19-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution...

19-1

Chapter 19

Additional Assurance Services: Historical Financial Information

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19-2

Engagements that involve historical information

Audit based services: assurance on additional information Reporting on compliance Letters for underwriters Summary financial statements

Auditing financial statements that use a financial reporting framework other than GAAP Special purpose frameworks Another country’s framework

Additional GAAS Audits Single financial statements and specified elements Personal financial statement

Reviews of historical financial statements Compilations of historical financial statements


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Types of Attestation Services

Examinations Review Agreed-upon procedures


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Professional Literature Terms

Auditor is used for most engagements under the generally accepted auditing standards.

Accountant is also used for financial statement review and compilation engagements of nonpublic companies.

Practitioner is the term used in the attestation standards and in most other assurance services.


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Audit Based Services: Assurance on Additional Information

Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Letter for Underwriters Summary Financial

Statements


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Reports on Compliance

Regulatory requirements and debt agreements Example: Report prepared for bond trustees as

evidence of company’s compliance with restrictions contained in bond indenture.

To provide this service auditor must have first performed an audit of related financial statements

Report provides negative assurance


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Letters for Underwriters

Comfort Letter Investment banking firms that underwrite a securities issue

request letter from independent auditors who audited financial statements in registration statement

Includes 1. The independence of the auditors. 2. Whether the audited financial statements and financial statement

schedules included in the registration statement comply with the accounting requirements of the Securities Act of 1933 and related regulations.

3. Unaudited financial statements, condensed interim financial information, and pro forma financial information.

4. Changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.

5. Tables, statistics, and other financial information included in the registration statement.

6. Negative assurance as to whether certain nonfinancial statement information included in the registration statement complies with SEC regulations.


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Summary Financial Statements

Also referred to as condensed financial statements

Include less detail than the audited financial statements

Auditors who have issued an audit report on the audited financial statements may issue a report on the summary financial statements Report indicates whether they are consistent,

in all material respects, with the audited financial statements.


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Auditing Financial Statements using Frameworks other than GAAP

This includes financial statements prepared In accordance with special purpose

financial reporting frameworks. Using a financial reporting framework

generally accepted in another country


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Special Purpose Financial Reporting Frameworks 1/3

Comprehensive bases of accounting other than GAAP Cash basis Tax basis Regulatory basis Contractual basis


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Sample Introductory Paragraph—Cash Basis We have audited the accompanying statement of assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

Special Purpose Financial Reporting Frameworks 2/3


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Special Purpose Financial Reporting Frameworks Figure 19.1 3/3


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Financial Reporting Framework Generally Accepted in Another Country

US company prepare financial statements for use in other countries Example: US company with subsidiary in Germany may

prepare financial statements for that subsidiary Auditors follow general and fieldwork standards of AICPA to the

extent appropriate Report depends on the expected use of the financial statements

Only outside the US Issue a US report modified to reflect accounting principles

of other country OR Issue a report form of the other country

Use in the US and outside the US—2 reports US unmodified report with emphasis of matter paragraph

indicating basis of accounting. Either option from “Only outside the US” above.


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Additional GAAS Audits

Single financial statements and specified elements, accounts or items of financial statements

Personal financial statements


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Audits of Single Financial Statements and Specified Elements of Financial Statements

Auditors may be engaged to attest only to (1) a single financial statements (e.g., balance sheet) or (2) specified elements, accounts or items of a financial statement Example of specified elements: Report on

lessee’s revenue requested by lessee. May be required by provisions of lease agreement.

Materiality for specified elements is generally less than would be in audit - in relation to other information presented


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Audits of Personal Financial Statements

Examples: Politicians or large loan applications

GAAP to personal financial statements Assets shown at estimated current values Liabilities presented at estimated current

amounts Balance sheet = statement of financial

condition shown individual net worth Income statement = statement of changes in

net worth Completeness of statements is audit

concernCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19-17

Reviews for Nonpublic Companies

Nonpublic companies may not need an audit of annual financial information

CPAs follow Statement on Standards for Accounting and Review Services (SSARS)

Review Attest service in which the accountants

Perform analytical procedures Make inquiries of management and others Obtain representation from management relating to

financial statements Report provides limited (negative) assurance


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Review Procedures for a Nonpublic Company

Screen clients Engagement letters Review Procedures

No knowledge of client’s internal control required Analytical procedures Inquiries of management

Obtain representation letter in which management acknowledges Responsibility for financial statements conformity with

GAAP Responsibility to prevent and detect fraud and to

divulge knowledge of actual or suspected fraud Responsibility to respond fully and truthfully to all

inquiriesCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19-19

Review Report for Nonpublic Companies—Introductory Paragraph

We have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion


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Review Report for Nonpublic Companies—Management Responsibility

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.


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Review Report for Nonpublic Companies—Accountant Responsibility

Accountant’s ResponsibilityOur responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our report.


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Accountant’s ConclusionBased on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America

Review Report for Nonpublic Companies—Accountant’s Conclusion


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Nonpublic Company Review Report Modifications

Departure from GAAP Modify third paragraph and describe departure

in separate paragraph No modifications required for:

Lack of consistent application of GAAP Existence of major uncertainties including

going-concern uncertainties Scope limitation – no review report


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Review of Public Companies Public companies required to file quarterly financial

information with SEC on 10-Q Auditor reviews not audits information Objective of review

Provide accountants a basis for communicating whether they are aware of any material modifications to conform with GAAP

Steps in review Engagement letter to document understanding Understand the client’s business and internal

control This required understanding of internal control for public

company reviews is not required for nonpublic company reviews.

Other Review procedures—similar to nonpublic companiesCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19-25

Accounting Services Reports provide no explicit assurance that the

information constitutes a fair presentation Types of compilations

Compilation of financial statement for nonpublic companies Compilations of prospective financial information

Compilation Service in which accountants assist in the preparation of

financial statements without providing any assurance on them

Must at least read compiled statements for appropriate format and obvious material misstatements

Financial Statement Preparation Prepare financial statements, which remain management’s

representations.


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Compilation Report-Paragraph

Management is responsible for the accompanying financial statements of XYZ Company as of, and for the years ended, December 31, 20X2 and 20X1 in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.


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Comparison of Services

Financial Statement Preparation

Compilation

Agreed-upon Procedures

Review Examination

ExplicitAssurance

None None State findings

Limited (negative) assurance

Opinion

Distribution General General Limited to specified parties

General, unless agreed-upon criteria

General, unless agreed-upon criteria

Minimum Procedures

Prepare financial statements

Read statements

Agreed-upon procedures

Limited procedures, such as inquiry and analytical procedures

Sufficient appropriate evidence to support opinion


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