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Copyright © 2016 South-Western/Cengage Learning
OTHER SERVICES PROVIDEDBY AUDIT FIRMS
CHAPTER 17
AuditingA Risk-Based Approach To Conducting A Quality Audit
10th edition
Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg
Copyright © 2016 South-Western/Cengage Learning 17-2
LEARNING OBJECTIVES
1. Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant professional standards
2. Explain review and compilation engagements, relevant procedures performed, and reports issued
3. Explain the procedures and reporting requirements for providing assurance on interim financial information for audit clients
4. Discuss special reporting considerations for unique financial statement audit situations
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LEARNING OBJECTIVES
5. Describe attestation engagements relating to agreed-upon procedures, financial forecasts and projections, and pro forma financial information, and the types of reports that are issued for these engagements
6. Describe forensic accounting and distinguish between forensic accounting and auditing
7. Describe sustainability reporting and articulate the auditor’s role in providing assurance on management sustainability reports
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PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS
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PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS
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IDENTIFY AND DESCRIBE NONAUDIT ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS AND DISCUSS
THE RELEVANT PROFESSIONAL STANDARDS
LEARNING OBJECTIVE 1
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ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS
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SUBJECT MATTER OF AN ATTESTATION ENGAGEMENT
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COMPONENTS OF ATTESTATION SERVICES AND PARTIES INVOLVED IN ATTESTATION SERVICES
• Information or a process on which assurance service is provided• Criteria for evaluation• Sufficient appropriate evidence• Written attestation report• Parties involved• Responsible party• Practitioner• Intended users
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LEVELS OF ASSURANCE PROVIDED IN AN ATTESTATION ENGAGEMENT
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EXHIBIT 17.2 - UNITED STATES AND INTERNATIONAL ATTESTATION (ASSURANCE) STANDARDS
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EXPLAIN REVIEW AND COMPILATION ENGAGEMENTS, RELEVANT PROCEDURES
PERFORMED, AND REPORTS ISSUED
LEARNING OBJECTIVE 2
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REVIEW ENGAGEMENT
• Enables a practitioner to state whether anything has come to the practitioner’s attention that causes the practitioner to believe that financial statements are not prepared, in all material respects, in accordance with applicable financial reporting framework • Based on procedures which do not provide all
evidence that would be required in an audit• Obtain limited assurance that there are no material
modifications to be made to financial statements
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REVIEW PROCEDURES(SEE EXHIBIT 17.4)
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REVIEW PROCEDURES(SEE EXHIBIT 17.4)
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STANDARD REVIEW REPORT
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COMPILATION ENGAGEMENTS
• Accountant uses accounting expertise to collect, classify, and summarize financial information• Assists management in presenting financial
information in the form of financial statements• Does not undertake to obtain any assurance that there
are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework
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COMPILATION PROCEDURES
• Practitioner is not required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client• Additional or revised information should be obtained if
practitioner believes that client-provided information may be:• Incorrect• Incomplete• Unsatisfactory
• Practitioner should withdraw from engagement if client refuses to provide information
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EXPLAIN THE PROCEDURES AND REPORTING REQUIREMENTS FOR PROVIDING ASSURANCE ON
INTERIM FINANCIAL INFORMATION FOR AUDIT CLIENTS
LEARNING OBJECTIVE 3
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REVIEWS OF INTERIM FINANCIAL INFORMATION FOR AUDIT CLIENTS
• SEC requires public companies to:• File quarterly financial information with SEC on Form
10-Q within 40 to 45 days and provide shareholders with quarterly reports• Include quarterly information in annual reports to SEC
(Form 10-K) and in annual reports to shareholders• Have quarterly financial information reviewed by
independent auditors• Review report not required to be included in quarterly
information
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REVIEW PROCEDURES FOR INTERIM FINANCIAL INFORMATION
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REPORTING ON INTERIM FINANCIAL STATEMENTS
• Standard report on a review of separately issued interim financial statements of public companies:• Identifies the information reviewed • Indicates whether the standards of PCAOB were
followed in performing the review• Explains nature of a review• Disclaims an opinion• Provides negative assurance that auditor is not aware
of any material departures from GAAP
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DISCUSS SPECIAL REPORTING CONSIDERATIONS FOR UNIQUE FINANCIAL STATEMENT AUDIT
SITUATIONS
LEARNING OBJECTIVE 4
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AU-C 800 - AUDITS OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH SPECIAL-PURPOSE
FRAMEWORKS
• Special-purpose framework: Financial reporting framework other than GAAP• Other comprehensive bases of accounting• Cash basis: Records cash receipts and disbursements
and modifications of the cash basis having substantial support• Tax basis: Used to file income tax return for a period
covered by financial statements
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AU-C 800 - AUDITS OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH SPECIAL-PURPOSE
FRAMEWORKS
• Regulatory basis: Used to comply with requirements of financial reporting provisions of a regulatory agency to whose jurisdiction entity is subject • Contractual basis: Used to comply with an agreement
between the entity and one or more third parties other than auditor
• Special-purpose financial statements: Prepared in accordance with a special-purpose framework
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CONSIDERATIONS WHEN ACCEPTING AN ENGAGEMENT OF AUDIT OF SPECIAL-PURPOSE FINANCIAL
STATEMENTS
• Obtain an understanding of:• Purpose for which financial statements are being
prepared• Intended users• Steps taken by management to ensure that the
framework is acceptable under the circumstances• Obtain an agreement from management of its
understanding of and acknowledgement for its responsibility to include all appropriate disclosures
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CONSIDERATIONS WHEN PLANNING ANDPERFORMING AN ENGAGEMENT OF AUDIT OF SPECIAL-
PURPOSE FINANCIAL STATEMENTS
• Be sure to comply with all AU-C sections relevant to the audit• Adapt and apply all AU-C sections relevant to audit as
necessary in circumstances• Obtain an understanding of organization’s selection
and application of accounting policies
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CONSIDERATIONS WHEN FORMING AN OPINION ON SPECIAL-PURPOSE FINANCIAL STATEMENTS
• Consider whether management’s financial statements:• Adequately describe applicable financial reporting
framework• Have an appropriate title• Include a summary of significant accounting policies• Describe how special-purpose framework differs from
GAAP• Result in fair presentation of entity’s financial results
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EXHIBIT 17.8 - OVERVIEW OF REPORTING REQUIREMENTS FOR SPECIAL-PURPOSE FINANCIAL
STATEMENTS
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AU-C 805
• Addresses special considerations in application of AU-C 100–700 to the audit of a single financial statement or of a(n): • Specific element• Account• Item of a financial statement
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AU-C 806 - REPORTING ON COMPLIANCE WITH ASPECTS OF CONTRACTUAL AGREEMENTS OR
REGULATORY REQUIREMENTS
• Auditor is requested to report on an entity’s compliance with certain contractual agreements or regulatory requirements• Such reports can be issued if the covenants of the
agreement are based on information from audited financial statements
• Compliance report contains limited or negative assurance
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DESCRIBE ATTESTATION ENGAGEMENTS RELATING TO AGREED-UPON PROCEDURES, FINANCIAL FORECASTS AND PROJECTIONS, AND PRO FORMA FINANCIAL INFORMATION, AND THE TYPES OF
REPORTS THAT ARE ISSUED FOR THESE ENGAGEMENTS
LEARNING OBJECTIVE 5
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AGREED-UPON PROCEDURES ENGAGEMENTS
• Agreed-upon procedures engagement: Practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter• Report should be in the form of a description of
procedures and associated findings• Report should indicate that it is restricted in its use to
specified parties• Specified parties: Individuals who will receive the
practitioner’s agreed-upon procedures report
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AGREED-UPON PROCEDURES
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FINANCIAL FORECASTS AND PROJECTIONS
• Prospective financial statements: Forecasts or projections including summaries of assumptions and accounting policies• Financial forecast: Prospective financial statements
that present, to the best of the responsible party’s knowledge, an entity’s:• Expected financial position• Results of operations• Cash flows
Copyright © 2016 South-Western/Cengage Learning 17-36
FINANCIAL FORECASTS AND PROJECTIONS
• Financial projection: Prospective financial statements that present, to the best of the responsible party’s knowledge, given one or more hypothetical assumptions, an entity’s:• Expected financial position• Results of operations• Cash flows
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COMPILATION OF PROSPECTIVE FINANCIAL STATEMENTS
• Assembling prospective financial statements• Assembling: Manual or computer processing of
mathematical or clerical functions for presentation of prospective financial statements
• Performing compilation procedures• Issuing a compilation report
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EXAMINATION OF PROSPECTIVE FINANCIAL STATEMENTS
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AGREED-UPON PROCEDURES OF PROSPECTIVE FINANCIAL STATEMENTS• May be limited or extensive depending on
requirements of responsible party • Must involve more than a simple reading of
prospective financial statements
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REPORTING ON PRO FORMA FINANCIAL INFORMATION
• Pro forma financial information: Shows what significant effects on historical financial information might have been had a consummated or proposed transaction occurred at an earlier date• Illustrates effects of following types of transactions• Business combinations• Disposing of a significant segment of a business• Changing the form of organization of business or its
status as an autonomous entity
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PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION
• Obtain:• Understanding of the underlying transaction• Knowledge of each part of combined organization in a
business combination• Discuss management’s assumptions regarding effects
of transaction or event• Evaluate whether pro forma adjustments are
completely recorded
Copyright © 2016 South-Western/Cengage Learning 17-42
PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION
• Obtain appropriate evidence to support any pro forma adjustments• Evaluate whether management’s assumptions are
described in a clear and comprehensive fashion• Determine that computations underlying pro forma
adjustments are mathematically correct• Obtain from management written representations• Their responsibility for assumptions used in making
pro forma adjustments
Copyright © 2016 South-Western/Cengage Learning 17-43
PROCEDURES APPLICABLE FOR EXAMINING OR REVIEWING PRO FORMA FINANCIAL INFORMATION
• Assertion that assumptions provide a reasonable basis for presenting effects related to transaction• Assertion that significant effects related to transaction are
appropriately disclosed• Read such information and evaluate:• Underlying transaction• Pro forma adjustments• Significant assumptions• Uncertainties
• Evaluate source of historical financial information
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DESCRIBE FORENSIC ACCOUNTING AND DISTINGUISH BETWEEN FORENSIC ACCOUNTING
AND AUDITING
LEARNING OBJECTIVE 6
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EXHIBIT 17.19 - DIFFERENCES BETWEEN FORENSIC ACCOUNTING AND ACCOUNTING
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DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON
MANAGEMENT SUSTAINABILITY REPORTS
LEARNING OBJECTIVE 7
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SUSTAINABILITY-RELATED TERMS
• Non-financial reporting: Practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward goal of sustainable development• Corporate social responsibility reporting: Continuing
commitment by business to behave ethically and contribute to economic development while improving quality of life of the workforce, their families, local community, and society at large
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COMMON SUSTAINABILITY-RELATED TERMS
• Triple bottom-line reporting • Reporting on:• Financial performance• Environmental performance• Social performance
• Sustainability reporting: Voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes• Sustainability: Actions taken at corporate level to ensure
economic, environmental, and social responsibility
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REPORTING ON SUSTAINABILITY ACTIVITIES AND OUTCOMES
• Create a continuous platform for dialogue about expectations for responsibility and performance• Understand the impacts that organizations can have on
sustainable development• Compare performance within an organization and
between different organizations over time to inform decisions
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PROVIDING ASSURANCE ON SUSTAINABILITY REPORTING
• Independent assurance enhances the credibility of sustainability reporting• External assurance is preferable to internal assurance
because it is:• More objective • Independent from the management