Audit 2 - Other Reports Flashcards
What is a special purpose framework?
Financial framework other than GAAP that is: Cash basis, Tax basis, Regulatory basis, or a Contractual basis
What is OCBOA?
Other Comprehensive Basis Of Accounting (i.e. cash/tax/regulatory/contractual)
What additional requirements for the auditor exist when F/S are prepared in accordance with a special purpose framework?
Obtain an understanding of: purpose for which F/S are prepared, the intended users, and the steps taken by mgmt to determine whether financial reporting framework is acceptable.Obtain the agreement from mgmt that it understand it’s responsibilityObtain an understanding of any significant interpretations
What additional items should the report include when F/S are prepared in accordance with a special purpose framework??
Description of the purpose of the F/S, use Non-GAAP titles, modify the MR paragraph, EOM paragraph that explains the basis of accounting, OM paragraph that restricts the use of the report
Audits of single F/S or specific elements/accounts/items may be performed…
As a separate engagement OR in conjunction with an audit of complete F/S
Materiality: Audit of a single financial statement
Auditor should determine materiality for the single financial statement rather than for the complete set of F/S
Materiality: Audit of a specific element
Auditor should determine materiality separately for each element, rather than for the aggregate
Piecemeal opinions are only appropriate on specific elements when…
Opinion is not published, and element is not a major portion of the complete F/S
In order to issue a report on a client’s compliance with contractual agreements or regulatory requirements..
An auditor must have audited the client’s F/S and may ONLY issue negative assurance on compliance
Report on compliance should be…
In writing and may either be a separate report OR provided in one or more paragraphs in the auditor’s report on the F/S
When compliance report is issued separately…
Report should include the word “independent,” statement that nothing came to auditor’s attention if so, when instances of noncompliance are identified a description of the instances of noncompliance, and a paragraph that restricts the use
When compliance report is issued in the Auditor’s report…
OM paragraph - negative assurance, or description of noncompliance when present, and a paragraph that restricts the use
An auditor should not accept an engagement to report on summary F/S unless…
The auditor has also been engaged to audit the F/S from which the summary F/S are derived
What types of opinions may an auditor issue on the summary F/S?
Unmodified or adverse. A qualified opinion is not appropriate due to the summarized nature of these F/S
What is the objective of a compilation engagement of a nonissuer?
To present in the form of F/S information that is the representation of management without undertaking to express ANY assurance on the F/S. CPA does NOT perform audit or review procedures.
What is the objective of a review engagement of a nonissuer?
To express limited assurance that there are no material modifications that should be made to the F/S in order for the statements to be in conformity with the applicable financial reporting framework. Independence REQUIRED
What is SSARS?
Statements on Standards for Accounting and Review Services
What is a submission?
Presenting F/S to a client or third party that the accountant prepared, either manually or thru software. An accountant who submits unaudited F/S of a nonissuer should comply with SSARS
To what does SSARS not apply?
Accounting services, reviews of interim F/S on nonissuers
Is independence required in a compilation engagement of a nonissuer?
No, but the lack of should be disclosed
Report format for a Compilation
CAR MR. ARSOM; Compiled, not Audited or Reviewed, Management Responsibility, Accountant Responsibility, SSARS, Objective is to assist Management.
Reporting on F/S that omit substantially all disclosures..
Permitted if users are warned they are not complete and ommission may influence user’s conclusions, and the omission is not intended to mislead users
Report disclosure not adequate
Withdraw!!
Compilations of PERSONAL F/S
SSARS not required if client agrees that report will not be used to obtain credit
Submission of unaudited F/S may use and engagement letter rather than a compilation report when…
It is not expected that the F/S will be used by a third party. Must include use restriction on every page. “plain paper report”
Requirements of a Review of a nonissuer F/S
U LIAR CPA; Understanding established, Learn/obtain sufficient knowledge of business, Inquiries made to appropriate individuals, Analytical procedures performed, Review, Client rep letter obtained from mgmt, Professional judgment used, Accountant communicates results
In a review of a nonissuer, the accountant is not required to…
Test I/C, Perform Audit Tests, Assess Fraud Risk, or Communicate with predecessor accountant (permitted)
In a review of a nonissuer, the accountant inquires…
WITHIN the client’s organization. Not required to corroborate mgmt’s responses with other evidence
In a review of a nonissuer, the accountant performs analytical procedures…
designed to detect relationships and individual items that appear to be unusual and may indicate material misstatement (ratios and comparisons)
In a review of a nonissuer, the accountant should additionally
READ the F/S, obtain reports of other accountants who have been engaged to audit or review significant components of the reporting entity
In a review of a nonissuer, the accountant MUST
obtain a representation letter from management - if not obtained, accountant should consider withdrawing
Incomplete review…
will prevent the issuance of a review report - accountant MIGHT be able to issue a compilation instead
Report format for a Review
AMISAD MR FIR SALA;Intro - Analytical procedures, Management’s financial data, Inquiries, Substantially less in scope than an Audit, Does not express opinionMR FIR - Managements Responsibility, Financial statements, Internal control. Auditors Responsibility: SALA - SSARS, AICPA, Limited Assurance
Material departure from the applicable financial reporting framework in a review or compilation engagement…
When accountant believes modification of the report is appropriate, a separate paragraph disclosing the departure should be added to the end of the report. If disclosure is not adequate - withdraw! No audit, no opinion
Reporting fraud and illegal acts in a review or compilation engagement…
Should be communicated with appropriate level of management. Inconsequential matters need not be communicated. Should always be documented when made. If owner is involved - withdraw!
Subsequent discovery of facts existing at the date of the compilation or review
Accountant usually has no obligation to make continuing inquiries after the date of the report UNLESS material information discovered would have affected the report and persons are currently or are likely to rely on the F/S.
What should the accountant do when material information is discovered subsequent to the date of compilation or review?
The accountant should advise the client to immediately disclose the new info and its impact on the F/S to persons currently relying on or those likely to rely on the F/S
What to do if client refuses to take action on subsequently discovered material information disclosure?
DAR - disassociate, alert agencies, notify relying parties
Before agreeing to a change in service, an accountant should consider
The reason for request (especially scope lims), effort require to complete current engagement, estimated additional cost to complete the engagement.Never refer to original engagement, any procedures performed therein or any scope limitation
What are acceptable reasons for a change in service?
Change in client requirements (no longer required to have F/S audited), or a Misunderstanding as to the nature of the service to be rendered
What are unacceptable reasons for a change in service?
Engagement would uncover errors or fraud, the client is attempting to create misleading or deceptive financial statements, the client refuses to allow correspondence with legal counsel, the client refuses to provide a signed rep letter
Current period REVIEWED prior period COMPILED
Service upgrade. The report on the prior period should be updated and issued as the last paragraph of the current period’s report
Current period COMPILED and prior period REVIEWED
Service downgrade. Two choices: Issue compilation report and add a paragraph to the report on the current period statements OR reissue the prior period.
Predecessor accountant’s compilation or review report REISSUED UNCHANGED
Predecessor accountants should decide if their report is still appropriate. Read the current period statements/report, compare the prior period statement, obtain a letter from the successor accountants
Predecessor’s report NOT REISSUED
Successor accountant should either make reference to the report of the predecessor in the current report OR perform that level of service themselves
When unaudited F/S are presented in comparative form with audited F/S…
Reissue the prior period report OR include an additional paragraph in the current report describing the responsibility assumed for the prior period’s statements
Current period UNAUDITED and prior period AUDITED
Additional paragraph should indicated that no auditing procedures have been performed since the previous report date
Current period AUDITED and prior period UNAUDITED
Other-matter paragraph that includes a statement that the service was less in scope than an audit and did not provide the basis for an opinion
Review of Interim Financial Information
SEC requires that issuers have their quarterly information reviewed by an independent auditor.Specific requirements must be met for nonissuers to have their interim financial information reviewed
Requirements of a Review of an issuers F/S
U LIAR CPA; Understanding established, Learn/obtain sufficient knowledge of business, Inquiries made to appropriate individuals, Analytical procedures performed, Review, Client rep letter obtained from mgmt, Professional judgment used, Accountant communicates results
Auditor’s Responsibilties in a review of issuers
Conducting the review in accordance with SAS or PCAOB standards. NO OPINION expressed.
Inquiries in a review of an issuer
May make inquiry to entity’s lawyer, but not required
Review report on interim financial information
Each page should be clearly marked as “unaudited,” include reference to the INDEPENDENT auditor. In compliance with PCAOB standards, not SSARS.
Review report of issuers modified if…
During the review, the auditor becomes aware of a departure from the applicable framework (inadequate disclosure/changes in accounting principle not in conformity). Use a Basis for Modification ¶
Going concern issues in review report of issuer
No modification if disclosed - if no disclosure, then modify report
What is a comfort letter?
Gives negative assurance. Covers the period from the date of last auditors report to the effective date of registration. Does NOT update the opinion on previously issued F/SRestricted use must be explicitly stated
What kind of positive assurance is given in a comfort letter?
CPA’s independence, compliance as to form of the F/S with the SEC act assuming F/S are audited
What kind of negative assurance is given in a comfort letter?
Unaudited financial statements, changes in selected items, whether certain non-F/S info included in the registration statement complies as to form in all material respects with regulations S-K
What are attest engagements?
Those in which a CPA is engaged to issue or does issue an examination, review, compilation, or agreed-upon procedures report on subject matter, or on an assertion about the subject matter that is the responsibility of another party
What standards govern attest engagements?
Statements on Standards for Attestation Engagements (SSAE)
Examples of attest engagements
Agreed-upon procedures, financial forecasts and projections, pro forma F/S, internal control over financial reporting, compliance, managements discussion and analysis
SSAE do NOT apply to
Audits, compilations and reviews of nonissuers, return prep, advocating for the client (litigation services), providing consulting/advisory services, operational audits
Attestation standards vs. GAAS
Attestation standards provide levels of assurance below that provided by GAAS
General standards of attestation (5)
TIPPY; Training and proficiency, Independence, Performance/due professional care, Professional adequate knowledge of subject matter, Your belief that the subject matter is capable of evaluation
Fieldwork standards of attestation (2)
PA; Planning and supervision
Reporting standards of attestation (4)
SSER; Subject matter, Significant reservations, Express conclusions, Restrict use
Examination conclusion
A positive opinion, high level of assurance, generally based on a variety of procedures, including search/verification/inquiry/analyis
Review conclusion
Moderate level of assurance, generally based on inquiry and analytical procedures
Agreed-upon procedures conclusion
No assurance but procedures and findings are listed.
Agreed-upon procedure engagement conditions
I AM SURE; Independence, Agreement of the parties, Measurability and consistency, Sufficiency of the procedures, Use of the report is restricted, Responsibility for the subject matter, Engagements to perform agreed-upon procedures on prospective financial statements
Agreed-upon procedure engagement required elements of reporting
Independent accountant mentioned, statement that procedures performed were agreed-upon, statement of restriction of use
Financial Forecast
Reflects, to the best knowledge, the expected financial results of a future period. Based on expectations. Suitable for general AND limited use
Financial Projection
Reflects, based on hypothetical assumptions, the financial position and results of operations based on a “what if” type of scenario. Suitable ONLY for limited use
Association with prospective F/S
Compilation/Examination/Agreed-upon procedureReview of prospective F/S is not allowed
Purpose of compiling prospective F/S
The proper assembling of the financial data based on the responsible party’s assumptions. No assurance given.May not be issued if entity fails to disclose a summary of the significant assumptions that are used in the prospective F/S
Purpose of examining prospective F/S
Express an opinion as to whether the statements are presented in conformity with AICPA and the underlying assumptions provide a reasonable basis for the prospective statements.
What are pro forma F/S used for?
May be used to demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical F/S if it had occurred during the period covered by those F/S
An auditor’s report would be designated a report on compliance when..
it is issued in connection with compliance with aspects of regulatory requirements related to audited F/S.
An accountant with an immaterial direct financial interest in a client…
is no longer independent with respect to that client - may not issue a review report on the F/S. May issue a compilation report
