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AUD - Notes Chapter 2

Quality Control Standards
The five interrelated elements of quality control are:
A – Acceptance and continuance of client’s engagement
I – Independence, integrity and objectivity
C – Continuous monitoring
P – Personnel management
A – Assurance regarding engagement performance

Acceptance and continuance of clients and engagements

• Considers the risk associated with clients (don’t accept a client whose mgmt lacks integrity)
• Undertakes only those engagements that the firm can reasonably expect to complete with professional

Independence, integrity and objectivity

• Policies and procedures which help maintain personnel independence in fact and appearance
• Lead partner and the reviewing partner must rotate off the audit every five years
• Routine tax return preparation, tax planning and employee personal tax services are allowed under
Sarbanes-Oxley but must be approved by the audit committee in writing

Continuous monitoring
• What the title implies
Peer review
- One CPA firm reviews another CPA firms quality control system, occurs every 3 years for a CPA firm
that is a member of the AICPA.
- Purpose is to determine and report whether CPA firm being reviewed has developed adequate policies
and procedures for quality control and they are following them
- Upon completion, a report is issued with conclusions and recommendations

Personnel Management
• Criteria for hiring, assignment of the firms personnel to engagements, professional development and

Assurance regarding engagement performance

• Policies and procedures that assure that the engagement work meets professional standards, regulatory
requirements, and the firms own standards of quality

GAAS relate to the conduct of each individual engagement, whereas quality control relate to the conduct of all
professional activities of the firms practice as a whole

The quality control standards of a firm affect both the performance of each audit and the performance of the
audit practice as a whole

Deficiencies in a firm’s quality control do not necessarily mean/indicate a lack of GAAS compliance.

Other Engagements, Reports and Accounting Services

Auditing standards have restricted special reports to the following 5 areas
1. OCBOA – use of other comprehensive basis of accounting F/S (cash basis, price-level adjusted F/S)
The use of non-GAAP requires the auditor to issue either a qualified or adverse opinion unless the non-GAAP
method is an OCBOA (in which case an unqualified opinion is appropriate)

AUD - Notes Chapter 2
2. Specific elements, accounts or items of a F/S – The auditor expresses an opinion on each of the specified
elements, if the element is far-reaching or pervasive (NI, STK EQ, or any item based thereon) the auditor must
audit the complete set of financial statements.
A piecemeal opinion may be expressed if the items do not constitute a major portion of the F/S. A piecemeal
opinion cannot be issued if the auditor has expressed a disclaimer or adverse opinion.

3. Issue special report on a clients compliance with contractual agreements or regulatory requirements
Auditor must have audited the F/S and may only issue negative assurance. Cannot be issued if the auditor has
expressed a disclaimer or adverse opinion. Limitedly distributed

4. Special purpose financial presentations to comply with contractual agreements or regulatory provisions

5. Financial information presented in prescribed forms or schedules – the auditor may attest to the fairness on
financial information presented in prescribed forms such as loan applications or regulatory filings.

The auditor may make modifications to an unqualified special report by adding an explanatory paragraph after
the opinion paragraph

Compilation and Review of Financial Statements

CPA’s can perform two levels of service (compilation and review) with respect to unaudited F/S of a non-
public company.

Compilation engagement – No assurance or opinion. CPA does not perform any audit or review procedures.

A Review – Limited (negative) assurance. CPA performs inquiry and analytical procedures

When a CPA performs more than one service (such as complication and an audit) the CPA should issue a report
that is appropriate for the highest level of service rendered.

An engagement letter is recommended but not required

Statements on Standards for Accounting and Review Services – pronouncements issued by the accounting and
review services committee of the AICPA

A compilation engagement may involve compiling and reporting on only one financial statement
The compilation engagement report should include: ALARD
A – Statement that a compilation has been performed in accordance with SSARS issued by the AICPA
L – Statement that a compilation is limited to presenting, in the form of F/S, information that is the
representation of mgmt
A – Statement that the accountant has not audited the F/S
R – Statement that the accountant has not reviewed the F/S
D – Disclaimer of opinion and a statement that the accountant gives no assurance on the F/S
You’re A LARD when all you do is compile F/S

Compiled F/S that omit GAAP disclosures are acceptable if:

• Reason for omission was not to deceive user
• Compilation report warns user of missing disclosures

Compilation with limited disclosures are labeled “Selected Information – Substantially All Disclosures
Required By GAAP Are Not Included”

AUD - Notes Chapter 2

An opinion, even qualified or adverse, requires and audit. When an accountant performing a compilation or
review becomes aware of a GAAP departure, the report should be modified or the CPA with withdraw from the
engagement. An opinion would not be expressed

An accountant who submits unaudited F/S to the client that are not expected to be used by a third party may use
an engagement letter rather than a compilation report

Review of F/S – a higher level of service than compilation because it results in an expression of limited
assurance. Reviews include inquiry and analytical procedures. However, no required to obtain an understanding
of internal control or assess control risk

An auditor is required to perform these in a Review:

U – Understanding with client must be established
L – Learn and or obtain sufficient knowledge of the entity’s business
I – Inquires
A – Analytical procedures
R – Review, other procedures
C – Client representation letter required from mgmt (don’t need with a compilation)
P – Professional judgement should be used
A – Auditor should communicate results

The objective of a review of financial information is to determine whether material modifications are necessary
for the information to be in conformity with GAAP.

Not required to communicate with predecessor auditor

Make inquires of internal personnel, not external people or entities.

Client representation letter from mgmt is required which covers all F/S’s and periods covered by the review

Audit test work, including testing internal controls, is not performed

The accountants report in a review engagement should include:

A – the review has been performed in accordance with SSARS standards established by the AICPA
M – All F/S information is the representation of mgmt
I – a review consists principally of inquiries of company personnel
A – a review consists of analytical procedures applied to financial data
S – a review is substantially less in scope than an audit
N – no opinion is expressed
M – accountant is not aware of any material modifications that should be made to the F/S in order for
them to be in conformity with GAAP

Reporting on Comparative F/S

When the continuing auditor performs a higher level of service (service upgrade) in the current period, the
report on the prior period should be updated and issued as the last paragraph of the current period’s report

Downgrade in service (last yr we reviewed, this yr we compile). Issue a compilation report and add a paragraph
to describe prior period responsibility assumed. Or issue both a review report and compilation report

AUD - Notes Chapter 2
Whenever prior accountants are asked to reissue a prior report (audit, review or compilation) they should reas
the new F/S and obtain a representation letter from the new accountant

Reporting when one period is audited

• Reissue the prior period report, or
• Include an additional paragraph in the current report describing the responsibility assumed for the prior
period statements

Review of Interim Financial Information

In an initial review of interim financial information, the accountant should make inquires of the predecessor
auditor, and if allowed, review the predecessor’s documentation
Inquiry of clients lawyer is not required but may be appropriate in certain circumstances

Going concern is not required but may be appropriate

Likely misstatement – best estimate of the total misstatement in an account balance or class of transactions. The
accountant should:
• Accumulate all such estimates for further evaluation
• Consider that the aggregated effect of several immaterial misstatements
• Evaluate potential effect on current and future periods

A review of interim F/S of a public company is conducted in accordance with AICPA auditing standards not

Should modify their report if, during the review, they become aware of a departure from GAAP

Going concern no modification if disclosed

Lack of Consistency no modification if disclosed

Letters for Underwriters

A comfort letter is a letter from the CPA to the named underwriter. It covers the period from the date of the last
auditors’ report to the “effective date” of the registration.

When a comfort letter is issued, the CPA is required to perform a review of interim financial information in
accordance with auditing standards

To obtain a comfort letter, parties other than the names underwriter must provide the CPA with an attorney’s
opinion or representation letter, confirming that such a party has a “due diligence defense”

Comments in a comfort letter a limited to:

• Financial info expressed in dollars, and
• Financial info derived from accounting records

A comfort letter is solely to assist the underwriters in conducting and documenting their investigation of the
company in connection with the offering

Provide positive assurance on:

• CPA’s independence
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• Compliance of the F/S with the SEC Act, assuming the F/S are audited

Provide negative assurance on:

• Unaudited F/S – if a review has not been performed, procedures performed and findings obtained should be
• Changes in selected financial information during subsequent period
• Whether non-financial data in the registration statement complies with regulation S-K

Attest Engagements
Attest engagements – CPA is engaged to issue or does issue an examination, a review, or an agreed-upon
procedures report on subject matter, or an assertion that is the responsibility of another party (usually mgmt).
Major attest services:
• Agreed-upon procedures
• Financial forecasts and projections
• Pro forma F/S
• Internal control over financial reporting

The following standards apply to services a CPA may offer:

Audit engagements – SAS (Statements on Auditing Standards)
Compilation and review engagements – SSARS (Statements on Standards for Accounting and Review
Attest engagements – SSAE (Statements on Standards for Attest Engagements)

SSAE does not apply to:

• Providing consulting/advisory services
• Operational audits (usually performed by internal auditors)

There are 11 attestation standards: TIPPY PE ACRS

General Standards – TIPPY
T – Training and proficiency
I – Independence
P – Performance/due professional care in planning and performance
P – Professional knowledge of subject matter
Y – Your belief that the assertion and the criteria is objective, measurable and complete
Field work Standards – PE
P – Planning and supervision
E – Evidence to provide reasonable basis for the conclusion
Reporting Standards – ACRS
A – Assertion or subject matter should be identified
C – Conclusions should be expressed
R – Reservations or unresolved issues should be disclosed
S – Statement restricting use of the report to specified parties should be included (if necessary)

Agreed-upon procedures – CPA is engaged to issue a report of findings based on specific agreed upon
procedures (example is mutual fund performance). Agreed upon procedures may be performed is the following
conditions exist:
I – Independence of the practitioner
A – Agreement of the parties
M – Measurability and consistency
S – Sufficiency of the procedures
U – Use of the report is restricted to the specified parties
AUD - Notes Chapter 2
R – Responsibility for the subject matter rests with the client
E – Engagements to perform agreed upon procedures on prospective financial statements
I AM SURE you can perform these agreed upon procedures

Financial forecasts – the expected financial results of a future period, based on expected conditions (i.e.

Financial projection – financial results based on a “what if” scenario, based on hypothetical assumptions

Forecasts and projections are two types of prospective F/S. Pro forma F/S are different, because it shows what
past financial results of an expired period would have been if something had been different.

Only a financial forecast is appropriate for general use. While both, forecasts and projections are appropriate
for limited use.

Compilation of prospective F/S – the proper assembling of financial data based on the party’s assumptions
• No assurance of any kind given
• The practitioner is not required to gather supporting evidence
• Significant assumptions must be disclosed otherwise cannot issue compilation