Other Assurance Services Chapter 25 2010 Prentice Hall

Learning Objective 1 Understand the level of assurance and evidence requirements for review and

Review and Compilation Services The standards for compilations and reviews of financial statements are

Level of Assurance Attained Relationship Between Evidence Accumulation and Assurance Attained High (Audit) Moderate

Review Services A review service (SSARS review) engagement is designed to allow the accountant

Procedures Suggested for Reviews Ø Obtain knowledge of the accounting principles of the client’s

Make Inquires of Management 1. Discover the company’s procedures for recording, classifying, and summarizing

Compilation Services A compilation service engagement is defined in SSARS as one in which

Requirements for Compilation Ø Establish an understanding with the client about the nature and

Requirements for Compilation Ø Make inquiries to determine whether the client’s information is satisfactory

Form of Compilation Report 1. Compilation with full disclosure 2. Compilation that omits substantially

Learning Objective 2 Describe special engagements to review interim financial information for public companies.

Review of Interim Financial Information for Public Companies The SEC requires quarterly financial statements

Review of Interim Financial Information for Public Companies Like reviews under SSARS, a review

Learning Objective 3 Distinguish AICPA attestation standards from auditing standards and know the type

Attestation Engagements Ø Attestation standards Ø Types of attestation engagements Ø Levels of service

Types of Engagements and Related Reports Type of Engagement Amount of Evidence Examination Extensive

Learning Objective 4 Understand the nature of Web. Trust assurance services. © 2010 Prentice

Web. Trust Services In a Web. Trust attestation engagement, a client engages a CPA

Five Trust Services Principles Security The system is protected against unauthorized access Availability The

Learning Objective 5 Understand the nature of Sys. Trust assurance services. © 2010 Prentice

Sys. Trust Services In a Sys. Trust engagement, the Sys. Trust licensed CPA evaluates

Learning Objective 6 Describe special engagements to attest to prospective financial statements. © 2010

Prospective Financial Statements Ø Forecasts and projections Ø Use of prospective financial statements Ø

Learning Objective 7 Describe agreed-upon procedures engagements. © 2010 Prentice Hall Business Publishing, Auditing

Agreed-Upon Procedures Engagements The audit is limited to certain specific audit procedures. These are

Learning Objective 8 Describe other audit and limited assurance engagements related to historical financial

Other Audits or Limited Assurance Engagements Ø Other comprehensive basis of accounting Ø Specified

Other Comprehensive Basis of Accounting Ø Cash or modified cash basis Ø Basis used

Specified Elements, Accounts, or Items Auditors are often asked to audit and issue reports

Specified Elements, Accounts, or Items Two differences in these types of audits: 1. Materiality

Debt Compliance Letters and Similar Reports The engagement and report should be limited to

Debt Compliance Letters and Similar Reports The auditor’s opinion is in the form of

End of Chapter 25 © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25

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Learning Objective 1 Understand the level of assurance and evidence requirements for review and compilation services. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 2

Review and Compilation Services The standards for compilations and reviews of financial statements are called Statements on Standards for Accounting and Review Services (SSARS). © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 3

Level of Assurance Attained Relationship Between Evidence Accumulation and Assurance Attained High (Audit) Moderate (Review) None (Compilation) Minimal Significant Extensive (Compilation) (Review) (Audit) Amount of Evidence Accumulated © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 4

Review Services A review service (SSARS review) engagement is designed to allow the accountant to express limited assurance that the financial statements are in accordance with GAAP. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 5

Procedures Suggested for Reviews Ø Obtain knowledge of the accounting principles of the client’s industry Ø Obtain knowledge of the client Ø Make inquiries of management Ø Perform analytical procedures Ø Obtain letter of representation © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 6

Make Inquires of Management 1. Discover the company’s procedures for recording, classifying, and summarizing transactions and disclosing information in the statements. 2. Inquire into actions taken at meetings of stockholders and the board of directors. 3. Ask if each account on the financial statements was prepared in conformity with GAAP. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 7

Compilation Services A compilation service engagement is defined in SSARS as one in which accountants present to a client or third party, financial statements that the accountant has prepared. The CPA firm does not express any assurance on the statements. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 8

Requirements for Compilation Ø Establish an understanding with the client about the nature and limitations of the services to be performed and a description of the report Ø Possess knowledge about the accounting principles and practices of the client’s industry Ø Know the client, including the nature of its business transactions, accounting records, and content of its financial statements © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 9

Requirements for Compilation Ø Make inquiries to determine whether the client’s information is satisfactory Ø Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and GAAP © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 10

Form of Compilation Report 1. Compilation with full disclosure 2. Compilation that omits substantially all disclosures 3. Compilation without independence © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 11

Review of Interim Financial Information for Public Companies The SEC requires quarterly financial statements to be reviewed by the company’s external auditor prior to the company’s filing of the Form 10 -Q. Like reviews under SSARS, a public company interim review includes five requirements for review service engagements. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 13

Review of Interim Financial Information for Public Companies Like reviews under SSARS, a review for a public company does not provide a basis for expressing a positive form opinion. The review is conducted according to the standards of the PCAOB and there is no reference to the SSARS in a review report. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 14

Learning Objective 3 Distinguish AICPA attestation standards from auditing standards and know the type of engagements to which they apply. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 15

Types of Engagements and Related Reports Type of Engagement Amount of Evidence Examination Extensive Review Level of Assurance Form of Conclusion Distribution High Positive General Significant Moderate Negative General Agreed-upon procedures Varying © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley Findings Limited 25 - 17

Web. Trust Services In a Web. Trust attestation engagement, a client engages a CPA to provide reasonable assurance that a company’s Web site complies with certain Trust Services principles and criteria for one or more aspects of e-commerce activities. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 19

Five Trust Services Principles Security The system is protected against unauthorized access Availability The system is available for operation and use as committed or agreed Processing integrity System processing is complete, accurate, timely, and authorized Online privacy Personal information obtained as a result of e-commerce is collected, used, disclosed, and retained as committed or agreed Confidentiality Information designated as confidential is protected as committed or agreed © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 20

Sys. Trust Services In a Sys. Trust engagement, the Sys. Trust licensed CPA evaluates a company’s computer system using Trust Services principles and criteria. The report may address a single Trust Services principle or any combination of principles. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 22

Prospective Financial Statements Ø Forecasts and projections Ø Use of prospective financial statements Ø Types of engagements Ø Examination of prospective financial statements © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 24

Agreed-Upon Procedures Engagements The audit is limited to certain specific audit procedures. These are referred to as procedures and findings engagements. The SASs deal with financial statement items, whereas the SSAEs deal with nonfinancial statement matters. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 26

Learning Objective 8 Describe other audit and limited assurance engagements related to historical financial statements. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 27

Other Audits or Limited Assurance Engagements Ø Other comprehensive basis of accounting Ø Specified elements, accounts, or items Ø Debt compliance letters and similar reports © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 28

Other Comprehensive Basis of Accounting Ø Cash or modified cash basis Ø Basis used to comply with the requirements of a regulatory agency Ø Income tax basis Ø A definite set of criteria having substantial support © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 29

Specified Elements, Accounts, or Items Auditors are often asked to audit and issue reports on specific aspects of financial statements. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 30

Specified Elements, Accounts, or Items Two differences in these types of audits: 1. Materiality is defined in terms of the elements, accounts, or items being audited rather than for the overall statements. 2. The first standard of reporting under GAAS does not apply. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 31

Debt Compliance Letters and Similar Reports The engagement and report should be limited to compliance matters the auditor is qualified to evaluate. The auditor should provide a debt compliance letter only for a client for whom the auditor has done an audit of the overall financial statements. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 32

Debt Compliance Letters and Similar Reports The auditor’s opinion is in the form of a negative assurance, stating that nothing came to the auditor’s attention that would lead the auditor to believe there was noncompliance. © 2010 Prentice Hall Business Publishing, Auditing 13/e, Arens//Elder/Beasley 25 - 33