Chapter 17 Other Services Provided by Audit Firms

A U D I T I N GA RISK-BASED APPROACH TO

CONDUCTING A QUALITY AUDIT

9th Edition

Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg

Copyright © 2014 South-Western/Cengage Learning

Chapter 17Other Services Provided

by Audit Firms

Copyright © 2014 South-Western/Cengage Learning 17-2

Learning Objectives

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

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

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

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


Learning Objectives

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

6. Describe forensic accounting and distinguish between forensic accounting and auditing

7. Describe sustainability reporting and articulate the auditor’s role in providing assurance on management sustainability reports


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)



• 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)


Identify and describe nonaudit attestation services provided by audit firms and discuss the relevant

professional standards

Learning objective 1


Attestation Services Provided by Audit Firms


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


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


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


EXHIBIT 17.1 - Parties Involved in Attestation Engagements


Levels of Assurance Provided in an Attestation Engagement


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


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


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


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

ENGAGEMENTS

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Explain review and compilation engagements, relevant procedures performed, and reports

issued



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


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


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


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


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


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

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Standard Review Report


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


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


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


Explain the procedures and reporting requirements for providing assurance on interim

financial information



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


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


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


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


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


Discuss special reporting considerations for unique financial statement audit situations



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


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


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


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


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


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


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


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


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


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


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



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


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


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


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


Compilation of Prospective Financial Statements

• Assembling prospective financial statements• Assembling: Manual or computer processing of

mathematical or clerical functions for presentation of prospective financial statements

• Performing compilation procedures• Issuing a compilation report


Compilation of Prospective Financial Statements

• The following are required for a compilation of prospective financial statements• Performed by a person having adequate technical

training and proficiency • Due professional care should be exercised• Work should be adequately planned• Applicable compilation procedures should be

performed• Report should conform to the applicable guidance


Examination of Prospective Financial Statements

• Evaluating preparation of such statements• Evaluating support underlying the assumptions• Evaluating presentation for conformity with AICPA

presentation guidelines• Issuing an examination report


Agreed-Upon Procedures of Prospective Financial Statements

• May be limited or extensive depending on requirements of responsible party • Must involve more than a simple reading of

prospective financial statements


SSAE No. 10, AT Section 401 - Reporting on Pro Forma Financial Information

• Pro forma financial information: Shows what significant effects on historical financial information might have been had a consummated or proposed transaction occurred at an earlier date• Illustrates effects of following types of transactions• Business combinations• Disposing of a significant segment of a business• Changing the form of organization of business or its

status as an autonomous entity


Guidelines for presentation of pro forma financial information

• Describe the:• Transaction that is reflected• Source of historical financial information• Assumptions used to develop pro forma adjustments• Uncertainties about those assumptions

• Indicate that information should be considered in conjunction with historical financial information• Make clear that information not necessarily

indicative of results that would have been achieved had transaction taken place earlier


Procedures Applicable for Examining or Reviewing Pro Forma Financial Information

• Obtain:• Understanding of the underlying transaction• Knowledge of each part of combined organization in a

business combination• Discuss management’s assumptions regarding effects

of transaction or event• Evaluate whether pro forma adjustments are

completely recorded



• Obtain appropriate evidence to support any pro forma adjustments• Evaluate whether management’s assumptions are

described in a clear and comprehensive fashion• Determine that computations underlying pro forma

adjustments are mathematically correct• Obtain from management written representations• Their responsibility for assumptions used in making

pro forma adjustments



• Assertion that assumptions provide a reasonable basis for presenting effects related to transaction• Assertion that significant effects related to transaction

are appropriately disclosed• Read such information and evaluate:• Underlying transaction• Pro forma adjustments• Significant assumptions• Uncertainties

• Evaluate source of historical financial information


Describe forensic accounting and distinguish between forensic accounting and auditing



Forensic accounting

• Involves detailed investigation of situations where fraud has already been identified or where fraud is highly suspected• Builds support for legal action against the person

committing the fraud by:• Identifying the fraud• Calculating damages caused• Building both factual and testimonial evidence of fraud


Forensic accounting

• Forensic accountants:• Examine 100% of fraud-related documents for

accurately measuring cost of the fraud• Are often asked to provide litigation support• Work on reconstructing account balances


EXHIBIT 17.19 - Differences Between Forensic Accounting and Accounting


DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON

MANAGEMENT SUSTAINABILITY REPORTS



sustainability-related terms

• Non-financial reporting: Practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance toward goal of sustainable development• Corporate social responsibility reporting: Continuing

commitment by business to behave ethically and contribute to economic development while improving quality of life of the workforce, their families, local community, and society at large


common sustainability-related terms

• Triple bottom-line reporting • Reporting on:• Financial performance• Environmental performance• Social performance

• Sustainability reporting: Voluntary corporate disclosures about sustainability initiatives, plans, and associated outcomes• Sustainability: Actions taken at corporate level to ensure

economic, environmental, and social responsibility


Reporting on Sustainability Activities and Outcomes

• Global Reporting Initiative (GRI) G3 Reporting Framework• Used by companies to determine what to and how to

report• Enables sustainability report users to:• Assess sustainability performance with respect to laws,

norms, codes, performance standards, and voluntary initiatives


Reporting on Sustainability Activities and Outcomes

• Create a continuous platform for dialogue about expectations for responsibility and performance• Understand the impacts that organizations can have on

sustainable development• Compare performance within an organization and

between different organizations over time to inform decisions


G3 Framework

Principles emphasize: • Sustainability report

content• Sustainability report quality• Sustainability report

boundaries

Elements• Strategic approach• Management approach• Performance indicators


EXHIBIT 17.20 - Standards for Sustainability Reporting

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Providing Assurance on Sustainability Reporting

• Independent assurance enhances the credibility of sustainability reporting• External assurance is preferable to internal assurance

because it is:• More objective • Independent from the management



• According to GRI Reporting Framework, external assurance over sustainability reports should:• Be conducted by those with competence in the subject

matter and assurance practices• Be performed in a systematic manner that is evidence-

based and includes adequate documentation• Assess whether the sustainability report is reasonable,

balanced, and appropriately inclusive• Be issued by organizations that are independent of

company issuing the report



• Assess the extent to which report preparer has applied GRI Reporting Framework in reaching its conclusion• Result in a report that is:• Publicly available• Written in form• States the relationship between preparer of and issuer of

report


general types of assurance

• Reasonable assurance - Assurance provider’s opinion is stated in positive form, indicating that:• Information subject to audit is materially correct • High level of assurance has been achieved

• Limited assurance - Assurance provider’s opinion is stated in negative form, indicating that:• Information has not been found to be materially incorrect • Nothing has come to their attention based on limited scope

procedures • Less than a high level of assurance has been achieved

Chapter 17 Other Services Provided by Audit Firms

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Transcript of Chapter 17 Other Services Provided by Audit Firms