Chapter 19

Additional Assurance Services: Historical Financial Information

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Comparison of Audits, Comparison of Audits, Reviews and Compilations Reviews and Compilations

CompilationAgreed-Upon Procedures Review Examination

Explicit assurance None State findings or negative assurance

Limited (negative) assurance

Opinion

Distribution of report

General when a report is issued (limited when none issued)

Limited to specified parties involved

General, unless based on agreed-upon criteria

General, unless based on agreed-upon criteria

Minimum procedures

Read statements Agreed-upon procedures

Limited procedures, such as inquiry and analytical procedures

Collection of sufficient evidence to support opinion

Comments Referred to as “audits” for financial statements

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Engagements that involve historical Engagements that involve historical informationinformation

Audit based services: assurance on additional information Reporting on compliance Letters for underwriters Summary financial statements

Auditing financial statements that use a financial reporting framework other than GAAP

Special purpose frameworks Another country’s framework

Additional GAAS Audits Single financial statements and specified elements Personal financial statement

Reviews of historical financial statements Compilations of historical financial statements

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Professional Literature TermsProfessional Literature Terms

Auditor is used for most engagements under the generally accepted auditing standards.

Accountant is also used for financial statement review and compilation engagements of nonpublic companies.

Practitioner is the term used in the attestation standards and in most other assurance services.

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Audit Based Services: Assurance on Audit Based Services: Assurance on Additional InformationAdditional Information

Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Letter for Underwriters Summary Financial

Statements

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Reports on ComplianceReports on Compliance

Regulatory requirements and debt agreements Example: Report prepared for bond trustees

as evidence of company’s compliance with restrictions contained in bond indenture.

To provide this service auditor must have first performed an audit of related financial statements

Report provides negative assurance

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Letters for UnderwritersLetters for Underwriters

Comfort Letter Investment banking firms that underwrite a securities issue request

letter from independent auditors who audited financial statements in registration statement

Includes • 1. The independence of the auditors.

• 2. Whether the audited financial statements and financial statement schedules included in the registration statement comply with the accounting requirements of the Securities Act of 1933 and related regulations.

• 3. Unaudited financial statements, condensed interim financial information, and pro forma financial information.

• 4. Changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement.

• 5. Tables, statistics, and other financial information included in the registration statement.

• 6. Negative assurance as to whether certain nonfinancial statement information included in the registration statement complies with SEC regulations.

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Summary Financial StatementsSummary Financial Statements

Also referred to as condensed financial statements

Include less detail than the audited financial statements

Auditors who have issued an audit report on the audited financial statements may issue a report on the summary financial statements Report indicates whether they are consistent,

in all material respects, with the audited financial statements.

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Auditing Financial Statements using Auditing Financial Statements using Frameworks other than GAAPFrameworks other than GAAP

This includes financial statements prepared In accordance with special purpose

financial reporting frameworks. Using a financial reporting framework

generally accepted in another country

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Special Purpose Financial Reporting Special Purpose Financial Reporting Frameworks Frameworks 1/31/3

Comprehensive bases of accounting other than GAAP Cash basis Tax basis Regulatory basis Contractual basis

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Sample Introductory Paragraph--Cash Basis

We have audited the accompanying statement of assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

Special Purpose Financial Reporting Special Purpose Financial Reporting Frameworks Frameworks 2/32/3

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Special Purpose Financial Reporting Frameworks Special Purpose Financial Reporting Frameworks 3/33/3

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Financial Reporting Framework Generally Financial Reporting Framework Generally Accepted in Another CountryAccepted in Another Country

US company prepare financial statements for use in other countries Example: US company with subsidiary in Germany may prepare

financial statements for that subsidiary Auditors follow general and fieldwork standards of AICPA to the

extent appropriate Report depends on the expected use of the financial statements

Only outside the US• Issue a US report modified to reflect accounting principles of

other country OR• Issue a report form of the other country

Use in the US and outside the US—2 reports• US unmodified report with emphasis of matter paragraph

indicating basis of accounting.• Either option from “Only outside the US” above.

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Additional GAAS AuditsAdditional GAAS Audits

Single financial statements and specified elements, accounts or items of financial statements

Personal financial statements

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Audits of Single Financial Statements and Audits of Single Financial Statements and Specified Elements of Financial StatementsSpecified Elements of Financial Statements

Auditors may be engaged to attest only to (1) a single financial statements (e.g., balance sheet) or (2) specified elements, accounts or items of a financial statement Example of specified elements: Report on

lessee’s revenue requested by lessee. May be required by provisions of lease agreement.

Materiality for specified elements is generally less than would be in audit - in relation to other information presented

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Audits of Personal Financial StatementsAudits of Personal Financial Statements

Examples: Politicians or large loan applications GAAP to personal financial statements

Assets shown at estimated current values Liabilities presented at estimated current

amounts Balance sheet = statement of financial

condition shown individual net worth Income statement = statement of changes in

net worth Completeness of statements is audit concern

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Reviews for Nonpublic CompaniesReviews for Nonpublic Companies

Nonpublic companies may not need an audit of annual financial information

CPAs follow Statement on Standards for Accounting and Review Services (SSARS)

Review Attest service in which the accountants

• Perform analytical procedures• Make inquiries of management and others• Obtain representation from management relating to financial

statements Report provides limited (negative) assurance

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Review Procedures for a Nonpublic Review Procedures for a Nonpublic CompanyCompany

Screen clients Engagement letters Review Procedures

No knowledge of client’s internal control required Analytical procedures Inquiries of management

Obtain representation letter in which management acknowledges

Responsibility for financial statements conformity with GAAP Responsibility to prevent and detect fraud and to divulge

knowledge of actual or suspected fraud Responsibility to respond fully and truthfully to all inquiries

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Review Report for Nonpublic Review Report for Nonpublic Companies--First ParagraphCompanies--First Paragraph

We have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Company.

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Review Report for Nonpublic Review Report for Nonpublic Companies--Second ParagraphCompanies--Second Paragraph

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.

Review Report for Nonpublic Review Report for Nonpublic Companies--Third ParagraphCompanies--Third Paragraph

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Nonpublic Company Review Report Nonpublic Company Review Report ModificationsModifications

Departure from GAAP Modify third paragraph and describe

departure in separate paragraph No modifications required for:

Lack of consistent application of GAAP Existence of major uncertainties including

going-concern uncertainties Scope limitation – no review report

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Review of Public CompaniesReview of Public Companies Public companies required to file quarterly financial

information with SEC on 10-Q Auditor reviews not audits information Objective of review

Provide accountants a basis for communicating whether they are aware of any material modifications to conform with GAAP

Steps in review Engagement letter to document understanding Understand the client’s business and internal control

• This required understanding of internal control for public company reviews is not required for nonpublic company reviews.

Other Review procedures—similar to nonpublic companies

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Accounting ServicesAccounting Services

Reports provide no explicit assurance that the information constitutes a fair presentation

Types Compilation of financial statement for nonpublic companies Compilations of prospective financial information

Compilation Nonattest service in which accountants assist in the preparation

of financial statements without providing any assurance on them Must at least read compiled statements for appropriate format

and obvious material misstatements

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Compilation Report--First ParagraphCompilation Report--First Paragraph

We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

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Compilation Report--Second ParagraphCompilation Report--Second Paragraph

A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

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