Other Professional Services Flashcards
What is the most authoritative source of guidance for compilation and review engagements for nonissuers?
Statements on Standards for Accounting and Review Services (SSARS)
Under what circumstances should interim reviews be performed according to GAAS rather than SSARS?
(1) The entity’s most recent financials have been audited
(2) The CPA expects to audit the current-year financials
(3) The same reporting framework is used for both annual financials and interim financial info
Why are certain interim reviews performed according to GAAS rather than SSARS?
Because, in the right circumstances, such interim reviews are basically extensions of the annual audit
What standard is generally below SSARS in authority?
Interpretive publications
Are accountants required to follow interpretive publications?
No, they are recommended but not required
Accountants departing from interpretive publications must justify it, however
Who all is included under the heading of “third parties”?
Everyone besides management – including those charged with governance
What is a compilation?
Helping management to present financial data without providing assurance on the statements themselves
What is a review?
Gathering evidence to provide limited assurance that financial statements need no material changes to comply with a reporting framework
Does an accountant need to be independent to perform a compilation or a review?
Not for a compilation, but independence is necessary for a review
What do audits have that compilations and reviews typically don’t?
Testing of:
(1) internal control
(2) fraud risk
(3) accounting records
(4) source documents
If an accountant compiles financial statements that are not expected to be used by a third party, what is not required?
A report on the compilation
What is the typical structure for a compilation report?
(1) Introductory paragraph
(2) Paragraph for management’s responsibilities
(3) Paragraph for accountant’s responsibilities
What should compiled financial statements include on each page?
A reference to the compilation report (e.g. “See Compilation Report”)
If the accountant does something unusual per request (such as leaving out all disclosures), what should he say in the report?
There should be an explanatory paragraph after the paragraph outlining his responsibilities explaining the unusual activity
Purpose is not to be misleading
If the accountant doing a compilation is not independent, how should this be mentioned in the report?
As a final paragraph
If reasons for impairment are disclosed (though it’s not required), ALL reasons must be disclosed
In a compilation report, how should the accountant report any material departures from the reporting framework?
If the report can be modified to cover all the material departures, then it should be, but if it cannot (because the departures are so extensive), then the accountant should withdraw from the engagement
If a compilation report is a restricted use report, how should this be mentioned in the report?
A paragraph should be added at the end to state that it is restricted, to identify the parties, and to explain that outside parties should not use it
If an engagement is changed from an audit or review to a compilation, what would be a problematic reason for the change?
A change in scope (e.g. the accountant is forbidden from contacting the client’s attorney)
In the case of an attorney, the change in scope is severe, but otherwise a change to compilation is permissible
If there is a change of engagement to a compilation, what should the compilation report not mention?
(1) Original engagement
(2) Audit or review procedures performed
(3) Scope limitations that changed the engagement
If an accountant is doing a review of an entity’s financial statements, what should he obtain from management?
Representations for all financial statements and periods covered by the review report
What is important to know about review reports?
They are very similar to compilation reports
What is the typical structure for a review report?
(1) Introductory paragraph
(2) Paragraph for management’s responsibilities
(3) Paragraph for accountant’s responsibilities
(4) Paragraph for review results
If an accountant conducts a review, what should the reviewed financial statements include on each page?
A reference to the review report (e.g. “See Review Report”)
Is an accountant permitted to issue a review on only one financial statement?
Yes, so long as there is not a scope restriction on his inquiries and procedures
If financial statements need to be prepared in a “prescribed form,” what counts as a prescribed form?
Any standard (and preprinted) form adopted by the body receiving the report, usually gov’t or regulatory bodies
Does not count as a prescribed form if the entity itself has adopted a particular form
What happens if a prescribed form deviates from the reporting framework for a compilation?
It is not a problem, since the body prescribing the form has a reason for it – however, it should be a restricted use form
If a compilation shows that the entity deviates from the prescribed form, what should the accountant do?
Follow the SSARS guidance for an ordinary deviation from the reporting framework
Under what circumstances can an accountant be exempt from SSARS when submitting personal financial statements to a client?
If the statements will solely be used to fulfill the client’s personal goals (rather than, e.g., to obtain credit)
If exempt, the accountant should submit a written report stating that the statements were not audited, reviewed, or compiled
Is a successor for a review or compilation required to communicate with a predecessor?
No, though it is recommended in various situations (e.g. if there were frequent changes in accountants)
What is the difference between successor-predecessor communications for an audit and for a review/compilation?
For the latter, SSARS includes an inquiry about management’s cooperation in providing info, but does not include anything about internal controls (since reviews and compilations don’t assess internal controls)
If an accountant performs a compilation on specific items (rather than whole financial statements), does he need to write a report?
No, though it would be prudent to dispel any risk that his name might give to the assurance he provides on the info
How does a report for a compilation on particular financial items compare to one on whole financial statements?
They are essentially the same, except that the report will mention “items” or “schedule of the items” rather than “financial statements”
What should an accountant do if he is compiling pro forma financial info for a client?
Follow the specific guidance on it (AR 120), unless it is presented as supplementary information, in which case he should follow that guidance (AR 80)
What is pro forma financial information?
Financial information that reflects what historical records would have been if some event had occurred (e.g. a business combination)
How should pro forma financial information be presented?
It should be distinguished from actual historical information with some label (e.g. “pro forma”)
What must be included with compiled pro forma financial information?
(1) Actual historical financial statements – which must have been audited, reviewed, or compiled
(2) Report on the historical financial statements
Does an accountant need to write a report for pro forma financial information?
No, and the guidance here is the same as for compiled financial statements – it might still be prudent to write a report rather than have his name be associated with the statements without any description
If an accountant is reporting on comparative financial statements, how will his report differ?
It will generally be the same as for compilation/review reports on financial statements for one period
If an accountant reporting on comparative statements reissues his previous-year report, how should it be dated?
If reissued without modification, it should have the same date, but if with modification, it should be dual-dated
If comparative financial statements for one period but not another omit “substantially all” disclosures, can the accountant still report on those comparative statements?
No, since such statements would not be comparable
All statements being compared should have the same level of disclosure (or of disclosure-omission)
When reporting on comparative statements, what should a continuing accountant do if he has an equal or higher level of service done on the current period than on the prior one?
He should simply update the prior period report
When reporting on comparative statements, what should a continuing accountant do if he has a lower level of service done on the current period than on the prior one?
He should either
- describe his responsibility for the statements in a separate paragraph in the report
- reissue the prior-period report along with the current one (they can be combined or separate)
When reporting on comparative statements, what should a continuing accountant do for a changed reference to a deviation from the reporting framework on the prior period statements?
Report should have an explanatory paragraph with (1) the date of the previous report, (2) why the reference was changed, and (3) that the prior statements have been changed
Are predecessors permitted to reissue compilations or reviews if requested?
Yes, though not required
When reporting on comparative statements, what can a successor do if the predecessor does not reissue prior statements?
(1) Perform the compilation/review/audit himself
(2) Add a reference in the report to the predecessor’s report with a disclaimer
What should an accountant do if he is compiling or reviewing current period statements when the prior-period statements were audited?
Either (1) have prior-period report reissued or (2) include paragraph in current report describing the lesser responsibility assumed
If a prior period is audited when the current period is compiled or reviewed, what should the separate paragraph say about the accountant’s assumed responsibility?
(1) That the prior statements were audited
(2) Previous report’s date
(3) Previous report’s opinion
(4) If opinion wasn’t unqualified, the reasons why
(5) That no audit procedures were performed after the prior report’s date
What is the authority for attestation engagements?
Statements on Standards for Attestation Engagements (SSAE)
What is an attestation engagement?
An examination, review, or performance of agreed-upon procedures on some information provided
What happens if an accountant performs an attest engagement as part of a larger engagement?
SSAE applies only to the attestation part of the engagement, and any report issued by the accountant under other standards (besides SSAE) should be distinguished from the attestation report
What different things can be covered by an attest engagement?
(1) Historical information
(2) Prospective information
(3) Physical characteristics (e.g. square footage)
(4) Historical events
(5) Analyses (e.g. break-even)
(6) Systems or processes (e.g. internal control)
(7) Behavior (e.g. regulatory compliance, HR)
What is a necessary first step in an attest engagement?
Determining the “responsible party”: the party responsible for providing the information which the accountant is assessing
Usually is management but not necessarily (e.g. might be another entity’s mgmt who is trying to sell property to the client)
Is it possible for there to be no responsible party in an attest engagement?
Yes, in which case a party who could reasonably make a written assertion about the info becomes the responsible party
The accountant can never be the responsible party
What are the five general standards for attest engagements?
(1) Training
(2) Knowledge
(3) Criteria (by which to evaluate the information in a useful way)
(4) Independence
(5) Due Professional Care
What are the two fieldwork standards for attest engagements?
(1) Planning & Supervision
(2) Evidence
Reports for which kinds of attest engagements are usually general use reports?
Reports on examination or review engagements are usually general use, but reports on applications of agreed-upon procedures are usually restricted
What is the basic difference between an examination and a review?
They reduce the attestation risk down to different levels: examinations reduce it to an appropriately low level, while reviews lower it only to a moderate level
Reviews typically involve only inquiries and analytical procedures, while examinations can involve more
Under what conditions should a report for an attestation engagement be restricted?
(1) When criteria are appropriate only for specific parties
(2) When criteria are available only to specific parties
(3) When a written assertion has not been provided by the responsible party
(4) When the engagement is to apply agreed-upon procedures
What are the common features of reports on either examinations or reviews?
(1) Title with word “independent”
(2) Statement that the responsible party is responsible for the subject matter (or assertion)
(3) Subject matter (or assertion) itself, and the identification of the responsible party
(4) Restriction of report (if applicable)
(5) Signature and date
What are prospective financial statements (PFS)?
Financial forecasts or projections, including summaries of significant assumptions and policies
Distinct from pro forma statements
What is the difference between a financial forecast and a financial projection?
A projection is based more on hypothetical scenarios
Are financial forecasts and projections approved for general use, or should they be restricted?
Only financial forecasts are appropriate for general use (though not all are)
What is a partial presentation?
Prospective financial information which is less than full PFS
What information should be on reports for both forecasts and projections?
(1) That prospective results might not occur
(2) That the accountant isn’t responsible to update it after the report date
(3) Signature & date
If PFS lack a summary of significant assumptions, can the accountant still provide a compilation on them?
No
What must a document with pro forma financial info include?
The most recent historical financial statements (HFS)
These HFS must have been audited or reviewed
What level of assurance can an accountant give for pro forma financial info?
No more than the lowest level of assurance provided by the HFS themselves
E.g. if HFS have been audited at year-end and reviewed at an interim date, then the accountant could perform an examination of the year-end info but merely a review of the interim info
What is the different purpose for an examination on pro forma information than for a review?
As with all examinations and reviews, an examination would provide reasonable assurance that the pro forma info is suitable, whereas a review would provide negative assurance (i.e. nothing came to the accountant’s attention that would be problematic about the info)
How should a report on pro forma information be presented?
Can be added to the report on HFS, or can be separate
What should be included in a report on pro forma information?
(1) Paragraph explaining the limitations of pro forma info
(2) Reference to the actual HFS
(3) Date
Can an accountant provide a review on a client’s internal control over financial reporting?
No, he can only perform an examination, not a review
What constitutes a material weakness in internal controls?
A deficiency (or combination of them) that results in a “reasonable possibility” that a material misstatement will not be detected or prevented
What are the different tests an accountant might perform when examining internal controls?
(1) Inquiry
(2) Observation
(3) Inspection of documents
(4) Recalculation
(5) Reperformance
What would be an improper report for an accountant to issue upon internal controls?
A report stating no deficiencies were identified, or a report stating that no material weaknesses were identified
What is a compliance attestation engagement?
An engagement which assesses the compliance of a client with certain requirements (legal, regulatory, contractual, etc.)
What is the “responsible party” responsible for in a compliance engagement?
Ensuring that the entity complies with the applicable requirements (and the effectiveness of internal control over compliance)
Also responsible to provide a written assertion regarding compliance
For a compliance engagement, what should the accountant do if the responsible party refuses to provide a written representation letter?
If the client is the responsible party, then the accountant ought to withdraw; otherwise it is not necessary
What is a subservice organization?
A service organization employed by a service organization
What is the carve-out method?
Used when there is a service organization and a subservice organization – excludes the subservice organization’s control objectives and related controls from the scope of the audit engagement
What is the inclusive method?
The opposite of the carve-out method – includes the subservice organization’s control objectives and related controls in the scope of the audit engagement
What two kinds of reports can an auditor give for an engagement on a service organization?
Type 1 and Type 2 report
Both report on management’s description of a service organization’s system and its design of controls
What is the difference between a Type 1 and Type 2 report for service organization engagements?
Type 1 assesses the design of controls as of a given date
Type 2 assesses it throughout a given period
