Chapter 16
Topics Beyond the Integrated Audit
Prepared by Richard J. Campbell
Copyright 2011, Wiley and Sons
Learning Objectives
1. Describe forensic accounting and contrast it with ICFR and financial
statement audits.
2. Understand internal audit activities and the role of the internal audit
function within organizations.
3. Learn the extension of typical audit activities required when auditing
state and local government entities.
4. Explain the purposes and activities of compilation and review
engagements, applicable standards, and accountants’ reports.
5. Discuss the types of information for which accountants can issue attest
reports, list the requirements for an attest service to be possible, and
distinguish attest engagements from other services.
6. Identify other auditors’ services provided for public companies, explain
the auditors’ work activities, and describe the resulting report.
Chapter 16-1
FORENSIC ACCOUNTING
 The term forensic accounting most commonly refers to fraud
investigations and accounting work to support legal
actions.
 The Association of Certified Fraud Examiners (ACFE) is one
of the premier organizations for forensic accountants.
 Forensic accounting encompasses two major components:
investigative forensic services and litigation support.
Chapter 16 -2
Learning Objective #1
FORENSIC ACCOUNTING
 Forensic accountants investigate many situations and
suspected illegal acts including:
 Employee theft
 Vendor fraud
 Customer fraud
 Tax evasion
 Conflicts in divorce and bankruptcy proceedings
 Insurance claim filings
 Identity theft
 Organized crime
Chapter 16 -3
Learning Objective #1
FORENSIC ACCOUNTING
 During an interview, the forensic accountant may focus on a
range of issues, including:
 The tone set by top management toward ethical behavior
 Management’s values and beliefs
 Reward systems
 The potential for management override of internal
controls
 Forensic accountants may rely on evidence obtained from
real estate records, court records, corporate and partnership
records, and other public records to uncover potential fraud
motives.
Chapter 16 -4
Learning Objective #1
INTERNAL AUDITING
 Accountants who work within entities as internal auditors
also perform important functions for companies, not-forprofit organizations, and government units
 The Institute of Internal Auditors (IIA) is the most notable
professional organization for internal auditors.
 The internal auditor’s goal is to help improve the
organization’s operations, risk management, internal
controls, and governance.
Chapter 16 -5
Learning Objective #2
INTERNAL AUDITING
 Internal auditors assist in SOX compliance
Chapter 16 - 6
Learning Objective #2
INTERNAL AUDITING
 Internal auditors assist in SOX compliance
Chapter 16 -7
Learning Objective #2
STATE AND LOCAL GOVERNMENT AUDITS
 Financial statement audits of state and local governments
are performed by external auditors who work either for
public accounting firms or separate government-related
units.
Chapter 16 -8
Learning Objective #3
Single Audit Act
 This legislation called for audits to be conducted on an
entity-wide basis replacing requirements for multiple audits
of one entity on a grant-by-grant basis.
 When a governmental entity meets the $500,000
expenditure threshold, it is subject to a single audit of both
its financial statements and its compliance with the
provisions of any federal awards it received.
 The schedule of audit findings summarizes the results of
the audit.
Chapter 16 -9
Learning Objective #3
GOVERNMENT AUDITING STANDARDS AND THE YELLOW
BOOK
 Audits of government entities, including those under OMB
Circular A-133, are conducted according to generally
accepted government auditing standards (GAGAS) issued
by the Government Accountability Office (GAO).
 The Yellow Book contains standards covering financial
statement audits, attestation engagements, and
performance audits.
 The GAO’s primary role is to support congressional
oversight of the executive branch of the U.S. government.
Chapter 16 -10
Learning Objective #3
Work of the GAO
Chapter 16 -11
Learning Objective #3
COMPILATION AND REVIEW ENGAGEMENTS
EXHIBIT 16-1
Hierarchy of
Financial
Statement
Assurance
Activities
Chapter 16 -12
Learning Objective #4
Compilations
 In a compilation engagement, an accountant drafts financial
statements of an entity based on information provided by
the management or owners.
 The accountant needs to establish an understanding with
the client about the terms of the engagement, any
limitations on the use of the financial statements, and must
document the understanding through a written
communication with management.
Chapter 16-13
Learning Objective #4
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Chapter 16-14
Learning Objective #4
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Chapter 16-15
Learning Objective #4
Illustrative Compilation Engagement Letter
EXHIBIT 16-2
Chapter 16-16
Learning Objective #4
Standard Compilation Report
Chapter 16-17
Learning Objective #4
Reviews
 An engagement to review a nonpublic company’s financial
statements provides some assurance regarding the fairness
of the financial statements.
 The level of assurance provided by the accountant’s report
falls between an audit and a compilation.
Chapter 16-18
Learning Objective #4
Elements of an Engagement Letter for a SSARS Financial
Statement Review Engagement
Chapter 16-19
Learning Objective #4
Elements of an Engagement Letter for a SSARS Financial
Statement Review Engagement
Chapter 16-20
Learning Objective #4
Inquiries Made During a Review
EXHIBIT 16-3
Chapter 16-21
Learning Objective #4
Independent Accountant’s Review Report
Chapter 16-22
Learning Objective #2
ATTEST ENGAGEMENTS
Targets of attest engagements include financial forecasts
and projections, compliance with laws and regulations,
effectiveness of internal controls for nonpublic companies,
the accuracy and reliability of reported performance
measures, and the compliance with SEC regulations of a
company’s management discussion and analysis.
Chapter 16-23
Learning Objective #5
Examples of Attest Engagements
Chapter 16-24
Learning Objective #5
Availability of Criteria
EXHIBIT 16-4
Chapter 16-25
Learning Objective #5
Types of Attest Engagements and Reports
EXHIBIT 16-5
Chapter 16-26
Learning Objective #5
Independent Accountant’s Attest Examination-Level Report
Chapter 16-27
Learning Objective #5
SEC-RELATED ENGAGEMENTS
 CPAs perform many services in connection with SEC filings
such as issuing comfort letters to underwriters, performing
interim reviews, and conducting activities related to
registration statements for public offerings of securities.
 Letters for underwriters are commonly called comfort letters
because of the concept that they provide “comfort” on
specific issues in a company’s financial information.
Chapter 16-28
Learning Objective #5
Auditor’s Review Report on Interim Financial Statements
Chapter 16-29
Learning Objective #5
Review Question
Forensic accounting
(a) is best described by the term fraud
audit.
(b) includes investigative services and
litigation support.
(c) can only be carried out by CPAs.
(d) follows the same approach as
traditional auditing except that materiality
thresholds are
lower.
Chapter 16-30
Review Question
The independence of internal auditors and
the internal audit function is enhanced by
(a) avoiding conflicts of interest.
(b) being placed high in the organizational
hierarchy
and having access to the audit committee.
(c) conducting their tasks in an objective
manner.
(d) all of the above.
Chapter 16-31
Review Question
An examination attest engagement
provides:
(a) positive assurance.
(b) moderate or limited assurance.
(c) no assurance.
(d) agreed upon procedures
assurance.
Chapter 16-32
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