Becker AUD Chapter 6
Elements of preparation, compilation & review engagements
-3 party relationship -financial reporting framework -FS or financial info -Sufficient, appropriate evidence (review only) -Written communications or report
Threats to Compliance With the Fundamental Principles within AICPA code of professional conduct
-Adverse interest threat -Advocacy threat -Familiarity threat -Management participation threat -Self-interest threat -Self-review threat -Undue influence threat
Title 1 of SOX requires registered firms to adhere to what auditing standards
-Audit workpapers maintained for 7 years -Concurring or second partner review required -Report must describe scope of testing of issuers internal controls
Under AICPA Code of Professional Conduct, when are contingent fees prohibited
-Audits of FS -Reviews of FS -Examinations of prospective FS -Preparing an original or amended tax return or claim for a tax refund
Title II of SOX, what services may not be provided to an audit client Also same as SEC regulation S-X
-Bookkeeping -Financial info systems design & implementation -Appraisal & valuation services -Actuarial services -Management or HR functions -Internal audit outsourcing -Investment related -Legal services -Expert services unrelated to audit
Under AICPA Code of Professional Conduct, when are contingent fees permitted
-Compilations of Fs expected to be used by 3rd parties only if member includes statement that they are no independent -Fixed by courts or other public authority
Under SEC principles of independence, client relationship or service provided would create issues if:
-Creates a mutual or conflicting interest between auditor & client -Results in auditor acting as management or an employee of audit client -Places auditor in a position of auditing own work -Make auditor advocate for audit client
Required reporting by auditor to audit committee under Title II & SEC Reg S-X
-Critical accounting policies & procedures -Alternative accounting treatments with ramifications of alternatives & treatment preferred by auditor -Material written communications between auditor & management
Under AICPA Code of Professional Conduct, examples of acts discreditable to the profession
-Failure to return records to client after demanded -Harassment -Negligence -Failing to follow GAAS & other applicable standards -Failure to timely file a return -Making claims about experiences or qualifications that is false, misleading or deceptive -Disclosing confident information
Under AICPA Code of Professional Conduct, independence is impaired by employment relationships when:
-Formerly employed by client participates on engagement team or in a position to influence engagement when covering any period of former employment with client -Immediate family member or close relative is employed in a key position -Partner or professional employee leaves firm & is employed by client in a key position unless no longer in a position to influence
Review prior period & compiled current period what are reporting options? (DOWNGRADE)
-Issuing a compilation on current period with paragraph added to describe responsibility assumed for prior period statements -Reissuing (not updating) review report on prior period (can be combined with or presented separately)
Audit Partner rules under Title II & SEC Regulation S-X
-Lead concurring partner to rotate off audit every 5 years, then 5 year time out period -Regulation S-X only, other partners need to rotate off every 7 years with a 2 year time out period -PCAOB - auditors of issuers must disclose name of partner
Comfort letter should not comment or provide assurance on what type of info
-Market risk sensitive instruments -Qualitative disclosures
In a review/compilation where auditor becomes aware of material departure & FS are not revised, what are the accountants options?
-Modify the report if appropriate with separate paragraph disclosing the departure OR -Withdraw from engagement
Performance requirements that are necessary when engaged to perform a preparation
-Obtain engagement letter -Possess knowledge of & understand reporting framework -Prepare FS -Include statement on each page that "no assurance is provided" or issue a disclaimer
Performance requirements that are necessary when engaged in a compilation
-Obtain engagement letter -Possess knowledge of principles & practices -Understanding of clients business -Read compiled FS for appropriateness 7 free of obvious material errors -Follow up with management -Issue compilation report
PCAOB's tax related independence rules
-Registered firms may not provide confidential or aggressive tax transactions to audit clients -Registered firms may not provide tax services to corporate officers to audit clients or their immediate family members -Audit committee must preapprove tax services & related fees
Included in report on review of interim FS for nonissuers
-Title -Intro (entity, FS, dates, interim FS reviewed) -MR (fair presentation of FS & IC are responsibility -AR (conducted in accordance with GAAS, review is analytical procedures & inquiry, less in scope than audit, no opinion) -Conclusion (aware of any material modifications that should be made for interim FS)
Included in report on a review of nonissuers FS
-Title -Intro (entity, FS, dates, reviewed, inquiry & analytical procedures, less in scope, no opinion expressed) -MR (responsible for FS & IC) -AR (conducted engagement in accordance with SSARS, limited assurance, reasonable basis for report) -Conclusion (not aware of material modifications that should be made to FS other than whats indicated)
Under AICPA Code of Professional Conduct, circumstances that a CPA can disclose confidential info without client consent
-Valid subpoena or summons -Quality review of CPAs professional practices authorized by AICPA -Response to inquiry by ethics division or trial board of AICPA or duly-constituted investigative body of a state CPA society
Under AICPA Code of Professional Conduct, which independence rules apply to close relatives
-employed by a client in a key position -aware that close relative has a financial interest in client that either was material to relatives net worth or enables relative to exercise significant influence over client
Included in report on a compilation of nonissuers FS
1 paragraph: -management is responsible for FS -Identify entity, FS & date -performed compilation in accordance with SSARS -did not audit or review -not required to perform procedures -does not express opinion, conclusion nor provide any assurance -signature -city/state & date
FS prepared in accordance with special purpose framework are not considered appropriate in form unless they include which elements? (2)
1. Description of special purpose framework, including summary of significant accounting policies & description of material differences from GAAP 2. Disclosures similar to those required by GAAP if FS contain items that are similar to those prepared in accordance with GAAP
Steps in evaluation of auditor independence under GAGAS (4)
1. ID of threats to independence 2. Evaluation of significance of threats identified both individually & in aggregate 3. Application of safeguards necessary to eliminate threats to reduce them to an acceptable level 4. conclude if safeguards are adequate to eliminate or appropriately reduce threats
Conceptual framework approach utilized by AICPA code of professional conduct
1. Identify threats to compliance with fundamental principles 2. Evaluate significance of the threat 3. Apply safeguards to eliminate threats or reduce threats to acceptable level whenever possible
Issuing a compilation or review on FS, FS are intended for use only outside US, accountant should use either of which reports?
1. In accordance with SSARS that includes statement that refers to note of FS describing basis of presentation & ID of country of origin 2. Report in accordance with another set of compilation or review standards
6 Principles of the AICPA Code of Professional Conduct
1. Responsibilities 2. Public Interest 3. Integrity 4, Objectivity & independence 5. Due care 6. Scope & nature of services
Threats to auditor independence under GAGAS (7)
1. Self-interest threat 2. Self-review threat 3. Bias threat 4. Familiarity threat 5. Undue influence threat 6. Management participation threat 7. Structual threat
Ethical Principles under GAGAS
1. Serving the public interest 2. Integrity 3. Objectivity 4. Proper use of governmental info, resources & positions 5. Professional behavior
Reporting requirements with respect to compiled FS when: 1. substantially all disclosures are omitted 2. only limited disclosures are included 3. auditor lacks independence
1. can only report if omission is not intended to mislead expected users, must indicate & be modified by additional paragraph disclosing 2. labeled "Selected Info - Substantially All Disclosures Required by GAAP are Not Included" 3. last paragraph of report should disclose lack of independence, permitted but not required to disclose reasons for independence impairment
Under AICPA code of professional conduct, independence is impaired:
1. if a member has a direct financial interest with attestation clients without regard to materiality 2. member has a material indirect financial interest 3. member or immediate family has a loan to or from client 4. member accepts more than a token gift 5. member is an employee of or makes management decisions on behalf of the client 6. client is overdue more than 1 year in payment of professional fees to member or 7. actual or threatened litigation between member & client
Who must sign the engagement letter according to SARS (accounting & review services)
Account or accountants firm AND management or those charged with governance
Title II of SOX & SEC Regulation S-X, what services must be preapproved by audit committee
All auditing services & permitted non-audit services (tax)
Preparation, compilation & review standards require an accountant to establish an understanding, what is in the understanding?
An engagement letter that should include: -objectives -MR & AR -ID of applicable framework -explanation of limitations of the service (engagement cannot be relied upon to disclose errors, fraud or noncompliance) -Preparation only (agreement by management that each page will include no assurance or disclaimer issued) -Compilation & review only (expected report to be issued)
Required cooling off period under SOX Title II & SEC Reg S-X
Audit firm cannot have employed an issuers CEO, CFO, controller, CAO or other employee in a financial reporting oversight role during 1 year preceding audit
Which SSARS engagements require determination of independence? What are the effects on independence on reporting?
Compilation - not required, must be evaluated & disclosed Review - required, review report can only be issued when independent
Familiarity Threat
Due to long or close relationship with client, member will become too accepting of product or service and/or too sympathetic to clients organizational interests Ex: member experiences familiarity threat when a close friend is employed by the client
Issuer & what group establishes standards for audit reports
Entity subject to rules of SEC Public Accounting Oversight Board (PCAOB) establishes standards
Comfort Letter & types of assurance within it
From CPA to underwriters providing: -positive assurance regarding independence & whether FS comply in all material respects with applicable SEC requirements -Negative assurance regarding unaudited FS, capsule info, changes in certain items & compliance of certain info with SEC requirements
What independence rules apply to close relatives per SEC
Impaired if close family member: -has accounting or financial reporting oversight role with client or -owns more than 5 % of clients equity securities or controls the client
Characteristics of independence under GAGAS (2)
Independence of mind & in appearance
Under GAGAS, what is critical consideration in determining whether a non-audit service is a threat to independence
Managements ability to effectively oversee non-audit service to be performed, determine : that audited entity has designated an individual who possesses suitable skill, knowledge or experience AND understands the services to be performed sufficiently to oversee them
Self-Interest Threat
Member could benefit financially or otherwise from an interest in or relationship with a client or persons associated with the client Ex: member is eligible for profit or other performance related bonus at the employing organization & value of that bonus is directly affected by members decisions
Adverse Interest Threat
Member will not act with objectivity because members interests are opposed to the client or employing organizational interests Ex: commencing litigation against their client/employing organization
Advocacy Threat
Member will promote clients interests to the point that objectivity or independence is compromised Ex: endorses clients services or products
Undue Influence Threat
Member will subordinate judgment to individual associated with client or any relevant 3rd party due to reputation or expertise, aggressive or dominant personality or attempts to coerce or exercise excessive influence over member Ex: pressured to become associated with misleading info
Management Participation threat
Member will take on the role of client management or otherwise assume management responsibilities Ex: serves as an officer or a director of attest client
Type of info an auditor should promptly communicate to management during a review of interim financial info & what action should auditor take if management fails to appropriately respond
Should communicate: -material modifications -Issuer filed quarterly reports prior to review being completed -nonissuer issued interim financial info prior to completion of review When management does not respond appropriately, auditor should: -inform those responsible for governance & if they fail to respond, consider resigning or consulting legal counsel
Performance requirements for a review engagement "U LIAR CPA"
Understanding client Learn/obtain sufficient knowledge of entitys business Inquiry Analytical procedures Review other procedures Client rep letter should be obtained Professional judgment to evaluate results Accountant should communicate results
When should auditor perform review procedures related to going concern?
When reporting framework includes requirements for management to evaluate entitys ability to continue as a going concern or if accountant becomes aware of conditions that raise substantial doubt about ability to continue as a going concern
Under AICPA Code of Professional Conduct, departure of GAAP is justified under:
if compliance with GAAP would cause FS to be misleading
Self-Review Threat
member will not appropriately evaluate: -results of a previous judgment made or -service performed or supervised by the member or -individual in the members firm and -member will rely on that service in forming a judgment as part of another service