Chapter 16 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Topics Beyond the...

Chapter 16

Prepared by Richard J. Campbell

Copyright 2011, Wiley and Sons

Topics Beyond the Integrated Audit

Learning Objectives1. Describe forensic accounting and contrast it with ICFR

and financial statement audits.

2. Understand internal audit activities and the role of the internal audit function within organizations.

3. Learn the extension of typical audit activities required when auditing state and local government entities.

4. Explain the purposes and activities of compilation and review engagements, applicable standards, and accountants’ reports.

5. Discuss the types of information for which accountants can issue attest reports, list the requirements for an attest service to be possible, and distinguish attest engagements from other services.

6. Identify other auditors’ services provided for public companies, explain the auditors’ work activities, and describe the resulting report.

Chapter 16-1

FORENSIC ACCOUNTING

Learning Objective #1Chapter 16 -2

The term forensic accounting most commonly refers to fraud investigations and accounting work to support legal actions.

The Association of Certified Fraud Examiners (ACFE) is one of the premier organizations for forensic accountants.

Forensic accounting encompasses two major components: investigative forensic services and litigation support.

FORENSIC ACCOUNTING


Forensic accountants investigate many situations and suspected illegal acts including: Employee theft Vendor fraud Customer fraud Tax evasion Conflicts in divorce and bankruptcy proceedings Insurance claim filings Identity theft Organized crime

FORENSIC ACCOUNTING


During an interview, the forensic accountant may focus on a range of issues, including: The tone set by top management toward

ethical behavior Management’s values and beliefs Reward systems The potential for management override of

internal controls Forensic accountants may rely on evidence

obtained from real estate records, court records, corporate and partnership records, and other public records to uncover potential fraud motives.

INTERNAL AUDITING


Accountants who work within entities as internal auditors also perform important functions for companies, not-for-profit organizations, and government units

The Institute of Internal Auditors (IIA) is the most notable professional organization for internal auditors.

The internal auditor’s goal is to help improve the organization’s operations, risk management, internal controls, and governance.

INTERNAL AUDITING

Learning Objective #2Chapter 16 - 6

Internal auditors assist in SOX compliance

INTERNAL AUDITING


Internal auditors assist in SOX compliance

STATE AND LOCAL GOVERNMENT AUDITS


Financial statement audits of state and local governments are performed by external auditors who work either for public accounting firms or separate government-related units.

Single Audit Act

Chapter 16 -9 Learning Objective #3

This legislation called for audits to be conducted on an entity-wide basis replacing requirements for multiple audits of one entity on a grant-by-grant basis.

When a governmental entity meets the $500,000 expenditure threshold, it is subject to a single audit of both its financial statements and its compliance with the provisions of any federal awards it received.

The schedule of audit findings summarizes the results of the audit.

GOVERNMENT AUDITING STANDARDS AND THE YELLOW BOOK


Audits of government entities, including those under OMB Circular A-133, are conducted according to generally accepted government auditing standards (GAGAS) issued by the Government Accountability Office (GAO).

The Yellow Book contains standards covering financial statement audits, attestation engagements, and performance audits.

The GAO’s primary role is to support congressional oversight of the executive branch of the U.S. government.

Work of the GAO


COMPILATION AND REVIEW ENGAGEMENTS


EXHIBIT 16-1

Hierarchy of FinancialStatement AssuranceActivities

Compilations

Learning Objective #4Chapter 16-13

In a compilation engagement, an accountant drafts financial statements of an entity based on information provided by the management or owners.

The accountant needs to establish an understanding with the client about the terms of the engagement, any limitations on the use of the financial statements, and must document the understanding through a written communication with management.

Illustrative Compilation Engagement Letter


EXHIBIT 16-2



EXHIBIT 16-2

Standard Compilation Report


Reviews


An engagement to review a nonpublic company’s financial statements provides some assurance regarding the fairness of the financial statements.

The level of assurance provided by the accountant’s report falls between an audit and a compilation.

Elements of an Engagement Letter for a SSARS Financial Statement Review Engagement


Inquiries Made During a Review


EXHIBIT 16-3

Independent Accountant’s Review Report


ATTEST ENGAGEMENTS


Targets of attest engagements include financial forecasts and projections, compliance with laws and regulations, effectiveness of internal controls for nonpublic companies, the accuracy and reliability of reported performance measures, and the compliance with SEC regulations of a company’s management discussion and analysis.

Examples of Attest Engagements


Availability of Criteria


EXHIBIT 16-4

Types of Attest Engagements and Reports


EXHIBIT 16-5

Independent Accountant’s Attest Examination-Level Report


SEC-RELATED ENGAGEMENTS


CPAs perform many services in connection with SEC filings such as issuing comfort letters to underwriters, performing interim reviews, and conducting activities related to registration statements for public offerings of securities.

Letters for underwriters are commonly called comfort letters because of the concept that they provide “comfort” on specific issues in a company’s financial information.

Auditor’s Review Report on Interim Financial Statements


Review Question

Chapter 16-30

Forensic accounting(a) is best described by the term fraud audit.(b) includes investigative services and litigation support.(c) can only be carried out by CPAs.(d) follows the same approach as traditional auditing except that materiality thresholds arelower.

Review Question

Chapter 16-31

The independence of internal auditors andthe internal audit function is enhanced by(a) avoiding conflicts of interest.(b) being placed high in the organizational hierarchyand having access to the audit committee.(c) conducting their tasks in an objective manner.(d) all of the above.

Review Question

Chapter 16-32

An examination attest engagement provides:(a) positive assurance.(b) moderate or limited assurance.(c) no assurance.(d) agreed upon procedures assurance.

Copyright

“Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”

Chapter 16 Prepared by Richard J. Campbell Copyright 2011, Wiley and Sons Topics Beyond the...

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