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19-1

Audit based services: assurance on additional information
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


Auditing financial statements that use a financial reporting
framework other than GAAP

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


Special purpose frameworks
Another country’s framework
Additional GAAS Audits


Reporting on compliance
Letters for underwriters
Summary financial statements
Single financial statements and specified elements
Personal financial statement
Reviews of historical financial statements
Compilations of historical financial statements
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 Examinations
 Review
 Agreed-upon
procedures
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19-3



Auditor is used for most engagements under
the generally accepted auditing standards.
Accountant is also used for financial statement
review and compilation engagements of
nonpublic companies.
Practitioner is the term used in the attestation
standards and in most other assurance services.
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19-4



Reports on compliance with
aspects of contractual agreements
or regulatory requirements related
to audited financial statements.
Letter for Underwriters
Summary Financial Statements
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19-5

Regulatory requirements and debt agreements



Example: Report prepared for bond trustees as
evidence of company’s compliance with restrictions
contained in bond indenture.
To provide this service auditor must have first
performed an audit of related financial
statements
Report provides negative assurance
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19-6

Comfort Letter
 Investment banking firms that underwrite a securities issue request
letter from independent auditors who audited financial statements in
registration statement
 Includes
 1. The independence of the auditors.
 2. Whether the audited financial statements and financial statement schedules included




in the registration statement comply with the accounting requirements of the Securities
Act of 1933 and related regulations.
3. Unaudited financial statements, condensed interim financial information, and pro
forma financial information.
4. Changes in selected financial statement items during a period subsequent to the date
and period of the latest financial statements included in the registration statement.
5. Tables, statistics, and other financial information included in the registration
statement.
6. Negative assurance as to whether certain nonfinancial statement information
included in the registration statement complies with SEC regulations.
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19-7



Also referred to as condensed financial
statements
Include less detail than the audited financial
statements
Auditors who have issued an audit report on
the audited financial statements may issue a
report on the summary financial statements

Report indicates whether they are consistent, in all
material respects, with the audited financial
statements.
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19-8
This includes financial statements prepared
 In accordance with special purpose financial
reporting frameworks.
 Using a financial reporting framework
generally accepted in another country
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19-9

Comprehensive bases of accounting other than
GAAP
Cash basis
 Tax basis
 Regulatory basis
 Contractual basis

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19-10
Sample Introductory Paragraph—Cash Basis
We have audited the accompanying statement of
assets and liabilities arising from cash
transactions of XYZ Company as of December 31,
20X1, and the related statement of revenue collected
and expenses paid for the year then ended. These
financial statements are the responsibility of the
Company's management. Our responsibility is to
express an opinion on these financial statements
based on our audit.
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19-11
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19-12



US company prepare financial statements for use in other
countries
 Example: US company with subsidiary in Germany may
prepare financial statements for that subsidiary
Auditors follow general and fieldwork standards of AICPA to the
extent appropriate
Report depends on the expected use of the financial statements
 Only outside the US
 Issue a US report modified to reflect accounting principles of
other country OR
 Issue a report form of the other country
 Use in the US and outside the US—2 reports
 US unmodified report with emphasis of matter paragraph
indicating basis of accounting.
 Either option from “Only outside the US” above.
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19-13


Single financial statements and specified
elements, accounts or items of financial
statements
Personal financial statements
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19-14

Auditors may be engaged to attest only to (1) a
single financial statements (e.g., balance sheet)
or (2) specified elements, accounts or items of a
financial statement


Example of specified elements: Report on lessee’s
revenue requested by lessee. May be required by
provisions of lease agreement.
Materiality for specified elements is generally
less than would be in audit - in relation to
other information presented
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19-15


Examples: Politicians or large loan applications
GAAP to personal financial statements





Assets shown at estimated current values
Liabilities presented at estimated current amounts
Balance sheet = statement of financial condition
shown individual net worth
Income statement = statement of changes in net
worth
Completeness of statements is audit concern
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19-16



Nonpublic companies may not need an audit of annual financial
information
CPAs follow Statement on Standards for Accounting and Review
Services (SSARS)
Review
 Attest service in which the accountants
 Perform analytical procedures
 Make inquiries of management and others
 Obtain representation from management relating to financial
statements
 Report provides limited (negative) assurance
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19-17



Screen clients
Engagement letters
Review Procedures


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
No knowledge of client’s internal control required
Analytical procedures
Inquiries of management
Obtain representation letter in which management
acknowledges



Responsibility for financial statements conformity with GAAP
Responsibility to prevent and detect fraud and to divulge
knowledge of actual or suspected fraud
Responsibility to respond fully and truthfully to all inquiries
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19-18
We have reviewed the accompanying financial
statements of XYZ Company, which comprise
the balance sheet as of December 31, 20XX, and
the related statements of income, changes in
stockholders’ equity, and cash flows for the
year then ended, and the related notes to the
financial statements. A review includes
primarily applying analytical procedures to
management’s financial data and making
inquiries of company management. A review is
substantially less in scope than an audit, the
objective of which is the expression of an
opinion regarding the financial statements as a
whole. Accordingly, we do not express such an
opinion
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19-19
Management’s Responsibility for the
Financial Statements
Management is responsible for the
preparation and fair presentation of these
financial statements in accordance with
accounting principles generally accepted in
the United States of America; this includes
the design, implementation, and
maintenance of internal control relevant to
the preparation and fair presentation of
financial statements that are free from
material misstatement whether due to fraud
or error.
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19-20
Accountant’s Responsibility
Our responsibility is to conduct the review
engagement in accordance with Statements on
Standards for Accounting and Review Services
promulgated by the Accounting and Review
Services Committee of the American Institute of
Certified Public Accountants. Those standards
require us to perform procedures to obtain
limited assurance as a basis for reporting
whether we are aware of any material
modifications that should be made to the
financial statements for them to be in accordance
with accounting principles generally accepted in
the United States of America. We believe that the
results of our procedures provide a reasonable
basis for our report.
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19-21
Accountant’s Conclusion
Based on our review, we are not aware of
any material modifications that should be
made to the accompanying financial
statements in order for them to be in
accordance with accounting principles
generally accepted in the United States of
America
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19-22

Departure from GAAP


Modify third paragraph and describe departure in
separate paragraph
No modifications required for:



Lack of consistent application of GAAP
Existence of major uncertainties including goingconcern uncertainties
Scope limitation – no review report
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19-23




Public companies required to file quarterly financial
information with SEC on 10-Q
Auditor reviews not audits information
Objective of review
 Provide accountants a basis for communicating
whether they are aware of any material
modifications to conform with GAAP
Steps in review
 Engagement letter to document understanding
 Understand the client’s business and internal control
 This required understanding of internal control for public
company reviews is not required for nonpublic company
reviews.

Other Review procedures—similar to nonpublic
companies
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19-24


Reports provide no explicit assurance that the
information constitutes a fair presentation
Types of compilations



Compilation



Compilation of financial statement for nonpublic companies
Compilations of prospective financial information
Service in which accountants assist in the preparation of
financial statements without providing any assurance on them
Must at least read compiled statements for appropriate format
and obvious material misstatements
Financial Statement Preparation

Prepare financial statements, which remain management’s
representations.
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19-25
Management is responsible for the accompanying
financial statements of XYZ Company as of, and for
the years ended, December 31, 20X2 and 20X1 in
accordance with accounting principles generally
accepted in the United States of America. We have
performed a compilation engagement in accordance
with Statements on Standards for Accounting and
Review Services promulgated by the Accounting
and Review Services Committee of the AICPA. We
did not audit or review the financial statements nor
were we required to perform any procedures to
verify the accuracy or completeness of the
information provided by management. Accordingly,
we do not express an opinion, a conclusion, nor
provide any form of assurance on these financial
statements.
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19-26
Financial
Statement
Preparation
AgreedCompilation upon
Procedures
Explicit
Assurance
None
None
Distribution
General
Minimum
Procedures
Prepare
financial
statements
Review
Examination
State findings
Limited
(negative)
assurance
Opinion
General
Limited to
specified
parties
General,
unless
agreed-upon
criteria
General, unless
agreed-upon
criteria
Read
statements
Agreed-upon
procedures
Limited
procedures,
such as
inquiry and
analytical
procedures
Sufficient
appropriate
evidence to
support opinion
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19-27