Which four areas do auditors address in special consideration engagements?
Special consideration engagements include:
- Audits of financial statements prepared in accordance with special purpose framework
- Audits of single financial statements and specific elements, accounts, or items of a financial statement
- Reporting on compliance with aspects of contractual or regulatory requirements associated with audited financials
- Engagements to report on summary financial statements
Give examples of special purpose frameworks.
- Cash basis
- Tax basis
- Regulatory basis
- Contractual basis
- Any other basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in the financial statements.
Which of the following elements should be included in the auditor’s report when financial statements are prepared on the cash or tax basis?
- Description of purpose for which special purpose financial statements are prepared
- Emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework
- Other-matter paragraph restricting the use of the auditor’s report
An emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework should be included in the auditor’s report for financial statements prepared on the cash or tax basis.
Which of the following elements should be included in the auditor’s report when financial statements are prepared on the regulatory basis (not for general use) and contractual basis?
- Description of purpose for which special purpose financial statements are prepared
- Emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework
- Other-matter paragraph restricting the use of the auditor’s report
An auditor’s report for financial statements prepared on a regulatory basis (not for general use) or contractual basis should include:
- Description of purpose for which special purpose financial statements are prepared
- Emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework
- Other-matter paragraph restricting the use of the auditor’s report
Which of the following elements should be included in the auditor’s report when financial statements are prepared on the regulatory basis (for general use)?
- Description of purpose for which special purpose financial statements are prepared
- Emphasis-of-matter paragraph alerting readers about the preparation in accordance with a special purpose framework
- Other-matter paragraph restricting the use of the auditor’s report
An audit report for financial statements prepared on the regulatory basis for general use should include the description of purpose for which special purpose financial statements are prepared.
What should be included in an emphasis-of-matter paragraph included in a special purpose framework (other than regulatory basis financial statements intended for general use)?
The auditor’s report should include an emphasis-of-matter paragraph that:
- indicates that the financial statements are prepared in accordance with the applicable special purpose framework.
- refers to the note to the financial statements that describes that framework.
- states that the special purpose framework is a basis of accounting other than GAAP.
What types of information should an auditor gather prior to auditing a single financial statement or a specific element of a financial statement?
The auditor should obtain an understanding of the:
- purpose for preparing the single financial statement or specific element of a financial statement;
- intended users; and
- steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances.
What are some limitations surrounding an auditor’s report on a single financial statement, or a specified element, account, or item of a financial statement?
- If the item is based on stockholder’s equity, the auditor should perform procedures necessary to express an opinion about financial position.
- If the item is based on net income, the auditor should perform procedures necessary to express an opinion about financial position and results of operations.
- If an adverse opinion or disclaimer of opinion was issued, the auditor may not report on items that constitute a major portion of the financial statements. (The auditor may report on nonmajor items, but such reports should not accompany the report on the financial statements.)
Under U.S. auditing standards, when may an auditor issue a special report on a client’s compliance with contractual agreements or regulatory requirements?
Under U.S. auditing standards, the auditor:
- must have auditing the client’s financial statements and expressed an unmodified or qualified opinion (i.e., no adverse opinion or disclaimer); and
- may only give negative assurance on the compliance.
What type of opinion can an auditor issue on summary financial statements and when is that opinion appropriate?
The auditor may issue either an unmodified opinion or an adverse opinion on the summary financial statements, but cannot issue a qualified opinion due to the summarized nature of the financials.
An unmodified opinion is appropriate when the auditor concludes that the summary financial statements are consistent, in all material aspects, with the corresponding audited financial statements.
An adverse opinion is appropriate when the summary financial statements are not consistent, in all material aspects, with the audited financial statements, and management does not make necessary changes.
Name the five elements of compilation and review engagements.
- A three-party relationship (management, the accountant, and the intended users)
- Financial reporting framework
- Financial statements or financial information
- Sufficient, appropriate evidence (review only)
- Written communication or report
Compilation and review standards require that an accountant establish an understanding with the client as to the services to be performed. What should be included in this understanding?
An engagement letter is presumptively mandatory and should include:
- A description of the specific compilation or review services to be performed.
- The objectives of the engagement.
- Management’s responsibilities and accountant’s responsibilities.
- An explanation of the limitations of the service, including a statement that:
- the engagement cannot be relied upon to disclose errors, fraud, or illegal acts; and
- the entity will be informed of any information indicating that fraud or an illegal act may have occured.
- A description of other accounting services, if any, to be performed.
Identify the performance requirements that are necessary when engaged in a compilation.
When performing a compilation, the accountant must:
- Possess knowledge of the accounting principles and practices of the client’s industry.
- Have a general understanding of the client’s business.
- Read the compiled financial statements to determine if appropriate in form and free from obvious material errors.
- Follow up with management when aware of fraud or illegal acts, going concern issues, or subsequent events. The accountant should consider the impact of the follow-up on the financial statements, evaluate management conclusions, and consider the effect on the compilation report.
How does the expected use of compiled financial statements affect reporting requirements?
- When financial statments are expected to be used by third parties, a compilation report is required.
- When financial statements are not expected to be used by third parties, a written communication (either a compilation report or an engagement letter) is required.
What should be included in an accountant’s report on a compilation of a nonissuer’s financial statements?
- Title (“Accountant’s Compilation Report” or “Accountant’s Independent Compilation Report”), addressee, signature and date.
- Introductory Paragraph:
- The entity, financial statements, and dates
- The financial statements have been compiled
- The accountant has not audited or reviewed and does not express an opinion.
- Management Responsibility Paragraph:
- Management is responsible for the financial statements and internal contorls
- Accountant Responsibility Paragraph:
- Conducting the engagement in accordance with SSARS
- Assiting management in presenting financial statements without providing assurance.
What are the reporting requirements with respect to compiled financial statements when:
- Substantially all disclosures are omitted?
- Only limited disclosures are included?
- The auditor lacks independence?
Statements that omit substantially all disclosures:
- The accountant can only report if the omission is not intended to mislead expected users.
- The report must clearly indicate the omission.
- The compilation report should be modified by a fourth paragraph disclosing the omissions.
Statements that include only limited disclosures:
- Notes should be labeled “Selected Information–Substantially All DIsclosures Required by GAAP Are Not Included.”
Statements when the accountant lacks independence:
- The last paragraph of the report should disclose the lack of independence. The auditor is permitted, but not required, to disclose the reason(s) for the independence impairment.
What are the performance requirements applicable to a review engagement?
[U LIAR CPA]
The performance requirements applicable to a review are:
- *U**–Understanding with client must be established.
- *L**–Learn and/or obtain sufficient knowledge of the entity’s business.
- *I**–Inquires should be addressed to the appropriate individuals.
- *A**–Analytical procedures should be performed.
- *R**–Review–other procedures should be performed.
- *C**–Client representation letter should be obtained from management
- *P**–Professional judgment should be used to evaluate results.
- *A**–Accountant should communication results.
Rememfer the mnemonic “U LIAR CPA.”
What should be included in an accountant’s report on a review of a nonissuer’s financial statements?
- Title (Independent Accountant’s Review Report”), addressee, signature, and date.
- Introductory Paragraph:
- The entity, financial statements, and dates
- The financial statements have been reviewed.
- A review includes inquiry and analytical procedures.
- A review is less in scope than an audit and the accountant does not express an opinion.
- Management Responsibility Paragraph:
- Manahement is responsible for the financial statements and internal controls.
- Accountant Responsibility Paragraph:
- Conducting the engagement in accordance with SSARS.
- Perform procedures to obtain limited assurance
- Procedures provide a reasonable basis for report.
- Engagement Results Paragraph:
- The accountant is not aware of any material modifications that should be made to the financial statements (other than any indicated in the report).
If during the course of an engagement the client requests a change in the engagement (i.e. audit to review), what are some acceptable and unacceptable reasons for the change?
Acceptable reasons for change:
- Change in client requirements
- Misunderstanding as to the nature of services being performed
- Scope limitation but accountant determines change reasonable
Unacceptable reasons for change:
- Current engagement would uncover errors or fraud
- Client is attempting to create misleading or deceptive financial statements
- Scope limitations (client refusing to provide a signed representation letter or not allowing correspondence with client legal counsel)
In a review or compilation engagement, an accountant may become aware of a material departure from the applicable financial reporting framework. If the financial statements are not revised, what options does the accountant have?
- Modify the report. If the accountant believes modification of the report is appropriate, a separate paragraph disclosing the departure should be added to the end of the report.
OR
- Withdraw from the engagement. If the accountant believes disclosure in the report would not be adequate to indicate the deficiencies in the financial statements, he or she should withdraw from the engagement.
If an accountant has reviewed the prior period financial statements but compiled the current period financial statements, what are his or her reporting options?
The accountant has provided a lower level or service: review to compilation. Reporting options include:
- issuing a compilation report on the current period statements with a paragraph added to describe the responsibility assumed got the prior period statements; or
- reissuing (not updating) the review report on the prior period.
The reissued report may be combined with or presented separately from the compilation report on the current period.
Either the added paragraph (from the first option above) or the reissued report (in the second option) should include the original date and state that no review procedures have been performed since that date,
If an accountant has audited prior period statements, but compiled or reviewed current period statements, what are his or her reporting options?
When the level of service decreases from an audit to a review or compilation, the accountant should either reissue the prior period report or include an additional paragraph in the current period report. Such an additional paragraph should indicate:
- that prior period statements were audited;
- the date of the previous report(s);
- the opinions expressed, and if other than unqualified, the reaons for the modification; and
- that no auditing procedures have been performed since the previous report date.
What procedures should be performed in a review of the interim financial information of a publicly held company?
[U LIAR CPA]
Auditing standards require the accountant to perform the following:
- *U**–Understanding with client must be established.
- *L**–Learn and/or obtain sufficient knowledge of the entity’s business.
- *I**–Inquires should be addressed to the appropriate individuals.
- *A**–Analytical procedures should be performed.
- *R**–Review–other procedures should be performed.
- *C**–Client representation letter should be obtained from management
- *P**–Professional judgment should be used to evaluate results.
- *A**–Accountant should communication results.
Rememfer the mnemonic “U LIAR CPA.”
What should be included in an auditor’s report on the review of interim financial statements of a nonissuer?
- Title ( inclues the word “independent” addressee, signatire, location, date
- Introductory Paragraph:
- The entity, financial statements, and dates
- The interim financial statements have been reviewed
- Management’s Responsibility Paragraph
- Fair presentation of the interim financial information and internal controls are the responsibility of management
- Auditor’s Responsibility Paragraph
- Conduct the interim financial review in accordance with U.S. GAAS
- The review of interim financial statements is less in scope than an audit, which expresses an opinion on the financial statements as a whole, whereas an interim financial review expresses no such opinion
- Concluding Section Paragraph (with appropriate heading)
- A statement about whether the auditor is aware of any material modifications that should be made for the interim financial information to be in accordance with the applicable financial reporting framework
