Chapter 22: Assurance Services: Review and Compilation Engagements

Copyright © 2007 Pearson Education Canada

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Chapter 22: Assurance Services: Review and Compilation

Engagements


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Chapter 22 objectives

Identify similarities and differences between the assurance general standard and the audit general standard

Explain the importance of review and compilation services

Relate evidence collection procedures to assurance level desired

List the types of reports provided for interim financial information and future-oriented information


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Review of assurance services


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Assurance engagements are broad

They include financial statement audits, review engagements, certain types of management consulting, and specialized reports such as Eldercare

The three (or more) parties to such engagements are: the user(s), the practitioner, and management (or another accountable party)


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Practice problem 22-23 (pp. 638-39)

Identify additional testing required for a special report on royalties

Write the audit report


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Assurance engagement general standards

Practitioner should have a reasonable basis for believing the engagement can be completed in accordance with assurance standards

Management must acknowledge the responsibility for the subject matter

Adequate proficiency to perform the engagement and adequate knowledge of the subject matter


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Assurance engagement general standards (cont’d)

Engagement performed with due care and an objective state of mind

Criteria for evaluating the subject matter should be identified or developed


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Comparison to the general standard for audits of financial statements

This general standards (S 5100) requires that the audit be performed and the report prepared by a person or persons having adequate technical training and proficiency in auditing

Requires due care and an objective state of mind


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Similarities in general standard

Both require competence and technical training in the field of the engagement (audit or assurance)

Both require due care and an objective state of mind


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Differences in general standard

Additional requirements for the assurance general standards:– Believing that the engagement can be

completed– Management acknowledgement– Identification or development of criteria

Why do you think these differences exist?


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Review and compilation services

Financial statement reviews provide some assurance for clients that do not require an audit

Review engagements can also be completed for other financial information (e.g. verifying sales for lease agreements)

Compilations provide no assurance, but enable the accountant to prepare financial statements or tax returns, or compile other types of financial information


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Terms of the engagements

It is advisable that an engagement letter be completed for ALL engagements

Helps the accountant and the client clarify the nature of the work to be completed, the cost, and clearly set boundaries around what will not be completed


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Review engagement

Consists primarily of enquiry, analytical procedures and discussion

Objective is to assess whether the information being reported on is PLAUSIBLE

Within the framework of appropriate criteria (GAAP for financial statements)


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Procedures suggested for reviews

Obtain knowledge of the client’s business Make enquiries of client personnel Perform analytical procedures Have discussions with management

concerning information received and the information being reported on


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Practice problem 22-22 (p. 638)

What should be done before accepting a review engagement?

Outline the process for conducting the review engagement for a church


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Types of reviews

Financial statements Financial information other than financial

statements Compliance with agreements and

regulations


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Discuss three reporting approaches with respect to the examination of sales information for lease agreements


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Compilation engagement

These are bookkeeping services that lead to the completion of financial statements

Statements may be prepared monthly, quarterly, or annual

Also includes tax services No assurance is provided


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Procedures conducted during a compilation engagement

The accountant assembles the information Ensures that it is arithmetically correct Although the accountant should not be

associated with false or misleading financial statements, it may be difficult to make this determination because of the limited involvement


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Professional standards for compilation engagements

Should have adequate technical training and proficiency in accounting

Complete with due care Work should be adequately planned and

properly executed If assistants are employed, they should be

properly supervised


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Interim financial information

May be audited, reviewed, or compiled Estimates may be required to prepare the

information on a timely basis This means the information may not be as

reliable as year-end financial information


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Identify your responsibilities with respect to interim financial statements

List the work that you would need to perform with respect to a review of such statements


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Future-oriented financial information

There are two general types of future-oriented information in S 4250:– Forecast: uses assumptions reflection

management’s judgment as to the most probable courses of action

– Projection: Is prepared using one or more assumptions (hypotheses) that do not necessarily reflect the most likely course of action of the entity


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A third type of future-oriented information

Prospective financial information:– These are financial statements that are

prepared with expected future information, normally for a particular expected event, such as the sale of shares or the retirement of debt


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Professional standards

With respect to the examination of future-oriented information, it is important that the accountant:– Have adequate technical training and

proficiency in auditing– Requires due care– Work adequately planned and assistants

properly supervised– Sufficient evidence obtained for report issued


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Prior to accepting a future-oriented engagement:

Public accountant needs to ensure that:– There is adequate support for the assumptions

used to prepare the financial information– Any hypotheses do not significantly impair the

quality of the financial information– Management is willing to disclose all

significant assumptions


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Prior to accepting a future-oriented engagement (cont’d):

Public accountant needs to ensure that:– The period to be covered by the forecast or

projection does not extend beyond the point where future results can be reasonably estimated

– Any hypotheses are not false or misleading


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Practice problem 22-20 (pp. 637-38)

Three year forecasts to obtain additional financing

Can you accept the engagement?

What issues need to be discussed with management?


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Examination of prospective financial statements

Involves evaluating the preparation of future-oriented financial information and the underlying assumptions and assessing the plausibility of the hypotheses

PA would evaluate the presentation of the financial information for conformity with CICA presentation and disclosure guidelines


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Examination of prospective financial statements (cont’d)

In developing a knowledge of the industry and business, the PA would focus on:– Availability and cost of resources needed for

continuing operations– Nature and conditions of markets in which the

client operates– Specific industry factors such as competition– Past performance by the client and its

competitors

Chapter 22: Assurance Services: Review and Compilation Engagements

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Transcript of Chapter 22: Assurance Services: Review and Compilation Engagements