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MODERN AUDITINGth Edition

Developed by:Dr. Raymond N. Johnson, CPA

Gregory K. Lowry, MBA, CPA

John Wiley & Sons, Inc.

William C. Boynton

California Polytechnic StateUniversity at San Luis Obispo

Raymond N. JohnsonPortland State University

Walter G. KellUniversity of Michigan

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CHAPTER 21

OTHER SERVICES AND REPORTS

Overview of levels of assurance and

other services offered by CPAs

Other SAS Engagements Attestation Engagements

Accounting and Review Services

Other Considerations

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Assurance/Service Matrix

Figure 21-1

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The basic professional standards issued by the

Auditing Standards Board that relate to these

services are as follows:

1.Statements on Auditing Standards(SAS). TheSASs are interpretations of generally accepted

auditing standards and generally relate to

managements assertions about elements

contained in the financial statements.2.Statements on Standards for Attestation

Engagements(SSAE). The SSAEs establish abroad framework for a variety of attest services

increasingly demanded of the accounting

profession.

Overview of Levels of

Assurance and Other Services

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3.Statements on Standards for Accounting andReview Services(SSARS). The SSARSs define theservices associated with the review or thecompilation of financial statements of anonpublic entity and provide guidance toaccountants concerning the standards andprocedures applicable to these 2 engagements.These services are available only to nonpublicentities.

Overview of Levels of

Assurance and Other Services

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Other SAS Engagements

Special reportsare reports resulting from the audit of, orapplication of agreed-upon procedures to, historicalfinancial data other thanfinancial statementsprepared in conformity with GAAP. AU 623, SpecialReports(SAS 62 & 77), indicates that the term

special reportsapplies to auditors reports on:

1. Financial statements that are prepared in conformity with acomprehensive basis of accounting other than generally acceptedaccounting principles.

2. Specific elements, accounts, or items of a financial statement.

3. Compliance with aspects of contractual agreements or regulatoryrequirements related to audited financial statements.

4. Financial presentations to comply with contractual agreementsor regulatory provisions.

5. Financial information presented in prescribed forms or schedulesthat require a prescribed form of auditors report.

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Other Comprehensive

Bases of Accounting

Recognized in Auditing Standards (AU

623.04):

Federal income tax basis of accounting Cash and modified cash basis of accounting

Accounting procedures proscribed by

government or regulator Criteria enjoys substantial support (e.g., general

price level accounting)RARE

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Other Comprehensive

Bases of AccountingAll of the 10 GAAS are applicable

The first standard of reporting is satisfied byindicating whether the statements are

presented fairly in conformity with the basis of

accounting used.

The third reporting standard on disclosure also

applies.

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Other Comprehensive

Bases of AccountingThe auditors special report on financial

statements prepared on an OCBOA should

contain 4 paragraphs:1.An introductory paragraphthat is the same

as in the auditors standard report except

that more distinctive titles should be used

for the financial statements, such asstatement of assets and liabilities arising

from cash transactions.

2.A scope paragraphthat is the same as in the

auditors standard report.

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Other Comprehensive

Bases of Accounting3.An explanatory paragraphfollowing the

scope paragraph that states the basis of

presentation and refers to the note to the

financial statements that describes the

comprehensive basis of accounting other

than GAAP.

4.An opinion paragraphthat expresses theauditors opinion (or disclaims an opinion) on

whether the financial statements are

presented fairly, in all material respects, in

conformity with the basis of accountingdescribed.

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Special Reports

Specified Elements, Accounts, or

Items of a Financial Statement1. These data may include rentals, royalties, profit

participation plans, or the provision for income taxes.

2. A special report may be issued on these data as a result of

an auditor the application of agreed-upon procedures.

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Special Reports

Compliance Reports Related to Audited

Financial Statements

In addition to requiring audited financial statements, lenders

or their trustees often request assurance from the independent

auditor that the borrower has complied with the accounting

and auditing covenants of the agreement.

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Special Report on Debt Compliance

Given as a Separate Report

Figure 21-4

INDEPENDENT AUDITORS REPORT

We have audited, in accordance with generally accepted auditing

standards, the balance sheet of XYZ Company as of December 31, 20X2,

and the related statements of income, retained earnings, and cash flows

for the year then ended, and have issued our report thereon dated

February 16, 20X3.

In connection with our audit, nothing came to our attention that caused

us to believe that the Company failed to comply with the terms,

covenants, provisions, or conditions of sections XX to XX, inclusive ofthe Indenture dated July 21, 20X0, with ABC Bank insofar as they

relate to accounting matters. However, our audited was not directedprimarily toward obtaining knowledge of such noncompliance.

This report is intended solely for the information and use of the boards

of directors and management of XYZ Company and ABC Bank and

should not be used for any other purpose.

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SAS 71 Review

SAS 71 Review of Interim Financial

Statements

SAS 71pertains to reviews of interim financial

information(IFI) for less than a full year (usually

quarterly) or for a 12-month period ending on a date

other than the entitys fiscal year end. IFI includesdata on financial position, results of operations, and

cash flows in the form of complete or summarized

financial statements or summarized financial data.

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SAS 71 Review

An SAS 71 review service is substantially less in scope

than an audit. However, the accountant must possess:

1.an adequate knowledge of the accounting principles

and practices of the industry in which the entity

operates and

2.an understanding of the entitys business, including

its organization, its operating characteristics, and the

nature of its assets, liabilities, revenues, andexpenses, common review procedures include:

Making certain prescribed inquiries of management

and others with financial and accounting

responsibilities concerning the entitys accounting

principles and practices and any changes therein.

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SAS 71 Review

Performing analytical procedures designed to

identify relationships and individual items in the

financial information that appear to be unusual.

Obtaining information about actions taken atmeetings of stockholders and the board of directors

and its committees that may affect the financial

information.

Reading the financial information to consider

whether, on the basis of information coming to theaccountants attention, the information appears to

conform with GAAP.

Obtaining written representations from

management concerning the reviewed financialinformation and managements responsibility for it.

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SAS 71 Review

Additional Requirements in SAS 71

Reviews

SAS 71 reviews of IFI are performed only forentities whose annual financial statements

are audited. As a result, the reviewing

independent accountant is expected to have

an understanding of relevant internal

control policies and procedures that relate

to the preparation of both annual and

interim financial information.

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Furthermore, the accountant is expected to

use this knowledge to:

1.identify types of potential materialmisstatements in the IFI and consider the

likelihood of their occurrence and

2.select the inquiries and analytical

procedures that will provide a basis forreporting whether material modifications

should be made to the IFI to conform with

GAAP.

SAS 71 Review

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Accountants Report on SAS 71 Review

of Interim Financial Information

Figure 21-5

INDEPENDENT AUDITORS REPORTWe have reviewed the accompanying [describe the statements or informationreviewed] of ABC Company and consolidated subsidiaries as of September 30,

20X1, and for the three-month and nine-month periods then ended. Thesefinancial statements (information) are (is) the responsibility of the companysmanagement.

We conducted our review in accordance with standards established by theAmerican Institute of Certified Public Accountants. A review of interim financial

information consists principally of applying analytical procedures to financial

data and making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted in accordancewith 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.

Based on our review, we are not aware of any material modifications that should

be made to the accompanying financial statements (information) for them (it) to

be in conformity with generally accepted accounting principles.

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Accountants Report on

Unaudited StatementsFigure 21-6

The accompanying balance sheet of X Company as of

December 31, 20XX, and the related statements of income,

retained earnings, and cash flows for the year ended were notaudited by us, and accordingly, we do not express an opinion

on them.

(Signature and Date)

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Assurance/Service Matrix

Figure 21-1

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Accepting and Performing

Attest EngagementsIn 1986, the AICPA issued the first in a new series of

authoritative statements entitled Statements on Standards

for Attestation Engagements(SSAEs).

Intended to provide guidance and establish a broad framework

for performing and reporting on attest services, SSAE 1,

Attestation Standards(AT 100.01) defines an attest

engagement as follows:

An attest engagementis one in which a practitioner (CPA) is

engaged to issue or does issue a written communication that

expresses a conclusion about the reliability of a written

assertion that is the responsibility of another party.

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Accepting and Performing

Attest EngagementsIn performing an attest engagement, a CPA:

1.gathers evidence to support the assertion,

2.objectively assess the measurements andcommunications of the individual making

the assertion, and

3.reports the findings.

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Accepting and Performing

Attest EngagementsAttestation Standards

In an attest engagement, the CPA must meet the 11

general attestation standardspresented in ATSection 100.

The attestation standards, like GAAS, are classified

into 3 categories: general, fieldwork, and reporting.

These standards are shown in Figure 21-7where

they are compared with the 10 GAAS.

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Accepting and Performing

Attest EngagementsSignificant conceptual differences between the 2

sets of standards.

1. Extend the attest function beyond historical financial

statements. Thus, the standards omit references to

financial statements and to GAAP.

2. Allow the CPA to give assurances on the assertions below

the level of the positive expression of an opinion

associated with the traditional financial statement audit.

3. Provide for attest services tailored to the needs of specific

users based on agreed-upon procedures and limited-use reports.

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Attestation Standards Compared with GAAS

Figure 21-7

Attestation Generally Accepted

Standards Audit Standards

General Standards

1. The engagement shall be performed by a 1. The audit is to be performed by a person practitioner or practitioners having or persons having adequate technical adequate technical training and training and proficiency as an auditor. proficiency in the attest function.

2. The engagement shall be performed by a practitioner or practitioners having adequate knowledge in the subject matter

of the assertion.3. The practitioner shall perform an engagement only if he or she has reason to believe that the following 2 conditions exist: The assertion is capable of evaluation against reasonable criteria that either have been established by a recognized body or are stated in the presentation of the assertion in a sufficiently clear and comprehensive manner for a

knowledgeable reader to be able to understand them. The assertion is capable of reasonably consistent estimation or measurement using such criteria.

4. In all matters relating to the engagement, 2. In all matters relating to the assignment, an independence in mental attitude shall an independence in mental attitude is to be maintained by the practitioner or be maintained by the auditor or auditors. practitioners.

5. Due professional care shall be exercised 3. Due professional care is to be exercised in

in the performance of the engagement. the performance of the audit and the preparation of the report.

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Attestation Generally AcceptedStandards Audit Standards

Standards of Fieldwork

1. The work shall be adequately planned, and 1. The work is to be adequately planned, and assistants, if any, shall be properly assistants, if any, are to be properly

supervised. supervised.

2. Sufficient evidence shall be obtained to 2. A sufficient understanding of the internal provide a reasonable basis for the control structure is to be obtained to plan conclusion that is expressed in the report. the audit and to determine the nature,

timing, and extent of tests to be performed.

3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under audit.

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Attestation Generally AcceptedStandards Audit Standards

Standards of Reporting

1. The report shall identify the assertion 1. The report shall state whether the being reported on and state the character financial statements are presented in

of the engagement. accordance with generally accepted accounting principles.

2. The report shall state the practitioners 2. The report shall identify the circumstances conclusion about the reliability of the in which such principles have not been assertion based on the established or consistently observed in the current period stated criteria against which it was in relation to the preceding period. measured.

3. The report shall state all of the 3. Informative disclosures in the financial practitioners significant reservations statements are to be regarded as about the engagement and the reasonably adequate unless otherwise presentation of the assertion. stated in the report.

4. The report on an engagement to evaluate 4. The report shall either contain an an assertion that has been prepared in expression of opinion regarding the conformity with agreed-upon criteria on an financial statements, taken as a whole, or engagement to apply agreed-upon an assertion to the effect that an opinion

procedures should contain a statement cannot be expressed. When an overall limiting its use to the parties who have opinion cannot be expressed, the reasons agreed on such criteria or procedures. therefor should be stated. In all cases

where an auditors name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditors work, if any,

and the degree of responsibility the auditor is taking.

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Summary of Engagements Covered by Statements

on Standards for Attestation Engagements

Figure 21-8

SSAE Nature of Type of Section Attestation Engagement Assurance

200 Financial Forecasts and Projections Examination

A financial forecastis a prospective financial statement that Agreed-uponpresents; to the best of the responsible partys knowledge Procedures

and belief, an entitys expected financial position, results ofoperations, and cash flows.

A financial projectionis a prospective financial statement Compilation

that presents, to the best of the responsible partysknowledge and belief, given one or more hypothetical

assumptions, an entitys expected financial position, resultsof operations, and cash flows.

300 Reporting on Pro Forma Information ExaminationThe objective of pro forma financial informationis to show Reviewwhat the significant effects on historical financialinformation might have been had a consummated orproposed transaction (or event) occurred at an earlier date.

For example, pro forma financial information is commonlyused to show the effects of transactions such as a businesscombination or disposition of a significant portion of

business.

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SSAE Nature of Type of Section Attestation Engagement Assurance

400 Reporting on an Entitys Internal Controls This section Examinationprovides guidance regarding:

Conditions that must be met for a practitioner to examine Agreed-upon managements assertion about the effectiveness of an Procedures entitys internal controls, including the prohibition of

acceptance of an engagement to review such a management assertion.

Engagements to examine managements assertion about

the design and operating effectiveness of an entitys

internal controls, including a segment of an entitys internal controls.

Engagements to examine managements assertion about only the suitability of design of an entitys internal controls

(no assertion is made about the operating effectiveness of the internal controls).

Engagements to examine managements assertion about the design and operating effectiveness of an entitys internal controls based on criteria established by a regulatory agency.

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SSAE Nature of Type of Section Attestation Engagement Assurance

500 Compliance Attestations This section provides guidance Examinationfor engagements related to managements written assertioneither:

An entitys compliance with requirements of specified laws, Agreed-upon regulations, rules, contracts, grants, or Procedures

The effectiveness of an entitys internal control over compliance with specified requirements.

600 Agreed-upon Procedures Engagements This section sets Agreed-uponforth attestation standards and provides guidance to a Procedures

practitioner concerning performance and reporting in allagreed-upon procedures engagements, except those coveredby other specific professional standards.

700 Managements Discussion and Analysis This section Examinationsets forth attestation standards and provides guidance to apractitioner concerning the performance of an attest Reviewengagement with respect to managements discussion and

analysis prepared pursuant to the rules and regulationsadopted by the Securities and Exchange Commission (SEC),which are presented in annual reports to shareholders andin other documents.

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Accountants Standard Report on

Examination of a Financial Forecast

Figure 21-9We have examined the accompanying forecasted balance sheet,

statements of income, retained earnings, and cash flows of XYZ

Company as of December 31, 20XX, and for the year then ending. Our

examination was made in accordance with standards for an examination

of a forecast established by the American Institute of Certified PublicAccountants and, accordingly, included such procedures as we

considered necessary to evaluate both the assumptionsused by

management and the preparation and presentationof a forecast.

In our opinion, the accompanying forecast is presented in conformity

with guidelines for presentation of a forecast established by the

American Institute of Certified Public Accountants, and the underlyingassumptions provide a reasonable basis for managements forecast.However, there will usually be differences between the forecasted and

actual results, because events and circumstances frequently do not

occur as expected, and those differences may be material. We have noresponsibility to update this report for events and circumstances

occurring after the date of this report.

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Assurance/Service Matrix

Figure 21-1

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Accounting and

Review ServicesThe Statements and Standards for Accounting and

Review Services(SSARs) were first developed in 1979

at a time when CPAs could provide only 2 levels ofassurance on financial statements.

Audit

Unaudited

The SSARs review service was originally developed as

a lower-cost and lower-assurance alternative to an

audit of the financial statements of nonpublic

companies.

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Accounting and

Review ServicesThe codification of Statements on Standards for

Accounting and Review Services is referred to by

AR section numbers associated with accountingand review services. AR 100.04defines a

nonpublic companyas any entity other than:

1. One whose securities trade in a public market either on a stock

exchange (domestic or foreign) or in the over-the-countermarket, including securities quoted only locally or regionally,

2. One that makes a filing with a regulatory agency in preparation

for the sale of any class of its securities in a public market, or

3. A subsidiary, corporate joint venture, or other entity controlled

by an entity covered by 1or 2.

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Accounting and

Review ServicesReview of Financial Statements

The purpose of a review engagementof the financialstatements of a nonpublic entity is to performinquiry and analytical proceduresthat provide theaccountant with a reasonable basis for expressinglimited assurance that there are no materialmodifications that should be made to thestatements in order for them to be in conformitywith GAAP (or OCBOA), if applicable.

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Accountants Report on SSARS Review

of Financial Statements

Figure 21-13I [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 and 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 includedin these financial statements is the representation of the management

[owners] of XYZ Company.

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 regardingthe financial statements taken as a whole. Accordingly, I [we] do not express

such an opinion.

Based on my [our] review, I am [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.

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Accounting and

Review ServicesCompilation of Financial StatementsThe purpose of a compilation engagementis to present in the

form of financial statements information that is therepresentation of management without undertaking to express

any assurance on the statements.

Many small businesses rely on assistance from their CPAs to

prepare financial information for their use in either managingthe company or in submitting information about the company

to a bank in support of a request for financing.

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Accounting and Review Services

Compilation procedures focus on:

Accountants knowledge of accounting principles

Understanding the nature of business transactions

Accounting records

Stated qualifications of accounting personnel

Basis of accounting used

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Accountants Report on Compilation of

Financial Statements

Figure 21-14I [we] have compiled the accompanying balance sheet of

XYZ Company as of December 31, 20XX, and the related

statements of income, retained earnings, and cash flows

and for the year then ended, in accordance withStatements on Standards for Accounting and Review

Services issued by the American Institute of Certified

Public Accountants.

A compilation is limited to presenting in the form offinancial statements information that is the

representation of management [owners]. I [we] have notaudited 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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Accounting and

Review ServicesA sample standard review report

recommended in AR 100.17is shown in

Figure 21-14. In some cases, management

may want the accountant to compile

financial statements so that management

can monitor the business, andmanagement may decide that it doesnt

need full disclosure financial statements

for this purpose.

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Accounting and

Review ServicesThe Accounting and Review Services SSARS 8 allows theaccountant to evaluate the risk that a third party woulduse the compiled financial statements. When the auditor

answers that there is little risk of a third party using thefinancial statements, the accountant may either:

1. Issue a compilation report.

2. Obtain an engagement letter signed by management

documenting an understanding with the entity about theservices to be performed.

3. Issue a letter to management documenting theunderstanding with the entity about the services to beperformed.

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Other Considerations

Change of EngagementIn the course of rendering professional services, a CPA may beasked to change from one type of service to another. A change

is a step upwhen it results in a higher level of assurance than

originally agreed to. The CPA can agree to this type of change

when:

1. there appears to be sufficient evidence to support the higher

level of assurance and,

2. it seems likely that the revised engagement can be completed in

accordance with professional standards.

In contrast, a change in engagement is a step downwhen a lower

level of assurance is requested by the client.

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CHAPTER 21

OTHER SERVICES AND REPORTS

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Copyright

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United States Copyright Act without the express

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caused by the use of these programs or from the

use of the information contained herein.