AUDITING
A RISK-BASED APPROACH TO
CONDUCTING A QUALITY AUDIT
9th Edition
Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg
CHAPTER 17
OTHER SERVICES PROVIDED
BY AUDIT FIRMS
Copyright © 2014 South-Western/Cengage Learning
LEARNING OBJECTIVES
1.
2.
3.
4.
Identify and describe nonaudit attestation services
provided by audit firms and discuss the relevant
professional standards
Explain review and compilation engagements,
relevant procedures performed, and reports issued
Explain the procedures and reporting requirements
for providing assurance on interim financial
information
Discuss special reporting considerations for unique
financial statement audit situations
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LEARNING OBJECTIVES
5.
6.
7.
Describe attestation engagements relating to
agreed-upon procedures, financial forecasts and
projections, and pro forma financial information,
and the types of reports that will be issued for
these engagements
Describe forensic accounting and distinguish
between forensic accounting and auditing
Describe sustainability reporting and articulate the
auditor’s role in providing assurance on
management sustainability reports
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PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF
NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS
PwC
•Accounting advisory services
•Sustainable business solutions
•Valuation services
•Debt-offering services
Ernst & Young
•Accounting compliance and reporting
•Climate change and sustainability services
•Financial accounting advisory services
Deloitte
•Finance operations and controls transformation
•Reporting and accounting advisory services
•Financial instrument valuation and securitization
Baker Tilly
•Employee benefit plan audits
•Private equity audits
•Management consulting
•Mergers and acquisitions
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PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF
NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS
• What are nonaudit attestation services provided by
external auditors, and what standards govern the
conduct of such services? (LO 1)
• What are compilation and review services, and what
standards govern conduct of such services? (LO 2)
• What reports would an audit firm issue when
performing nonaudit attestation services? (LO 5)
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PROFESSIONAL JUDGMENT IN CONTEXT - EXAMPLES OF
NONAUDIT SERVICES PROVIDED BY AUDIT FIRMS
• What is forensic accounting, and how does it differ
from auditing? (LO 6)
• What is sustainability reporting, and what is the
auditor’s role in providing assurance on
management sustainability reports? (LO 7)
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LEARNING OBJECTIVE 1
IDENTIFY AND DESCRIBE NONAUDIT ATTESTATION
SERVICES PROVIDED BY AUDIT FIRMS AND DISCUSS
THE RELEVANT PROFESSIONAL STANDARDS
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ATTESTATION SERVICES PROVIDED BY
AUDIT FIRMS
Attestation engagement - AICPA
• Practitioner engaged to issue an examination, a
review, or an agreed-upon procedures report on
subject matter, or an assertion about the subject
matter, that is, responsibility of another party
Assurance engagement - IAASB
• Practitioner expresses a conclusion designed to
enhance the degree of confidence of the intended
users other than the responsible party about the
outcome of the evaluation or measurement of a
subject matter against criteria
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TOPICS COVERED IN SUBJECT MATTER
OF AN ATTESTATION ENGAGEMENT
• Prospective financial information, performance
measurements, or backlog data
• Physical characteristics
• Historical events
• Analyses
• Corporate governance, compliance with law and
regulations, or human resource practices
• Adequacy of process for capturing and reporting
medical data
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TOPICS COVERED IN SUBJECT MATTER
OF AN ATTESTATION ENGAGEMENT
• Adequacy and reasonableness of economic plans to
build a new convention center in a major city
• Reliability of sustainability disclosures in an
organization’s financial statements
• Accuracy of:
• Compliance assertions about grants, contracts, and
regulations
• Reliability assertions about information technology
systems, internal control, and corporate governance
regulations
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COMPONENTS OF ATTESTATION SERVICES AND
PARTIES INVOLVED IN ATTESTATION SERVICES
• Information or a process on which assurance service
is provided
• Criteria for evaluation
• Sufficient appropriate evidence
• Written attestation report
• Parties involved
• Responsible party
• Practitioner
• Intended users
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EXHIBIT 17.1 - PARTIES INVOLVED IN
ATTESTATION ENGAGEMENTS
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LEVELS OF ASSURANCE PROVIDED IN
AN ATTESTATION ENGAGEMENT
Reasonable assurance engagement
• Objective is a reduction in assurance engagement risk to
an acceptably low level in the circumstances of the
engagement as the basis for a positive form of expression of
the practitioner’s conclusion
Limited assurance engagement
• Objective is a reduction in assurance engagement risk to a
level that is acceptable in the circumstances of the
engagement, but where that risk is greater than that for a
reasonable assurance engagement, as the basis for a
negative form of expression of the practitioner’s conclusion
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LEVELS OF ASSURANCE PROVIDED IN
AN ATTESTATION ENGAGEMENT
• Designed to address assurance engagement risk to
differing degrees
• Assurance engagement risk: Practitioner expresses an
inappropriate conclusion when the subject matter
information is materially misstated
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PROFESSIONAL STANDARDS FOR
ATTESTATION ENGAGEMENTS
• Attestation standards: Professional standards that
provide guidance about:
• Gathering evidence regarding specific assertions
• Communicating an opinion on fairness of presentation
to a third party
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EXHIBIT 17.2 - UNITED STATES AND INTERNATIONAL
ATTESTATION (ASSURANCE) STANDARDS
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EXHIBIT 17.3 - AICPA’S GENERAL, FIELDWORK, AND
REPORTING STANDARDS FOR ATTESTATION
ENGAGEMENTS
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LEARNING OBJECTIVE 2
EXPLAIN REVIEW AND COMPILATION
ENGAGEMENTS, RELEVANT PROCEDURES
PERFORMED, AND REPORTS ISSUED
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REVIEW ENGAGEMENT
• Enables a practitioner to state whether anything has
come to the practitioner’s attention that causes the
practitioner to believe that financial statements are
not prepared, in all material respects, in accordance
with applicable financial reporting framework
• Based on procedures which do not provide all evidence
that would be required in an audit
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REVIEWS
• Obtain limited assurance that there are no material
modifications to be made to financial statements
• Do not involve:
• Obtaining an understanding of entity’s internal control
• Assessing fraud risk
• Testing accounting records by obtaining appropriate
evidence
• Obtaining assurance that a practitioner will become
aware of all significant matters that would be
investigated in an audit
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REVIEW PROCEDURES
• Obtain a written engagement letter
• Inquire about actions taken at meetings of board of
directors and other decision-making bodies
• Inquire whether financial statements have been
consistently prepared in conformity with the
comprehensive basis of accounting
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REVIEW PROCEDURES
• Inquire about changes in business activities or
accounting principles and practices and events
• Obtain or prepare a trial balance of general ledger
and foot and reconcile it to general ledger
• Trace financial statement amounts to trial balance
• Perform basic analytical procedures
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REVIEW PROCEDURES
• Obtain explanations from management for any
unusual results and consider the need for further
investigation
• Read financial statements to determine whether
they appear to conform to GAAP
• Obtain a management representation letter about
important assertions that management has made
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EXHIBIT 17.4 - REVIEW ENGAGEMENT: INQUIRIES AND
ANALYTICAL PROCEDURES FOR REVENUE CYCLE
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STANDARD REVIEW REPORT
First paragraph
• Identifies what was reviewed
Second paragraph
• Describes a review
Third paragraph
• Expresses what is referred to as limited assurance
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COMPILATION ENGAGEMENT OR
BOOKKEEPING SERVICES
• Accountant uses accounting expertise to collect,
classify, and summarize financial information
• Assists management in presenting financial
information in the form of financial statements
• Does not undertake to obtain any assurance that there
are no material modifications that should be made to
the financial statements in order for the statements to
be in conformity with the applicable financial reporting
framework
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COMPILATION PROCEDURES
• Practitioner is not required to make inquiries or
perform procedures to verify, corroborate, or review
information provided by the client
• Additional or revised information should be obtained if
practitioner believes that client-provided information
may be:
• Incorrect
• Incomplete
• Unsatisfactory
• Practitioner should withdraw from engagement if
client refuses to provide information
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POTENTIAL MODIFICATIONS TO THE
STANDARD COMPILATION REPORT
• Situations in which the practitioner will modify the
report
• Omission of disclosures for compilations
• Compilation report not required
• Practitioner’s lack of independence
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LEARNING OBJECTIVE 3
EXPLAIN THE PROCEDURES AND REPORTING
REQUIREMENTS FOR PROVIDING ASSURANCE ON
INTERIM FINANCIAL INFORMATION
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REVIEWS OF INTERIM FINANCIAL
INFORMATION FOR PUBLIC COMPANIES
• SEC requires public companies to:
• File quarterly financial information with SEC on Form
10-Q within 40 to 45 days and provide shareholders
with quarterly reports
• Include quarterly information in annual reports to SEC
(Form 10-K) and in annual reports to shareholders
• Have quarterly financial information reviewed by
independent auditors
• Review report not required to be included in quarterly
information
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REVIEW PROCEDURES FOR INTERIM
FINANCIAL INFORMATION
• Performed on quarterly information:
• Contained in annual report to shareholders
• Issued at end of each of first three quarters of fiscal
year when engaged to do so
• Include:
•
•
•
•
Making inquiries
Performing analytical procedures
Reading minutes of board of directors’ meetings
Reading interim information to conform to GAAP
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REVIEW PROCEDURES FOR INTERIM
FINANCIAL INFORMATION
• Auditor should obtain:
• Written representations from management concerning
things as its responsibility for financial information
• Completeness of minutes
• Subsequent events
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REPORTING ON INTERIM FINANCIAL
STATEMENTS
• Standard report on a review of separately issued
interim financial statements of public companies:
• Identifies the information reviewed
• Indicates whether the standards of PCAOB were
followed in performing the review
• Explains nature of a review
• Disclaims an opinion
• Provides negative assurance that auditor is not aware
of any material departures from GAAP
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REPORTING ON INTERIM FINANCIAL
STATEMENTS
• Disclosure and reporting requirements for interim
financial statements differ from those for annual
financial statements
• Negative assurance should be modified when there is
a known material departure from GAAP
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LEARNING OBJECTIVE 4
DISCUSS SPECIAL REPORTING CONSIDERATIONS
FOR UNIQUE FINANCIAL STATEMENT AUDIT
SITUATIONS
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AU-C SECTION 800 - AUDITS OF FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH
SPECIAL-PURPOSE FRAMEWORKS
• Special purpose framework: Financial reporting
framework other than GAAP
• Other comprehensive bases of accounting
• Cash basis: Records cash receipts and disbursements
and modifications of the cash basis having substantial
support
• Tax basis: Used to file income tax return for a period
covered by financial statements
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AU-C SECTION 800 - AUDITS OF FINANCIAL
STATEMENTS PREPARED IN ACCORDANCE WITH
SPECIAL-PURPOSE FRAMEWORKS
• Regulatory basis: Used to comply with requirements of
financial reporting provisions of a regulatory agency to
whose jurisdiction entity is subject
• Contractual basis: Used to comply with an agreement
between the entity and one or more third parties
other than auditor
• Special-purpose financial statements: Prepared in
accordance with a special-purpose framework
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CONSIDERATIONS WHEN ACCEPTING AN ENGAGEMENT
OF AUDIT OF SPECIAL-PURPOSE FINANCIAL
STATEMENTS
• Obtain an understanding of:
• Purpose for which financial statements are being
prepared
• Intended users
• Steps taken by management to ensure that the
framework is acceptable under the circumstances
• Obtain an agreement from management of its
understanding of and acknowledgement for its
responsibility to include all appropriate disclosures
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CONSIDERATIONS WHEN PLANNING AND
PERFORMING AN ENGAGEMENT OF AUDIT OF SPECIALPURPOSE FINANCIAL STATEMENTS
• Be sure to comply with all AU-C sections relevant to
the audit
• Adapt and apply all AU-C sections relevant to audit
as necessary in circumstances
• Obtain an understanding of organization’s selection
and application of accounting policies
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CONSIDERATIONS WHEN FORMING AN OPINION
ON SPECIAL-PURPOSE FINANCIAL STATEMENTS
• Do management’s financial statements:
• Adequately describe applicable financial reporting
framework
• Have an appropriate title
• Include a summary of significant accounting policies
• Describe how special-purpose framework differs from
GAAP
• Result in fair presentation of entity’s financial results
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EXHIBIT 17.8 - OVERVIEW OF REPORTING
REQUIREMENTS FOR SPECIAL-PURPOSE FINANCIAL
STATEMENTS
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AU-C SECTION 805
• Addresses special considerations in application of
AU-C Sections 100–700 to the audit of a single
financial statement or of a(n):
• Specific element
• Account
• Item of a financial statement
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CONSIDERATIONS WHEN ACCEPTING, PLANNING, AND
PERFORMING AN ENGAGEMENT UNDER AU-C 805
• Obtain further evidence to corroborate audit
evidence acquired from management and the
accounting records
• Consider whether it is appropriate to apply
applicable financial reporting framework to a single
financial statement or a specific element, account, or
item of a financial statement
• Evaluate whether disclosures in footnotes for single
financial statement or specific element, account, or
item are adequate
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CONSIDERATIONS WHEN FORMING AN OPINION AND
REPORTING ON AN ENGAGEMENT OF THE AUDIT
UNDER AU-C 805
• Disclosures enable the intended users to understand:
• Information conveyed in financial statement or specific
element
• Effect of material transactions and events on
information conveyed in financial statement or specific
element
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AU-C SECTION 806 - REPORTING ON COMPLIANCE
WITH ASPECTS OF CONTRACTUAL AGREEMENTS OR
REGULATORY REQUIREMENTS
• Auditor is requested to report on an entity’s
compliance with certain contractual agreements or
regulatory requirements
• Such reports can be issued if the covenants of the
agreement are based on information from audited
financial statements
• Compliance report contains limited or negative
assurance
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LEARNING OBJECTIVE 5
DESCRIBE ATTESTATION ENGAGEMENTS RELATING TO AGREEDUPON PROCEDURES, FINANCIAL FORECASTS AND PROJECTIONS,
AND PRO FORMA FINANCIAL INFORMATION, AND THE TYPES OF
REPORTS THAT WILL BE ISSUED FOR THESE ENGAGEMENTS
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SSAES NO. 10 AND 11, AT SECTION 201 AGREED-UPON PROCEDURES ENGAGEMENTS
• Agreed-upon procedures engagement: Practitioner
is engaged by a client to issue a report of findings
based on specific procedures performed on subject
matter
• Report should be in the form of a description of
procedures and associated findings
• Report should indicate that it is restricted in its use to
specified parties
• Specified parties: Individuals who will receive the
practitioner’s agree-upon procedures report
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AGREED-UPON PROCEDURES
• Responsibility of practitioner
• Conduct procedures
• Report the findings
• Practitioner is not required to determine if a
difference exists between:
• Agreed-upon procedures requested by parties
• Procedures conducted to perform another form of
engagement
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SSAES NO. 10 AND 17, AT SECTION 301 FINANCIAL FORECASTS AND PROJECTIONS
• Prospective financial statements: Forecasts or
projections including summaries of assumptions and
accounting policies
• Financial forecast: Prospective financial statements
that present, to the best of the responsible party’s
knowledge, an entity’s:
• Expected financial position
• Results of operations
• Cash flows
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SSAES NO. 10 AND 17, AT SECTION 301 FINANCIAL FORECASTS AND PROJECTIONS
• Financial projection: Prospective financial statements
that present, to the best of the responsible party’s
knowledge, given one or more hypothetical assumptions,
an entity’s:
• Expected financial position
• Results of operations
• Cash flows
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COMPILATION OF PROSPECTIVE
FINANCIAL STATEMENTS
• Assembling prospective financial statements
• Assembling: Manual or computer processing of
mathematical or clerical functions for presentation of
prospective financial statements
• Performing compilation procedures
• Issuing a compilation report
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COMPILATION OF PROSPECTIVE
FINANCIAL STATEMENTS
• The following are required for a compilation of
prospective financial statements
• Performed by a person having adequate technical
training and proficiency
• Due professional care should be exercised
• Work should be adequately planned
• Applicable compilation procedures should be
performed
• Report should conform to the applicable guidance
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EXAMINATION OF PROSPECTIVE
FINANCIAL STATEMENTS
• Evaluating preparation of such statements
• Evaluating support underlying the assumptions
• Evaluating presentation for conformity with AICPA
presentation guidelines
• Issuing an examination report
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AGREED-UPON PROCEDURES OF
PROSPECTIVE FINANCIAL STATEMENTS
• May be limited or extensive depending on
requirements of responsible party
• Must involve more than a simple reading of
prospective financial statements
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SSAE NO. 10, AT SECTION 401 - REPORTING
ON PRO FORMA FINANCIAL INFORMATION
• Pro forma financial information: Shows what
significant effects on historical financial information
might have been had a consummated or proposed
transaction occurred at an earlier date
• Illustrates effects of following types of transactions
• Business combinations
• Disposing of a significant segment of a business
• Changing the form of organization of business or its
status as an autonomous entity
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GUIDELINES FOR PRESENTATION OF
PRO FORMA FINANCIAL INFORMATION
• Describe the:
•
•
•
•
Transaction that is reflected
Source of historical financial information
Assumptions used to develop pro forma adjustments
Uncertainties about those assumptions
• Indicate that information should be considered in
conjunction with historical financial information
• Make clear that information not necessarily
indicative of results that would have been achieved
had transaction taken place earlier
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PROCEDURES APPLICABLE FOR EXAMINING OR
REVIEWING PRO FORMA FINANCIAL INFORMATION
• Obtain:
• Understanding of the underlying transaction
• Knowledge of each part of combined organization in a
business combination
• Discuss management’s assumptions regarding
effects of transaction or event
• Evaluate whether pro forma adjustments are
completely recorded
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PROCEDURES APPLICABLE FOR EXAMINING OR
REVIEWING PRO FORMA FINANCIAL INFORMATION
• Obtain appropriate evidence to support any pro
forma adjustments
• Evaluate whether management’s assumptions are
described in a clear and comprehensive fashion
• Determine that computations underlying pro forma
adjustments are mathematically correct
• Obtain from management written representations
• Their responsibility for assumptions used in making pro
forma adjustments
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PROCEDURES APPLICABLE FOR EXAMINING OR
REVIEWING PRO FORMA FINANCIAL INFORMATION
• Assertion that assumptions provide a reasonable basis
for presenting effects related to transaction
• Assertion that significant effects related to transaction
are appropriately disclosed
• Read such information and evaluate:
•
•
•
•
Underlying transaction
Pro forma adjustments
Significant assumptions
Uncertainties
• Evaluate source of historical financial information
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LEARNING OBJECTIVE 6
DESCRIBE FORENSIC ACCOUNTING AND
DISTINGUISH BETWEEN FORENSIC ACCOUNTING
AND AUDITING
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FORENSIC ACCOUNTING
• Involves detailed investigation of situations where
fraud has already been identified or where fraud is
highly suspected
• Builds support for legal action against the person
committing the fraud by:
• Identifying the fraud
• Calculating damages caused
• Building both factual and testimonial evidence of fraud
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FORENSIC ACCOUNTING
• Forensic accountants:
• Examine 100% of fraud-related documents for
accurately measuring cost of the fraud
• Are often asked to provide litigation support
• Work on reconstructing account balances
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EXHIBIT 17.19 - DIFFERENCES BETWEEN
FORENSIC ACCOUNTING AND ACCOUNTING
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LEARNING OBJECTIVE 7
DESCRIBE SUSTAINABILITY REPORTING AND ARTICULATE
THE AUDITOR’S ROLE IN PROVIDING ASSURANCE ON
MANAGEMENT SUSTAINABILITY REPORTS
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SUSTAINABILITY-RELATED TERMS
• Non-financial reporting: Practice of measuring,
disclosing, and being accountable to internal and
external stakeholders for organizational performance
toward goal of sustainable development
• Corporate social responsibility reporting: Continuing
commitment by business to behave ethically and
contribute to economic development while
improving quality of life of the workforce, their
families, local community, and society at large
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COMMON SUSTAINABILITY-RELATED
TERMS
• Triple bottom-line reporting
• Reporting on:
• Financial performance
• Environmental performance
• Social performance
• Sustainability reporting: Voluntary corporate
disclosures about sustainability initiatives, plans, and
associated outcomes
• Sustainability: Actions taken at corporate level to ensure
economic, environmental, and social responsibility
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REPORTING ON SUSTAINABILITY
ACTIVITIES AND OUTCOMES
• Global Reporting Initiative (GRI) G3 Reporting
Framework
• Used by companies to determine what to and how to
report
• Enables sustainability report users to:
• Assess sustainability performance with respect to laws,
norms, codes, performance standards, and voluntary
initiatives
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REPORTING ON SUSTAINABILITY
ACTIVITIES AND OUTCOMES
• Create a continuous platform for dialogue about
expectations for responsibility and performance
• Understand the impacts that organizations can have on
sustainable development
• Compare performance within an organization and
between different organizations over time to inform
decisions
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G3 FRAMEWORK
Principles emphasize:
• Sustainability report
content
• Sustainability report quality
• Sustainability report
boundaries
Elements
• Strategic approach
• Management approach
• Performance indicators
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EXHIBIT 17.20 - STANDARDS FOR
SUSTAINABILITY REPORTING
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PROVIDING ASSURANCE ON
SUSTAINABILITY REPORTING
• Independent assurance enhances the credibility of
sustainability reporting
• External assurance is preferable to internal assurance
because it is:
• More objective
• Independent from the management
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PROVIDING ASSURANCE ON
SUSTAINABILITY REPORTING
• According to GRI Reporting Framework, external
assurance over sustainability reports should:
• Be conducted by those with competence in the subject
matter and assurance practices
• Be performed in a systematic manner that is evidencebased and includes adequate documentation
• Assess whether the sustainability report is reasonable,
balanced, and appropriately inclusive
• Be issued by organizations that are independent of
company issuing the report
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PROVIDING ASSURANCE ON
SUSTAINABILITY REPORTING
• Assess the extent to which report preparer has applied
GRI Reporting Framework in reaching its conclusion
• Result in a report that is:
• Publicly available
• Written in form
• States the relationship between preparer of and issuer of
report
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GENERAL TYPES OF ASSURANCE
• Reasonable assurance - Assurance provider’s opinion is
stated in positive form, indicating that:
• Information subject to audit is materially correct
• High level of assurance has been achieved
• Limited assurance - Assurance provider’s opinion is
stated in negative form, indicating that:
• Information has not been found to be materially incorrect
• Nothing has come to their attention based on limited scope
procedures
• Less than a high level of assurance has been achieved
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