Audit 2: Chapter 2

• Quality Control Standards: CPA firm required by AICPA to adopt

quality control standards for auditing, attestation, accounting and
review services

• Five Elements of Quality Control

o Acceptance and continuance of clients and engagements

 Policies should be established to decide whether or not

to accept clients

 Should provide firm with reasonable assurance that

likelihood of clients with management that lacks
integrity is low

 Ways to do it: review financial statements, inquiry of

third parties, evaluating firm’s ability to service client,
periodically reevaluating clients

o Independence, integrity, and objectivity

 Independence: impartiality & freedom from obligation to

client

 Integrity: requires personnel to be honest and candid

 Objectivity: imposes obligation to be impartial,

intellectually honest and free of conflicts of interest

 Examples: maintain records showing personnel

previously employed, notifying personnel as to names of
audit clients publicly held, confirm with staff that
prohibited relationships don’t exist, emphasize
independence of mental attitude.

 SOX Compliance: may not performing if auditing client:

bookkeeping, financial information systems,
design/implementation, appraisal/valuation, actuarial
services, internal audit, etc.

• Non audit procedures okay if pre-approved by

audit committee and disclosed

o Continuous monitoring

 Monitor quality control is implemented: relevance and

adequacy of firm’s policies, appropriateness,
 effectiveness of professional development, compliance
with firm’s policies (peet review)

o Personnel management

 Criteria for hiring new personnel

o Assurance regarding engagement performance

 Work performed meets applicable professional

standards

• Other Considerations

o Firm size, organizational structure, nature and complexity,

degree of autonomy, cost-benefit considerations

o GAAS is NOT the same as quality control standards: GAAS

relate to individual audit engagement, quality control related
to conduct of professional activities

• Other engagements, reports, and accounting services

• Special Reports:

o Other Comprehensive Basis of Accounting financial

statements (OCBOA)

 Each would be considered other basis: cash receipts,

basis for income tax filing, compliance with
governmental agency, definite set of criteria having
substantial support applied to material items

 Modify Intro and Opinion paragraphs: Non-GAAP

statements should be titled properly

 Explanatory P: should state basis of presentation & non-

GAAP

 Restrictive paragraph can be used to restrict use of

report

o Specified elements accounts or items in financial statements

 May be performed in conjunction with audit or as special

engagement

 Audit may be required

  Piecemeal opinions: expressions of opinion to certain
identified line items in F/S

• Possible restricted use paragraph

o Compliance with contractual or regulatory requirements

related to audited financial statements

 Must have audited F/S & can only issue negative

assurance

 May be in separate report or included in additional

paragraph in audit report

o Financial presentations to comply with contractual

agreements or regulatory services

 Requires restricted use paragraph & statement to

OCBOA presentation

o Financial information presented in prescribed forms or

schedules

 Must reword or attach separate report

 May add explanatory paragraph after opinion paragraph

• Compilation and review of financial statements

o Levels of Service

o Compilation: objective is to present F/S that is representation

of management without undertaking to express any
assurance on F/S (no audit or review procedures performed)

o Review: May express limited (negative) assurance on F/S that

aren’t audited. Objective is to express limited assurance no
material modifications that should be made to F/S in order to
conform with GAAP. (Inquiry and Analytical procedures)

o Professional Standards

o Statements on Standards for Accounting and Review Services

(SSARS)

o SSAR applies when accountant submits unaudited F/S of a

nonissuer
 o Establishing understanding with client: establish
understanding with client, preferable in writing as services to
be performed; if compilation report not to be issues then
written engagement letter is required.

• Compilation of Financial Statements (Non-issuers)

o Requirements

 Knowledge of Industry Accounting Principles & Practices

 Understanding of Client’s Business

 Reading Financial Statements

 Fraud & Illegal Acts, Going Concern & Subsequent

Events

o Financial Statements that may be inaccurate or incomplete

 Accountants are not required to, but may make

inquiries/perform other procedures to corroborate
information supplied by client

o Reporting on a compilation

 Overview: report is method by which accountant

communicates extene of the responsibility assumed for
F/S, cannot issue report unless accountant complied
with standards for compilation

 Report must include:

• Statement that compilation has been performed in

accordance with SSARS issued by the AICPA

• Statement that compilation is limited to

presenting, in form of financial statements,
information that is the representation of
management

• Statement that accountant has not audited the

F/S

• Statement that accountant has not reviewed the

F/S and

• Disclaimer of opinion and statement that

accountant gives no assurance on F/S
  Additional Requirements

• Each page marked “see accountant’s compilation

report”

• No letter head necessary

• Separate paragraph of report may be used to

emphasize any matter disclosed in F/S

 Prescribed forms that call for GAAP Departure:

additional paragraph added stating that F/S presented
with non-GAAP requirements

 Compilation without omission of all disclosures

• Accountant’s report indicates omission by

including paragraph disclosing such omissions &
indicating F/S not designed for those who are
uninformed

• Omission not intended to mislead any person who

might be expected to use such F/S

 Compilation that omit GAAP disclosures acceptable if:

• F/S otherwise in conformity with GAAP

• Reason for omission not to deceive user

• Compilation report warns user of missing

disclosures

 Exception to Reporting Requirement: accountant who

submits unaudited F/S to client that aren’t expected to
be used by third party may use engagement letter
instead of compilation report

• Review of Financial Statements: higher level than compilation

o Review procedures should be tailored to the engagement

o Review Requirements

 Understanding with client must be established

• Objectives of the engagement

• Management’s responsibility
 Learn and/or obtain sufficient knowledge of entity’s
business

• Knowledge of accounting principles and practices

of industry

• Understanding client’s business

• Not required to: test internal control, perform

audit tests, assess fraud risk, communicate with
predecessor auditor

 Inquiries should be addressed to appropriate individuals

• Should be directed towards members of

management with financial and accounting
responsibilities

 Analytical procedures should be performed

• Analytical procedures in review should be

designed to detect relationships and individual
items that appear to be unusual

 Review- other procedures should be formed

• Read F/S for conformity with GAAP or OCBOA

• Obtain prior reports, consider effects of any going

concern or subsequent events

 Client representation letter should be obtained from

management

• Should be dated as of date of accountant’s report

 Professional judgment should be used to evaluate

results

• Review procedures should be performed

 Accountant (CPA) should communicate results

• Statement that review has been performed in

accordance with SSARS established by AICPA

• Statement that all financial statement information

is representation of Management
 • Statement that review consists principally of
inquiries of company personnel

• Statement that review consists of Analytical

procedures applied to financial data

• Statement that review is Substantially less in

scope than an Audit

• Statement that no opinion expressed; a

Disclaimer of opinion is issued

 Miscellaneous

• Each page should be marked “see accountant’s

review report”

• As long as adequate disclosure; no modification to

review report necessary

• At discretion separate paragraph can be used to

discuss any uncertainties or to emphasize matters
like going concern or subsequent events

• Accountant must be independent

o Reporting departures from GAAP: if aware of departure from

GAAP, should recommend that financial statements be revised
to conform to GAAP

 Modification: separate paragraph should be added to

report

 Modification not adequate: if believed to be inadequate;

they should withdraw

o Reporting Fraud and Illegal Acts

 Should document cases of fraud or illegal acts (oral or

written)

o Change in Engagement from Audit to Compilation or Review

 Consider reasons why the change is requested

• Reporting on Comparative Financial Statements

 o When continuing accountant performs higher level of service
in current period, report on prior periods should be updated
and issued as last paragraph of current report

o If unaudited F/S are presented in comparative form with

audited F/S in documents filed to SEC, statements should be
marked “unaudited” but not referred to

• Review of Interim Financial Information: covers less than a full year

or 12 month period other than entity’s fiscal year end

o Some situations require companies file interim F/S, auditors

required to review quarterly information before report filed

o Procedures: must perform following procedures

 Understanding with client must be established

• Understanding with client: objectives of

engagement, management’s responsibilities,
accountant’s responsibilities, limitations of
engagement

• Review NOT designed to provide assurance

regarding internal control, but communication
required if significant deficiencies in internal
control are noted

 Learn and/or obtain sufficient knowledge of entity’s

business and its internal control

• Needs to have general understanding of entity’s

business and internal control: determine types of
material misstatement, evaluate likelihood that
misstatements will occur, select appropriate
inquiries and analytical procedures

 Inquiries should be addressed to appropriate individuals

• should be directed to members of management

with responsibility for financial and accounting
matters and should include queries

• not required: client’s lawyer, going concern

 Analytical procedures should be performed

• Performed to provide basis for inquiry about

unusual items
  Review other procedures should be performed

• read minutes of meetings, conformity with GAAP

 Client representation letter should be obtained from

management

• Management’s responsibility: completeness of

information, recognition, measurement,
disclosure, subsequent events

• Internal controls: significant deficiency disclosure,

management’s responsibility for design and
implementation, knowledge of fraud or allegations

 Professional judgment should be used to evaluate

results

• Consider likely misstatements, scope limitations

 Accountant (CPA) should communicate results

• Communicate to management if: material

modification should be made to interim F/S, files
10-Q

 Review report required elements

• Each page marked unaudited

• PCAOB standards

• Reviewed

• Letters for Underwriters

o Comfort letter: negative assurance, covers period from date of

last auditors’ report to effective date of registration, restrict
use

o Positive assurance: CPA’s independence, Compliance with F/S

with SEC Act

o Negative assurance: unaudited F/S, changes in selected F/S,

whether certain non-F/S complies to regulation S-K

o Not comment or provide assurance: market risk sensitive

instruments, qualitative disclosures
• Attest Engagements: CPA engaged to issue or does issue an
examination, review, agreed upon procedures report on subject
matter or assertion

o Trust Services: address risks and opportunities related to IT

 WebTrust: assurance related to e-commerce

 SysTrust: reliability of any defined electronic system

o Statements on Standards for Attestation Engagements (SSAE)

 For: agreed-upon procedures, financial

forecasts/projections, pro forma F/S, internal control
over financial reporting, compliance, MD&A

• Attestation Standards (11)

o General Standards

 Training and proficiency

 Independence

 Performance/due professional care in planning and

performance

 Professional, adequate knowledge of subject matter

 Your belief that subject matter is capable of evaluation

against suitable criteria and available to users

o Fieldwork Standards

 Planning and supervision

 Appropriate, sufficient evidence to provide reasonable

basis for conclusion

o Reporting Standards

 Identify the Subject matter or assertion being reported

on and character of engagement

 Disclose Significant reservations about engagement

 Express conclusions about subject matter or assertion in

relation to established criteria

 Restrict use when necessary

 o Conclusions

 Examination: positive opinion, high level of assurance

 Review: (negative assurance) moderate level of

assurance, based on inquiry and analytical procedures

 Agreed-Upon: no assurance, but procedures/finding

listed

• Agreed-Upon Procedures: issue a report of findings based on

specific agreed-upon procedures

o Conditions must exist:

 Independence of Practitioner

 Agreement of Parties

 Measurability and consistency

 Sufficiency of procedures

 Use of report is restricted to specified parties

 Responsibility for subject matter is under client

 Engagements to perform agreed-upon procedures on

prospective F/S must include summary of significant
assumptions

• Financial forecasts and projections

o Based on expected conditions and expected courses of action

o Only used with: compilation, examination engagement,

agreed-upon procedures

o Compilation Purpose: proper assembling of financial data

based on responsible party’s assumptions

 Compilation Contents

 Identification of prospective F/S presented by

responsible party

 Statement that practitioner has Compiled prospective

F/S in accordance with attestation standards established
by AICPA
  Statement limited in scope, and does not give any form
of assurance

 Caveat that prospective results may no be achieved

 Practitioner assumes no responsibility to update report

for subsequent events

 Signature of firm and date of report

o Examination: express opinion to: statements presented in

conformity with AICPA guidelines, underlying assumptions
provide reasonable basis for prospective statements

 Required: independence, evidence

 Contents:

 Title that includes Independent, signature of firm, date

of report

 Identification of prospective F/S presented

 Identification of responsible party and statement that

prospective F/S are responsibility of responsible party

 Statement that practitioner’s responsibility is to express

opinion on prospective F/S

 Examined under AICPA standards

 Restrict use if necessary