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Chapter 17 Other Services Provided by Audit Firms

Chapter 17 Other Services Provided by Audit Firms. Learning Objectives. Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant professional standards Explain review and compilation engagements, relevant procedures performed, and reports issued

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Chapter 17 Other Services Provided by Audit Firms

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  1. Chapter 17Other Services Providedby Audit Firms

  2. Learning Objectives • Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant professional standards • Explain review and compilation engagements, relevant procedures performed, and reports issued • Explain the procedures and reporting requirements for providing assurance on interim financial information • Discuss special reporting considerations for unique financial statement audit situations

  3. Learning Objectives • Describe attestation engagements relating to agreed-upon procedures, financial forecasts and projections, and pro forma financial information, and the types of reports that will be issued for these engagements • Describe forensic accounting and distinguish between forensic accounting and auditing • Describe sustainability reporting and articulate the auditor’s role in providing assurance on management sustainability reports

  4. Professional Judgment in Context - Examples of Nonaudit Services Provided by Audit Firms

  5. Professional Judgment in Context - Examples of Nonaudit Services Provided by Audit Firms • What are nonaudit attestation services provided by external auditors, and what standards govern the conduct of such services? (LO 1) • What are compilation and review services, and what standards govern conduct of such services? (LO 2) • What reports would an audit firm issue when performing nonaudit attestation services? (LO 5)

  6. Professional Judgment in Context - Examples of Nonaudit Services Provided by Audit Firms • What is forensic accounting, and how does it differ from auditing? (LO 6) • What is sustainability reporting, and what is the auditor’s role in providing assurance on management sustainability reports? (LO 7)

  7. Learning objective 1 Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant professional standards

  8. Attestation Services Provided by Audit Firms

  9. Topics covered in Subject Matter of an Attestation Engagement • Prospective financial information, performance measurements, or backlog data • Physical characteristics • Historical events • Analyses • Corporate governance, compliance with law and regulations, or human resource practices • Adequacy of process for capturing and reporting medical data

  10. Topics covered in Subject Matter of an Attestation Engagement • Adequacy and reasonableness of economic plans to build a new convention center in a major city • Reliability of sustainability disclosures in an organization’s financial statements • Accuracy of: • Compliance assertions about grants, contracts, and regulations • Reliability assertions about information technology systems, internal control, and corporate governance regulations

  11. Components of Attestation Services and Parties Involved in Attestation Services • Information or a process on which assurance service is provided • Criteria for evaluation • Sufficient appropriate evidence • Written attestation report • Parties involved • Responsible party • Practitioner • Intended users

  12. EXHIBIT 17.1 - Parties Involved in Attestation Engagements

  13. Levels of Assurance Provided in an Attestation Engagement

  14. Levels of Assurance Provided in an Attestation Engagement • Designed to address assurance engagement risk to differing degrees • Assurance engagement risk: Practitioner expresses an inappropriate conclusion when the subject matter information is materially misstated

  15. Professional Standards for Attestation Engagements • Attestation standards: Professional standards that provide guidance about: • Gathering evidence regarding specific assertions • Communicating an opinion on fairness of presentation to a third party

  16. EXHIBIT 17.2 - United States and International Attestation (Assurance) Standards

  17. EXHIBIT 17.3 - AICPA’S GENERAL, FIELDWORK, AND REPORTING STANDARDS FOR ATTESTATION ENGAGEMENTS

  18. Learning objective 2 Explain review and compilation engagements, relevant procedures performed, and reports issued

  19. Review engagement • Enables a practitioner to state whether anything has come to the practitioner’s attention that causes the practitioner to believe that financial statements are not prepared, in all material respects, in accordance with applicable financial reporting framework • Based on procedures which do not provide all evidence that would be required in an audit

  20. Reviews • Obtain limited assurance that there are no material modifications to be made to financial statements • Do not involve: • Obtaining an understanding of entity’s internal control • Assessing fraud risk • Testing accounting records by obtaining appropriate evidence • Obtaining assurance that a practitioner will become aware of all significant matters that would be investigated in an audit

  21. Review Procedures • Obtain a written engagement letter • Inquire about actions taken at meetings of board of directors and other decision-making bodies • Inquire whether financial statements have been consistently prepared in conformity with the comprehensive basis of accounting

  22. Review Procedures • Inquire about changes in business activities or accounting principles and practices and events • Obtain or prepare a trial balance of general ledger and foot and reconcile it to general ledger • Trace financial statement amounts to trial balance • Perform basic analytical procedures

  23. Review Procedures • Obtain explanations from management for any unusual results and consider the need for further investigation • Read financial statements to determine whether they appear to conform to GAAP • Obtain a management representation letter about important assertions that management has made

  24. EXHIBIT 17.4 - Review Engagement: Inquiries and Analytical Procedures for Revenue Cycle

  25. Standard Review Report

  26. Compilation engagement or bookkeeping services • Accountant uses accounting expertise to collect, classify, and summarize financial information • Assists management in presenting financial information in the form of financial statements • Does not undertake to obtain any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework

  27. Compilation Procedures • Practitioner is not required to make inquiries or perform procedures to verify, corroborate, or review information provided by the client • Additional or revised information should be obtained if practitioner believes that client-provided information may be: • Incorrect • Incomplete • Unsatisfactory • Practitioner should withdraw from engagement if client refuses to provide information

  28. Potential Modifications to the Standard Compilation Report • Situations in which the practitioner will modify the report • Omission of disclosures for compilations • Compilation report not required • Practitioner’s lack of independence

  29. Learning objective 3 Explain the procedures and reporting requirements for providing assurance on interim financial information

  30. Reviews of Interim Financial Information for Public Companies • SEC requires public companies to: • File quarterly financial information with SEC on Form 10-Q within 40 to 45 days and provide shareholders with quarterly reports • Include quarterly information in annual reports to SEC (Form 10-K) and in annual reports to shareholders • Have quarterly financial information reviewed by independent auditors • Review report not required to be included in quarterly information

  31. Review Procedures for Interim Financial Information • Performed on quarterly information: • Contained in annual report to shareholders • Issued at end of each of first three quarters of fiscal year when engaged to do so • Include: • Making inquiries • Performing analytical procedures • Reading minutes of board of directors’ meetings • Reading interim information to conform to GAAP

  32. Review Procedures for Interim Financial Information • Auditor should obtain: • Written representations from management concerning things as its responsibility for financial information • Completeness of minutes • Subsequent events

  33. Reporting on Interim Financial Statements • Standard report on a review of separately issued interim financial statements of public companies: • Identifies the information reviewed • Indicates whether the standards of PCAOB were followed in performing the review • Explains nature of a review • Disclaims an opinion • Provides negative assurance that auditor is not aware of any material departures from GAAP

  34. Reporting on Interim Financial Statements • Disclosure and reporting requirements for interim financial statements differ from those for annual financial statements • Negative assurance should be modified when there is a known material departure from GAAP

  35. Learning objective 4 Discuss special reporting considerations for unique financial statement audit situations

  36. AU-C Section 800 - Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks • Special purpose framework: Financial reporting framework other than GAAP • Other comprehensive bases of accounting • Cash basis: Records cash receipts and disbursements and modifications of the cash basis having substantial support • Tax basis: Used to file income tax return for a period covered by financial statements

  37. AU-C Section 800 - Audits of Financial Statements Prepared in Accordance with Special-Purpose Frameworks • Regulatory basis:Used to comply with requirements of financial reporting provisions of a regulatory agency to whose jurisdiction entity is subject • Contractual basis: Used to comply with an agreement between the entity and one or more third parties other than auditor • Special-purpose financial statements: Prepared in accordance with a special-purpose framework

  38. Considerations When Accepting an Engagement of Audit of Special-Purpose Financial Statements • Obtain an understanding of: • Purpose for which financial statements are being prepared • Intended users • Steps taken by management to ensure that the framework is acceptable under the circumstances • Obtain an agreement from management of its understanding of and acknowledgement for its responsibility to include all appropriate disclosures

  39. Considerations When Planning andPerforming an Engagement of Audit of Special-Purpose Financial Statements • Be sure to comply with all AU-C sections relevant to the audit • Adapt and apply all AU-C sections relevant to audit as necessary in circumstances • Obtain an understanding of organization’s selection and application of accounting policies

  40. Considerations When Forming an Opinion on special-purpose financial statements • Do management’s financial statements: • Adequately describe applicable financial reporting framework • Have an appropriate title • Include a summary of significant accounting policies • Describe how special-purpose framework differs from GAAP • Result in fair presentation of entity’s financial results

  41. EXHIBIT 17.8 - Overview of Reporting Requirements for Special-Purpose Financial Statements

  42. AU-C Section 805 • Addresses special considerations in application of AU-C Sections 100–700 to the audit of a single financial statement or of a(n): • Specific element • Account • Item of a financial statement

  43. Considerations When Accepting, Planning, and Performing an Engagement under au-c 805 • Obtain further evidence to corroborate audit evidence acquired from management and the accounting records • Consider whether it is appropriate to apply applicable financial reporting framework to a single financial statement or a specific element, account, or item of a financial statement • Evaluate whether disclosures in footnotes for single financial statement or specific element, account, or item are adequate

  44. Considerations When Forming an Opinion and Reporting on an Engagement of the Audit under au-c 805 • Disclosures enable the intended users to understand: • Information conveyed in financial statement or specific element • Effect of material transactions and events on information conveyed in financial statement or specific element

  45. AU-C Section 806 - Reporting on Compliance with Aspects of Contractual Agreements or Regulatory Requirements • Auditor is requested to report on an entity’s compliance with certain contractual agreements or regulatory requirements • Such reports can be issued if the covenants of the agreement are based on information from audited financial statements • Compliance report contains limited or negative assurance

  46. Learning objective 5 Describe attestation engagements relating to agreed-upon procedures, financial forecasts and projections, and pro forma financial information, and the types of reports that will be issued for these engagements

  47. SSAEs No. 10 and 11, AT Section 201 - Agreed-Upon Procedures Engagements • Agreed-upon procedures engagement: Practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter • Report should be in the form of a description of procedures and associated findings • Report should indicate that it is restricted in its use to specified parties • Specified parties: Individuals who will receive the practitioner’s agree-upon procedures report

  48. Agreed-Upon Procedures • Responsibility of practitioner • Conduct procedures • Report the findings • Practitioner is not required to determine if a difference exists between: • Agreed-upon procedures requested by parties • Procedures conducted to perform another form of engagement

  49. SSAEs No. 10 and 17, AT Section 301 - Financial Forecasts and Projections • Prospective financial statements: Forecasts or projections including summaries of assumptions and accounting policies • Financial forecast: Prospective financial statements that present, to the best of the responsible party’s knowledge, an entity’s: • Expected financial position • Results of operations • Cash flows

  50. SSAEs No. 10 and 17, AT Section 301 - Financial Forecasts and Projections • Financial projection: Prospective financial statements that present, to the best of the responsible party’s knowledge, given one or more hypothetical assumptions, an entity’s: • Expected financial position • Results of operations • Cash flows

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