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American Institute of CPAs

Audit, Review, Compilation, and Preparation of Financial Statements

DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Copyright © 2011 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.


Speaker Biography

Michael P. (Mike) Glynn is a Senior Technical Manager in the AICPA Audit and Attest Standards Team. In this capacity, Mike serves as the staff liaison to the Accounting and Review Services Committee (ARSC). In addition, Mike supports the activities of Auditing Standards Board (ASB) and its subcommittees by assisting members in drafting and deliberating authoritative professional standards and interpretations.

Prior to joining the Audit and Attest Standards Team, Mike was a technical manager in the AICPA SEC Practice Section (SECPS). In that capacity, Mike supported the Quality Control Inquiry Committee (QCIC) by participating in deliberations of QCIC cases and participating in meetings with the Securities and Exchange Commission regarding the SEC’s oversight of the self-regulatory process. Prior to joining the SECPS, Mike was a technical manager in the AICPA Professional Ethics Division.

Prior to joining the AICPA in April 1998, Mike worked at Ernst & Young LLP in New York.

Mike also serves as a member of the New York State Society of CPAs’ Accounting and Review Services Committee.

Mike is a graduate of Pace University with a BBA in public accounting.

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DISCLAIMER

Views expressed by AICPA employees are expressed for purposes of deliberation, providing member services and other purposes exclusive of practicing public accounting. Views expressed by AICPA staff do not necessarily represent the official views of the AICPA unless otherwise noted. Official AICPA positions are determined through certain specific committee procedures, due process and deliberation.


Session Objectives

Discuss standards for audits, reviews, compilations, and financial statement preparation.• Discuss the changes to practice expected as a result of the

ARSC’s project to clarify the literature for compilations and reviews – including significant revisions to the requirements for financial statement preparers.

• Discuss recently issued auditing standards including SAS 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern; SAS 127, Omnibus Statement on Auditing Standards – 2013; and SAS 128, Using the Work of Internal Auditors.

• Discuss implementation issues related to the clarified standards on initial audits and group audits.

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SSARSs Clarity Project: Overview


Clarity Project Goals

Same as ASB’s Clarity Project Goals• Address concerns over length and complexity of standards

• Make standards easier to read, understand and implement

• Lead to enhancements in engagement quality

Same format and drafting guidelines• No inclusion of special considerations for smaller, less complex

entities or governmental entities

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SSARSs Clarity Project: Significant Changes to Standards for Financial Statement Preparers


Submission of Financial Statements

AR section 80 applies when an accountant is engaged to report on compiled financial statements or submits financial statements to the client or to third parties.• Submission is defined as “prepare and present”

Determining Whether Financial Statements Have Been Prepared by the Accountant• Cloud computing and other applications have made it difficult to

determine who (or what) has prepared the financial statements:

- The accountant?

- Management?

- The computer application?

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Submission of Financial Statements

ARSC proposes to revise the applicability so that the standard applies when an accountant is engagedto perform a compilation service.


Clarifying the Comp. & Review Standards

New Exposure Draft, Proposed SSARSs • “Preparation of Financial Statements;

• Compilation Engagements;

• Association With Financial Statements”

- Issued October 23, 2013

- Available on AICPA website at http://www.aicpa.org/Research/ExposureDrafts/CompilationReview/Pages/EDofSSARS.aspx

- Comment period ends May 2, 2014

- Proposed effective date for calendar 2015 engagements –with early implementation permitted

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New Proposed SSARSs

Preparation of Financial Statements • Would apply when an accountant is engaged to prepare

financial statements

Compilation Engagements• Would apply when an accountant is engaged to perform a

compilation engagement

Association With Financial Statements• Applies when an accountant permits the use of his or her name

in a report, document, or written communication containing financial statements that the accountant did not issue an audit, review or compilation report on.

• Accountant may or may not have prepared the financial statements.


Proposed New Preparation Standard

Would apply when the accountant is engaged to prepare f/s but not engaged to perform an audit, review, or compilation on those f/s

Would not require a report – even when f/s are expected to be used or presented to third parties

Would require an engagement letter

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Proposed New Preparation Standard

Would require a legend on each page of the f/s stating that no assurance is being provided• If management refuses or cannot include the legend, the

accountant could issue a disclaimer report, a compilation report, or resign.

Would not require the accountant to consider whether he or she is independent

Can be applied to f/s with or without disclosures


Significant Changes to Compilation Standard

Report would always be required.• Report is shortened to differentiate from audit and review

(assurance) reporting

• Management use only financial statements would be covered by the preparation standard

Would require an engagement letter.

Would retain the independence requirements from the current compilation standard.

Can be applied to financial statements with or without disclosures.

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Comparison of Proposed SSARS

Compilation Preparation

When does the standard apply? Engaged to compile

Engaged to prepare

Is an engagement letter required? Yes Yes

Is the accountant required to determine if he or she is independent of the client?

Yes No

If the accountant is not independent, is that fact required to be disclosed?

Yes N/A

Does the engagement require a report? Yes No1

May the financial statements go to users outside of management?

Yes Yes

May the financial statements omit notes? Yes Yes

1legend required that no assurance provided.


Compilation and Preparation SSARSs

Would result in a bright line between accounting services and reporting services.

Accountant would not have to be concerned about whether the financial statements would be used internally or by third parties.

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Other New Proposed SSARS

FRAMEWORK FOR PERFORMING AND REPORTING ON COMPILATION AND REVIEW ENGAGEMENTS • (To supersede paragraphs .01�.04 and .09�.51 of AR section

60, Framework for Performing and Reporting on Compilation and Review Engagements [AICPA, Professional Standards])

• No substantive changes from existing standard

SSARSs Clarity Project: Proposed Review

SSARSs

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Proposed Review SSARS

Proposed SSARS: Review of Financial Statements

Proposed SSARS: Review of Financial Statements—Special Considerations• Issued November 2012

• Comment period ended April 2013

• 14 comment letters received

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Proposed Changes to the Review Literature

The SSARSs review literature will be converged with the requirements of AU-C section 930, Interim Financial Information• Will result in consistency between limited assurance

engagements.

Scope• The Standard may be applied to historical financial information

other than historical financial statements, such as:

- Specified elements, accounts, or items of a f/s

- Supplementary information

- Required supplementary information

- Financial information included in a tax return

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Proposed Changes to the Review Literature

Requirement to exercise professional judgment• Is implicit in extant SSARSs

Requirement to obtain a signed engagement letter• Signed by the accountant/accountant’s firm AND

management/those charged with governance

Reporting on financial statements• Requires the use of headings in the accountant’s review report

• Required to name the city and state of the issuing office

- May be included on letterhead

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SSARSs Clarity Project - Timeline

May 2014 – Comment period ends with respect to all of the following proposed clarified SSARSs:• Association With Financial Statements

• Preparation of Financial Statements

• Compilation Engagements

• Framework for Performing and Reporting on Compilation and Review Engagements

ARSC to consider comments received on the 4 proposed clarified SSARS

ARSC to consider voting to finalize the proposed clarified SSARS, Review Engagements

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SSARSs Clarity Project - Timeline

August 2014 – ARSC to consider voting to finalize the following proposed clarified SSARSs:• Framework for Performing and Reporting on Compilation and

Review Engagements

• Association With Financial Statements

• Preparation of Financial Statements

• Compilation Engagements

ARSC to issue the above standards as one SSARSs along with the finalized Review SSARS



Final clarified SSARS containing all compilation and review standards

• One SSARS (SSARS 21) even though two or more exposure drafts

- Expected issuance in second half 2014 (estimate)

- Proposed effective date:

- effective for calendar 2015 engagements – early implementation is expected to be permitted

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Recent and Upcoming Auditing Standards


SAS No. 126 - Overview

The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern(Redrafted)

• Issued June 2012 • Effective for audits of financial statements for periods

ending on or after December 15, 2012• Clarity redraft of AU section 341 of the same title• Not converged with ISA 570, Going Concern • Convergence postponed pending expected FASB

guidance

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SAS No. 126 – Differences From AU 341

Changes, Not Expected to Affect Practice• New requirement to obtain written representation

from management if conditions or events have been identified that indicate there could be substantial doubt about the entity’s ability to continue as a going concern.

- Not previously required, but included in illustrative going concern representation in appendix B of AU section 333, Management Representations.

• Interpretation No. 1, “Eliminating a Going-Concern Explanatory Paragraph From a Reissued Report,” of AU section 341, incorporated into AU-C section 570 (paragraph .21).


SAS No. 127 - Overview

Omnibus Statement on Auditing Standards - 2013• Issued January 2013

• Effective for periods ending on or after December 15, 2012

• Amends:

- AU-C section 600, Special Considerations - Audits of Group Financial Statements (Including the Work of Component Auditors)

- AU-C section 800, Special Considerations - Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

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SAS 127 – Amendments to AU-C 600

Amended preconditions to making reference to others’ work, relating to• Basis of component f/s preparation when financial

reporting frameworks differ*

• Auditing standards followed by component auditor, if not GAAS

*exception in application paragraphs for GASB and FASAB, which address this

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SAS 127: AU-C 600 AmendmentsMaking Reference

• Other audit report restricted as to use NO

• Component F/S use different financial reporting framework MAYBE

• Other auditor met the relevant requirements of GAAS YES

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When frameworks differ• Disclose the financial

reporting framework used by component

• Disclose that the auditor of the group financial statements is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group.

When other auditing standards used but GAAS requirements met• Disclose in report the set of

auditing standards used and

• That the other auditor performed additional procedures to meet the relevant requirements of GAAS

Making Reference – Additional Reporting Requirements


Cash

Tax

Contractual

Regulatory

Other Basis

Other Basis

A definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements

SAS No. 127 – Amendment to AU-C 800

Special Purpose Frameworks

Other Basis

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SAS No. 128

Using the Work of Internal Auditors

Clarity redraft of AU section 322, The Auditor's Consideration of the Internal Audit Function in an Audit of Financial Statements

• Issued February 2014

• Effective for audits of financial statements for periods ending on or after December 15, 2014


SAS No. 128 - Internal Audit

Converged with ISA 610 (Revised 2013), Using the Work of Internal Auditors, to reflect • developments in the internal auditing environment

• changes in practice regarding the interactions between the external and internal auditors

Amendments to several AU-C sections• Conform language used to describe internal audit function

• Guidance added to AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement

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SAS No. 128 - Internal Audit

Introduces the concept of a systematic and disciplined approach

New requirement, as a prerequisite to being able to use the work of the internal audit function, that the external auditor evaluate the application by the internal audit function of a systematic and disciplined approach, including quality control.

aicpa.org/FRCMonth 5, 2011

Implementation Issues

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American Institute of CPAs® aicpa.org/FRC

Other Acceptance Considerations

Initial Audits• Looking at predecessor workpapers is useful but can’t be the

only procedure to verify opening balances

• What else is needed?

- Prior year balances correctly brought forward.

- Prior year balances correctly accounted for.

- Evidence from current year and

- Look at prior year workpapers and/or

- Do work in current year


Group Audits

Biggest source of implementation questions

Issues include• Identifying components

• Equity investments

• Setting materiality

• EBP audits – investments accounted for at fair value are NOT defined as components!

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Group Audits

Does AU-C section 600 still apply if my firm is the only firm performing the audit of a parent and all subsidiaries?• Yes, the requirements of AU-C section 600 would still apply,

even if the same firm is performing the work of the group as well as the component entities

Does AU-C section 600 apply only when the auditor makes reference to another auditor in their report on the group financial statements?• No. AU-C section 600 applies to all audits of group financial

statements.


Group Audits

Do the requirements of AU-C section 600 apply if a company holds equity method investments?• Yes. An investment accounted for under the equity method

constitutes a component for purposes of AU-C section 600.

If I make reference to the auditor of the equity method investee, what additional procedures might be necessary?• Obtain their report

• Reviewing information in the group (investor’s) files that relate to the equity method investee such as minutes, budgets, cash flow information

• Making inquiries of management about the equity method investee’s financial results

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Group Audits

Am I required to calculate separate component materiality if I am the only firm auditing both the group as well as the component units?• You would have to apply judgment. Factors to consider might

include:

- Whether the components are material to the group as a whole

- Whether the component and group share the same location, internal control policies and procedures

- Whether the accounting and finance functions are centralized

- Whether there are any significant risks or accounts that only reside at the component level


Special Considerations—Audit of Group Financial Statements (AU-C 600)

Understanding the Responsibilities of Auditors for Audits of Group Financial Statements - AICPA Audit Risk Alert• Contains a decision making flowchart

• Examples for not-for-profit organizations and a local government

Product# ARAGRP12P

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Technical Practice Aids for Group Audits

41 Technical Questions and Answers

Nonauthoritative guidance to address various questions

Available• in TIS Section 8800, Audits of Group Financial Statements and

Work of Others (AICPA, Technical Practice Aids)

• on AICPA Website at http://www.aicpa.org/interestareas/frc/pages/recentlyissuedtechnicalquestionsandanswers.aspx

aicpa.org/FRCMonth 5, 2011

Statements on Standards for Attestation Engagements

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Clarifying the Attestation Standards

Commonly known as attestation standards

Apply to engagements that address subject matter other than historical financial statements, e.g:

• an entity’s compliance with laws or regulations

• the effectiveness of an entity’s controls over the privacy of information

• a financial forecast

Address examination, review and agreed-upon procedures (AUP) engagements



4 “general” AT sections that provide a framework for developing an attestation engagement

• AT 20, Defining Professional Requirements in Statements on Standards for Attestation Engagements

• AT 50, SSAE Hierarchy

• AT 101, Attest Engagements (which addresses examination and review engagements)

• AT 201, Agreed-Upon Procedures Engagements

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Currently: 6 “topic-specific” AT sections for reporting on• prospective financial information (AT 301)

• pro forma financial information (AT 401)

• internal control over financial reporting (AT 501)

• compliance with laws and regulations (AT 601)

• management’s discussion and analysis (AT 701)

• controls at service organizations (AT 801)



Objective: to make AT sections easier to read, understand and apply

Redraft in clarity format

New structure (objective is to eliminate repetition)• Chapter 1: Concepts common to all attestation engagements

• Chapters 2-4: Levels of service (examination, review, agreed-upon procedures).

- Each chapter addresses a specific level of service and builds on the common concepts chapter

• Subject-matter specific chapters

- Each chapter builds on common concepts and level of service chapters

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Example – Reporting on an examination of prospective financial information under current structure, • Currently, the following AT sections apply:

- AT 20

- AT 50

- AT 401

• Proposed structure, the following sections would apply:

- Chapter 1, Common Concepts

- Chapter 2, Examinations

- Chapter X, Forecasts



Convergence with standards of the International Audit and Assurance Standards Board (IAASB)• Foundation for the common concepts, examination, and review

sections of the proposed attestation standards:

- AICPA’s existing attestation standards

- IAASB exposure draft, International Standards on Assurance Engagements (ISAE) 3000, “Assurance Engagements Other than Audits or Reviews of Historical Financial Information” (April 2011)

- ISAE 3000 is IAASB’s framework standard for assurance engagements (equivalent of attestation engagements)

- ISAE 3410, Assurance Engagements on Greenhouse Gas Emissions

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Convergence with standards of the International Audit and Assurance Standards Board (IAASB)

• AT 801 was converged with ISAE 3402, Assurance Reports on Controls at a Service Organization, when SSAE No. 16, Reporting on Controls at a Service Organization, was issued in April 2010

• Proposed “Reporting on Pro Forma Financial Information,” includes elements of ISAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus



July 2013, the ASB issued an exposure draft of the first four “chapters”• Common Concepts

• Examinations

• Reviews

• Agreed-upon Procedures

October 2103, the ASB voted to ballot for exposure the following subject-specific chapters:• Financial Forecasts and Projections

• Reporting on Pro Forma Financial Information

• Compliance Attestation

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AT 801 exposure vote on May 2014 ASB agenda• Reporting on Controls at Service Organization

• Delayed to include guidance from AAG

Two sections not being clarified:• An Examination of an Entity’s Internal Control Over Financial

Reporting That Is Integrated With an Audit of Its Financial Statements (AT 501)

- Will be moved to auditing standards

• Management’s Discussion and Analysis (AT 701)

- Will remain unclarified



Final clarified SSAE will contain all attestation standards

• One SSAE (SSAE No. 18) even though two exposure drafts

- Expected issuance in first half of 2015 (estimate)

- Proposed effective date (estimate):- No earlier than for reports dated September

15, 2015

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Exposure draftshttp://www.aicpa.org/Research/ExposureDrafts/AccountingandAuditing/Pages/ExposureDrafts_ASB.aspx

More informationDedicated ASB Attest Clarity page on AICPA Website at http://www.aicpa.org/InterestAreas/FRC/AuditAttest/Pages/AttestClarityProject.aspx

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Helpful Information and Resources

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More information

• Dedicated ARSC Clarity page on AICPA Website at http://www.aicpa.org/InterestAreas/FRC/Review/Pages/ARSCClarityProject.aspx

• Summary of significant differences between the clarified and existing standards, and effect on practice (to come)



Authoritative standards for non-issuers (SASs, SSARSs, SSAEs, SQCSs) as of June 1 are available at http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Audit+and+Attest+Standards/Authoritative+Standards+and+Related+Guidance+for+Non-Issuers/default.htm

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AICPA Accounting and Auditing Technical Hotline

• (877) 242-7212• [email protected]

• http://www.aicpa.org/Professional+Resources/Accounting+and+Auditing/Accounting+and+Auditing+Technical+Help/

Questions?

Documents

Audit, Review, Compilation, and Preparation of Financial ...macpamedia.org/media/downloads/2014GNFP/Glynn_PPT2pp.pdf · Audit, Review, Compilation, and Preparation of ... committee