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Transcript of 19-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution...
19-1
Chapter 19
Additional Assurance Services: Historical Financial Information
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-2
Engagements that involve historical information
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
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-3
Types of Attestation Services
Examinations Review Agreed-upon procedures
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-4
Professional 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.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-5
Audit Based Services: Assurance on Additional 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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19-6
Reports 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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19-7
Letters 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.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-8
Summary 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.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-9
Auditing Financial Statements using Frameworks 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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19-10
Special Purpose Financial Reporting Frameworks 1/3
Comprehensive bases of accounting other than GAAP Cash basis Tax basis Regulatory basis Contractual basis
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19-11
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 Frameworks 2/3
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-12
Special Purpose Financial Reporting Frameworks Figure 19.1 3/3
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19-13
Financial Reporting Framework Generally Accepted 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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19-14
Additional GAAS Audits
Single financial statements and specified elements, accounts or items of financial statements
Personal financial statements
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19-15
Audits of Single Financial Statements and Specified 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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19-16
Audits 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
concernCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-17
Reviews 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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19-18
Review Procedures for a Nonpublic Company
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
inquiriesCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-19
Review Report for Nonpublic Companies—Introductory Paragraph
We have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion
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19-20
Review Report for Nonpublic Companies—Management Responsibility
Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-21
Review Report for Nonpublic Companies—Accountant Responsibility
Accountant’s ResponsibilityOur responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our report.
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19-22
Accountant’s ConclusionBased 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 accordance with accounting principles generally accepted in the United States of America
Review Report for Nonpublic Companies—Accountant’s Conclusion
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19-23
Nonpublic Company Review Report Modifications
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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19-24
Review 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 companiesCopyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
19-25
Accounting Services Reports provide no explicit assurance that the
information constitutes a fair presentation Types of compilations
Compilation of financial statement for nonpublic companies Compilations of prospective financial information
Compilation 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
Financial Statement Preparation Prepare financial statements, which remain management’s
representations.
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19-26
Compilation Report-Paragraph
Management is responsible for the accompanying financial statements of XYZ Company as of, and for the years ended, December 31, 20X2 and 20X1 in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.
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19-27
Comparison of Services
Financial Statement Preparation
Compilation
Agreed-upon Procedures
Review Examination
ExplicitAssurance
None None State findings
Limited (negative) assurance
Opinion
Distribution General General Limited to specified parties
General, unless agreed-upon criteria
General, unless agreed-upon criteria
Minimum Procedures
Prepare financial statements
Read statements
Agreed-upon procedures
Limited procedures, such as inquiry and analytical procedures
Sufficient appropriate evidence to support opinion
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