those FS
• examined or reviewed
• written representation from mgt
• make reference to historical FS that info got derived from

Question 15

An examination of a financial forecast is a professional service that involves:

Answer 15

1. Evaluating the preparation of the prospective financial statements,
2. Evaluating the support underlying the assumptions,
3. Evaluating the presentation of the prospective financial statements in conformity with AICPA guidelines, and
4. Issuing an examination report.

Question 16

Financial projections

Answer 16

Financial projections are hypothetical, “what if” prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions, financial projections are “restricted use” reports, whose use is restricted to the responsible party and those third parties with whom the responsible party is negotiating directly.

Question 17

An accountant’s compilation report on a financial forecast should include a statement that the:

Answer 17

An accountant’s compilation report on a financial forecast should include a statement that the compilation does not include evaluation of the support of the assumptions underlying the forecast.

(An examination of the financial forecast would include evaluation of the support).

An accountant does not give any form of assurance related to hypothetical assumptions, which are not used in financial forecasts anyway. (Hypothetical assumptions are used in financial projections).

No mention of the range of assumptions selected is made in the compilation report.

A compilation is limited to presenting, in the form of a forecast, information that is management’s representation.

Question 18

Why an engagement to report on management’s discussion and analysis (MD&A) professional services would be considered an attest engagement covered by the Statements on Standards for Attestation Engagements (SSAEs)?

Answer 18

• An engagement to report on MD&A would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party’s assertion.
• A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party’s assertion.
• An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement.
• The compilation of financial statements from a client’s accounting records (a compilation engagement) is considered to be an attest engagement. However, compilations are covered by SSARS (Statements on Standards for Accounting and Review Services).

Note: The compilation of prospective financial statements is covered under Statements on Standards for Attestation Engagements, but the question does not indicate that prospective financial statements are involved.

Question 19

Partial presentations

Answer 19

Partial presentations are presentations of prospective financial information which would not ordinarily be appropriate for general use because they omit one or more of these essential elements:

(a) sales or gross revenue,
(b) gross profit or cost of sales,
(c) unusual or infrequently occurring items,
(d) provision for income taxes,
(e) discontinued operations or extraordinary items,
(f) income from continuing operations,
(g) net income,
(h) earnings per share, and
(i) significant changes in financial position.

Question 20

An accountant’s standard report on a compilation of a projection should include a statement that:

Answer 20

• An accountant’s standard report on a compilation of a projection does not include a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.
• An accountant’s standard report on a compilation of a projection does state that there will usually be differences between the forecasted and actual results.
• An accountant’s standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances.
• An accountant’s standard report on a compilation of a projection does state that the compilation of a projection is limited in scope
• (“A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.”)

Question 21

When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that:

Answer 21

The accountant’s report on compiled projected financial statements should include a separate paragraph that describes the limitations on the projection’s usefulness. For example, the paragraph states that there will usually be differences between projected and actual results, and indicates that the accountant has no responsibility to update the report for events occurring after the date of the report.

Question 22

A comprehensive basis of accounting other than GAAP is one of the following:

Answer 22

• Cash basis and modified cash basis
• Tax basis
• Prescribed regulatory basis
• Other basis with substantial support (e.g., price-level basis).

Question 23

Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and:

Answer 23

Unaudited FS for the prior year presented in comparative form with audited FS for the current year should be clearly marked to indicate their status (“unaudited”) and either:

• the report on the prior period should be reissued

OR

• the report on the current period should include a separate explanatory paragraph describing the responsibility assumed for the prior period’s financial statements.

Question 24

When an accountant examines projected financial statements, the accountant’s report should include a separate paragraph that:

Answer 24

The accountant’s standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieved.

This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: “…there will usually be differences between the forecasted and actual results… [that] may be material.”

Question 25

An attest engagement

Answer 25

In performing an attest engagement, a CPA typically issues a report on subject matter (or on an assertion about subject matter) that is the responsibility of another party.

Question 26

When an auditor is requested to change the engagement from an audit to a compilation, the auditor must consider:

Answer 26

• the effort needed to complete the audit,
• the cost of completing the audit, and
• the reasons for the client’s request.

If the audit is substantially complete or an insignificant effort is needed to complete the audit, the auditor should consider the propriety of agreeing to the request.
In addition, if the reason for the request is to limit the scope of the auditor’s examination, the auditor must consider whether the information affected by the scope limitation is incorrect, incomplete, or otherwise unsatisfactory.