Financial statements are unaudited if the CPA has not applied any auditing procedures or has not applied procedures which produced sufficient evidence upon which to base an opinion on th
Trang 1NONAUDIT ENGAGEMENTS:
PROCEDURES AND REPORTS
I Review Questions
1 Examples of using “what has held true in the past will hold true in the future:” (a) evaluating the collectibility of accounts receivable based on past collection history,
(b) evaluating inventory obsolescence on the basis of past usage patterns, (c) assessing the economic usefulness and useful lives of fixed assets based upon experience with similar assets,
(d) relying on a control risk assessment for a period between the time of the original assessment at interim and the fiscal year-end, and
(e) expecting to encounter classification and evaluation errors when management has been known to have acted without sufficient decision planning in the past
2 Financial statements are unaudited if the CPA has not applied any auditing procedures or has not applied procedures which produced sufficient evidence upon which to base an opinion on the financial statements as a whole
With respect to unaudited statements, in addition to a disclaimer of opinion
(public companies), the following guides should be followed:
1 If the CPA should learn that the statements are not in conformity with generally accepted accounting principles (including adequate disclosures),
he should explain the departures in the disclaimer
2 If prior years’ unaudited statements are present, the disclaimer should cover them as well as the current year statement
3 Each page of the statements should be clearly labeled as unaudited
3 Prospective financial statements are defined as complete financial statements in
the same form as traditional income statements, balance sheets and statements of changes in financial position However, an abbreviated presentation constitutes prospective financial statements if its contains all of these items (if applicable):
1 Sale or gross revenue
2 Gross profit
3 Unusual or infrequently occurring items
4 Provision for income taxes
5 Discontinued operations or extraordinary items
6 Net income
Trang 27 Primary and fully diluted earnings per share
8 Summary of significant changes in financial position
9 Summary of significant assumptions
10 Summary of significant accounting policies
Omission of any items 1–8 makes the presentation a partial presentation Omission of 9 or 10 makes it a deficient presentation
4 Similarities and Differences
Examination Report on a Forecast Audit Report on Historical Statements
a Identification of financial
statements and what they intend to
represent
a Identification of statements audited
b Warning about ultimate
attainment of prospective results
c Statement about review in
accordance with ASPC standards
c Statement that audit was in accordance with GAAS
d Opinion / assurance about
presentation and reasonable
assumptions
d Opinion about conformity with GAAP
e Statement about no responsibility
to update the report
Compilation Report on a Forecast Compilation Report on Historical Statements
a Identification of financial
statements and what they
represent
a Identification of statements compiled
b Warning about ultimate
attainment of prospective results b Statement / warning that information is the representation
of management (owners)
c Statement about compilation in
accordance with ASPC standards c Same kind of statement about compilation and ASPC standards
d Disclaimer of opinion / assurance d Disclaimer of opinion / assurance
e Statement about no responsibility
to update the report
5 Both review service and compilation service engagements are less than an audit
A comparison of the three amounts to a hierarchy of assurance:
1 Audit engagement Auditor obtains sufficient competent
evidence that serves as a basis for an opinion on financial statements The
auditor obtains reasonable assurance
within the inherent limitations of the audit
Trang 32 Review engagement Accountant obtains limited assurance
through analytical procedures that there are
no material modifications that should be made to financial statements
3 Compilation engagement Accountant puts client information in
financial statement form without obtaining any assurance (because no procedures are
performed) that material modification should or should not be made to the financial statements
Additionally, an accountant who is not independent may report on a compilation service (providing that lack of independence is disclosed), but not on a review service or audit engagement
6 A state of association exists whenever:
a The CPA’s name is used in a document containing the statements; or
b The CPA has prepared or assisted in preparing the statements
7 a Compilation: In compiling financial statements for a client, the CPA
presents information that is the representation of management without undertaking to express any assurance on the statements
b Review: More than a compilation, but less than an audit, a review consists
mainly of performing inquiry and analytical procedures Such procedures provide the CPA a basis for expressing limited assurance concerning conformance with GAAP
c Audit: An audit provides reasonable assurance concerning conformance of
financial statements with GAAP In addition to inquiry and analytical procedures, an audit involves a study of the client’s internal controls and application of such evidence gathering procedures as confirmation, observation, inspection, vouching, and examination
8 The major procedures applied in a review consist of reading the financial statements, inquiry as to accounting procedures, and analytical procedures A compilation, in contrast to a review, consists of obtaining an understanding of industry accounting principles and practices and reading the financial statements
9 A CPA who lacks independence may compile financial statements; but may not perform an audit, review, or any other form of attestation service
Trang 410 Procedures to be applied in compiling prospective financial statements should include the following:
a Inquire about the accounting principles used in preparing the statements
b Ask how the key factors are identified and how the assumptions are developed
c Obtain a list of assumptions and consider whether there are any omissions
or inconsistencies
d Test the mathematical accuracy of computations
e Read the statements for conformity with PSA presentation guidelines
f Obtain client representations concerning compliance with the guidelines
II Multiple Choice Questions
III Comprehensive Cases
Case 1 a Liability to Delcee and other stockholders:
Delcee in its own right may bring an action, or the other stockholders may bring a derivative action against Canada and Canada on behalf of the corporation, for negligent performance in failing to detect the fraud (embezzlement)
A lawsuit based on constructive fraud might be asserted against C & C, because the conduct of the review may be characterized as gross negligence with reckless disregard for the truth Individual shareholders and lending institutions will claim this is the case, and if upheld, privity of contract will not be a valid defense
b Liability to financial institutions:
Third-party financial institutions have rights to sue accountants for negligence in performing review engagements As a general rule, third parties, even though not direct parties to an audit contract, may successfully assert negligence if they can show that they are members of a class of persons intended to benefit from the services performed by the CPA and that their use of the statements was reasonably foreseeable by the CPA
Trang 5Case 2.
Assumption Evidence Sources and Procedures
a Sale of real estate 1 Determine market value of real estate:
* Review appraisals (if any), inquire of real estate broker for the selling price of similar pieces of land
2 Determine cost and tax basis of land:
* Examine underlying documents (use financial statement cost presentations, if previously audited) – deeds, purchase contracts
* Review National Internal Revenue Code and appropriate publications to determine proper tax basis, tax rates, treatment
3 Determine after-tax profit and proceeds:
* Based on above information, compute profit and proceeds Compare amounts to client representations to determine reasonableness
4 Determine authority for use of proceeds:
* Examine minutes of directors’ and officers’ meetings for evidence of authority to sell the real estate and a formal plan for using the proceeds to retire bonds
b Retire outstanding
debentures
1 Determine probable cost of repurchasing bonds:
* Examine amount, terms of bonds outstanding
* Review current forecasted market for bonds,
in light of terms, amount
* Compute estimated cost of repurchase
2 Determine adequacy of funding for repurchase:
* Compare amount of proceeds [computed in (a)] to amount estimated for repurchase
3 Determine authority for retirement:
* Examine minutes of executives’ and officers’ meetings for evidence of approval of retirement
c Labor contract 1 Determine probable wage increase:
* Examine prior contract settlements, including subjective analysis of
Trang 6labor-management relations Confer with union officials
* Examine documents, memos, and minutes regarding upcoming labor negotiations
* Examine management’s proposed contract
2 Determine effect of higher than predicted wage settlement:
* Recompute effect of percent change in wage increase to net income and correlate to management’s figures
d Sales projections 1 Determine estimated completion date of Tarlac
facility:
* Examine contract plans, consult with contractor, observe facility
* Examine contracts for machinery, installation; consult with vendor – dates, type of equipment, product capacity
* Compare auditor-estimated completion date
to management’s for reasonableness
* Consider if company can meet personnel requirements of the new facility
2 Estimate financial impact of Tarlac production:
* Compare productive capacity to forecasted sales figure (presumed determined reasonable by the auditor)
* Recompute probable effect of delay in Tarlac’s completion date and compare to management’s figures
Case 3 Nicky has no accounting staff and has little expertise in preparing financial
statements himself However, he needs them occasionally, apparently for credit purposes
Three kinds of compiled financial statements are available:
1 Compilation Without Independence Brother Kian can prepare the compiled
financial statements (with or without all disclosures), but he will need to disclose in this report his lack of independence
2 Compilation With Full Disclosure CPA Bryan can compile the statements
and present them in the complete form used for audited financial statements
3 Compilation That Omits Substantially All Disclosures CPA Bryan can
compile statements without footnote disclosures, but his report will indicate the lack of disclosure and will warn users
Trang 7Case 4 a Yes, this is a negative assurance.
b Negative assurance is generally prohibited in audit reports because the profession wishes such reports to contain positive assertions based on
evidence instead of negative statements based on “what did not come to my
attention.”
c A review service is less than an audit, hence the report can be less than positive assurance Clients get what they paid (less) for
Case 5.
To the Board of Directors of Francisco Company
I have reviewed the accompanying balance sheet of Francisco Company as of December 31, 2004, and the related statements of income, retained earnings, and changes in financial position for the year then ended, in accordance with standards established by the Auditing Standards and Practices Council All information included in these financial statements is the representation of the management of Francisco Company.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole Accordingly, I do not express such an opinion.
Based on my review, I am not aware of any material modifications that should be made
to the 2004 financial statements in order for them to be in conformity with generally accepted accounting principles.
The accompanying 2003 financial statements of Francisco Company were compiled by other accountants whose report dated January 11, 2004, stated that they did not express any opinion or any other form of assurance of those statements
Jo Cee, CPA
January 15, 2005
Note: This report presumes:
1 Jo Cee is independent
2 Francisco and Associates, CPAs made no modifications in their
2003 compilation report
3 Francisco and Associates, CPAs was independent
Trang 84 The 2003 statements contained all necessary disclosures.
Case 6.
b Agreed upon
procedures Review As agreed and applied to specified elements
analytical procedures
underlying assumptions Determine whether presentation is in conformity with PSA guidelines
Case 7. a.
Nature of Engagement
Type of Report
Principal Procedures
internal control; observe, examine, confirm, reconcile, calculate, and vouch
b Comprehensive
basis other than GAAP
Opinion; positive Same as (a)
c Review;
nonpublic entity Review; limited Inquiry; analytical procedures
d Compilation;
nonpublic entity
Compilation; none Understand industry
accounting practices; read the financial statements
e Agreed-upon
procedures Review; limited As specified by engagement letter
f Letter for
underwriter
Review; limited Inquiry-as specified by
agreement; read the financial statements
Trang 9g Examination of
prospective
financial
statements-projection
Opinion; positive Examine evidence
supporting assumptions; determine whether assumptions provide a reasonable basis for the projection; evaluate preparation and presentation of projected financial statements
h Review of
interim financial
information
Review; limited Inquiry; analytical
procedures
b
a General
b Restricted to management, the board of directors, and the regulatory commission
c General
d General (but a fourth paragraph must be added which states that the CPA is not independent.)
e Restricted to the parties named in the agreement
f Restricted to the underwriters, Candy and Lolli
g Restricted to management, the board of directors, and the prospective lender
h General