CPA Auditing 2 -Notes fr Homework

8/20/2019 CPA Auditing 2 -Notes fr Homework

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NOTES ON HOMEWORK - AUDITING 2:

COMPARATIVE FINANCIAL STATEMENTS

Clark, CPA, compiled and properly reported on the fnancial statements o Green

Co., a nonissuer, or the year ended March 31, Year 1. These fnancial statements

omitted sustantially all disclosures re!uired y "enerally accepted accountin"

principles #GAAP$. Green asked Clark to compile the statements or the year ended

March 31, Year %, and to include all GAAP disclosures or the Year % statements only,

ut other&ise present oth years' fnancial statements in comparati(e orm. )hat is

Clark's responsiility concernin" the proposed en"a"ement*

Clark may not report on the comparative financial statements because the Year 1

statements are not comparable to the Year 2 statements that include the GAAP disclosures .

When the prior period has been audited, the accountant should issue the current period

compilation or review report, and any additional pararaph should indicate!

• That prior period statements were audited;

• The date of the previous report(s);

• The opinions e"pressed, & if other than unmodified, the reasons for the modification;

• That no auditin procedures have been performed since the previous report date.

Before reissuing a compilation report on the financial statements of a nonissuer for the prioryear, the predecessor accountant is required to Compare the prior year#s financial statements

with those of the current year.

OTHER REPORTS

The annual financial statements of a publicly held company have been audited, and its interim

financial statements have been reviewed. !hich of the following is true about the application of

professional standards to this review"

PCA$% standards apply.

The ob&ective of a review of interim financial information of a public entity is to provide an

accountant with a basis for reporting whether through inquiries and analytical procedures, with

a basis for reporting whether material modifications should be made to such information to

conform with enerally accepted accountin principles'


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#f a report on a review of interim financial information is presented in a reistration statement,

the prospectus should include a statement that the report is not a (report( or (part( of the

reistration statement. The accountant should also read the other portions of the registration

statement to ensure that his or her name is not used in a way that indicates greater responsibility

than s$he intends.

A review repor o! "e i!eri# $!%!&i%' i!(or#%io! o( % p)*'i&'+ "e',

&o#p%!+ ,oe !o provi,e %! opi!io! o! "e $!%!&i%' %e#e!

Di.ere!&e *ewee! % review o( % p)*'i& e!i+/ i!eri# $!%!&i%'

i!(or#%io! %!, % review o( "e )!%),ie, $!%!&i%' %e#e! o( %

!o!i)er0

The guidance for a review of a public entity%s interim financial information is provided by

'B standards, whereas a review of a nonissuer%s unaudited financial statements is conducted

in accordance with *tatements on *tandards for ccounting and +eview *ervices.

review of a public entity%s interim financial information requires an evaluation of internal

control while a review of a nonissuer%s unaudited financial statements does not.

review of a public entity%s interim financial information requires communication with the

predecessor auditor while review of a nonissuer%s unaudited financial statements does not.

AUDITING STANDARDS ON REVIEW SERVICES FOR 1OTH ISSUERS AND

NON-ISSUERS re)ire "e %),ior o per(or# "e (o''owi!3 : 4U LIAR CPA5

+ )!,er%!,i!3 &ith client should e estalish #a"reement o m"t itsresponsiility in the -s$

'e%r! %!,6or o*%i! su/cient understandin" o the entitym its en(ironment,

includin" 0-C #issuer only$

0i!)irie hould e address to appropriate indi(iduals

A%!%'+i&%' procedures should e perormed

review 2 other procedures should e perormed

C&'ie! representation letter should e otained rom m"t

Ppro(eio!%' ud"ment should e used to e(aluate results

A%),ior #CPA$ should communicate results

W"e! p'%!!i!3 % review o( %! %),i &'ie!/ i!eri# $!%!&i%' %e#e!7

w"i&" o( "e (o''owi!3 pro&e,)re "o)', "e %&&o)!%! per(or# o


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)p,%e "e %&&o)!%!/ 8!ow'e,3e %*o) "e e!i+/ *)i!e %!, i

i!er!%' &o!ro'0

Considerin" the results o audit procedures that ha(e pre(iously een perormed

and ho& they correspond to the current year's fnancial statements is a step that

may e perormed durin" the plannin" sta"e to update the accountant's kno&led"eo the client.

Analytical procedures perormed on specifc accounts &ould e done ater the

+nderstand2earn20n!uiry phases. 4stalishin" an understandin" &ith the client is

frst, ollo&ed y learnin"-otainin" a su/cient understandin" o the entity and its

en(ironment, includin" internal control. The third phase consists o in!uiries

addressed to the appropriate indi(iduals, ollo&ed y the analytical procedures.

The !uarterly data re!uired y 54C e"ulation 526 ha(e een omitted. )hich o the

ollo&in" statements must e included in the auditor's report*

I( "e )%rer'+ ,%% re)ire, *+ SEC Re3)'%io! S-K "%ve *ee! o#ie,7

"e %),ior/ repor #) i!&'),e % %e#e! i!,i&%i!3 "% "e &o#p%!+

"% !o pree!e, )&" ,%%9

Green, CPA, is a&are that Green's name is to e included in the annual report o

7ational Company, a pulicly2held entity, ecause Green has audited the annual

fnancial statements included therein. 7ational's !uarterly fnancial statements are

also contained in the annual report. Green has not audited ut has re(ie&ed these

interim fnancial statements. Green should re!uest that8"e $r )%rer i!eri#

$!%!&i%' %e#e! *e #%r8e, % )!%),ie,9 A 'o!3 % "e CPA "%

&o#p'ee, "i or "er review7 "i !%#e #%+ *e i!&'),e, i! "e %!!)%'

repor9

)hich o the ollo&in" statements is correct concernin" letters or under&riters,

commonly reerred to as comort letters*

)etters for underwriters typically ive neative assurance on unaudited interim financial

information on the conformity of the entity%s unaudited condensed interim financial information

with generally accepted accounting principles ().* the accountants e"press an opinion

+i'e', positive assurance concernin the financial statements# compliance +as to form with

the pertinent accountin re-uirements of the ./C. letter containing a negative assurance

from the ' to the underwriter or certain other requesting parties -ust before the registration ofthe client%s securities.

A00/.0 /GAG//0.

)hen a CPA e9amines a client's proected fnancial statements, the CPA's report

should8


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"e %!,%r, repor "o)', i!&'),e % %e#e! "% "e e%#i!%io! ;<

i!&'),e, )&" pro&e,)re % we &o!i,ere, !e&e%r+ o ev%')%e *o" "e

%)#pio! )e, *+ #%!%3e#e! %!, "e prep%r%io! %!, pree!%io!

o( "e pro=e&io!.:

A CPA is re-uired to comply with the provisions of .tatements on .tandards forAttestation /naements +..A/ when engaged to

3 4eview manaement#s discussion and analysis +56A prepared pursuant to rules and

reulations adopted by the ./C*

3 compilin a clients financial pro&ection that presents a hypothetical course of action*

A Web0rust enaement in which the ' determines whether the client%s web site meets

defined criteria relating to transaction integrity, information protection, and disclosure of

business practices

3 a report about a firm%s compliance with laws and regulation

reparing the income statement and balance sheet for one year in the future based on client

e/pectations and predictions

to issue a report on sub-ect matter or on an assertion about the sub-ect matter e/. the square

footage of the warehouse), that is the responsibility of another party (e/. management) or to

provide assurance on investment performance statistics prepared by an investment company on

established criteria.

.

Attestation standards were created to provide assurance on representations other than historical

financial statements and in forms other than the positive opinion.

n attest enaement is one in which a ' is engaged to issue an e"amination, a review, or

an areed3upon procedures report on sub-ect matter, or on an assertion about the sub-ect

matter, that is the responsibility of another party.

ne of the conditions$policies that must e/ist in an areed3upon procedures attestation

engagement is that the practitioner be independent from the client and other specified parties

pertainin to the enaement.

n areed3upon procedures engagement is one in which the practitioner is engaged to issue a

report of findins based on specific procedures performed'


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Areed3upon procedure enaements provide no assurance'

4eviews provide limited +neative assurance'

' was engaged by a group of royalty recipients to apply agreedupon procedures to financial

data supplied by 0odern 'o. regarding 0odern%s written assertion about its compliance withcontractual requirements to pay royalties. CPA#s report on these areed3upon procedures

should contain a! )ist of the procedures performed +or reference thereto and CPA#s

findins'

An e"amination of a financial forecast is a professional service that involves!

1. 2valuating the preparation of the prospective financial statements,

3. 2valuating the support underlyin the assumptions,

4. 2valuating the presentation of the prospective financial statements in conformity

with A7CPA uidelines, and

5. #ssuing an e"amination report.

0he accountant#s compilation report on a client#s financial forecast or pro&ected financial

statement should include a caveat on a separate pararaph that the prospective results may

not be achieved or describes the limitations on the usefulness of the pro&ection' This is

included in a separate paragraph that describes the limitations on the usefulness of the

presentation 6...there will usually be differences between the forecasted and actual results...7that8 may be material.6

..A4. does not re-uire that the compilation report be printed on the accountant#s

letterhead, nor does it re-uire a manual sinature' lthough a signature is required, it need

not be manual. lso, the report may be presented in the accountant%s letterhead, but is not

required.

'ompiled financial statements should be accompanied by a report stating that 0he accountant

is not re-uired to perform any procedures to verify the accuracy or completeness of

information provided by manaement'

n accountant may compile financial statements that omit substantially all disclosures

re-uired by GAAP provided the omission is not undertaken to mislead the users of the

financial statements and is properly disclosed in the accountant#s report as an additional

pararaph.


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W"e! %! %&&o)!%! e%#i!e % $!%!&i%' (ore&% "% (%i' o ,i&'oe

i3!i$&%! %)#pio! )e, o prep%re "e (ore&%7 "e %&&o)!%!

"o)', i)e %! %,vere opi!io!9 Per AICPA/ SSAE7 %'' i3!i$&%!

%)#pio! )e, o prep%re "e prope&ive (6 "o)', *e i!&'),e,9

' is engaged to e/amine an entity%s financial forecast. 7f one or more of the sinificant assumptions do not provide a reasonable basis for the financial statements, an adverse

opinion would be issued. n unmodified opinion with an e/planatory paragraph would not be

sufficient.

A financial forecast is appropriate for eneral use, but a financial pro&ection is not +for

restricted use'

n accountant%s compilation report on a financial forecast should include a statement that 0here

will usually be differences between the forecasted and actual results'

o assurance is provided in a compilation of prospective financial statements.

)hich procedures should an accountant perorm durin" an e!3%3e#e! o

&o#pi'e prospecti(e fnancial statements* "o)', #%8e i!)irie %*o) "e

%&&o)!i!3 pri!&ip'e )e, i! "e prep%r%io! o( "e prope&ive $!%!&i%'

%e#e!9

!hich of the following is a conceptual difference between the attestation standards and generally

accepted auditing standards" The requirement that the CPA be independent in mental attitude

is included in both sets of standards.

Attestation standards provide a framework for the attest function beyond historical

financial statements.

eative assurance may be e"pressed when an accountant is re-uested to report on the

results of performin a review of manaement#s assertion.

P%ri%' pree!%io!: are presentations o prospecti(e fnancial inormation

&hich &ould not ordinarily e appropriate or "eneral use ecause they o#i o!e

or #ore o( "ee ee!i%' e'e#e!: 4%5 %'e or 3ro reve!)e7 4*5 3ro

pro$ or &o o( %'e7 4&5 )!))%' or i!(re)e!'+ o&&)rri!3 ie#7 4,5proviio! (or i!&o#e %e7 4e5 ,i&o!i!)e, oper%io! or er%or,i!%r+

ie#7 4(5 i!&o#e (ro# &o!i!)i!3 oper%io!7 435 !e i!&o#e7 4"5 e%r!i!3

per "%re7 %!, 4i5 i3!i$&%! &"%!3e i! $!%!&i%' poiio!9

An accountant's report on a re(ie& o pro orma fnancial inormation should include

a8 % re(ere!&e o "e $!%!&i%' %e#e! (ro# w"i&" "e "iori&%'


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i!(or#%io! i ,erive, %!, % %e#e! % o w"e"er )&" $!%!&i%'

%e#e! were %),ie, or reviewe,9

1e(ore per(or#i!3 % review o a nonissuer's fnancial statements, an accountant

should o*%i! % )>&ie! 'eve' o( 8!ow'e,3e o( "e %&&o)!i!3 pri!&ip'e

%!, pr%&i&e o( "e i!,)r+ i! w"i&" "e e!i+ oper%e9

)hich in!uiry procedures does a CPA normally per(or# $r i! % review

e!3%3e#e! in accordance &ith Statements on Standards for Accounting and

Review Services #55A5$* I!)ir+ re3%r,i!3 "e &'ie!/ %&&o)!i!3 pri!&ip'e

%!, pr%&i&e %!, "e #e"o, o( %pp'+i!3 "e#

n accountant may accept an engagement to apply agreedupon procedures to prospective

financial statements provided the 5istribution +use of the report is restricted to the specified

users'

A pro forma financial statement is one that shows historical financial statements as they wouldhave been if a hypothetical event had occurred..

A -ualified opinion miht be issued if A7CPA presentation uidelines were not followed'

!hich of the following is a conceptual similarity between generally accepted auditing standards

and the attestation standards" 0he re-uirement that the CPA be independent in mental

attitude is included in both sets of standards

practitioner has been engaged to apply areed3upon procedures in accordance with

Statements on Standards for Attestation Engagements +..A/ to prospective financialstatements. !hich of the following conditions must be met for the practitioner to perform the

engagement" 0he practitioner and specified parties aree upon the procedures to be

performed by the practitioner'

An accountant#s report on a review of pro forma financial information should include a!

4eference to the financial statements from which the historical financial information is

derived.

)hich o the ollo&in" components is appropriate in a practitioner's report on the

results o applyin" %3ree,-)po! pro&e,)re* A 'i o( "e pro&e,)reper(or#e,7 % %3ree, o *+ "e pe&i$e, p%rie i,e!i$e, i! "e repor

This statement would be included in an areed3upon procedures report n indication that had

the accountants performed additional procedures, other matters might have come to their

attention that would have been reported.


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Pro=e&e, *%'%!&e "ee7 $!%!&i%' (ore&% %!, $!%!&i%'

pro=e&io! %re (or# o( prope&ive $!%!&i%' %e#e!9

An accountant may accept an en"a"ement to apply a"reed2upon procedures to

prospecti(e fnancial statements pro(ided the8 )e o( "e repor i reri&e, o

"e pe&i$e, )er.

The ollo&in" &ould e likely to e included in an e9amination report related to a

$!%!&i%' pro=e&io!* %! opi!io! "% "e pro=e&io! i pree!e, i!

&o!(or#i+ wi" AICPA 3)i,e'i!e? "% "e repor i i!e!,e, o'e'+ (or

"e i!(or#%io! %!, )e o( pe&i$e, p%rie ? wo)', i!&'),e %! opi!io!

"% "e )!,er'+i!3 %)#pio! provi,e % re%o!%*'e *%i (or "e

pro=e&io!9

8inancial pro&ections are hypothetical, 6what if( prospective financial statements. Because the

user may need to as9 the responsible party questions about the underlying assumptions, financial

pro-ections are 6restricted use( reports ($0 8$4 G//4A) 9./), whose use is restricted to

the responsible party and those third parties with whom the responsible party is negotiating

directly. Therefore should not be included in an offering statement of the entity%s initial public

offering of common stoc9.

:inancial pro-ections are appropriate for limited use, such as a mortgage application for the

purpose of e/panding the entity%s facilities a comprehensive document to be used in negotiating

a new labor contract; a report to the audit committee that is not sent to the stoc9holders.

A! %&&o)!%!/ %!,%r, repor o! % &o#pi'%io! o( % pro=e&io!"o)', i!&'),e %:

2a statement that a compilation is limited in scope;

2statement that the accountant assumes no responsiility to update the report or

e(ents suse!uent to the report date.

2a separate para"raph that descries the limitations on the presentation's

useulness;

-does !o include e(aluation o the support o the assumptions underlyin" the

orecast. #An e%#i!%io! o the fnancial orecast &ould include e(aluation o thesupport$.

A financial forecast is appropriate for eneral use, but a financial pro&ection is

not +for restricted use only'


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!hen an accountant accepts a compilation of a financial pro-ection engagement, he or she

should indicate that it is limited in scope and would not include an opinion or assurance on

the pro&ected financial statements or the related assumptions'

pro&ection, which is based on hypothetical assumptions may be included in a document

with audited historical financial statements. The compilation report would also be included

with the document to ma9e clear that the accountant provides no opinion or any other form of

assurance.

Any type of prospective financial statements +financial forecasts and financial pro&ections)

would normally be appropriate for limited use'

The standard report issued y an accountant ater re(ie&in" the fnancial

statements o a nonissuer states that8 "e %&&o)!%! i !o %w%re o( %!+

#%eri%' #o,i$&%io! "% "o)', *e #%,e o "e $!%!&i%' %e#e!9

T"i i 8!ow! % ;!e3%ive %)r%!&e; 4%8% 'i#ie, %)r%!&e95

E%&" p%3e o( "e $!%!&i%' %e#e! reviewe, y the accountant should

include a reerence such as ;See I!,epe!,e! A&&o)!%!/ Review Repor9;

n accountant has been engaged to review a nonissuer%s financial statements that contain several

departures from . 7f the financial statements are not revised and modification of the

standard review report is not ade-uate to indicate the deficiencies, the accountant should

Withdraw from the enaement and provide no further services concerning these financial

statements.

!hich of the following procedures is not usually performed by the accountant during a review

engagement of a nonissuer in accordance with Statements on Standards for Accounting and

Review Services" Communicatin any material weaknesses discovered durin the

consideration of internal control' Generally there is no consideration of internal control in

a review enaement performed in accordance with ..A4.'

An accountant is re-uired to comply with ..A4. when he:she prepares, compiles, or

reviews financial statements of a nonissuer' 'ompilation of financial statements requires

compliance with **+*. rafting financial statement notes for the client does not constitute

6preparation6 of financial statements.

)hen reportin" on fnancial statements prepared on the same asis o accountin"

used or income ta9 purposes, the auditor should include in the report a para"raph

that: "e %),ior "o)', i!&'),e i! "e repor % p%r%3r%p" "% %e "%

"e i!&o#e % *%i o( %&&o)!i!3 i % *%i o( %&&o)!i!3 o"er "%!


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GAAP9 T"i e#p"%i o( #%er p%r%3r%p" i i!&'),e, %(er "e opi!io!

p%r%3r%p"9 E%#p'e o( %! %ppropri%e i'e (or "i p%r%3r%p" %re

;E#p"%i o( M%er; or ;1%i o( A&&o)!i!39;

T"e o*=e&ive o( % review o( i!eri# $!%!&i%' i!(or#%io! o( % p)*'i& e!i+

is to pro(ide the accountant &ith % *%i (or repori!3 w"e"er #%eri%'#o,i$&%io! "o)', *e #%,e o &o!(or# wi" GAAP9

Per(or#i!3 i!)ir+ %!, %!%'+i&%' pro&e,)re i "e pri#%r+ *%i (or %!

%&&o)!%! o i)e % review repor o! &o#p%r%ive $!%!&i%' %e#e!

(or % !o!i)er i! i e&o!, +e%r o( oper%io!.

)hen an independent accountant's report ased on a review o( i!eri# $!%!&i%'

i!(or#%io! is presented in a re"istration statement, the prospectus should include

a statement clariyin" that the accountant's re(ie& report i !o % ;p%r; o( "e

re3ir%io! %e#e! wi"i! "e #e%!i!3 o( "e Se&)riie A& o( @BB9

0, durin" a review o( "e $!%!&i%' %e#e! o( % !o!i)er, an accountant

ecomes a&are o a '%&8 o( %,e)%e ,i&'o)re "% i #%eri%' to the

fnancial statements, and mana"ement reuses to correct the fnancial statement

presentations, the accountant should ,i&'oe "i ,ep%r)re (ro# GAAP i! %

ep%r%e p%r%3r%p" o( "e repor.

)hen an auditor is re!uested to &"%!3e "e e!3%3e#e! (ro# %! %),i o %

&o#pi'%io!, the auditor must &o!i,er "e e.or !ee,e, o &o#p'ee "e

%),i, "e &o o( &o#p'ei!3 "e %),i7 %!, "e re%o! (or "e &'ie!/

re)e. 0 the audit is sustantially complete or an insi"nifcant e

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CPA Auditing 2 -Notes fr Homework