Chapter 20 Attest and Assurance Services and Related Reports Spring 2006

1. Chapter 20Attest and Assurance Services and Related ReportsSpring 2006

2. Common Other Services in Public Accounting Today • Compilations • Review for Non-Public Companies • Interim Reviews for Public Companies • Reports on Internal Controls for Non-Public Companies • Reports on Internal Controls for Service Providers

3. Assurance Services Compilation Assurance Services • Report on Internal Controls • Agreed-upon Procedures • Reviews • Attesting to a forecast • Service Provider Report on Controls Audit Attest Services Financial Stmt Audit

4. Levels of Assurance • Audit/Examination – positive expression of an opinion • Review – negative assurance • Agreed-upon Procedures – summary of findings based on a specific set of procedures • Unaudited/Compilation – no assurance

5. Reviews of Non-public Company F/S • Follow AICPA’s SSARS • Must understand relevant accounting principles. • Must understand business, industry, organization & operating characteristics. • Make inquiries of management and others concerning accounting principles and practices. • Perform analytical procedures • Obtain information about actions taken at stockholders meetings. • Read Financial Statements • Obtain written representation from management. • See report example p. 961 figure 20-16

6. Reviews of Interim F/S of Public Companies Not focused on in book – but important • Why is this important? • In 2002 SAS 100 superceded SAS 71 • Increased standards and incorporated PCAOB’s Panel on Audit Effectiveness recommendations • SEC requires public companies to have independent accountant to review interim financial information before it is included on Form 10-Q • Do we give an opinion?

7. SAS 100 Review • Primarily use inquiry, analytical procedures and other procedures to perform review. Do not need to corroborate responses of management. • Accountants’ Report • SAS 100 doesn’t require the accountant to issue a report on the review of interim financial information, • The SEC does require that the accountant’s review report be filed with the interim financial information if management stipulates that the information has been reviewed by the accountant.

8. SAS 100 Review: Procedures • Do not test controls, but need knowledge of entity’s business including internal controls over annual and interim financial information. • Implications for new versus existing client? • Initial procedures should include: • Read and analyze documentation related to the prior-year audit and review engagements. • Read the most recent annual, and comparable prior interim, financial information. • Consider the results of any audit procedures performed with respect to the financial statements of the current year. • Inquire of management about any changes in business activities of the entity. • Inquire of management about any significant changes in internal controls.

9. SAS 100 Review: Procedures • Analytical procedures to identify unusual items: • Comparing quarterly interim f/s with comparable information for the immediately preceding interim period and year-to-date interim f/s with the corresponding periods in the previous year. • Considering plausible relationships between and among both financial and non-financial information. • Comparing recorded amounts, or ratios developed from recorded amounts, to expected amounts. • Comparing disaggregated revenue data (e.g., by month, by product line, or by operating segment) during the current interim period with the information associated with prior periods.

10. SAS 100 Review: Procedures • Other procedures • Read BOD and committee minutes • Obtain reports from other accountants doing reviews • Inquire if interim f/s used GAAP consistently applied • Inquire of mgmt about any unusual or complex situations that may affect interim f/s • Business combinations Litigation • Complex revenue recognition Debt covenant compliance • Asset impairment Stock comp changes • Disposal of a segment EPS calc changes • Derivatives Changes in major contracts • Restructuring Changes in estimates

11. SAS 100 Review: Procedures • Other Procedures continued: Inquire of mgmt about: • status of any uncorrected misstatements identified during the previous audit and interim review. • matters where questions have been raised while applying review procedures. • events subsequent to the interim period that could have a material effect on the presentation of financial information. • knowledge of fraud or suspected fraud affecting the entity. • significant journal entries and other adjustments. • communications from regulatory agencies. • significant deficiencies, including material weaknesses, in the design or operation of internal controls.

12. SAS 100 Review: Procedures • Other procedures continued • Obtain evidence that the interim f/s agrees w/ accounting records. • Read the interim f/s to consider whether it conforms with GAAP. • Consider whether accompanying information, or its presentation, is materially consistent with the interim financial information. • if information comes to light and an accountant believes that the entity’s lawyer may possess helpful information, the accountant should inquire of the lawyer. (inquiry letter generally not necessary)

13. SAS 100 Review: Procedures • Other procedures continued • when the accountant becomes aware of going concern issues, the accountant should inquire of management about associated plans and consider the adequacy of disclosure in the financial statements. • In the performance of review procedures, if the accountant becomes aware of information that suggests information may not be in conformity with GAAP, the accountant should make additional inquiries or perform other procedures in order to reach a decision on this issue. • Perform Disclosure Checklist

14. Agreed-Upon Procedures • Examples • Specific procedures related to the acquisition of a company • Specific procedures related to a specific figure such as store revenue or cash balances • Report of Procedures and Findings – spells out exactly what was done and only give assurance to that

15. Compilation of F/S for Non-Public Company • Follow AICPA Accounting & Review (SSARS) standards • CPA is expected to be knowledgeable of: • the client • accounting principles and practices in the industry • accounting records • qualification of accounting personnel • form and content of financial statements • Compile and “READ” statement with critical eye. • CPA is not free to disregard suspicious circumstances. • Report – p.962 figure 20-17

16. Reports on Internal Controls for Non-Public Companies • Previously used for public and non-public companies – what changed? • Currently still used for non-public companies • Significantly lesser in scope than SOX404

17. Reports on Internal Controls for Service Providers – SAS 70 reports • 3rd party service providers: • bank trust departments that invest and service assets for employee benefit plans; example US Bank, Standard Insurance • mortgage bankers that service mortgages for others, • electronic processors of financial and operational transactions such as payroll services, example ADP

18. Reports on Internal Controls for Service Providers – SAS 70 reports • SAS 70 provides guidance • Primarily an auditor-to-auditor communication • Useful to companies as it provides a third-party's opinion of the soundness of the organization's controls.        • Types of reports • Type I: Reports on controls placed in operation • Type II: Reports on controls placed in operation and tests of operating effectiveness

19. Auditors’ Report on F/S • Audit standards of reporting basically still apply to audits of all companies, both public and private • Big difference in report: • Public company: • GAAS = PCAOB • May include reference to attestation management assertions about internal controls • Private Company • GAAS = AICPA

20. GAAS Standards of Reporting 1.The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles. 2. The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period. 3. Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

21. GAAS: Standards of Reporting 4.The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking.

22. Meaning of “Present Fairly” (SAS 69; AU411.04) The auditor’s opinion as to conformity with GAAP should be based on his or her judgment as to whether: 1. The accounting principles selected and applied have general acceptance 2. The accounting principles are appropriate in the circumstances 3. The financial statements, including the related notes, are informative of matters that may affect their use, understanding, and interpretation

23. Meaning of “Present Fairly” (SAS 69; AU411.04) 4.The information presented in the financial statements is classified and summarized in a reasonable manner 5. The statements reflect the underlying events and transactions in a manner that presents the financial position, results of operations, and cash flows within reasonable and practicable limits

24. Implications of “Consistently” Unless the report contains specific language to the contrary, the reader can conclude that accounting principles have been consistently applied. The objectives of this standard are: 1. to give assurance that the comparability of financial statements between accounting periods has not been materially affected by changes in accounting principles and 2. to require appropriate reporting by the auditor when comparability has been materially affected by such changes.

25. Auditors’ Standard Report Basic Elements of Auditor’s Standard Report Title Addressee Introductory Paragraph Scope Paragraph Opinion Paragraph Firm’s Signature Date

26. Types of Auditors’ Reports (Fig 2-4 p. 69)

27. Types of Auditors’ Reports (Fig 2-4 p. 69)

28. Unqualified Opinion with Explanatory Paragraph • Still means financial statements presented fairly • Reasons for additional paragraph • Change in accounting principal (GAAP): paragraph after opinion • Emphasis of a matter: paragraph after opinion • Going concern: paragraph after opinion • Non-GAAP f/s when GAAP is misleading: paragraph before opinion

29. Unqualified Opinion: Shared responsibility • Decision to make reference or not partly based on materiality and; • Don’t make reference to other auditors • Can do this if the principal auditor (1) knows the work of the other auditor well, (2) guides and controls the work and (3) reviews the audit programs and work papers • Principal auditor takes full responsibility • Make reference to other auditors • More than one auditor, principal auditor unwilling to accept responsibility for work of other auditor(s) • Modify all 3 standard paragraphs but don’t add explanatory paragraph

30. Other Types of Opinions The auditor may conclude that an unqualified opinion cannot be expressed. In such a case, AU 508.10 indicates that the auditor may express on of the following other types of opinions: 1. A qualified opinion which states that, except for the effects of the matter(s) to which the qualification relates, the financial statements present fairly … in conformity with GAAP. 2. An adverse opinion which states that the financial statements do not present fairly … in conformity with GAAP. 3. A disclaimer of opinion which states that the auditor does not express an opinion on the financial statements.

31. Qualified Opinion When a qualified opinion is issued, the auditor should: 1. Disclose in an explanatory paragraph(s), preceding the opinion paragraph, all of the substantive reasons for the opinion. 2. Disclose in the explanatory paragraph(s) the principle effects of the subject matter of the qualification on financial position, results of operations, and cash flows, if practicable. If not practicable, the report should so state. 3. Express a qualified opinion in the opinion paragraph with reference to the explanatory paragraph(s).

32. Adverse Opinion The effects on the auditor’s report of issuing an adverse opinion are similar but not identical to the effects of a qualified opinion. In this case: 1. the explanatory paragraph(s) should indicate the substantive reasons for the adverse opinion and the principal effects of the subject matter of the adverse opinion, if practicable, and 2. the opinion paragraph should state that, because of the effects of the matter(s) described in the explanatory paragraph(s), the financial statements do not present fairly.

33. Disclaimer of Opinion When a disclaimer of opinion is expressed: 1. The introductory paragraph is modified 2. The scope paragraph is omitted 3. An explanatory paragraph is included after the introductory paragraph explaining the reasons for the disclaimer of opinion 4. The third and concluding paragraph contains a denial of an opinion

34. Circumstance requiring departure: Scope Limitation • Occurs when the auditor cannot perform the necessary procedures or the procedures do not provide sufficient evidence • Circumstance imposed • Qualified or Disclaim • Client imposed • Examples include refusal to: • permit confirmation of receivables, • sign a client representation letter, • access to the minutes of BOD meetings. • Disclaim

35. Circumstance requiring departure: Nonconformity with GAAP • F/S not GAAP • Adverse • Qualified • Inadequate disclosure • Adverse • Qualified

36. Other Reporting Considerations • Comparative F/S • Different opinions: add’l para, modify scope & opinion • Update opinion from prior year: add’l para • Change in auditors: modify intro para • Info accompanying audited F/S • Required FASB & GASB info: auditor makes no reference unless info is inadequate • Voluntary info provided by mgmt: auditor reads for consistency and makes no reference unless inconsistent • F/S for use in other countries • Modify all paragraphs to indicate U.S. GAAS & GAAP

37. Chapter 21 – Internal, Operational and Gov’t Auditing • Internal audit is the only “in-scope” portion of this chapter.

38. Internal Audit • Internal – inside organization • Independent and objective – free of bias • Systematic, disciplined approach – follow professional standards • Helps an organization accomplish its objectives – adds value to the organization

39. Internal Audit • Professional • Has licensing similar to public (CIA) • Test, experience & must obtain CPE • Code of Professional Ethics • Foreign Corrupt Practices Act in 1977 • Sarbanes Oxley?

40. Relationship with External Auditors • Supplement to but not substitute for work of independent auditors • Internal audit work may be leveraged for financial statement audit (SAS 65) • External auditors  focus on f/s • Internal auditors  focus on potential f/s misstatement, however, business performance is also a focus

41. Comparison