Copyright © 2016 South-Western/Cengage Learning OTHER SERVICES PROVIDED BY AUDIT FIRMS CHAPTER 17...

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


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


PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS


IDENTIFY AND DESCRIBE NONAUDIT ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS AND DISCUSS

THE RELEVANT PROFESSIONAL STANDARDS

LEARNING OBJECTIVE 1


ATTESTATION SERVICES PROVIDED BY AUDIT FIRMS


SUBJECT MATTER OF AN ATTESTATION ENGAGEMENT


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


LEVELS OF ASSURANCE PROVIDED IN AN ATTESTATION ENGAGEMENT


EXHIBIT 17.2 - UNITED STATES AND INTERNATIONAL ATTESTATION (ASSURANCE) STANDARDS

Gramling,Audrey

Note to CE - Update with changes in 17.2 in 10e


EXPLAIN REVIEW AND COMPILATION ENGAGEMENTS, RELEVANT PROCEDURES

PERFORMED, AND REPORTS ISSUED



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


REVIEW PROCEDURES(SEE EXHIBIT 17.4)


STANDARD REVIEW REPORT


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


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


EXPLAIN THE PROCEDURES AND REPORTING REQUIREMENTS FOR PROVIDING ASSURANCE ON

INTERIM FINANCIAL INFORMATION FOR AUDIT CLIENTS



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


REVIEW PROCEDURES FOR INTERIM FINANCIAL INFORMATION


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


DISCUSS SPECIAL REPORTING CONSIDERATIONS FOR UNIQUE FINANCIAL STATEMENT AUDIT

SITUATIONS



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


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


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


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


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


EXHIBIT 17.8 - OVERVIEW OF REPORTING REQUIREMENTS FOR SPECIAL-PURPOSE FINANCIAL

STATEMENTS


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


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


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



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


AGREED-UPON PROCEDURES


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


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


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


EXAMINATION OF PROSPECTIVE FINANCIAL STATEMENTS


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


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


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



• 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



• 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


DESCRIBE FORENSIC ACCOUNTING AND DISTINGUISH BETWEEN FORENSIC ACCOUNTING

AND AUDITING



EXHIBIT 17.19 - DIFFERENCES BETWEEN FORENSIC ACCOUNTING AND ACCOUNTING

Gramling,Audrey

Note to CE - In title change the last Accounting" to "Auditing"


DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON

MANAGEMENT SUSTAINABILITY REPORTS



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


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


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


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

Copyright © 2016 South-Western/Cengage Learning OTHER SERVICES PROVIDED BY AUDIT FIRMS CHAPTER 17...

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