WEEK 4: OTHER PUBLIC ACCOUNTING

SERVICES AND REPORTS

ACCT 322
 AGENDA

1. Homework review

2. Prior week review

3. Chapter 17: Other Public Accounting Services and Reports –

Reviews and Compilations

4. Case Study
 PRIOR WEEK REVIEW

• Comment on an PA’s responsibilities.

• What is ethics?
• What are the different philosophical principles in the study of ethics?
• What are the 5 fundamental principles in the Code of Ethics?
• Why is serving the public interest the auditor’s single most important principle (role)?
• Name the 5 threats to auditor independence.
• How can an auditor’s independence be compromised?
• How does a PA become associated with financial information?
• Describe the 3 levels of assurance.
• Describe the segments of an audit report.
• What are the 2 reasons for a reservation in an audit report? How do reservations
impact the audit report?
 CHAPTER 17 LEARNING OBJECTIVES

Prepare reports for review and compilation of unaudited financial statements, given specific facts.

Write a report on a review of interim financial information.

Describe the various reports on internal control and their connection with public reporting and
reporting to a client’s audit committee
 ENGAGEMENTS

AUDIT REVIEW COMPILATION

High/Reasonable Assurance Limited assurance. No assurance. Compile financial

To form a conclusion on whether information into statements based on
anything has come to the information provided by the client
practitioner’s attention to cause
them to believe that the financial
statements were not prepared in
accordance with GAAP in all
material respects
 REVIEW ENGAGEMENTS

• Have their own set of standards (Canadian Standard on Review Engagements “CSRE” 2400,
HB 7060)

• Became popular in the 80s for high-tech firms and new businesses – such firms would request
some assurance from PAs without the cost and time commitment of a full audit

• Frequently used for interim financial statements (quarterly) and forecasts

 REVIEW ENGAGEMENTS

• In a review engagement, the accountant performs some procedures to achieve a limited level of
assurance (moderate or “negative”) level of assurance

CPA Handbook 8100.05

Reviews are distinguishable from audits in that the scope of a review is less than that of an audit
and therefore the level of assurance provided is lower. A review consists primarily on enquiry,
analytical procedures, and discussions related to information supplied to the public accountant
by the enterprise, with the limited objective of assessing whether the information is being
reported on appropriate criteria. In this section, the word plausible is used in the sense of
appearing to be worthy of belief based on the information obtained by the public accountant in
connection with the review.
 GENERAL STANDARD
CSRE 2400

The review should be performed and the review engagement report prepared by a person or
persons having adequate technical training and proficiency in conducting reviews, with due care
in the exercise of professional skepticism and professional judgement, and complying with
relevant ethical requirements including those pertaining to independence.
 REVIEW STANDARDS
CSRE 2400

i. Work must be adequately planned and properly executed, assistants properly supervised
ii. PA should have or acquire sufficient knowledge of the business carried on by the enterprise so that
intelligent enquiry an assessment of information can be made
iii. PA should perform a review with the limited objective of assessing whether the information being
reported on is meaningful in the circumstances within the framework of appropriate criteria. Such a
review should consist of:

a) Enquiry, analytical procedures, and discussion; and

b) An understanding of the entity and its environment, the applicable financial reporting
framework, including identifying related party or unusual transactions, the existence of potential
fraud, and events or conditions that may cast doubt on the entity’s ability to continue as a going
concern
c) Additional or more extensive procedures when the PA’s knowledge of the business and the
results of the enquiry, analytical procedures, and discussion cause him or her to doubt the
meaningfulness of such information
 REPORTING STANDARDS
CSRE 2400

i. Engagement report should indicate the scope of the review. The nature of the review engagement
should be made evident and be clearly distinguished from an audit

ii. Report should indicate, based on the review,

a. Whether anything has come to the PA’s attention that causes him or her to believe that the
information being reported on is not, in all material respects, in accordance with appropriate
criteria

b. That limited assurance can be provided (”limited” might be considered to fall in a 70 to 80%
assurance range, as compared with the 90 to 99% assurance sought for an audit engagement)
 SOME RECOMMENDED REVIEW PROCEDURES

• Obtain knowledge of the client’s business. Know the accounting principles of the client’s industry.
Understand the client’s organization and operations

• Inquire about the accounting system and bookkeeping procedures

• Perform analytical procedures to identify relationships and individual items that appear to be unusual

• Inquire about actions taken at meetings of shareholders, directors’ and other important executive
committees

• Read (study) the financial statements for indications that they conform with GAAP

• Prepare working papers showing the matters covered by the inquiry and analytical review procedures,
especially the resolution of unusual problems and questions
 COMPILATION SERVICES

• Essentially putting the financial information in the form of financial statements

• The PA is concerned that the assembly of information is arithmetically correct; however

he/she does not attempt to verify the accuracy of completeness of the information provided

• Different from an audit or a review because there is no expression of assurance

 COMPILATION SERVICE RESPONSIBILITY

• Even though no assurance is provided in a compilation engagement, the PA still has the
responsibility of not being associated with misleading information

• If the PA becomes aware of matters that would cause them to believe that the financial
statements are false or misleading, they must request additional or revised information in
order to complete the statements

• If the additional information requested by the PA is not provided, the PA should not release
the statements or should withdraw from the engagement
 NON-GAAP COMPILATIONS

• Financial statements can be compiled on a basis other than GAAP if, in the auditor’s
judgement, this is appropriate for the circumstances

• Appropriate non-GAAP bases are traditionally referred to as another appropriate disclosed

basis of accounting (AADBA)

• AADBA statements should be identified as such through their title or in a note discussing
the statements
 COMPILED FINANCIAL STATEMENTS

• Presentation can range from bare-bones, single-column presentations to GAAP-form

financial statement presentations with all known notes

• Minimum standard is that the statements should not be false or misleading - includes
arithmetic accuracy and conformity with the appropriate disclosed basis of accounting

• Accounting credibility
 PRIOR TO THE COMPILATION

• PA should have an understanding and written agreement with the client as to the services
that will be provided (an engagement letter)

• PA should understand the business

• Study the financial statements looking for obvious clerical or accounting principle errors

• Follow up on information that is incorrect, incomplete or otherwise unsatisfactory

 NOTICE TO READER

• Each page of the financial statements must be marked as “unaudited”

• The Notice to Reader should contain:

• An assertion that the PA compiled the statement from information provided by

management

• A statement that the PA has not audited, reviewed, or otherwise attempted to verity the
accuracy or completeness of such information

• A caution to readers that the statement may not be appropriate for their purposes

• No expression of any form of opinion or negative assurance

Important Note: The report can be issued by an accountant who is not independent, provided that the lack of
independence and the reasons for it are disclosed in the financial statements and in the Notice to Reader
 INTERIM FINANCIAL INFORMATION

• Interim statements are usually not audited

• When interim information is presented, it should conform to GAAP

• Sometimes they are audited if a business is being bought or sold, or to fulfill regulatory
requirements (SEC)

• Interim statements are commonly reviewed

 REVIEW OF INTERIM FINANCIAL STATEMENTS

• Reviews mainly consist of inquiry and analytical procedures

• The Handbook suggests checklists that can be used for interim information and include the
following:

• Inquire about the accounting system

• Obtain an understanding of the system. Have there been any significant changes in the
system used to produce interim information?

• Perform analytical procedures to identify relationships and individual items that seem
unusual

• Read the minutes of shareholder, board of director and board committee meetings to
identify actions or events that may affect interim financial information
TIMING OF REVIEW PROCEDURES FOR INTERIM FINANCIAL
STATEMENTS

• Should be performed at or near the date of the interim information

• Starting the engagement before the cutoff date gives auditors a chance to deal with problems
and questions without undue deadline pressures
 EXTENT OF REVIEW PROCEDURES

• PA needs sufficient knowledge of the client’s business (as if it were a regular audit)

• Extent of review procedures is dependent upon professional judgement about problem areas, past errors

• With this knowledge the PA can direct and fine-tune the review procedures

• Review engagement working papers include the following:

• Financial statements and review engagement report
• Engagement letter
• Evidence of planning
• Documentation of KNOB
• Names of persons requiring inquiries
• Memoranda of inquiries and discussions
• Analytical procedures
• Details of documents examined
• Lead schedules in comparative form, conclusion that the items dealt with are plausible under the circumstances,
or if not their effect on the report
• Review engagement questionnaires
• Letter of representation (without one, scope limitation)
 REPORTING ON A REVIEW OF INTERIM INFORMATION
(SEPARATE FROM AUDITED FINANCIAL STATEMENTS)

• PA may report on the interim information separately from the audited financial statements

• Basic content of report:

• Statement that a review was made in accordance with standards established for review
engagements
• Identification of interim information reviewed
• Description of the review procedures
• Statement that a review is not an audit
• Denial of opinion on the interim information
• Negative assurance about conformity with the disclosed basis of accounting
• Mark indicating “unaudited” status on each page
 REPORTING ON A REVIEW OF INTERIM INFORMATION
(SUPPLEMENTAL TO AUDITED FINANCIAL STATEMENTS)

• When reviewed interim information is presented as supplemental information in a note to the

audited financial statements, the auditors give the standard audit report without mentioning the
reviewed interim information, unless there is a reason to take exception.

• That is, interim information is only mentioned in a standard audit report if:

1. It departs from IAS34 (Interim Financial Reporting),

2. Management indicates that the auditors performed procedures without also saying
that they express no opinion, or
3. Management fails to label interim information as “unaudited” in the note to the
annual financial statements
 FOR NEXT WEEK

 Review these slides and read the Chapters

 Review these slides and read the Chapters
 Chapter 17 Homework: EP17-1 Compilation Presentation Alternatives, EP17-2 Limited (Negative)
 Assurance
Chapter 17in Review Reports
Homework: EP17-1 Compilation Presentation Alternatives, EP17-2 Limited (Negative)
Assurance in Review Reports
 Chapter 17 continued (Internal Control) Chapter 18: Preliminary Audit Planning: Understanding the
 Auditee’s
Chapter 17Business
continued (Internal Control) Chapter 18: Preliminary Audit Planning: Understanding the
Auditee’s Business