Audit Reports - Pre-Clarity Flashcards
What are the requirements for an Audit Report?
Must conform to GAAP
Consistency with prior period reporting is implied (must state if inconsistent)
Adequacy of disclosure is implied (must state if disclosures are lacking)
Opinion is provided - provides assurance
Must be signed by the auditor and dated.
How should an Audit Report be adjusted if reporting is not consistent with the prior period?
If inconsistent- an Unqualified Opinion is OK
Explanatory paragraph after Opinion is added
Otherwise - Qualified Opinion issued
When is consistency not violated with respect to changes in reporting between years?
Accounting Errors
Reclassifications
Prospective treatment of a new principle
Accounting Estimate Change
What assurance is provided in an audit opinion?
The opinion states that the financial statements are fairly presented in all material respects
The opinion states if the financials are in conformity with GAAP.
What are the sections of the Audit Report?
Title - States that the auditor is independent
Address - whomever hired the auditor
Introduction Paragraph
Scope Paragraph
Opinion Paragraph
Signed and Dated by Auditor
Which statements are included in the Scope Paragraph of the Audit Report?
GAAS was followed (IF SEC company- uses the standard of the PCAOB)
Reasonable assurance about material misstatements was obtained.
Financial statements and disclosures are supported by evidence.
Management estimates evaluated
Accounting principles evaluated
Financial Statement presentation evaluated
Reasonable basis exists for an opinion
If any scope limitations exist- the auditor tries to work around them and still issue an unqualified opinion if possible.
For an unqualified opinion to be issued- what must be the case with all periods presented?
A prior year’s Financial Statement used for comparative purposes must also meet criteria for an Unqualified Opinion
If an exception arises- the Explanatory and Opinion paragraphs will address the issue
If a prior year’s issue has been corrected - issue an Unqualified opinion and ignore the past issue
What is included in an unqualified opinion paragraph with an emphasis?
Includes:
Immaterial GAAP issues
Going Concern worries
Auditor shares responsibility
Emphasizing a particular aspect of Financial Statements
Unqualified Opinion/Assurances not affected
Explanatory paragraph added after opinion
What is the effect of a qualified opinion?
A qualified opinion creates reduced assurances.
It results from scope limitations or major inconsistencies.
It includes material problems with GAAP- disclosures- or segment reporting.
If there is an issue that causes a Qualified Opinion- the explanatory paragraph goes after the Scope and before the Opinion paragraphs and the Opinion paragraph refers to the issue as well.
How is the Audit Report changed if there is Scope Limitation?
Qualified opinion is issued.
Scope paragraph modified
Explanatory paragraph between Scope and Opinion paragraphs
Opinion paragraph points out scope limitation
How is the Audit Report modified for major inconsistencies found during the audit?
Qualified opinion is issued.
Scope paragraph remains unchanged
Explanatory paragraph between Scope and Opinion paragraphs
Opinion paragraph points out inconsistency
How does a Disclaimer of Opinion affect the Audit Report?
States that an opinion cannot be issued.
Includes severe Scope limitation
What would cause an Adverse Opinion?
Very material GAAP and Disclosure issues would cause an Adverse Opinion.
If there is an issue that causes an Adverse Opinion- the explanatory paragraph goes after
the Scope and Before the Opinion paragraphs and the Opinion paragraph refers to the issue as well
How is division of auditor responsibility disclosed?
Disclosed in Introductory Paragraph.
Doesn’t name the other auditor without permission.
Referenced in Opinion paragraph and division of responsibility indicated
If other auditor is not referenced- then you take responsibility for their conclusions- so consideration of independence- experience- credentials- etc required
What standards govern SSARS engagements?
Compilations are governed by SSARS (Statements on Standards for Accounting and Review Services)
Which clients can have compilation engagements?
Non-SEC (non-public) registrants only.
What is a compilation?
Accountant puts together financial statements with information PROVIDED BY MANAGEMENT.
No opinion is expressed- and no assurances are given.
Independence is not required.
What disclosures are required for Compilation engagements?
Disclosures not necessary must state that they are not included
What standards govern Review engagements?
SSARS (Statements on Standards for Accounting and Review Services)
What type of assurance is given in a Review engagement?
Reviews give limited assurance.
What procedures are required for Review engagements?
Analytical procedures are required for reviews.
Compare results to documented predictions.
What is a Review engagement?
Financial statements are presented with no opinion expressed- and limited assurances are given.
Independence is required for a review engagement.
What is a Forecast?
A prospective financial statement that uses normal circumstances.
General and limited use allowed.
What is a Projection?
A prospective financial statement using hypothetical situations.
Only limited use by the client is allowed.
What are the requirements for Agreed Upon Procedures?
Independence is required
Only limited use by the client is allowed.
What disclosures are required for remote likelihood of losses?
No disclosure required.
What disclosure is required for a probable loss contingency?
Accrue if estimable.
Explanatory paragraph if not estimable.
What disclosure is made if a loss contingency is reasonably possible?
Auditor assesses need for explanatory paragraph based on loss likelihood.
How is a gain contingency reported?
Gain contingencies are not reported.
How does an immaterial GAAP issue affect the audit opinion?
It doesn’t. Opinion is Unqualifed.
How does a material GAAP issue affect the audit opinion?
Qualified Opinion is issued.
Similar to Scope Limitation.
Explanatory paragraph after Scope Paragraph.
Opinion refers to GAAP issue.
How does a very material GAAP issue affect the Audit Report?
Adverse opinion is issued.
Same paragraph structure as a Qualified opinion.
How does a Going Concern issue affect the Audit Report?
Unqualified opinion with an Emphasis is OK
Explanatory paragraph is added after Opinion paragraph.
What is a Yellow Book audit?
An audit performed under governmental auditing standards (GAS).
How do GAS standards compare to GAAS?
GAS is more strict that GAAS.
What is required under the Single Audit Act?
A report on internal control is required.
GAAS and GAS don’t require the I/C report.
In regards to an emphasis-of-matter situation properly accounted for as a change in accounting principle, what is difference between International Auditing Standards and GAAP?
International Auditing Standards allow, but DO NOT require an emphasis-of-matter situation relating to a properly accounted for change in accounting principles
US standards REQUIRE that a change in accounting principle that’s properly accounted for and disclosed in a footnote still has to be disclosed in an emphasis-of-matter paragraph
When is an emphasis-of-matter paragraph required for a change in accounting principle?
An emphasis-of-matter paragraph on an audit report is required for a change in accounting principle in the following situations:
- GAAP to GAAP
- Non-GAAP to GAAP
- GAAP to non-GAAP
- For NEWLY acquired assets in an EXISTING class of assets (whether it relates to items 1- 3 above)
When is an emphasis-of-matter paragraph required for a change in accounting estimate?
An emphasis-of-matter paragraph on an audit report is required for a change in accounting estimate in the following situation:
- Inseparable estimate and principle change
When is an emphasis-of-matter paragraph required for a change in entity?
An emphasis-of-matter paragraph on an audit report is required for a change in entity in the following situation:
- Changes NOT involving a transaction
When is an emphasis-of-matter paragraph required for a correction of error?
An emphasis-of-matter paragraph on an audit report is required for a correction of an error in the following situations:
- Error in principle
- Error not involving application of a principle
When is an emphasis-of-matter paragraph NOT required for a change in accounting principle?
An emphasis-of-matter paragraph on an audit report is NOT required for a change in accounting principle in the following situation:
- For NEWLY acquired assets within a NEW asset class that relate to either of the following:
a. GAAP to GAAP
b. Non-GAAP to GAAP
c. GAAP to non-GAAP
For newly acquired assets in a new asset class, there is no inconsistency and no real change; thus no emphasis-of-matter paragraph would be required. The auditor would issue an unmodified opinion
When is an emphasis-of-matter paragraph NOT required for a change in accounting estimate?
An emphasis-of-matter paragraph on an audit report is NOT required for a change in accounting estimate in the following situation:
- Judgmental adjustments
When is an emphasis-of-matter paragraph NOT required for a change in entity?
An emphasis-of-matter paragraph on an audit report is NOT required for a change in entity in the following situation:
- Changes involving a transaction
Does a change in statement format require an emphasis-of-matter paragraph to be included in an audit report?
A change in statement format in relation to classifications and reclassifications DO NOT require an emphasis-of-matter paragraph to be included in an audit report
An example of this would be classifying or reclassifying something on the statement in terms of format in the current year to look like something in the prior year
What opinion would an auditor render on financial statements if there is a GAAP departure and it’s at least material?
An auditor would render a Qualified or Adverse opinion on financial statements where there is a GAAP departure and it’s at least material
The opinion would be based on the auditors’ judgment and would be based on the pervasiveness of the departure
What opinion would an auditor render on financial statements if a scope limitation exist and it’s at least material?
An auditor would render a Qualified or Disclaimer opinion on financial statements when there is a scope limitation and it’s at least material
The opinion would be based on the auditors’ judgment and would be based on the pervasiveness of the departure
In regards to Unmodified Opinions with Other-Matter paragraphs, how are they different from emphasis-of-matter paragraphs?
Unmodified Opinions with Other-Matter paragraphs differ from emphasis-of-matter paragraphs in that they refer to a matter NOT in the audited financial statements
In what situations would an auditor need to include an other-matter paragraph in an audit opinion?
An auditor would need to include an other-matter paragraph in audit opinion in the following situations:
- Prior period financial statements not audited by CPA - that is they are reviewed, compiled or there is no CPA
In this situation, an other-matter paragraph is added indicating the nature of CPA association with the prior period financial statements (or indicating that there is no association) - this is for a non-issuer
- Opinion on prior period statements different from opinion previously issued
An example, say a company didn’t capitalize a lease in the prior year, so you issued a qualified/modified opinion. Say for the current year, they fixed the PY issue. For the current year, an unqualified/unmodified opinion will be rendered on the PY and CY financial statements since they are comparative.
- Prior period financial statements audited by a predecessor auditor
What does a predecessor auditor situation entail?
A predecessor auditor situation involves, for example, two years of financial statements with a different CPA firm each year
What does a group audit situation entail?
A group audit situation involves, for example, one year financial statements with two CPA firms involved with that one audit
What is Required Supplementary Information?
What is an auditors responsibility for dealing with RSI?
Required Supplementary Information is information that is required be included with the basis financial statements by the following accounting standard setting organizations:
- FASB
- GASB
- FASAB (Federal Accounting Standards Advisory Board)
Auditor is required to do the following with RSI:
- Inquire of management about methods of preparing information
- Compare information for consistency with management response to inquires, basic financial statements, and other knowledge obtained during audit
- Obtain written representations from management regarding the RSI
In regards to RSI, if an auditor DOES NOT identify likely misstatements from review of the RSI, how should it be reported on an audit opinion?
The PCAOB standards DO NOT include any disclosure in this situation for public company audit
The Auditing Standards Board (for non-public companies) requires that an other-matter paragraph be included in the audit report
Question:
In May 2023, an auditor reissues the auditor’s report on the 2022 financial statements at a continuing client’s request. The 2022 financial statements are not restated and the auditor does not revise the wording of the report.
What should the auditor do in this situation?
The auditor should use the original report date on the reissued report
Note: If the auditor changes the date on the reissued report, then the auditor is saying that they are taking full responsibility for everything through the new date. In this case, they would just use the original issue date
When would an auditor dual date an audit report?
An auditor would date an audit report when the work is completed. However, if something significant occurs between the completion date and when the financial statements are issued; the auditor would have two dates in this situation, which would be a dual-dated report
In this case, one date covers everything, except for the issue or item cited (which is usually described in a FN) and the second date would cover the item cited or issue only
Question:
A financial statement audit report issued for the audit of an issuer (public) company concludes that the financial statements follow…
…Generally accepted accounting principles
This is explicitly stated in the opinion paragraph. A publicly traded company in the US issues their financial statements in US GAAP
Note: You don’t say the financial statements follow audit standards (PCAOB)
Does an auditor have to include an emphasis-of-matter paragraph in an audit report if the CPA concludes there is substantial doubt about an entity ability to continue as a going concern if it’s adequately disclosed?
YES!
The auditor would still have to include an emphasis-of-matter paragraph even if the going concern issue is adequately disclosed
In addition, the emphasis-of-matter paragraph must specially use the following words:
- Going concern
- Substantial doubt
In this case, the auditor would render an unmodified opinion with an emphasis-of-matter paragraph
If there are conditions that cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern and these conditions are INADEQUATELY disclosed, which opinion could an auditor render?
In the case where an auditor believes there is substantial doubt about an entity’s ability to continue as a going concern and it is IMPROPERLY disclosed; this is considered to be a GAAP departure
The auditor can express a Qualified or Adverse opinion
Question:
An auditor who qualifies an opinion because of an insufficiency of audit evidence should describe the limitations in and basis for modification paragraph
The auditor should also refer to the limitation in the
In addition to describing the scope limitation and basis of modification paragraph, the auditor should also include the limitation in the following:
- Auditor’s responsibility section - if there is a scope limitation, you’ve got to mention this in the auditors responsibility section because your basically going to be saying that you did an audit and how it was done; except for, what is cited in the Basis for Qualified Opinion paragraph
- Opinion paragraph - you have to say “except for the possible effects…” and refer the issue to the Basis for Qualified Opinion paragraph, which precedes the opinion paragraph
Note: Scope limitation would NOT be included in the Notes to the financial statements because those are managements’
Question:
What situation would an auditor ordinarily issue an unmodified audit opinion WITHOUT an emphasis-of-matter paragraph?
An auditor would issue this type of report when the auditor decides to make reference to the report of an auditor who audited a component of group financial statements
This would be a shared responsibility (between group and component auditors) report and would NOT require an emphasis-of-matter paragraph
Note: Modification of report to set forth a division or responsibility for the audit would be required. However, the audit report would be unmodified WITHOUT an emphasis-of-matter paragraph
Question:
An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements.
If the auditor concludes that the financial statements DO NOT require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may…
The auditor may revise the auditor’s report to include a separate other-matter paragraph describing the material inconsistency
Assume that a group auditor completed its audit procedures on March 28, 2023 and planned to submit its auditor’s report to the client on April 4, 2023
What date should be on the audit report?
The date on the audit report should be the date that the auditor completed the audit including proper review of workpapers.
The actual release date can be a little bit later (but shouldn’t be too much later)
In this case, the date on the audit report should be March 28, 2023
Assume a group and component auditor decided to shared responsibility in auditing a parent and subsidiary company and the group auditor decides NOT to assume responsibility for the work of the component auditor
In this situation, who should sign the audit report?
The group auditor should be the ONLY CPA firm that signs the audit report
The component auditor DOES NOT sign the audit report, even though the group auditor is not assuming responsibility for the work performed by the component auditor
How does an audit report on financial statements prepared using a special purpose financial reporting framework differs from the standard audit report?
An audit report on financial statements prepared using a special purpose financial reporting framework is different in the following ways:
- The report must include an emphasis-of-matter paragraph alerting users that the financial statements are prepared in accordance with the special purpose financial reporting framework and refer the F/S note that describe the framework
- The paragraph should also state that the special purpose framework is a basis of accounting other than GAAP
- The paragraph should describe basis being used or refer to the footnote in the financials
Note: The essence of the report is the expression of an opinion as to whether the financial statements fairly present what they purport to present according to the special purpose framework being used (NOT GAAP)
What is a comfort letter?
What type of assurance will a CPA provide for these?
When a company wishes to issue new securities to the public, the underwriters of the securities will generally ask the company’s auditors to provide “comfort” on the financial and accounting data in the prospectus that is not covered by an accountant’s report of some form
CPAs provide positive assurance that they are independent and that their audit followed SEC standards
CPAs provide an opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC - positive assurance
CPAs provide negative assurance or a summary of findings on various types of accounting related matters such as the following:
- unaudited condensed & summarized interim information
- Pro-forma financial information
- Change subsequent to the balance sheet date
- Various tables of data
Question:
Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representation from who?
The predecessor auditor should obtain a letter of representation from
- Former client’s management
- Successor auditor
The predecessor auditor would want to obtain a letter of representation from both to protect themselves
Question:
Compiled financial statements for the prior year presented in a comparative from with audited financial statements for the current year should be clearly marked to indicate their status and
Either
- The report on the prior period should be reissued to accompany the current period report
OR
- The report on the current period should include as a separate paragraph a description of the responsibility assumed for the period’s financial statements
You just have to make it clear that the financial statements are comparable, but the level of service provided is different
Question:
In an audit of a non-issuer company, what is an auditors’ responsibility concerning required supplementary information by a designated accounting standards setter?
The auditor should apply certain limited procedures to the required supplementary information and report deficiencies in, or omissions of, such information
In regards to required RSI, an auditor:
- Has to know that the company has to have it
- Has to be satisfied that the information is included
- Has to be satisfied that the information is presented in the proper format
How should an auditor report the financial statements of a US entity, prepared for inclusion in the consolidated financial statements of its non-US parent, assuming they are prepared in conformity with the accounting principles generally accepted in the parent’s county and are for use only in that country?
The auditor may present the financial statements as follows:
- A US-style report modified to report on the accounting principles of the parent’s country
- The report form of the parent’s country
Note: The auditor CANNOT present the financial statements as a US-style report (unmodified)
What would an auditor do if financial information is presented in a printed form that prescribes the wording of the independent auditors’ report, but is not acceptable because it contains statements that are inconsistent with the auditor’s responsibility?
In this situation, the auditor would reword the form or attach a separate report
In this case; the auditor WOULD NOT express a qualified opinion with an explanation or limit distribution of the report
In what situation would an auditor be required to the financial statements (a complete set or one) when they are only engaged to audit a certain account or specific element or item of a financial statement?
An auditor would be required to audit the financial statements (one or a complete set) if the item that the CPA was engaged to audit is dependent on a key financial statement element
For example, if you were engaged to express an opinion on an employee profit participation that is based on net income; you could not express an opinion on the employee profit participation without being satisfied that net income is fairly presented. So you would have to at least audit the income statement to be comfortable with reported net income in order to express your opinion on the employee profit participation in accordance with some type of contract/agreement
Normally, an auditor does NOT have to audit the financial statements when they are engaged to audit only a specific account or element of the financial statements
Assume that a CPA has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA, the engaged CPA can accept the engagement to provide an opinion on the specific transaction, but should…
The CPA should consult with the continuing CPA to obtain information relevant to the transaction
The idea with this is someone who is not your client calls you and asks how would you handle a certain transaction. If you agree with what the client is doing to properly account for the transaction and the auditors do not agree with it; the client could potentially switch auditors to you.
From a client point of view, this is called opinion shopping. You can accept this engagement, but you must get representations from the client and the auditors + have all the facts. This can’t be done secretly
Question:
When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be?
The statements should be:
- Marked as unaudited
- Referred to in the auditor’s report - you would include an other-matter paragraph saying that last year financial statements were unaudited and current years’ were. This other-matter paragraph is needed if there were different services performed for a year and financial statements are presented in comparative form
Can an accountant perform a review on forecasted or projection financial statements?
No!
An accountant CANNOT perform a review on forecasted or projection financial statements
The accountant can only perform a compilation or examination report on forecasted or projected financial statements
In performing which level of service MUST an auditor/accountant be independent?
An auditor or accountant must be independent when performing the following services:
- Audit
- Review (under PCAOB for public companies or Auditing Standards Board for private companies)
- Examination
- Review (under the attestation standards)
- Agreed Upon Procedures
What can the subject matter of an attestation engagement be?
The subject matter of an attestation engagement may take on the following forms:
- Historical or prospective performance or condition (i.e. historical prospective financial information, performance measurements, and backlog data)
- Physical characteristics (i.e. narrative descriptions, square footage of facilities)
- Historical events (i.e. price of a market basket of goods on a certain date)
- Analysis (i.e. break-even analysis)
- System or processes (i.e. internal control)
- Behavior - (i.e. corporate governance, compliance with laws & regulations, and HR practices)
What is an assertion?
Attestation engagements
An assertion is a declaration about whether the subject matter is presented in accordance with certain criteria
For example, management might assert that internal control are adequately in place
What is criteria?
Attestation engagements
Criteria are standards or benchmarks that are used to evaluate the subject matter or the engagements
Criteria used in an attestation engagement should be suitable and available
Suitable criteria should have an appropriate combination of the following characteristics: objective, measurable, complete, and relevant
Criteria should be available in one or more of the following ways:
- Publicly
- Inclusions - with the subject matter or in the assertion
- Inclusion in CPA’s report
- Well understood by most
- Available only to specified parties (in this case the CPA’s report is restricted to those parties)
What are the most important points attestation standards say about financial forecasts and projections?
The following are extremely important points relative to the outlined presented in Attestation standard section 301:
- An accountant should NOT be associated with forecasts/projections that DO NOT disclose assumptions
- Forecasts may be for general or limited use, while projections are for limited use only
- Independence is NOT required for compilations
- Concerning assurance provided:
a. Compilation report provides no assurance;
b. An examination report provides positive assurance with respect to the reasonableness of assumptions
c. Agreed-upon procedures report provides a summary of findings
What is the difference between forecasted and pro-forma financial statements?
Forecasted financial statements are “future” oriented based on conditions expected to exist whereas pro-forma financial statements take historical statements (these can be audited or unaudited) and adjusts them for some type of event that hasn’t happened yet
What is a Trust Services engagement?
Trust Services are designed to provide information system business assurance and advisory services that instill confidence in an organization, system, or other entity by improving the quality or context of information for decision makers
Trust Services view a system as consisting of 5 key components organized to achieve a specified objective:
a. Infrastructure
b. Software
c. People
d. Procedures
e. Data
What does a CPA report on when performing a Trust Service engagement?
The CPA reports on whether the system meets one or more of the following principles over a particular reporting period:
- Security - the system (infrastructure, software, people, procedures, and data) is protected against unauthorized access (both physical and logical)
- Availability - the system is available for operation and use as committed or agreed
- Processing Integrity - system processing is complete, accurate, timely and authorized
- Online Privacy - private information obtained as a result of electronic commerce is collected, used, disclosed, and retained as committed or agreed
- Confidentiality - information designated as confidential is protected as committed or agreed
When performing a Trust Service engagement, for each principle reported on by the CPA, what are criteria is considered?
For each principle reported upon by the CPA, the CPA considers each of the following 4 criteria:
- Policies - the entity has defined and documented its policies relevant to the particular principle. These policies are written statements that communicate management’s intent, objectives, requirements, responsibilities, and/or standards for a particular subject
- Communications - the entity has communicated its defined policies to authorized users
- Procedures - the entity utilizes procedures to achieve the objectives in accordance with its defined policies
- Monitoring - the entity monitors the system and takes action to maintain compliance with its defined policies
What are the key points related to a Trust Services engagement?
The following are key points to consider:
- Management ordinarily provides the CPA with a written assertion on the system and the CPA may report either on management’s assertion or the subject matter of the engagement (one or more of the principles). When the CPA reports on the assertion, the assertion should accompany the CPA’s report or the first paragraph of the report should contain a statement of the assertion
- If one or more criteria relating to a principle have not been achieved, the CPA issues a qualified or adverse report. If management refuses to provide a written assertion, a disclaimer of opinion is ordinarily appropriate
- When reporting on more than one principle, the CPA may issue either a combined report on all principles, or individual reports
- Either an examination or an agreed-upon procedures engagement may be performed for a Trust Services engagement
- WebTrust and SysTrust (types of trust services that a CPA performs) are designed to incorporate a seal management process by which a seal (logo) may be included on a client’s website as an electronic representation of the practitioner’s unqualified WebTrust report
- Trust Service engagements are performed under the provisions of Statements on Standards for Attestation Engagements
What is a WebTrust?
A WebTrust is one type of Trust Service that a CPA performs
WebTrust provides assurance on electronic commerce (including websites). The CPA is engaged to examine:
a. that a client compiled with the Trust Service criteria (i.e. the company uses procedures in accordance with its defined policies)
b. that it maintained effective controls over the system based on Trust Services criteria (i.e. the company’s procedures are effective)
What is a SysTrust?
A SysTrust is one type of Trust Service that a CPA performs
SysTrust provides assurance on any defined electronic system. In a SysTrust engagement the CPA is engaged to examine ONLY that a client maintained effective controls over the system based on the Trust Services criteria
When an accountant examines projected financial statements, the account’s report should include a separate paragraph that…
…describes the limitations on the usefulness of the presentation
This is in reference to the report where an accountant says actual results will differ and we have no responsibility to update
What is one unique thing about financial projection examination reports?
A financial projection examination report CAN ONLY be for limited distribution use
An accountant can’t do a financial projection examination for general use
What is the difference between forecasted and projected financial statements?
Forecasted financial statements are “future” oriented based on conditions expected to exist whereas projected financial statements are based on hypothetical assumptions
What should a CPA include in a report on a review of pro-forma financial statements?
The report should include a reference to the financial statements from which the historical financial information is derived
What are the objectives of a CPA’s examination of a client’s management discussion and analysis (MD&A) prepared pursuant to SEC rules and regulations?
The following are objectives of a CPA examination of a client MD&A:
- The historical amounts have been accurately derived, in all material respects, from the entity’s financial statements
- The underlying information, determinations, estimates and assumptions of the entity provide a reasonable basis for the disclosures contained herein
- The presentation includes the required elements of MD&A
What is a SOC 1 report?
SOC 1 reports are RESTRICTED use reports on controls at a service organization relevant to a user entity’s internal control over financial reporting
What is a SOC 2 report?
SOC 2 reports are RESTRICTED use reports on controls at a service organization related to security, availability, processing integrity, confidentiality, and/or privacy
What is a SOC 3 report?
SOC 3 reports are GENERAL use SysTrust reports related to security, availability, processing integrity, confidentiality, and/or privacy
This is the ONLY general use reports out of the three types
What does pervasive mean?
Pervasive means the effects on financial statement of misstatements or possible effects of misstatements that are undetected due to an inability to obtain sufficient appropriate audit evidence
Pervasive effects on the financial statements are those that, in the auditor’s judgment are not confined to specific elements, accounts or items of the financial statements or if so confined, represent or could represent a substantial proportion of the financial statements or in relation to disclosures, are fundamental to users’ understanding of the financial statements
These can also be qualitative (or non-quantitative) factors as well - for example, client left out a footnote that was required/essential for disclosure
If a CPA is compiling financial statements and there is a GAAP departure that is material, but the client has correct it; how would the CPA modify the compilation report?
In this case, since the client corrected it, the compilation report WOULD NOT be modified. The CPA would issue a standard report
The CPA would only modify the report by adding a separate paragraph discussing the departure ONLY if its material and the client DID NOT correct it
If a CPA is compiling financial statements and the following are noted:
- Lack of consistency in application of GAAP
- Substantial doubt regarding going concern
- Both items are NOT properly disclosed
How would the CPA modify the compilation report?
- If there is a going concern issue and it’s properly cited in the financial statements (footnote disclosure); then the CPA DO NOT have to mention it in the report by adding an additional paragraph. So the CPA may do it; but they don’t have to do it
Contrast this to an audit report; the CPA would have to cite a going concern issue by adding an additional paragraph in the report
- However; if there is a going concern issue and your issuing a compilation report with no footnotes; then as long as the CPA is satisfied that there is no intent to mislead and as long as you include the additional paragraph in the compilation report; the CPA does NOT have to mention it.
The CPA may NOT mention it in the report if it’s NOT mentioned in a footnote; which means conceivably, the CPA does NOT have to mention it at all
- However, assuming footnotes will be included with the compilation report; if the there is a going concern issue and the client refuses to disclose it; then the report should indicate a departure from GAAP with modification of the report’s 3rd paragraph and addition of an explanatory paragraph
If a CPA is engaged to submit to a client a personal financial plan using unaudited personal financial statements and the CPA is anticipating omitting certain disclosures required by GAAP since the sole purpose of the financial statements will be used to develop a personal financial plan. For the CPA to be exempt from complying with SSARS requirements, the client is required to agree to what?
In this situation, the client would have to agree that the financial statements will NOT be used to obtain credit
The client would have to agree that the financial will not be given to outsiders; only for the client use. Otherwise, the CPA would be required to attach a compilation report
The CPA could also include a restricted use clause on each page of the financial statement to show that the statements should not be used by 3rd parties
What type of reports are issued for compilation and reviews?
A CPA only issues a standard or modified compilation and review report
Note that the CPA DOES NOT issue adverse or qualified opinions on compilation and review reports. These opinions are ONLY issued for audit reports
If a CPA compiled a private company financial statements and omitted all disclosures required by GAAP and in the next year compiled the financial statements and INCLUDED all required disclosures; if the client wanted to present both year comparatively, what is the CPA responsibility concerning the engagement?
The CPA may NOT report on the comparative financial statements become the prior year statements are NOT comparable to the current year statements that include the GAAP disclosures
You may NOT show as comparative where one year has footnotes and the other year doesn’t. Either footnotes have to cover both years or no years
What is the difference between analytical procedures in an a review vs. an audit?
Analytical procedures in an audit are external and internal vs. internal only for a review
In an audit, if you inquire with management about something, you have to corroborate their explanation with some type of other audit procedure
In a review, if you inquire with management about something; if it’s logical and make sense, then you can accept the client’s explanation. You DO NOT have to corroborate inquiry in a review engagement
Can an CPA issue comparative financial statements if a compilation was performed in the prior year and a review performed in the current year?
YES!
The financial statements are still comparable, the only difference is the level of service performed. If the CPA wants to issue comparative statements, they would write the standard review report for the current year and add a paragraph stating that the prior year financials were compiled in accordance to SSARS
or…
The financial statements could be issued separately with each separate report
Rule of thumb: Write the report for the current year and add a paragraph to site what was done in the prior year
What kind of things can a CPA do which DO NOT require the CPA to submit compiled financial statements?
A CPA can do the following WITHOUT having to attach a compilation report with a set of financial statements:
- Simply reading or typing client-prepared financial statements
- Preparing a working trial balance
- Proposing adjusting or correcting entries
- Providing a client with financial statement format that does NOT include amount
What does the concept of “submitting financial statements” entail?
Submitting financial statements is defined as presenting to a client or 3rd parties financial statements that the accountant has prepared either manually or through the use of computer software
A CPA should NOT submit unaudited financial statements of a non-issuer UNLESS, at a minimum, a compilation was performed
While performing a compilation is the minimum service, issuance of a compilation report is ONLY required when 3rd party reliance upon the compiled financial statements is reasonably expected
Question:
A CPA began a financial statement audit and was asked to change the engagement to a review because of a restriction on the scope restriction. If there is reasonable justification for the change, should the CPAs review report include a reference to the following?
Scope limitation that caused the changed engagement -
No! - in this situation, the CPA thinks that the audit scope limitation was okay; thus they would NOT include it in the review report
Original engagement that was agreed to -
No! - For the same reason as described above the CPA would NOT make reference to this in the review report
In this situation a “step down” in services was performed - going from an audit to a review. You would issue a report for the lower level of service performed (review) and would NOT mention the higher level of service at which you started at.
So a standard review report would be issued with no modification to the report because the CPA was “okay” with the situation that arose to cause the lower level of service to be performed
What type of service would an auditor comply with when following Accounting and Review Services committee- Statements on Standards for Accounting and Review Services (SSARS)?
- An annual review of financial statements of a nonpublic company
- A compilation of financial statements of a nonpublic company
- A quarterly review of the financial statement of a nonpublic company that annually has a review of its financial statements - since they have the annual review; then the quarterly review is under SSARS
What type of service would an auditor comply with when following Auditing Standards Board- Statements on Auditing Standards (AS)?
- A quarterly review of financial statements of a nonpublic company that has an annual audit
- An audit of the financial statements of a nonpublic company
- A report on summary financial statement of a nonpublic company
What type of service would an auditor comply with when following PCAOB- Auditing Standards?
- A quarterly review of the financial statements of a public company that has an annual audit
- A letter to an underwriter of a public company
- An audit of a public company
What type of engagement is a compilation?
A compilation is considered to be an attestation engagement
