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Chap

ter 2

1CHAPTER 21ASSURANCE, ATTESTATION, AND OTHER FORMS OF SERVICES

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THE RELATIONSHIP BETWEEN AUDITING, ATTESTATION, AND

ASSURANCE SERVICES

AttestationAuditing Assurance

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ATTESTATION ENGAGEMENTS

Attestation services occur when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

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TYPES OF ATTESTATION ENGAGEMENTS

Examination Review Agreed-upon procedures

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OVERVIEW OF ATTESTATION ENGAGEMENTS

Type ofEngagement

Level ofAssurance

AttestationRisk

Type ofReport

ReportDistribution

Examination high low positive general orlimited

Review moderate moderate negative assurance general orlimited

Agreed-uponProcedures

variable variable summary offindings

limited

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ATTESTATION STANDARDS

GENERAL STANDARDS

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ATTESTATION STANDARDSATTESTATION STANDARDS

STANDARDS OF FIELDWORK

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ATTESTATION STANDARDSATTESTATION STANDARDS

STANDARDS OF REPORTING

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REPORTING ON AN ENTITY'S INTERNAL CONTROLS OVER

FINANCIAL REPORTING

Section 404 of S-O requires each annual report of an issuer contain an “internal control report” which shall:

(1) State responsibility of management for establishing and maintaining an adequate internal control structure; and

(2) Contain an assessment of the effectiveness of the internal control structure

Auditors shall attest to, and report on, the assessment made by management and is not to be considered a separate engagement.

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CONDITIONS FOR CONDUCTING AN ENGAGEMENT

Management accepts responsibility for the effectiveness of the entity's internal control

The responsible party evaluates the effectiveness of the entity's internal control using suitable criteria

Sufficient competent evidence must exist or could be developed to support responsible party's evaluation

Management provides to the practitioner its written assertion based on control criteria

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AUDITORS REPORTING ON AN ENTITY'S INTERNAL CONTROL OVER FINANCIAL REPORTING

Management may present its written assertion about the effectiveness of internal control in:

Separate Report

Representation Letter

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AUDITORS REPORTING ON AN ENTITY'S INTERNAL CONTROL OVER FINANCIAL REPORTING

The practitioner can express an opinion on:

Effectiveness of the entity’s internal control, in all material respects, based on control criteria, or

Whether management’s assertion about the effectiveness of internal control is fairly stated

Types of attestation reports:

Examination Agreed-upon procedures

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STEPS OF EXAMINATION ENGAGEMENT

(Internal Control Reporting)

1. Planning

2. Obtaining an understanding of internal control

3. Evaluating the design effectiveness of the controls

4. Testing and evaluating the operating effectiveness of the controls

5. Forming an opinion on the effectiveness of the internal controls or management’s assertion

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ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS

ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS

Title that includes the word independent

Identification of subject matter (I/C over reporting)

Statement that management is responsible for maintaining effective internal control over reporting

Statement that auditor’s responsibility is to express an opinion based on examination

Statement that examination was conducted in accordance with standards established by AICPA

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ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS

ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS

Statement that the auditor believes the examination provides a reasonable basis for his or her opinion

Paragraph stating that, because of the inherent limitations of internal control, errors or fraud may occur and not be detected

Opinion on whether the entity has maintained, in all material respects, effective internal control

Exhibits 21-3 and 21-4

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FINANCIAL FORECASTS AND PROJECTIONS

A practitioner's involvement with financial forecasts and projections may include (1) assembling or assisting the client in assembling prospective financial statements or (b) reporting on client-prepared prospective financial statements.

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TYPES OF PROSPECTIVE FINANCIAL STATEMENTS

Financial Forecasts - prospective financial statements that present an entity's expected financial position, results of operations, and cash flows

Financial Projections - prospective financial statements that present, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows (e.g. “What would happen if….?”)

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DISTRIBUTION OF PROSPECTIVE FINANCIAL STATEMENTS

General use prospective financial statements refer to the use of the statements by persons with whom the responsible party is not negotiating directly (Only financial forecasts)

Limited use prospective financial statements refers to use of the statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly (Forecasts or Projections)

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ACCOUNTING AND REVIEW SERVICES

Many nonpublic businesses do not need an audit of their financial statements for the following reasons:

These entities may employ a CPA to assist with preparation of their financial statements, tax returns, or other financial documents.

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TYPES OF ACCOUNTING ANDREVIEW SERVICES

Compilation

Review

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COMPILATION OF FINANCIAL STATEMENTS

A compilation is defined as presenting, in the form of financial statements, information that is the representation of management or owners without undertaking to express any assurance on the statements.

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COMPILATION OF FINANCIAL STATEMENTS

COMPILATION OF FINANCIAL STATEMENTS

Accountants must have the following knowledge about the entity:

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COMPILATION PROCEDURESCOMPILATION PROCEDURES

Auditor is not required to conduct any inquiries or perform any procedures to verify or corroborate information supplied by the client

Auditor should read the compiled financial statements to determine whether they are in appropriate form and free from obvious errors (e.g. mathematical mistakes or mistakes in the application of accounting principles)

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FORMS OF COMPILATION REPORTS

Compilation with full disclosure

Compilation that omits substantially all disclosures

Compilation when the accountant is not independent

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REVIEW OF FINANCIAL STATEMENTS

A review is defined as performing 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.

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REVIEW PROCEDURES

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REVIEW PROCEDURES

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ELEMENTS OF REVIEW REPORT

Identify the financial statements being reviewed

Procedures are conducted in accordance with SSARS

Scope paragraph identifying review procedures (inquiry and analytical procedures); substantially less in scope than an audit

Limited Assurance: We are unaware of any material modifications that should be made for the financial statements to be in conformity with GAAP

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REVIEW REPORTREVIEW REPORT

The financial statements should include all required disclosures under GAAP

The report should be dated as of the completion of the review procedures

Each page of the financial statements should contain “See Accountant’s Review Report”

Exhibit 21 - 12

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CONDITIONS THAT MAY RESULT IN MODIFICATIONS OF A COMPILATION

OR REVIEW REPORT

Departure from generally accepted accounting principles

---Should be disclosed in separate paragraph of the report

Going concern uncertainty

---Add going concern paragraph at end of report