SSAEs - MD&A

Question 1

Preconditions

Answer 1

Must have audited the annual financials for the latest period applicable to the MD&A presentation; any other financials involved must have been audited (or at least reviewed if interim/quarterly financials) by the practitioner or a predecessor auditor.

Question 2

Examination Purpose

Answer 2

to express an opinion on whether

• MD&A includes the elements required by the SEC
• the historical amounts are accurately derived
• The underlying information and assumptions provide a reasonable basis for the disclosures within the MD&A presentation

Question 3

Required elements

Answer 3

a. Discussion of financial condition (liquidity and capital resources);
b. Discussion of changes in financial condition;
c. Discussion of results of operations.

Question 4

Four assertions implicitly embodied in the MD&A Presentation

Answer 4

1. Occurrence – Whether reported events actually occurred during the period.
2. Consistency with the financials – Whether historical amounts have been accurately derived from the financials.
3. Completeness of the explanation – Whether the description of matters comprising the MD&A presentation is complete.
4. Presentation and disclosure – Whether information in the MD&A is properly classified, described, and disclosed.

Question 5

Primary Dimensions of an Examination of MD&A

Answer 5

1. Planning the examination (similar to an audit engagement) – Develop an overall strategy that limits “attestation risk” to an acceptably low level.
   a. Inherent risk - varies with the assertion involved.
   b. Control risk (same as previously discussed).
   c. Detection risk (same as previously discussed).
2. Consideration of internal control applicable to MD&A (similar to an audit) – Pertains to assessment of control risk, documenting the understanding, and communication of significant deficiencies.
3. Obtain sufficient evidence – Varies with the circumstances but includes reading the MD&A for consistency with the financials, examining related documents, reading minutes, reading communications from the SEC, and obtaining written representations from management, among other things.
4. Consideration of subsequent events – (SEC expects MD&A to reflect events at or near the filing date) – Read minutes and available interim financials; make inquiries of management and obtain appropriate representations in writing.

Question 6

Exam. Report MD&A

Answer 6

1. Title – “Independent Accountant’s Report.”
2. Standard examination report consists of four paragraphs –
   a.
   Introductory paragraph (four sentences) –
   i. Identify MD&A presentation.
   ii. Identify management’s responsibility.
   iii. Identify accountant’s responsibility.
   iv. Refer to related audit report.
   b.
   Scope paragraph (three sentences) –
   i. Refer to attestation standards established by AICPA.
   ii. Describe scope of examination.
   iii. Say that examination provides reasonable basis for opinion.
   c.
   Explanatory paragraph (three sentences) –
   i. Comment on the need for estimates and assumptions.
   ii. Comment on the role of future expectations.
   iii. State that actual results may differ.
   d.
   Opinion paragraph (one long sentence) – Whether (1) the presentation includes elements required by SEC; (2) the historical amounts are accurately derived; and (3) the underlying information and assumptions provide a reasonable basis for the MD&A.

Question 7

Modification of Report - Exam.

Answer 7

a.
Reservations as to presentation – Results in a qualified or adverse opinion.
b.
Reservations as to scope – Results in a qualified opinion or a disclaimer of opinion.
c.
Division of responsibility – May refer to another practitioner’s report on MD&A for a specific component as a partial basis for one’s own report.
d.
Emphasis of a matter – Presented as a separate paragraph (e.g. information included beyond the SEC’s requirements).

Question 8

Purpose: Review

Answer 8

To report whether the practitioner has any reason to believe that:

1. The presentation does not include the elements required by the SEC;
2. The historical financial amounts are not accurately derived from the financials;
3. The underlying information, assumptions, etc., do not provide a reasonable basis for the disclosures within the MD&A.

Question 9

Primary dimensions of Review

Answer 9

1. Obtain an understanding of the SEC requirements regarding MD&A.
2. Plan the engagement - develop an overall strategy.
3. Consider relevant portions of internal control affecting MD&A presentation.
4. Apply analytical procedures and make inquiries of management (usually do not have to obtain corroboration).
5. Consideration of subsequent events.
6. Obtain written representations from management.