Name the elements of a CPA firm’s system of quality control for its auditing, attest, and accounting and review services
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HUMAN resources
ENGAGEMENT/client acceptace and continuance
LEADERSHIP responsibilities
PERFORMANCE of the engagement
MONITORING
ETHICAL requirements
What are the objectives of an auditor when implementing quality control procedures at the engagement level?
The objectives of the auditor are to provide reasonable assurance:
- That the audit compiles with professional standards and any legal or regulatory requirements
- That the report issued by the auditor is appropriate for the engagement
Explain the relationship between quality control standards and GAAS standards
Qualifty control standards pertain to the conduct of all professional activities of an entity’s practice as a whole
GAAS standards relate to the conduct of each individual audit engagement
Which four areas do auditors addres in special consideration engagements?
Special consideration engagements include:
- Audits of F/S prepared in accordance witha a special purpose framework
- Audits of single F/S and specific elements, accounts, or items of a F/S
- Reporting on compliance with aspects of contractual or regulatory requirements associated with audited financials
- Engagements to report on summary F/S
Give examples of special purpose frameworks
- Cash basis
- Tax basis
- Regulatory basis
- Contractual basis
What type of information should an auditor gather prior to auditing a single F/S or a specific element of a F/S?
The auditor should obtain an understaning of the:
- Purpose for preparing the single F/S or specific element of a F/S
- Intended users, and
- Steps taken by managment to ensure that the applicable financial reporting framework is acceptable under the circumstances
What are some of the 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 constitue a major portion of the F/S (The auditor may report on nonmajor items, but such reports not accompany the report on the F/S)
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. audting standards, the auditor:
- Must have audtied teh client’s F/S and expressed an unmodified or qualified opinion (i.e., no adverse opinion or disclaimer); and
- May only give negative assurance on the compliance
What thype of opinion can an auditor issue on summary financial statements and whe is that opinion appropriate?
The auditor may issue either an unmodified opinion or an adverse opinion on the summary F/S, but cannot issue a qualified opinion due to the summarized nature of the financials.
An unmodified opinion is appropriate when the auditor concldes that the summary F/S are consistent, in all material respects, with the corresponding audited F/S.
An adverse opinion is appropriate when the summary F/S are not consistent, in all material respects, with the audited F/S, and management does make the 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 the 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 F/S to determine if appropriate in form and free from obvious material erros
- Follow up with managment 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 F/S, evaluate managment conclusions, and consider the effect on the compilation report.
How does the expected use of compiled F/S affect reporting requirements?
- When F/S are expected to be used by third parties, a compilation report is required
- When F/S 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 F/S?
- Title (“Accountant’s Compilation Report” or “Accountant’s Independent Compilation Report”). addressee, signature, and date
- Introductory paragraph
- The entity, F/S, and dates
- The F/S have been compiled
- The accountant has not audited or reviewd and does not express an opinion
- Management Responsibility Paragraph
- Management is responsible for the F/S and internal controls
- Accountant’s Responsibility Paragraph
- Conducting the engagement in accordance with SSARS
- Assisting managment in presenting F/S without providing assurance
What are the reporting requirements with respect to complied F/S 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 - INQUIRIES 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 managment
P - PROFESSIONAL judgment should be used to evaluate results
A - ACCOUNTANT should communicate results
Remember the mnemonic “U LIAR CPA”
What should be included in an accountant’s report on a review of a nonissuer’s F/S?
- Title (“Independent Accountant’s Review Report”), addressee, signature, and date
- Introductory paragraph
- The entity, F/S and dates
- The F/S 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
Managment Responsibility Paragraph
- Management is responsible for the F/S and internal controls
Accountant’s 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 modificiations that should be made to the F/S (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 F/S
- Scope limitation (client refusing to provide a signed representation letter or not allowing correspondence with client legal counsel)
If an accountant has reviewd the prior period statements but compiled the current period statements, what are his or her reporting options?
The accountant has provided a lower level of 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 for 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 auditd 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 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 that unqualified, the reasons 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 - INQUIRIES 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 managment
P - PROFESSIONAL judgment should be used to evaluate results
A - ACCOUNTANT should communicate results
Remember the mnemonic “U LIAR CPA”
What should be included in an auditor’s report on the review of interim F/S on a publicly held entity?
- Title (Includes the word “independent”). addressee, signature, location, date
- Introductory paragraph
- The entity, F/S and dates
- The interim F/S have been reviewed
- Management’s Responsibility Paragraph
- Fair presentation of the interim financial information and internal controls are the responsibility of managment
- Auditor’s Responsibilty Paragraph
- Conduct the interim financial review in accordance with U.S. GAAS
- The review consists principally of analytical procedures and inquiry
- A review of interim F/S is less in scope than an audit, which expresses an opinion on the F/S 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
What type of information should an auditor promptly communicate to managment during a review of interim financial information and what action should the auditor take if management fails to appropriately respond?
The auditor should promptly communicate to management if:
- Material modifications need to be made to interim financial information to be in accordance with the applicable financial reporting framework
- The issuer filed quarterly reports (10-Q or 10-QSB) prior to the review being completed
- The nonissuer issued interim financial information prior to the completion of the review (when the review is required)
When managment does not appropriately respond, the auditor should:
- Inform those responsible for corporate governance, and, if they fail to adequately respond, consider resigning or consulting legal counsel
What is a comfort letter and what types of assurance are provided within it?
A comfort letter is a letter from the CPA to underwriters. It provides:
- Positive assurance regarding the CPA’s independence and whether the F/S comply as to form in all material respects with the applicable requirements of the SEC Act
- Negative assurance regarding unaudited F/S, capsul financial information, changes in certain F/S items, and compliance of certain nonfinancial statement information with SEC requirements
- A list of procedures and findings (no assurance) regarding pro forma financial information, forecasts, and other financial information
