MODERN AUDITING 7th Edition

1. MODERN AUDITING 7th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan Developed by: Dr. Raymond N. Johnson, CPA Gregory K. Lowry, MBA, CPA John Wiley & Sons, Inc.

2. CHAPTER 21OTHER SERVICES AND REPORTS • Overview of levels of assurance and other services offered by CPAs • Other SAS Engagements • Attestation Engagements • Accounting and Review Services • Other Considerations

3. Assurance/Service MatrixFigure 21-1

4. Overview of Levels of Assurance and Other Services The basic professional standards issued by the Auditing Standards Board that relate to these services are as follows: 1.Statements on Auditing Standards (SAS). The SASs are interpretations of generally accepted auditing standards and generally relate to management’s assertions about elements contained in the financial statements. 2.Statements on Standards for Attestation Engagements (SSAE). The SSAEs establish a broad framework for a variety of attest services increasingly demanded of the accounting profession.

5. Overview of Levels of Assurance and Other Services 3.Statements on Standards for Accounting and Review Services (SSARS). The SSARSs define the services associated with the review or the compilation of financial statements of a nonpublic entity and provide guidance to accountants concerning the standards and procedures applicable to these 2 engagements. These services are available only to nonpublic entities.

6. Other SAS Engagements Special reports are reports resulting from the audit of, or application of agreed-upon procedures to, historical financial data other than financial statements prepared in conformity with GAAP. AU 623, Special Reports (SAS 62 & 77), indicates that the term special reports applies to auditors’ reports on: • Financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles. • Specific elements, accounts, or items of a financial statement. • Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements. • Financial presentations to comply with contractual agreements or regulatory provisions. • Financial information presented in prescribed forms or schedules that require a prescribed form of auditors’ report.

7. Other Comprehensive Bases of Accounting Recognized in Auditing Standards (AU 623.04): • Federal income tax basis of accounting • Cash and modified cash basis of accounting • Accounting procedures proscribed by government or regulator • Criteria enjoys substantial support (e.g., general price level accounting) – RARE

8. Other Comprehensive Bases of Accounting All of the 10 GAAS are applicable The first standard of reporting is satisfied by indicating whether the statements are presented fairly in conformity with the basis of accounting used. The third reporting standard on disclosure also applies.

9. Other Comprehensive Bases of Accounting The auditor’s special report on financial statements prepared on an OCBOA should contain 4 paragraphs: 1. An introductory paragraph that is the same as in the auditor’s standard report except that more distinctive titles should be used for the financial statements, such as statement of assets and liabilities arising from cash transactions. 2. A scope paragraph that is the same as in the auditor’s standard report.

10. Other Comprehensive Bases of Accounting 3. An explanatory paragraph following the scope paragraph that states the basis of presentation and refers to the note to the financial statements that describes the comprehensive basis of accounting other than GAAP. 4. An opinion paragraph that expresses the auditor’s opinion (or disclaims an opinion) on whether the financial statements are presented fairly, in all material respects, in conformity with the basis of accounting described.

11. Special Reports Specified Elements, Accounts, or Items of a Financial Statement • These data may include rentals, royalties, profit participation plans, or the provision for income taxes. • A special report may be issued on these data as a result of an audit or the application of agreed-upon procedures.

12. Special Reports Compliance Reports Related to Audited Financial Statements In addition to requiring audited financial statements, lenders or their trustees often request assurance from the independent auditor that the borrower has complied with the accounting and auditing covenants of the agreement.

13. INDEPENDENT AUDITOR’S REPORT We have audited, in accordance with generally accepted auditing standards, the balance sheet of XYZ Company as of December 31, 20X2, and the related statements of income, retained earnings, and cash flows for the year then ended, and have issued our report thereon dated February 16, 20X3. In connection with our audit, nothing came to our attention that caused us to believe that the Company failed to comply with the terms, covenants, provisions, or conditions of sections XX to XX, inclusive of the Indenture dated July 21, 20X0, with ABC Bank insofar as they relate to accounting matters. However, our audited was not directed primarily toward obtaining knowledge of such noncompliance. This report is intended solely for the information and use of the boards of directors and management of XYZ Company and ABC Bank and should not be used for any other purpose. Special Report on Debt Compliance Given as a Separate ReportFigure 21-4

14. SAS 71 Review SAS 71 Review of Interim Financial Statements SAS 71 pertains to reviews of interim financial information (IFI) for less than a full year (usually quarterly) or for a 12-month period ending on a date other than the entity’s fiscal year end. IFI includes data on financial position, results of operations, and cash flows in the form of complete or summarized financial statements or summarized financial data.

15. SAS 71 Review An SAS 71 review service is substantially less in scope than an audit. However, the accountant must possess: 1. an adequate knowledge of the accounting principles and practices of the industry in which the entity operates and 2. an understanding of the entity’s business, including its organization, its operating characteristics, and the nature of its assets, liabilities, revenues, and expenses, common review procedures include:  Making certain prescribed inquiries of management and others with financial and accounting responsibilities concerning the entity’s accounting principles and practices and any changes therein.

16. SAS 71 Review  Performing analytical procedures designed to identify relationships and individual items in the financial information that appear to be unusual.  Obtaining information about actions taken at meetings of stockholders and the board of directors and its committees that may affect the financial information.  Reading the financial information to consider whether, on the basis of information coming to the accountant’s attention, the information appears to conform with GAAP.  Obtaining written representations from management concerning the reviewed financial information and management’s responsibility for it.

17. SAS 71 Review Additional Requirements in SAS 71 Reviews SAS 71 reviews of IFI are performed only for entities whose annual financial statements are audited. As a result, the reviewing independent accountant is expected to have an understanding of relevant internal control policies and procedures that relate to the preparation of both annual and interim financial information.

18. SAS 71 Review Furthermore, the accountant is expected to use this knowledge to: 1. identify types of potential material misstatements in the IFI and consider the likelihood of their occurrence and 2. select the inquiries and analytical procedures that will provide a basis for reporting whether material modifications should be made to the IFI to conform with GAAP.

19. INDEPENDENT AUDITOR’S REPORT We have reviewed the accompanying [describe the statements or information reviewed] of ABC Company and consolidated subsidiaries as of September 30, 20X1, and for the three-month and nine-month periods then ended. These financial statements (information) are (is) the responsibility of the company’s management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted 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. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements (information) for them (it) to be in conformity with generally accepted accounting principles. Accountant’s Report on SAS 71 Review of Interim Financial InformationFigure 21-5

20. The accompanying balance sheet of X Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year ended were not audited by us, and accordingly, we do not express an opinion on them. (Signature and Date) Accountant’s Report on Unaudited StatementsFigure 21-6

21. Assurance/Service MatrixFigure 21-1

22. Accepting and Performing Attest Engagements In 1986, the AICPA issued the first in a new series of authoritative statements entitled Statements on Standards for Attestation Engagements (SSAEs). Intended to provide guidance and establish a broad framework for performing and reporting on attest services, SSAE 1, Attestation Standards (AT 100.01) defines an attest engagement as follows: An attest engagement is one in which a practitioner (CPA) is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party.

23. Accepting and Performing Attest Engagements In performing an attest engagement, a CPA: 1. gathers evidence to support the assertion, 2. objectively assess the measurements and communications of the individual making the assertion, and 3. reports the findings.

24. Accepting and Performing Attest Engagements Attestation Standards In an attest engagement, the CPA must meet the 11 general attestation standards presented in AT Section 100. The attestation standards, like GAAS, are classified into 3 categories: general, fieldwork, and reporting. These standards are shown in Figure 21-7 where they are compared with the 10 GAAS.

25. Accepting and Performing Attest Engagements Significant conceptual differences between the 2 sets of standards. • Extend the attest function beyond historical financial statements. Thus, the standards omit references to financial statements and to GAAP. • Allow the CPA to give assurances on the assertions below the level of the “positive expression of an opinion” associated with the traditional financial statement audit. • Provide for attest services tailored to the needs of specific users based on “agreed-upon procedures” and “limited-use” reports.

26. Attestation Standards Compared with GAASFigure 21-7

29. Summary of Engagements Covered by Statements on Standards for Attestation EngagementsFigure 21-8

32. We have examined the accompanying forecasted balance sheet, statements of income, retained earnings, and cash flows of XYZ Company as of December 31, 20XX, and for the year then ending. Our examination was made in accordance with standards for an examination of a forecast established by the American Institute of Certified Public Accountants and, accordingly, included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of a forecast. In our opinion, the accompanying forecast is presented in conformity with guidelines for presentation of a forecast established by the American Institute of Certified Public Accountants, and the underlying assumptions provide a reasonable basis for management’s forecast. However, there will usually be differences between the forecasted and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report. Accountant’s Standard Report on Examination of a Financial ForecastFigure 21-9

33. Assurance/Service MatrixFigure 21-1

34. Accounting and Review Services The Statements and Standards for Accounting and Review Services (SSARs) were first developed in 1979 at a time when CPAs could provide only 2 levels of assurance on financial statements. • Audit • Unaudited The SSARs review service was originally developed as a lower-cost and lower-assurance alternative to an audit of the financial statements of nonpublic companies.

35. Accounting and Review Services The codification of Statements on Standards for Accounting and Review Services is referred to by AR section numbers associated with accounting and review services. AR 100.04 defines a nonpublic company as any entity other than: • One whose securities trade in a public market either on a stock exchange (domestic or foreign) or in the over-the-counter market, including securities quoted only locally or regionally, • One that makes a filing with a regulatory agency in preparation for the sale of any class of its securities in a public market, or • A subsidiary, corporate joint venture, or other entity controlled by an entity covered by 1 or 2.

36. Accounting and Review Services Review of Financial Statements The purpose of a review engagement of the financial statements of a nonpublic entity is to perform inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP (or OCBOA), if applicable.

37. I [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 and 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 [owners] of XYZ Company. 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, I [we] do not express such an opinion. Based on my [our] review, I am [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. Accountant’s Report on SSARS Review of Financial StatementsFigure 21-13

38. Accounting and Review Services Compilation of Financial Statements The purpose of a compilation engagement is to present in the form of financial statements information that is the representation of management without undertaking to express any assurance on the statements. Many small businesses rely on assistance from their CPAs to prepare financial information for their use in either managing the company or in submitting information about the company to a bank in support of a request for financing.

39. Accounting and Review Services • Compilation procedures focus on: • Accountant’s knowledge of accounting principles • Understanding the nature of business transactions • Accounting records • Stated qualifications of accounting personnel • Basis of accounting used

40. I [we] have compiled the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows and 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. A compilation is limited to presenting in the form of financial statements information that is the representation of management [owners]. I [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. Accountant’s Report on Compilation of Financial StatementsFigure 21-14

41. Accounting and Review Services A sample standard review report recommended in AR 100.17 is shown in Figure 21-14. In some cases, management may want the accountant to compile financial statements so that management can monitor the business, and management may decide that it doesn’t need full disclosure financial statements for this purpose.

42. Accounting and Review Services The Accounting and Review Services SSARS 8 allows the accountant to evaluate the risk that a third party would use the compiled financial statements. When the auditor answers that there is little risk of a third party using the financial statements, the accountant may either: • Issue a compilation report. • Obtain an engagement letter signed by management documenting an understanding with the entity about the services to be performed. • Issue a letter to management documenting the understanding with the entity about the services to be performed.

43. Other Considerations Change of Engagement In the course of rendering professional services, a CPA may be asked to change from one type of service to another. A change is a step up when it results in a higher level of assurance than originally agreed to. The CPA can agree to this type of change when: • there appears to be sufficient evidence to support the higher level of assurance and, • it seems likely that the revised engagement can be completed in accordance with professional standards. In contrast, a change in engagement is a step down when a lower level of assurance is requested by the client.

44. CHAPTER 21OTHER SERVICES AND REPORTS

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