Chapter 7: Statements on Standards for Accounting & Review Services
Before accepting or continuing an engagement or a relationship with a client, the accountant should ascertain what?
-All ethical requirements -Reliable information needed -There is no reason to doubt the client's integrity -FRF selected by management is acceptable -Management has acknowledged responsibility for: a) Selecting the AFRF to be applied: GAAP or IFRS b)Design implementation and maintenance (DIM) of internal control c)Preventing and detecting fraud
What are the responsibilities of an accountant in a compilation engagement?
-Complying with all requirements of SSARS -Have/obtain an understanding of the FRF that will be used -Read the F/S: a) significant accounting policies taken into account b) Accountant considers if the F/S appear to be free of obvious material misstatements
What documentation is required for the compilation of pro forma financial information?
-Engagement letter or other documentation of understanding -Results of procedures performed -Copy of the pro forma financial information -Copy of the compilation report
What is the engagement partner responsible for on SSARS engagements?
-Overall quality of the engagement -Engagement's direction, planning, supervision, and performance -Compliance with the firm's quality control policies and procedures -Identifying and communicating circumstances that may affect the client or engagement acceptance or continuance decision -Being aware of potential noncompliance with ethical requirements
What communication should be made between the predecessor and successor account? (RID)
-Reasons for the change -Integrity of management -Disagreements with management about accounting principles a) must obtain permission from client to obtain access to predecessor's workpapers
For preparation engagements, what should the engagement letter include?
-The objective -Management's responsibilities as indicated by AR-C 60 -Accountant's responsibilities -Limitations of an engagement to prepare F/S -Identification of the applicable FRF -Whether certain conditions are expected to exist, such as: a) Known departure from applicable FRF b) Omission of substantially all disclosures required by the FRF -An Agreement by management that each page of the F/S will include a statement indicating that no assurance is provided
What changes will the review report of a public company (under the jurisdiction of the PCAOB) be changed?
-Title includes "independent Registered Public Accounting Firm" -Report will refer to PCAOB standards, not SSARS standards -Signature of the CPA-in charge must be lisited
What should the auditor do when management fails to provide a representation letter in a review engagement?
1) Ask to do a compilation engagement 2) Withdraw from the engagement
What are the 4 different types of accounting services for financial statements and their level of assurance?
1) Audit- Positive assurance 2) Review: attest assurance 3) Compilation: (no assurance, non-attest, independence is assumed and additional paragraph will be added if not) 4) Preparation: no assurance, non attest, do not need to be independent
What is the difference and hierarchy of the four types of engagements for nonpublic entities?
1) Audits: -Obtain and document understanding of IC -Assess RMM -Perform Tests (ICORRIA) inspection, observation, confirmation 2) Reviews of Audits: -Be independent -Obtain management rep letter -Make inquiries and apply analytical procedures -Going concern? 3) Compilations, reviews, audits: -Read the F/S and notes to ensure free from obvious material error -Communicate any illegal acts in the form of noncompliance -In compilation, the auditor is not required to obtain a management rep letter 4) Preparation of F/S, compilations, and audits: -Obtain an engagement letter, signed by both CPA and client -Understand the applicable accounting framework
What are the four elements in the compilation report? (Hint: CARD)
1) Compiled: 2) AICPA Standards: 3) Responsibility of management 4) Do not express an opinion or provide assurance The mnemonic CARD reminds us that the compilation report is small enough to fit on a small card
Why would an accountant issue a modified report for a compilation engagement?
1) F/S prepared in accordance with a special purpose FRF: Like cash, modified cash basis, tax basis, contractual or regulatory basis, IFRS for SMEs, or FRF for SMEs promulgated by the AICPA 2) Lack of independence 3) Omission of substantially all disclosures required by the applicable FRF 4) Known departures from the applicable FRF 5) Supplementary information accompanying the F/S 6) Required supplementary information
What key elements will a compilation report include?
1) Indication management is responsible for the F/S 2)Compilation was performed in accordance with SSARS, promulgated by the ARSC of the AICPA 3) Indication the accountant did not: a) Review the F/S b) Was not required to perform any procedures to verify the accuracy or completeness of the information provided by management c) Does not express an opinion, conclusion, nor provide any assurance on the F/S 4) Accountant's signature 5) Indication of the city and state in which the accountant practices 6) Date of the report 7) Dated as of the date on which the accountant completes all requirements under AR-C section 80
When an auditor is associated with public companies, they will follow what standards? When an auditor is associated with nonpublic, nongvoernmental entity, they will follow what standards?
1) PCAOB 2) GAAS
What are the considerations for accepting a compilation or review of F/S prepared in accordance with FRF generally accepted in another country?
1) Purpose of the F/S and the applicable FRF 2) Intended user 3) Steps taken by management to determine the FRF is acceptable 4) CPA understands the legal responsibilities involved in the engagement
In what paragraph of a review report, should it state that no opinion is expressed?
A review report should contain an indication in the introductory paragraph that, since a review is less in scope than an audit, no opinion is expressed.
What should follow a pro forma financial statement/information?
A summary of significant assumptions so users will understand not only the framework but also management's plans that are being considered
What is the structure of a standard review report?
AICPA professional standards provide examples of the wording included in each type of engagement's report, so each report is easily distinguishable (eg, audits versus reviews). For example, the objective in a review engagement is to obtain limited assurance about whether the financial statements (F/S) require any material modifications to adhere to the applicable framework. A CPA performing a review issues a conclusion that indicates negative assurance was obtained. The standard phrasing for a conclusion is "nothing came to our attention..." or "we are not aware of modifications that should be made..."
SSARs engagements must adhere to what?
AR-C 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services
Preparation engagements must adhere to what standard?
AR-C 70 (as well as 60)
What is the objective of compilation engagements?
AR-C 80: The objective of the accountant in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of F/S and report in accordance with this section without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the F/S -May also be engaged to compile historical financial information (AR-C 120) -May also compile prospective (forecast) financial information (AR-C-80) -Also may perform hypothetical assumption
What if the client will not agree to include a statement that no assurance is provided on the F/S, for a preparation engagement?
Accountant will: -Issue a disclaimer, indicating the lack of assurance -Compile the F/S and issue a compilation report -Withdraw from the engagement -
The auditor learns the financial statements are materially misstated during a compilation engagement, what should the auditor do?
Accountants (CPAs) performing compilations apply their accounting and financial expertise to assist management in presenting the entity's financial statements (F/S), elements, accounts, or items of F/S. No assurance is provided. As part of this service, accountants read the F/S to identify obvious material misstatements, consider whether the F/S are in appropriate form, and issue a report.
Key note/difference
An accountant must obtain industry knowledge prior to accepting an engagement for a review or audit. The accountant may accept the engagement for a compilation, and then obtain necessary industry knowledge.
What type of engagement is an audit and review considered?
Assurance engagement, which the accountant will evaluate the accuracy and completeness. Audit and reviews are considered attest engagements; therefore independence is required.
What is and why would a client downgrade an engagement?
Audit client request that the engagement be downgraded to a review or compilation. Reasons? Change in circumstance or cost The new engagement should not make reference to the original engagement or the reasons for the downgrade
In what paragraph of a review report, should the auditor mention conformity with GAAP or other applicable financial reporting framework?
Fourth paragraph
In what paragraph does the auditor express limited assurance in a review engagement report?
In the conclusion paragraph, 4th paragraph.
Can an auditor provide assurance in a compilation of financial projection (either forecasting or projections)?
It is not appropriate for the accountant to provide any assurance in a compilation. An indication that the assumptions used are reasonable is a form of assurance and should not be included. AR-C 80 provides that a compilation report should "include a statement that the accountant did not audit or review the financial statements nor was the accountant required to perform any procedures to verify the accuracy or completeness of the information provided by management and, accordingly, does not express an opinion, a conclusion, nor provide any assurance on the financial statements." In addition to the requirements associated with a standard compilation report, a report on prospective financial information (i.e., forecasts and projections), will also include (1) a statement that the forecasted or projected results may not be achieved; and (2) a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. The accountant not include an evaluation of the support for the assumptions underlying the projection
What does pro-forma financial information show?
It shows the HISTORICAL information that is derived from historical F/S of an entity, but modified to reflect what management believes the F/S would have looked like if certain decisions had or had not been made.
May compilations and reviews of annual F/S be performed for public entities?
No, only interim F/S.
Will a CPA perform an compilation engagement with a client, if there is indication of fraud?
No- CPAs generally do not want to associate with clients whose F/S are likely misstated due to fraud.
Will the auditor generally discuss internal controls when engaged in a review engagement?
No- Generally not. And, not with the predecessor auditor.
When reviewed FS are in comparative format, should there be any reference to prior year's audited FS in the introductory paragraph?
No- When reviewed financial statements are issued on a comparative basis with audited financial statements for a prior period, a review report should be issued along with either the 1) reissuance of the prior period's report or 2) a separate paragraph describing the responsibility being assumed for the prior period's financial statements. Reference to the prior period's audited financial statements in the body of the review report, other than the separate paragraph, is not appropriate.
What type of engagement is a Preparation considered?
Nonassurance engagements, the accountant is not required to verify the accuracy or completeness of the information. Nonattest engagement; therefore, no independence is required. Accountant only assumes responsibility over preparing the F/S after the client picks the AFRF.
What type of engagement is a compilation considered?
Not an assurance engagement, but a report is issued. The report does not contain an expression of opinion or conclusion.
What will the accountant consider when preparing prospective financial information?
Preparing prospective financial information requires management to make various significant assumptions about what will occur in the future. -The account must include a summary of significant assumptions -Identification of any hypothetical assumptions, which the projection is based - A description of the limitations on the usefulness of the presentation
Summary part 2
Review reports: are typically "general use" but may be "Limited use"
What are the key differences between a Review, Compilation, and Preparation?
Statements on Standards for Accounting and Review Services (SSARS) establish professional responsibilities for CPAs performing reviews, compilations, and preparation engagements for nonpublic entities. 1) A CPA performing reviews provides limited assurance (negative assurance) about whether any material modifications are needed in the financial statements (F/S) so that F/S adhere to the applicable reporting framework 2) A CPA performing compilations applies accounting and financial expertise to assist management in presenting the entity's F/S, elements, accounts, or items of F/S, with no assurance provided. As part of this service, the CPA reads the F/S to identify obvious material misstatements, considers whether F/S are in appropriate form, and issues a report. 3) A CPA performing a preparation puts together F/S in a way similar to that for a compilation. However, the CPA is not responsible for reading the F/S or for issuing a report.
A review, compilation, or preparation of the F/S will follow what standards?
Statements on Standards for Accounting and Review Services (SSARS) issued by the Accounting and Review Services Committee (ARSC) of the AICPA
How does the compilation report change when there are omitted disclosures?
The accountant may compile F/S that omit substantially all disclosures required by the applicable FRF. But, will need to add: 1) Management has elected to omit 2) Information, had it not been omitted, may influence conclusions about the entity's performance or financial position 3) F/S are designed exclusively for those knowledgeable about such matters
For a review engagement, when would the accountant include an other matter or emphasis of other matter paragraph?
The objective of a review engagement is to obtain limited assurance about whether the financial statements (F/S) require any material modifications to adhere to the applicable reporting framework. When accountants (ie, CPAs) find it necessary or are required by review standards to alert users about certain matters, the report will be modified. An other-matter paragraph is used when accountants consider it necessary to communicate a matter that is not presented or disclosed (nor is it required to be) in the F/S. The accountant believes the matter will help users better understand the review, the accountant's responsibilities, or the report. This paragraph is presented immediately following the accountant's conclusions and any emphasis-of-matter paragraph(s). An emphasis-of-matter paragraph is used when accountants wish to draw attention to a matter that has been properly accounted for and disclosed in the F/S (Choice D). The accountant believes this matter merits special attention in the report.
In a review engagement report, should there be mention of the accountant's responsibility to express limited assurance in either the introductory paragraph or the accountant's responsibility paragraph?
There should be no mention of the accountant's responsibility to express limited assurance in either the introductory paragraph or the accountant's responsibility paragraph. The accountant's responsibility paragraph will indicate, however, that the accountant is responsible for complying with SSARS and perform procedures to obtain, not express, limited assurance.
What should a CPA do before reissuing a compilation report on a nonissuer for a prior year?
When reissuing a compilation or review report, a predecessor will consider if the report is still appropriate and will read the current period's financial statements and related report, compare the prior period's financial statements with those previously issued and the current statements, and obtain a letter of assurance from the successor indicating whether or not the successor is aware of matters that would affect the financial statements. The predecessor is not required to make inquiries about actions taken at board meetings. Unless there is a reason to restrict the report, a reissued report may be used to obtain credit. The predecessor would not review the successor's papers, although the successor would provide information to the predecessor about matters affecting the prior year.
For a public client, what is performed during interim?
While the annual F/S of a public (issuer) client may be audited, the quarterly (interim) information typically is not. Instead, the auditor of the annual F/S will normally perform a review of interim financial information. Like all reviews, the auditor will use inquiry and analytical procedures for the expression of limited assurance (negative assurance).
Does the accountant need to add an explantory paragraph in comparative compilation reports?
Yes, indicating that: 1) Prior F/S had been audited or reviewed 2) Date and type of report originally issued on the prior period F/S, and the reasons for a modification to the prior period report.
Do you need an engagement letter for compilation engagements?
Yes, should include: -Objective of the engagement -Management's responsibilities -Accountant's responsibilities -Limitations of an engagement to compile F/S -Identification of the applicable FRF -Expected form and content of the compilation report
May accept an engagement to compile pro forma financial information provided it is in a document that also contains or refers to the historical financial statements on which the pro forma information is based?
Yes- But the historical financial statements must have been compiled, audited, or reviewed
For a preparation engagement, can the accountant omit substantially all disclosures requirements?
Yes- Provided the omission was not for the purpose of misleading users. And, the omission should be disclosed within the F/S
In a review engagement report, does it mention a review is less in scope than an audit, and if so, what paragraph?
Yes- The scope of a review is compared to the scope of an audit so that users will understand that a review does not provide as much assurance as an audit. It is, however, included in the first (introductory) paragraph, not the third (auditor responsibility) paragraph.
In a review engagement report, should there be an indication that no auditing procedures were performed after the date of the report on the prior year's financial statements in the fifth (separate) paragraph?
Yes- The separate paragraph should include an indication that no audit procedures were performed after the date of the report on the prior year's financial statements.
In a review engagement report, should there be an indication of the type of opinion is expressed on the prior year's audited financial statements in the fifth (separate) paragraph?
Yes. Since the previous period's report is not being reissued, a separate paragraph should include an indication of the type of report issued on the previous period's financial statements, the date of the report and that no audit procedures have been performed since that date.
When would the accountant withdraw from a compilation engagement?
a) Management not willing to provide information the accountant considers necessary b)F/S contain departures from applicable FRF and management will not make proposed changes
