Chapter 25

Other Assurance Services

and Nonassurance Services

 Review Questions

25-1 Attestation standards provide a general framework for and set reasonable
boundaries around the attestation function. They provide guidance to AICPA
standard-setting bodies for establishing detailed standards and interpretations of
standards for specific types of services. They also provide practitioners useful
guidance in performing new and evolving attestation services where no specific
guidance exists.
The attestation standards, therefore, provide a conceptual framework for
various types of services. Generally accepted auditing standards do the same
thing for the conduct of the ordinary audit of financial statements prepared in
accordance with generally accepted accounting principles.

25-2 In a WebTrust assurance services engagement, a client engages a CPA

to provide reasonable assurance that a company’s Web site complies with one or
more of the following five Trust Services principles:

1. Security – Security practices ensuring that the system is protected

against authorized access (both physical and logical).
2. Availability – Availability practices, ensuring that the system is
available for operation and use as committed or agreed.
3. Processing Integrity – Processing integrity, ensuring that system
processing is complete, accurate, timely, and authorized.
4. Online Privacy – Online privacy practices, ensuring that personal
information obtained as a result of e-commerce is collected used,
disclosed, and retained as committed or agreed.
5. Confidentiality – Confidentiality practices, ensuring that information
designated as confidential is protected as committed or agreed.

A licensed CPA can issue a WebTrust opinion on an individual

principle or on combinations of principles.

25-3 The purpose of a SysTrust engagement is for the licensed accountant to

evaluate a company’s information technology system using Trust Services
principles and criteria and to determine whether controls over the system exist.
The accountant then performs tests to determine whether those controls were
operating effectively during a specified period. See the solution to Review
Question 25-2 for the five Trust Services principles.

25-4 A prospective financial statement is a predicted or expected financial

statement in some future period or at some future date. There are two general
types of prospective financial statements: forecasts and projections. A forecast is

25-1
a prospective financial statement that presents an entity's expected financial
position, results of operations, and cash flows for future periods, to the best of

25-2
25-4 (continued)

the responsible party's knowledge and belief. A projection is a prospective

financial statement that present an entity's financial position, results of
operations, and cash flows, to the best of the responsible party's knowledge and
belief, given one or more hypothetical assumptions.
An examination of prospective financial statements involves:

 Evaluating the preparation of the prospective financial statements.

 Evaluating the support underlying assumptions.
 Evaluating the presentation of the prospective financial statements
for conformity with AICPA presentation guidelines.
 Issuing an examination report.

25-5 Levels of assurance represent the degree of certainty the practitioner has
attained, and wishes to convey, that the conclusions stated in his or her report
are correct.
Audits of historical financial statements prepared in accordance with
generally accepted accounting principles are one type of examination. They are
governed by auditing standards. An audit results in a conclusion that is in a
positive form. In this type of report, the practitioner makes a direct statement as
to whether the presentation of the assertions, taken as a whole, conform to the
applicable criteria. The level of assurance is high.
In a review, the practitioner provides a conclusion in the form of a negative
assurance. In this form, the practitioner's report states whether any information
came to the practitioner's attention to indicate that the assertions are not
presented in all material respects in conformity with the applicable criteria. The
level of assurance is moderate.
A compilation is defined in SSARS as presenting, in the form of financial
statements, information that is the representation of management without
undertaking to express any assurance on the statements.

25-6 A negative assurance states, along with factual statements, that nothing
came to the auditor's attention that would lead the auditor to believe that the
financial statements were not prepared in accordance with GAAP or other
comprehensive basis of accounting. The reason for including such a statement in
a review report is to provide financial statement users with some level of
assurance that the financial statements are fairly stated. The level of assurance
is less than that for an audit of historical financial statements, but more than the
zero-level assurance for a compilation.

25-7 Compilation is defined in SSARS No. 1 as presenting in the form of

financial statements information that is the representation of management,
without undertaking to express any assurance on the statements. Review is
defined by SSARS No. 1 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.
There is no level of assurance provided by a compilation. Reviews provide
limited assurance, but considerably less than a typical audit.

25-3
25-8 One of three forms of compilation can be provided to clients:

 Compilation With Full Disclosure Compilation of this type

requires disclosures in accordance with generally accepted
accounting principles, the same as for audited statements.
 Compilation That Omits Substantially All Disclosures This
type of compilation is acceptable if the report indicates the lack of
disclosures and the absence of disclosures is not, to the CPA's
knowledge, undertaken with the intent to mislead users.
 Compilation Without Independence A CPA firm can issue a
compilation report even if it is not independent with respect to the
client, as defined by the Code of Professional Conduct. However,
the CPA firm must state its lack of independence in the report.

25-9 The following five things are required by SSARS No. 1 for compilation.
The preparer of the statements must:

 Know something about the accounting principles and practices of

the client's industry.
 Know the client, the nature of its business transactions, accounting
records and employees, and the basis, form, and content of the
financial statements.
 Make inquiries to determine if the client's information is satisfactory.
 Read the compiled financial statements and be alert for any
obvious omissions or errors in arithmetic and generally accepted
accounting principles.
 Disclose in the report any omissions or departures from generally
accepted accounting principles of which the accountant is aware.
This requirement does not apply to a compilation that omits
substantially all disclosures.

25-10 For a compilation, the accountant does not have to make inquiries or
perform other procedures to verify information supplied by the entity beyond
those identified in the answer to Review Question 25-9. But if the auditor
becomes aware that the statements are not fairly presented, he or she should
obtain additional information. If the client refuses to provide the information, the
auditor should withdraw from the compilation engagement.

25-11 The following types of procedures are emphasized for review services:

 Obtain knowledge of the accounting principles and practices of the

client's industry. The level of knowledge for reviews should be
somewhat higher than that for compilation.
 Obtain knowledge of the client. The information should be about the
nature of the client's business transactions, its accounting records
and employees, and the basis, form, and content of the financial
statements. The level of knowledge should be higher than that for
compilation.
 Make inquiries of management. The objective of these inquiries is
to determine whether the financial statements are fairly presented,
assuming that management does not intend to deceive the
25-4
25-11 (continued)

accountant. Inquiry is the most important of the review procedures.

The following are illustrative inquiries:
• Inquire as to the company's procedures for recording,
classifying, and summarizing transactions, and disclosing
information in the statements.
• Inquire into actions taken at meetings of stockholders and
board of directors.
• Inquire of persons having responsibility for financial and
accounting matters whether the financial statements have
been prepared in conformity with generally accepted
accounting principles consistently applied.
 Perform analytical procedures. The analytical procedures are
meant to identify relationships and individual items that appear to
be unusual. The appropriate analytical procedures are no different
from the ones already studied in Chapters 7 and 8 and in those
chapters dealing with tests of details of balances.

25-12 For review services, if a client fails to follow generally accepted accounting
principles, a modification of the report is needed. The accountant is not required
to determine the effect of a departure if management has not done so, but that
fact must also be disclosed in the report. For example, the use of replacement
cost rather than FIFO for inventory valuation would have to be disclosed, but the
effect of the departure on net earnings does not require disclosure.

25-13 Compilations and reviews under SSARS No. 1 can only be issued for
nonpublic companies for which an audit has not been performed. They may be
for monthly, quarterly, or annual statements.
Reviews are issued on quarterly information of publicly held companies as
a part of the client's reporting requirements to the SEC and are subject to
PCAOB standards. Although there are some minor differences in the wording on
a review report for a nonpublic company and a public company review report,
they are substantively the same.

25-14 The review procedures are essentially the same for public company and
SSARS 1 reviews. Some additional procedures are required for public company
reviews that are beyond the scope of SSARS 1 as follows:

 The level of knowledge the accountant has about the client's

internal control is likely to be higher for public company reviews.
Because an annual audit is done for public companies that have an
interim review, the accountant must also obtain sufficient
information about the client’s internal control for both annual and
interim financial information.
 The auditor's knowledge of the results of the audit procedures
performed during the annual audit will affect the scope of the
procedures performed during the review of interim financial
information.
 The accountant will also have a good idea whether the quarterly
statements were accurate after the annual audit is complete. This
25-5
25-14 (continued)

information will be useful in determining the review procedures in

subsequent years.
 Under SSARS, the auditor makes inquiries about actions of
directors and stockholder meetings; for public companies the
auditor reads the minutes of those meetings.
 For public companies, the accountant must also obtain evidence
that the interim financial information agrees or reconciles with the
accounting records.

25-15 The purpose of an engagement of specified elements, accounts, or items

is like that of an ordinary audit, but it is limited only to certain accounts or parts of
the financial statements. An example is the audit of the sales account for a retail
store in a shopping mall.
The following are four specific requirements for reports on specified
elements, accounts, or items:

 The specified elements, accounts, or items must be identified.

 The basis on which the specified elements, accounts, or items are
presented and the agreements specifying the basis must be
described.
 The source of significant interpretations made by the client about
the provisions of a relevant agreement must be indicated and
described.
 If the specified element, account, or item is presented on a basis
that is not in conformity with GAAP or another comprehensive basis
of accounting, a paragraph that restricts the distribution of the
report to those within the entity and the parties to the contract or
agreement must be added.

25-16 The reporting requirements for statements prepared on a basis other than
GAAP include the following paragraphs: introductory, scope, middle, opinion, and
restriction of distribution paragraph. The introductory, scope, and opinion
paragraphs are essentially the same as for statements prepared in conformity
with GAAP. The middle paragraph states the basis of presentation and refers to
a note to the financial statements that describes the basis of accounting followed.
The restriction of distribution (final) paragraph is used when the financial
statements are prepared in conformity with requirements of a governmental
regulatory agency. Distribution of the report is then restricted to those within the
entity and for filing with the regulatory agency.

25-17 It would be appropriate for Germany to provide a report to Northern State

Bank on all of the conditions except the competency of management. Reports on
the working capital ratio, dividends paid on preferred stock, and aging of
accounts receivable are factual matters within a normal auditor's competence.
Reporting on the competence of management is highly subjective and should not
ordinarily be in a debt compliance letter.

25-6
Multiple Choice Questions From CPA Examinations

25-18 a. (2) b. (3)

25-19 a. (4) b. (3) c. (2) d. (1) e. (2) f. (3)

25-20 a. (1) b. (1) c. (1) d. (1)

 Discussion Questions and Problems

25-21
a. The CPA cannot perform WebTrust assurance services without being
licensed by the AICPA to provide such services. CPAs seeking to
provide WebTrust services must attend training, apply for the
WebTrust license, and satisfy other quality control requirements.

b. The CPA can perform the requested SysTrust assurance service on

compliance with the Availability principle. CPAs can provide
assurance about an entity’s compliance with a single Trust Services
principle or a combination of two or more principles.

c. The WebTrust seal cannot remain on the company’s Web site through
May 31, 2006 without the CPA updating his or her work to support
the seal. The WebTrust service requires the CPA to update his or
her testing once every twelve months to ensure the entity continues
to comply with Trust Services principles and criteria.

d. A client may request a SysTrust engagement for a system that is in the

pre-implementation phase. In this engagement, the CPA would
report on the suitability of the design of the controls and the report
would be as of a point in time rather than for a period of time.

25-22 a. It would be acceptable to undertake the engagement only if

all of the following conditions exist:

 The accountant has sufficient competence to properly

complete an examination of the forecasted financial
statements.
 The client is willing to take responsibility for preparation (with
the accountant's assistance) of the forecast in accordance
with guidelines, established by the AICPA in Statements on
Standards for Accountant's Services on Prospective
Financial Statements.
 The accountant believes a reasonably accurate forecast is
practicable in the circumstances.
 The client understands and agrees to the examination
procedures and reporting requirements the accountant must
comply with.

25-22 (continued)
25-7
 b. If Monson believes the accountant can issue an opinion
about the achievability of the forecast, but later finds that such an
opinion cannot be given, Monson is likely to be unhappy. The result
would be a loss of fee, loss of a client for other services, and
perhaps even a lawsuit. Similarly, Monson must understand his
responsibilities concerning the forecast of the assumptions and
other aspects of the report, again to avoid a misunderstanding later.
c. The primary information the CPA firm will need to help in
completing the forecast are the following:

 Audited financial statements for the past several years.

(Easily available because Monson is an audit client.)
 Information about the economic conditions of the industry.
The CPA firm will likely need knowledge beyond that
required for performing the audits.
 Information about the offer he has made for the new
business and the offer he has received for the existing
assets. Because the financial statements will be a forecast,
and not a projection, it is necessary to determine that there
is a reasonable likelihood of the transaction being completed
and the forecasted result, assuming both transactions are
finalized.

d. The report will be a report on a forecast and will include the

following components:

 An identification of the prospective financial statements

presented.
 A statement that the examination of the prospective financial
statements was made in accordance with AICPA standards
and a brief description of the nature of such examination.
 The accountant's opinion that the prospective financial
statements are presented in conformity with AICPA
presentation guidelines and that the underlying assumptions
provide a reasonable basis for the forecast.
 A caveat that the prospective results may not be achieved.
 A statement that the accountant assumes no responsibility to
update the report for events and circumstances occurring
after the date of the report.

25-23 a. The purpose of a debt compliance letter is to provide the

lender with an independent opinion of the existence or
nonexistence of some condition. The lender usually will request a
CPA to determine whether certain loan covenants are being
adhered to by the debtor.
b. An audit of the company is necessary before a debt
compliance letter is issued because a compliance letter would be
difficult to prepare without an audit. This stems from the fact that
the CPA is usually concerned with financial balances and ratios of
the
25-8
25-23 (continued)

company when preparing a debt compliance letter. An audit is

virtually required in order to verify these amounts.
c. A CPA firm could issue a debt compliance letter on the amount of
the current ratio and the owner's equity. The firm may report on
these two aspects because it is qualified to evaluate such matters.
However, the other three requests require legal expertise and
subjective judgment that a CPA firm does not claim to possess.
Therefore, the CPA should restrict the debt compliance letter to the
two quantitative requests.

25-24 The accountant is responsible for the care in the preparation of compiled
financial statements. The accountant must perform all five steps identified in the
answer in Review Question 25-9 with due care. The report must also be properly
prepared and reflect the findings of the accountant.
Users other than management are not prohibited from using compiled
financial statements. They can expect the accountant to meet the standards set
by the profession.
The courts have not established the responsibilities of accountants for
compilations. Presumably, the responsibilities should be far less than for audits
and somewhat less than for reviews. Responsibilities exist, but the level has yet
to be finalized.

25-25

a. b.
REQUIRED ON A REQUIRED ON A
REVIEW COMPILATION
PROCEDURE ENGAGEMENT ENGAGEMENT
1. X X
2. X
3. X X
4.
5. X
6.
7. X
8. X
9.

X = Required procedure

25-26 a. The requirements are the same as for audited statements.

The company must use a historical cost method, including lower of
cost or market and the valuation method must be specified on the
statements.

25-9
25-26 (continued)

b. The CPA firm is apparently associating itself with financial

statements that are not in accordance with generally accepted
accounting principles. In addition, the firm could be signing a tax
return that violates the tax laws.
Unless the facts are fully disclosed in the statements and tax
returns, the firm could be in violation of Rule 203 of the Rules of
Conduct. There is also potential liability from financial statement
users and the Internal Revenue Service.
c. There are three categories of procedures that the accountant
should follow.

 Understand the client's business. If the accountant

understands the nature of the client's inventory needs, an
assessment of the amount that is likely to be on hand is
more likely.
 Analytical procedures. The use of ratio analysis–including
inventory turnover, gross margin, and inventory as a percent
of current assets–should be useful in this case.
 Inquiries of management. Appendix A of SSARS 1 provides
guidance as to the appropriate inquiries for inventories.
 Have inventories been physically counted? If not, how
have inventories been determined?
 Have general ledger control accounts been adjusted
to agree with physical inventories?
 If physical inventories are taken at a date other than
the balance sheet date, what procedures were used
to record the change in inventory between the date of
the physical inventory and the balance sheet date?
 Were consignments in or out considered in taking
physical inventories?
 What is the basis of valuation?
 Does inventory cost include material, labor, and
overhead where applicable?
 Have write-downs for obsolescence or cost in excess
of net realizable value been made?
 Have proper cutoffs of purchases, goods in transit,
and returned goods been made?
 Are there any inventory encumbrances?

d. The problem is serious because the statements appear not

to be acceptable as stated. The client is not following generally
accepted accounting principles and the tax returns apparently are
not being prepared correctly. On the basis of the information
provided, it is questionable whether a CPA firm can sign the tax
return. Materiality is a critical consideration.
The most important course of action is for the staff
person to talk to the partner and see what he or she says. The staff
person is obligated to the firm to express the viewpoint that the
statements are not correctly prepared.
25-10
25-26 (continued)

ALTERNATIVES COST - BENEFIT

1. Convince the client to prepare This is the best alternative, but the firm
proper financial statements by may lose the client.
convincing management of potential
consequences. Also convince the
client of benefits of properly
prepared statements.

2. Prepare review as the statements The firm will probably lose the client,
now exist, but include appropriate but it is an appropriate action.
report qualifications. Do not do or
sign tax return.

3. Withdraw. Loss of client, but will potentially save

the firm from a lawsuit or IRS action.

4. Change to a compilation with full This alternative is identical to No. 2 and

disclosure. requires disclosure. The firm still
cannot sign the tax return.

25-27 a. In addition to the inquiries listed, the accountant must understand

the client's business to facilitate evaluating whether the statements
are reasonable. Analytical procedures must also be performed. It
may also be appropriate to inquire about such things as the
possibility of unbilled sales, authorization procedures for sales,
whether the accounts receivable control account has been
reconciled with the master file records, and the possible inclusion of
consignment shipments as sales.
b. In reviews, no procedures such as tests of controls, substantive
tests of transactions, cutoff tests, or confirmation requests are
done. The only things that are done are inquiries and analytical
tests. An examination of the procedures for sales and receivables
discussed in Chapters 14 and 16 shows that there is considerable
difference between an audit and those review procedures listed in
this problem.
c. Inquiries would ordinarily be made of the chief financial officer in a
small or large business. Ordinarily the chief financial officer in a
small business is the owner, but it may also be a controller or vice-
president.
d. Additional procedures should be performed when the accountant
believes, based on the information obtained through inquiry and
analytical procedures, that the financial statements may be
materially misstated. Examples where this could be the case are:

■ A material increase in the gross margin percent

■ A material decrease in allowance for uncollectible accounts
divided by accounts receivable
■ A statement by a bookkeeper that leads the accountant to
believe the client's personnel do not fully understand correct
sales cutoff procedures
25-11
25-27 (continued)

e. The achieved level of assurance for audits is ordinarily much

higher than for reviews. The differences in the procedures identified
in this problem and those studied in Chapters 14 and 16 are
significant and result in large differences in the achieved levels of
assurance.

25-28 a. It is not appropriate to do a review service for a publicly held

company. Review service engagements are restricted to nonpublic
companies. Annual statements of public companies must either be
audited or unaudited in accordance with generally accepted
auditing standards and requirements of the Securities and
Exchange Commission. This provides a clearer definition in the
level of assurance for the financial statements of public companies.
However, a review-type service can be provided for interim financial
statements of public companies.

b. There are some deficiencies in the approach taken:

 Because Tidwell is a high risk client, indicating a high

likelihood of misstatement, and because the required review
procedures include inquiries and analytical procedure, the
review should, at least in part, be performed by the more
experienced member of the engagement team, and not be
so completely delegated.
 Because there are some differences between an SSARS 1
review and a public company review, use of the firm's
standard procedures for SSARS reviews without
modification is inappropriate. Additional procedures to be
performed include (at a minimum):
 Relating inquiries to findings in the recent audit
 Reading minutes

c. The following problems exist with regard to the report:

 Pages should be marked "unaudited" not "reviewed."

 The report should be addressed to the client, not the
Securities and Exchange Commission.
 The wording of the report should be changed from the
SSARS review to the required wording for public companies,
including reference to PCAOB standards.

25-12
25-29 a. We have audited, in accordance with generally accepted
auditing standards, the balance sheet of Pollution Control Devices,
Inc. as of and the related statements of income, retained
earnings, and cash flows for the year then ended, and have issued
our report thereon dated .
In connection with our audit, nothing came to our attention
that caused us to believe that the Company failed to comply with
any of the provisions of the indenture dated with (lender)
insofar as they relate to accounting matters. However, our audit
was not directed primarily toward obtaining knowledge of such
noncompliance.
This report is intended solely for the information of the
boards of directors and management of Pollution Control Devices,
Inc. and (lender) and should not be used for any other purpose.

b. The supplemental report would have to state that the company was not
in compliance with the provisions of the indenture because net
earnings did not exceed dividends by at least $1,000,000.
c. The supplemental report would be the same as discussed in b.
Assuming that a default in the provisions of the indenture results in the
loan becoming due immediately, the auditor's report would have to
include either an adverse or qualified opinion depending upon the
materiality of the misstatement. Because the mortgage is for $4 million,
which is material to the client, violation of the indenture and potential
default cannot be dismissed as being immaterial.
d. Contingencies due to a lawsuit may affect the liabilities of the client
that will affect the indenture provisions. The auditor will be unable to
express an opinion in the debt compliance letter because of this
uncertainty. This should be disclosed in the supplemental report.

25-30 a. There are two aspects of the audit that are affected because of the
special audit of royalties. First, the allowable materiality for royalties
must be lower than ordinary. Second, the resolution of the dispute is
desirable because of the effect it will have on the special report.
It will probably be necessary for the auditor to do the following due to
the special report:

 Increase the sample size for tests of sales transactions.

 Test more sales cutoff transactions than normal because of
the importance of sales.
 Verify the existence, accuracy, and classification of the four
types of disputed sales.

b. A standard unqualified report is appropriate for the financial

statements unless a $9,000 (12% of 75,000) disputed amount is
considered material.

25-13
25-30 (continued)

c. We have audited the account, royalties expense, and the five

related accounts identified in paragraph three below, applicable to
Ronnie Johnson for writing CPA Review Materials for Quality CPA
Review for the year ended December 31, 2005 under the terms of
the licensing agreement between Ronnie Johnson and Quality CPA
Review. These accounts are the responsibility of Quality CPA
Review's management. Our responsibility is to express an opinion
on the account, royalty expense, and the five related accounts
based on our audit.
We conducted our audit in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the account, royalties
expense, is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures for the account. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall account
presentation. We believe that our audit provides a reasonable basis
for our opinion.
We have been informed that, under Quality CPA
Review's interpretation of the contract, royalties are to be paid on
the basis of 12% of gross sales which specifically exclude royalties
on any of the following four accounts:

 Materials sent to instructors for promotion

 Uncollected fees due to bad debts
 Candidates who paid no fee because they performed
administrative duties during the course
 Refunds to customers who were dissatisfied with the course

In our opinion, the account, royalties expense, presents fairly, in all

material aspects, the amount of royalties applicable for the CPA
materials sold by Quality CPA Review during the year-ended
December 31, 2005, under the interpretation of the royalty
agreement as stated above.
In our opinion, gross sales and the four accounts identified in
paragraph three on which royalties have not been paid are fairly
stated, in all material respects, for the year-ended December 31,
2005 as presented in Schedule Three on page four of the financial
statements.
This report is intended solely for the information and use of the
board of directors and management of Quality CPA Review and
Ronnie Johnson, and should not be used for any other purpose.

25-14
25-31 a. Jones will probably have to conduct additional audit tests in order to
report on these items individually. It will be necessary for Jones to
accumulate additional evidence because the materiality of the
individual items is much lower than for the overall financial
statements. The additional evidence will enable the auditor to
obtain a higher level of assurance regarding the items than is
attained without expanding the audit procedures. The individual
items have a lower level of materiality because their magnitude is
less than the overall financial statements. Therefore, an amount
that is not considered material to the financial statements as a
whole may be material when applied to the three accounts being
considered.
b. The following additional tests are likely to be needed before the
special report can be issued:

Sales
 Cutoff tests of sales may be expanded
 Depending upon the previous results, tests of controls and
substantive tests of transactions for sales may be increased

Net fixed assets

 Examine physical existence of a sample of fixed assets
 Determine if fixed assets are still on the books but not being
used
 Recalculate depreciation
 Increase vouching of additions in the current year

Inventory
 Increase the price test coverage of inventory value

It should be noted that the extent of these tests depends on the

results attained in these areas in the audit, the amount of evidence
gathered in the audit, and the client's internal controls. The audit
procedures above are vague because of this and are intended to
be illustrative of the type of procedures that should be considered.
After-the-fact auditing has limitations in that some information
cannot feasibly be recreated. For instance, the auditor cannot
extend test counts of inventory in order to verify the quantity of
inventory. In these cases the auditor must attempt to satisfy the
objective by alternative methods.
c. We have audited the schedules of sales, net fixed assets, and
inventory valued at FIFO (as defined in the lease agreement dated
between (lessor) and Sarack Lumber Supply Co.) of
Sarack Lumber Supply Co. for the year-ended . These
schedules are the responsibility of Sarack Lumber Supply Co's.
management. Our responsibility is to express an opinion on the
schedules based on our audit.

25-15
25-31 (continued)
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the schedules of sales, net fixed assets, and
inventory valued at FIFO are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the schedules. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall schedule
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the schedules of sales, net fixed assets, and
inventory valued at FIFO present fairly, in all material respects, the
sales, net fixed assets, and inventory valued at FIFO of Sarack
Lumber Supply Co. for the year-ended , on the basis
specified in the lease agreement referred to above.
This report is intended solely for the information and use of the
boards of directors and management of Sarack Lumber Supply Co.
and (lessor) and should not be used for any other purpose.

 Internet Problem Solution: Reporting on Quarterly Financial Information

25-1 The Securities and Exchange Commission has implemented rules that
require registrants to have their quarterly financial statements reviewed prior to
filing those statements with the Commission. The rule is available on the SEC’s
Web site [www.sec.gov/rules/final/34-42266.htm]. Answer the following questions
after you have browsed the rule.

1. Prior to the issuance of the new rule requiring quarterly reviews, the SEC
investigated the frequency with which registrants had their auditors perform
reviews. What did the SEC learn from its investigation especially related to
what were at the time the Big Five’s clients?

Answer: “… we understand that the five largest U.S. accounting firms and
other firms have policies to require that their clients have reviews of quarterly
financial statements as a condition to acceptance of the audit. Consequently,
those firms already have implemented the new requirement for the
companies that are audited by those firms.”

2. Which statement on auditing standards is directly applicable to a review of

quarterly financial information?

Answer: SAS No. 100 (Note: reviews for public companies are conducted
under PCAOB standards, and are currently based on SAS 100 because
existing standards were adopted as interim standards by the PCAOB).

(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions are subject to
change. Current information on Internet problems is available at
www.prenhall.com/arens).

25-16