Additional Assurance Services: Historical Financial Information

Chapter 19

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Engagements that involve Engagements that involve historical informationhistorical information

Issuing special reports. Auditing financial statements prepared for

use in other countries. Auditing personal financial statements. Reviewing historical information. Issuing comfort letters. Auditing condensed financial statements. Performing accounting services.

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Types of Attestation ServicesTypes of Attestation Services

ExaminationsReviewAgreed-upon procedures

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Professional Literature TermsProfessional Literature Terms

Auditor is used for most engagements under the generally accepted auditing standards, although accountant is used for interim review and for agreed-upon procedure engagements.

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.

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Special ReportsSpecial Reports

Reports on financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

Reports on specified elements, accounts, or items of financial statements.

Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.

Reports on financial presentations to comply with contractual or regulatory provisions.

Reports on audited financial information presented in prescribed forms or schedules that require a prescribed form of auditors’ report.

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Other Comprehensive Other Comprehensive Bases of AccountingBases of Accounting

Comprehensive basis of accounting other than GAAP Any basis required by a governmental

regulatory agency The income tax basis The cash basis A definite set of criteria having substantial

support, such as price-level adjusted financial statements

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Introductory Paragraph

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.

Audit Report--Cash BasisAudit Report--Cash Basis

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Scope Paragraph

We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

Audit Report--Cash BasisAudit Report--Cash Basis

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Basis of Accounting and Opinion Paragraphs

As described in Note 1, these financial statements were prepared on the basis of cash receipts and disbursements, which is a comprehensive basis of accounting other than generally accepted accounting principles.

In our opinion, the financial statements referred to above present fairly, in all material respects, the assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the revenue collected and expenses paid during the year then ended, on the basis of accounting described in Note 1.

Audit Report--Cash BasisAudit Report--Cash Basis

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Specified Elements, Accounts or Specified Elements, Accounts or Items of Financial StatementsItems of Financial Statements

Engaged to attest only to specified elements, accounts or items of a financial statement Example: Report on lessee’s revenue

requested by lessee. May be required by provisions of lease agreement.

Materiality is generally less than would be in audit - in relation to other information presented

Report restricted to specified party and lists procedures performed.

Disclaimer of opinion

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Compliance ReportsCompliance Reports

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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Special-Purpose Financial StatementsSpecial-Purpose Financial Statements

Audit level of service for financial statements prepared to comply with either a contractual agreement or regulatory provisions

Statements prepared following either GAAP or other comprehensive bases of

accounting A prescribed basis of accounting

Example: Statement of net assets sold may be prepared following GAAP

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Report on Special-Purpose Presentation Report on Special-Purpose Presentation

Standard Introductory and Scope Paragraphs

The accompanying statement was prepared to present the net assets of Warren Company sold to Easton Corporation pursuant to the purchase agreement described in Note 7, and is not intended to be a complete presentation of Warren Company's assets and liabilities.

In our opinion, the accompanying statement of net assets sold presents fairly, in all material respects, the net assets of Warren Company as of June 8, 20X1 sold pursuant to the purchase agreement referred to in Note 7, in conformity with generally accepted accounting principles.

This report is intended solely for the information and use of the boards of directors and management of Warren Company and Easton Corporation and should not be used for any other purpose.

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Prescribed Forms or SchedulesPrescribed Forms or Schedules

Audit fairness of information supplied by client on a prescribed form Example: Loan application

Language of form may not conform to professional standards Auditor should reword form to company with

GAAS or Mark form “see attached” for audited financial

statements as an attachment

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Audit of Financial Statements for Audit of Financial Statements for use in other countriesuse in other countries

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 primary use

Outside the US• Issue a US report modified to reflect accounting principles of

other country• Issue a report form of the other country

Use in US• US standard report with modifications for departures from US

GAAP

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Audits of Personal Audits of Personal Financial StatementsFinancial 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 concern

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Review of Public CompaniesReview 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.

Review procedures--next slide

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Review ProceduresReview Procedures

Types Analytical procedures Inquiries of top management

• Whether financial statements follow GAAP

• Unusual or complex situations

• Significant transactions occurring around end of period

• Subsequent events

• Whether management has knowledge of fraud

• Whether allegations of fraudulent financial reporting have been made

Certain other procedures• Reading available minutes of meetings• Reading interim financial information• Obtain reports from other accountants who have reviewed significant

components

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Other StepsOther Steps

Communicate results Client decides whether accountant should issue a review report If issued, report indicates limited assurance provided If CPA believes financial information materially misstated,

communicate to management as soon as practicable, then to audit committee

Document the review Document any findings or significant issues plus results of

procedures performed Examples: Review programs, analyses, memoranda,

representation letters

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Review Report for Public Review Report for Public Companies--First ParagraphCompanies--First Paragraph

We have reviewed the balance sheet and related statements of income, retained earnings, and cash flows of ABC Company and consolidated subsidiaries as of September 30, 20X2 and 20X1, and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the company’s management.

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Review Report for Public Companies--Review Report for Public Companies--Second ParagraphSecond Paragraph

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board. 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.

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Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles.

Review Report for Public Review Report for Public Companies--Third ParagraphCompanies--Third Paragraph

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Reviews for Nonpublic CompaniesReviews 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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Review Steps for a Nonpublic Review Steps for a Nonpublic CompanyCompany

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 inquiries

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Review Report for Nonpublic Review Report for Nonpublic Companies--First ParagraphCompanies--First Paragraph

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 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 of XYZ Company.

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Review Report for Nonpublic Review Report for Nonpublic Companies--Second ParagraphCompanies--Second Paragraph

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, we do not express such an opinion.

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Based 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 conformity with generally accepted accounting principles.

Review Report for Nonpublic Review Report for Nonpublic Companies--Third ParagraphCompanies--Third Paragraph

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Nonpublic Company Review Report Nonpublic Company Review Report ModificationsModifications

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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Letters for UnderwritersLetters 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.

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Accounting ServicesAccounting Services

Reports provide no explicit assurance that the information constitutes a fair presentation

Types Compilation of financial statement for nonpublic companies Association with financial statements of public companies Compilations of prospective financial information

Compilation Nonattest 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

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Compilation Report--First ParagraphCompilation Report--First Paragraph

We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows 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.

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Compilation Report--Second ParagraphCompilation Report--Second Paragraph

A compilation is limited to presenting in the form of financial statements information that is the representation of management. 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.

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Association with Financial Statements Association with Financial Statements of Public Companiesof Public Companies

Assist public company in preparing financial statements or submitting statements to client or another third party

No responsibility to perform investigative procedures except to read statements for obvious material misstatements

Each page of statement marked “unaudited” No need to be independent

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Comparison of Audits, Comparison of Audits, Reviews and CompilationsReviews and Compilations

CompilationAgreed-Upon Procedures Review Examination

Type of Service Accounting Attest Attest Attest

Explicit assurance None State findings or negative assurance

Limited (negative) assurance

Opinion

Distribution of report

General Limited to specified parties involved

General, unless based on agreed-upon criteria

General, unless based on agreed-upon criteria

Minimum procedures

Read statements Agreed-upon procedures

Limited procedures, such as inquiry and analytical procedures

Collection of sufficient evidence to support opinion

Comments Referred to as “unaudited statements” for public companies

Referred to as “audits” for financial statements