Professional Documents
Culture Documents
a.
b.
The following table summarizes the 3 groups of professional standards that are
issued by the Auditing Standards Board with examples of engagements that may be
provided under each group of professional standards.
Group of Professional Standards
Statements on Auditing Standards
Example Engagements
Special reports include reports on:
Financial statement that are prepared in
conformity with a comprehensive basis of
accounting other than GAAP (OCBOA).
Specified elements, accounts or items of a
financial statement.
Compliance with aspects of contractual
agreements or regulatory requirements related to
audited financial statements.
Financial information presented in prescribed
forms or schedules that require a prescribed form
of auditors report.
20-1
20-2 a.
The term special reports applies to auditors' reports issued in connection with
Financial statements that are prepared in conformity with a comprehensive basis
of accounting other than generally accepted accounting principles.
Specified elements, accounts, or items of a financial statement.
Compliance with aspects of contractual agreements or regulatory requirements
related to audited financial statements.
Financial presentations to comply with contractual agreements or regulatory
provisions.
Financial information presented in prescribed forms or schedules that required a
prescribed form of auditor's report.
b.
A common characteristic of the types of data covered by special reports is that they
are all historical financial data other than financial statements prepared in conformity
with GAAP.
20-3. a.
20-4.
b.
a.
20-2
such as royalties expense and royalties payable for when rentals are based on and
audited sales amount. Perhaps the audit of profits calculated for profit participation
plans purposes is the underlying reason for the audit.
20-5.
20-6.
20-7.
b.
a.
b.
a.
b.
a.
The attestation standards are classified into three groups-- general, field work, and
reporting. The classifications, therefore, are the same as for generally accepted
auditing standards.
20-3
b.
There are three significant conceptual differences between the attestation standards
and GAAS. The attestation standards:
Extend the attest function beyond historical financial statements. Thus, the
standards omit references to financial statements and to GAAP.
Allow the CPA to give assurances on the assertions below the level expressed in
the traditional financial statement audit ("positive opinion").
Provide for attest services tailored to the needs of specific users for agreed-upon
procedures reports and for limited-use reports.
20-8. The following table identifies six types of attest engagement that have been recognized
under attestation standards and the levels of assurance associated with each type of attest
engagement.
a. Type of Attest Engagement
Reporting on Agreed-upon Procedures
Engagements
Reporting on Forecasts and Projections
Reporting on Pro Forma Information
Reporting on Internal Controls
Reporting on Compliance Attestations
Reporting on Managements Discussion
and Analysis
20-9.
b. Level of Assurance
Agreed-Upon Procedures
Examination
Agreed-Upon Procedures
Compilation (no assurance)
Examination
Review
Examination
Agreed-Upon Procedures
Examination
Agreed-Upon Procedures
Examination
Review
a.
b.
WebTrust engagements address the following three risks associated with electronic
commerce.
1. An entitys business and information privacy practices; that is the entity
discloses its business and information privacy practices for e-commerce
transactions and executes transactions in accordance with its disclosed practices.
2. Transaction integrity; that is whether the entity maintains effective controls to
provide reasonable assurance that customers transactions using e-commerce are
completed and billed as agreed.
20-4
20-10.
c.
d.
a.
b.
c.
The three categories of criteria associated with each of the four broad principles are
as follows:
20-5
1.
2.
3.
d.
e.
20-11. a.
20-6
f.
g.
h.
i.
j.
k.
b.
Criteria to be used in the determination of findings are agreed upon between the
practitioner and the specified parties.
The procedures to be applied to the specific subject matter are expected to result
in reasonably consistent findings using the criteria.
Evidential matter related to the specific subject matter to which the procedures
are applied is expected to exist to provide a reasonable basis for expressing the
findings in the practitioner's report.
Where applicable, the practitioner and the specified parties agree on any
materiality limits for reporting purposes.
Use of the report is restricted to the specified parties.
For agreed-upon procedures engagements on prospective financial information,
the prospective financial statements include a summary of significant
assumptions.
20-7
20-12. a.
b.
c.
Opinion
qualified opinion or an adverse
opinion
adverse opinion
adverse opinion
20-8
20-13. a.
b.
c.
20-14. a.
b.
20-9
c.
20-15. a.
b.
c.
20-10
20-16. a.
b.
Three major types of services associated with a risk assessment engagement are:
Identification and assessment of primary potential risks faced by a business or
entity
Independent assessment of risks identified by an entity
Evaluation of an entity's systems for identifying and limiting risks
c.
d.
The auditor likely obtains knowledge of each of these risks while performing the
financial statement audit. For example:
The auditor might obtain knowledge about strategic environment risks associated
with changes in customers tastes and preferences or changes in the competitive
environment when auditing the revenue and production cycles.
The auditor often obtains knowledge of the risk of adverse changes in the market
for the clients products in order to evaluate the net realizable value of the clients
inventory.
The auditor might obtain knowledge about operating environment risks related to
inefficient business practices when auditing the production cycle.
The auditor might obtain knowledge about information risks associated with
poor-quality financial information when obtaining an understanding of the
entitys system of internal control.
Auditors also consider these types of risks when evaluating whether an entity is
likely to continue as a going concern. Understanding the clients business risks is
important to making audit judgments regarding accounting estimates and
evaluating the reasonableness of the entitys profitability.
20-11
20-17. a.
b.
The potential performance measurement services that might be offered by a CPA are
as follows:
Organizations that have performance measurement systems Assessing the reliability of information being reported from the organization's
performance measurement system.
Assessing the relevance of the performance measures (that is, how well they
inform management about achievement of the performance objectives they have
set).
Organizations that do not have performance measurement systems Identifying relevant performance measures.
Helping design and implement a performance measurement system.
All organizations Providing advice on how the organization can improve their performance
measurement system and their actual results.
c.
The following table identifies the four elements of the balanced scorecard, along
with examples goals and related measures.
Element of the
Balanced Scorecard
Example Goals
Customer Perspective
Internal Perspective
Innovation Perspective
Manufacturing efficiency
Product Innovation
Financial Perspective
Example Measures
Report of new customers ranked
by volume of activity or gross
profit margins
Product cycle time
Percent of revenues from new
products
Number of suggestions made and
implemented
Return on investment
Overall cash flow generation
d.
The auditor may learn about each of these perspectives when obtaining an
understanding of the business and industry and using this information to develop
expectations of the financial statements. The auditor might plan to use particular
information to support analytical procedures and may become aware of the absence
of such information in the process.
20-18. a.
The purpose of a CPA ElderCare engagement is assure family members that elderly
relatives no longer able to be totally independent are receiving the type and kind of
care they need. The likely client for this service would possibly be the children of
20-12
elderly tax clients who are unable to personally determine the quality of care
received by their parents who live in a different part of the country.
b.
The following table describes three type of services that might be offered by CPAs
and provides examples of each.
Type of ElderCare Service
Attestation engagements such as a compliance
attestation where the CPA performs tests of a
health care facilities assertion that it complied
with stated regulations or policies in accordance
with AT 500 on Compliance Attestations.
Alternatively the CPA might perform and an
agreed-upon procedure attestation where the CPA
issues a report of procedures and findings
associated with the measurable care-giving
performance (AT 600 on Agreed-Upon
Procedure Engagements). An attest service
might also include a review of the financial
performance of a trust in accordance with AR
100, Compilation and Review of Financial
Statements.
Direct services such as paying bills for elderly
individuals or ensuring that expected revenues
are received in the process of managing an
elderly individuals checking account.
Performing direct services for an elderly client
may impair independence associated with other
services for that client.
Example
Financial
Review and report on financial transactions
Test for asserters adherence to established criteria
Review investments and trust activity
Audit third-party calculations, such as pension,
insurance and annuity payouts
Review reports from fiduciaries
Nonfinancial
Measure and report on care provider performance
against established goals
Evaluate and report on the performance of other
outside parties, such as contractors
Financial
Receive, deposit and account for client receipts
Ensure expected revenues are received
Make appropriate disbursements
Submit claims to insurance companies
Nonfinancial
Arrange for transportation, housekeeping and
other services
Manage real estate and other property
Visit and report on elderly on behalf of children in
distant locations
Financial
ElderCare Planning for
Housing and support service needs
Death or disability of one or both spouses
Alternative costs of retirement communities and
other housing
Nonfinancial Consulting Services
Help family monitor care
Establish standards of care expected
Communicate expectations to care providers
Establish performance measurement systems
20-13
c.
An important trend that motivates the need for CPA ElderCare engagements is the
overall aging of the US population. The proportion over age 65 is increasing, it has a
greater degree of wealth and disposable income available to it, and as the US
population has become more mobile parents may live significant distances from their
children. The combination of these trends leads to an increased need for CPA
ElderCare services.
Comprehensive Questions
20-19. (Estimated time - 25 minutes)
a.
Independent Auditor's Report
We have audited the accompanying statement of assets and liabilities arising from cash
transactions of Jiffy Clerical Services as of December 31, 20XO, 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.
We conducted our audit in accordance with generally accepted auditing standards. 'nose
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note X, these financial statements were prepared on the basis of cash
receipts and disbursements, which is a comprehensive basis of accounting other than
generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the assets and liabilities arising from cash transactions of Jiffy Clerical Services as of
December 31, 20XO, and its revenue collected and expenses paid during the year then
ended, on the basis of accounting described in Note X.
Signature
Date
20-14
b.
20-15
The second and third paragraphs above would be added following the opinion
paragraph of the auditor's report on the financial statements.
20-16
b.
The client makes three major assertions in a WebTrust engagement about its
electronic commerce practices. The principles involved in a WebTrust engagement
address the following:
An entitys business and information privacy practices; that is the entity
discloses its business and information privacy practices for e-commerce
transactions and executes transactions in accordance with its disclosed practices.
Transaction integrity; that is whether the entity maintains effective controls to
provide reasonable assurance that customers transactions using e-commerce are
completed and billed as agreed.
Information protection; that is whether the entity maintains effective controls to
provide reasonable assurance that private customer information obtained as a
result of e-commerce is protected from uses not related to the entitys business.
The client needs to represent that it has met the specific criteria related to these
assertions and the CPA will attest to that assertion.
c.
A business may make representations about these three criteria without asking for an
assurance report from a CPA. However, the public may not attach the same degree
of credibility as they would if the assertion was the subject of an attest engagement.
The business needs to make a judgment about the importance of having the assertion
attested to by a CPA.
d.
The primary clients that would be interested in a SysTrust engagement are entities
that prepare, process, or maintain information that is used by others for decisionmaking. For example, a supplier in a strategic alliance may make production
decisions based on information obtained from customer about its sales and
inventory levels. The supplier may want assurance about the reliability of
information obtained from the customer because of its strategic importance to
decisions made by the supplier. Hence, the customer might engage the CPA to
attest to the reliability of the system. If the end customer must coordinate product
obtained from several suppliers, the need for SysTrust engagement may increase to
ensure coordination of strategic decisions by all parties.
b.
The SysTrust principles and criteria address four major concerns about system
reliability: (1) System availability, (2) system security, (3) system integrity, and (4)
system maintainability. A SysTrust engagement provides reasonable assurance that
20-17
these four principles and related criteria were achieved during a specific time period.
Users should understand the inherent limitations associated with the fact that:
Because of inherent limitations of controls, errors or fraud may occur and not be
detected. Even a strong system of internal control might not find every fraud,
particularly fraud that involves collusion.
Users should not project any conclusions, based on our findings, to future
periods. There is a risk that changes made to the system or controls, changes in
processing requirements, or failure to make changes required because of the
passage of time, may alter the validity of conclusions on past performance.
c.
A CPA that sells time on its accounting system to small business clients where they
can log onto the system and maintain their own general ledger, could engage another
independent CPA to issues a SysTrust report on the accounting system associated
with the systems availability, security, integrity and maintainability. The CPA could
not issue an attestation report on its own system as it would not be independent.
Further, there may be a risk that users may misunderstand the SysTrust report and
expect that the CPAs system will ensure that financial statements that result from the
system are prepared in accordance with GAAP. No such assurance could be
provided as the CPA would not know the basis transactions recorded using the
system.
20-18
b.
1.
2.
3.
Only a financial forecast is appropriate for general use, but any type of
prospective financial statements (either a financial forecast or a financial
projection) would normally be appropriate for limited use.
2.
Even a regular audit engagement cannot be relied upon to disclose defalcations, and
in an engagement for unaudited financial statements the CPA has no responsibility to
20-19
apply any auditing procedures. However, as a professional, the CPA does have a
responsibility to exercise due care in carrying out engagements, to apply professional
judgment in the preparation of financial statements, and to bring to the client's
attention any unusual or suspicious matters noted during the engagement.
In a typical situation of principal and agent, a third party may rely on an agent's
representations. To avoid misunderstanding in this situation, the CPA should have a
clear understanding and written statement from the client (the businessman) that the
CPA may rely on information and representations from the independent agent.
3.
The word "audit" should be avoided in nonaudit engagements. The CPA should
persuade the client to change the account title to 'accounting services," and should be
certain the client understands the difference between an accounting service and an
engagement to examine the financial statements in accordance with generally
accepted auditing standards.
4.
Using language in a covering letter such as "which we have reviewed" can imply that
an examination of some type was made and the CPA may find that he or she has
assumed more responsibility than intended. A short, concise disclaimer of opinion
should always accompany unaudited financial statements with which the CPA is
associated and each page should be clearly and conspicuously marked as unaudited.
If a separate covering letter is used, it should contain no language that would expand
upon the simple disclaimer of opinion. 'The recommended disclaimer is as follows:
"The accompanying balance sheet of X Company as of December 31, 19XX, and the
related statements of income and retained earnings, and cash flows for the year then
ended were not audited by us and accordingly we do not express an opinion on
them."
5.
While the CPA does not have a responsibility to perform any auditing procedures in
an unaudited engagement, he or she does have a responsibility to perform all services
undertaken in a professional capacity with reasonable skill and care.
The fact that the CPA was reviewing invoices only to determine account
classification and the missing invoices did not affect the total financial statements
does not eliminate his or her responsibility to bring to the client's attention any
potential problem areas. The CPA should have advised the client of the missing
invoices and suggested that the client follow up on this matter or, if the client so
desired, the CPA could pursue it further as an additional accounting service.
6.
By definition, unaudited financial statements have not been audited by the CPA and
he or she cannot be expected to have an opinion as to whether they are prepared in
conformity with generally accepted accounting principles. However, the CPA does
have a responsibility to complete the unaudited engagement in a professional
manner, and if he or she concludes on the basis of facts known to him or her that the
20-20
The CPA must issue a disclaimer of opinion on the client's unaudited financial
statements since, by assisting in their preparation, he or she has become associated
with them. Additionally, if the client cannot be persuaded to add the footnote
disclosures recommended by the CPA, the disclaimer of opinion should set forth
clearly this departure from generally accepted accounting principles.
If the statements are only for internal use by the client's the footnote disclosures may
not be necessary, but then the CPA must add to the disclaimer a sentence that the
financial statements are restricted to internal use by the client and therefore do not
necessarily include all disclosures that might be required for a fair presentation in
conformity with GAAP.
If the client refuses to accept the CPA's disclaimer of opinion with the reservations
clearly set forth, the CPA should refuse to be associated with the financial statements
and formally withdraw from the engagement.
b.
20-21
In a review engagement, the auditor can give some assurance on the fairness of the
financial statements by stating that he or she is unaware of any material
modifications that should be made in the financial Statements for them to conform
with GAAP.
d.
An opinion cannot be given unless an audit of the financial statements has been
made in accordance with GAAS.
20-22
b.
Following are several examples of competitive advantages that a CPA who is the
companys auditor might bring to a risk assessment engagement.
The CPA may have a reputation as a trusted business advisor. For example, the
CPA may have expertise in the construction industry that is important to this
business client and may have experience in evaluating the impact of industry
trends on the financial position, results of operations, and cash flows of those in
the industry.
CPAs have a reputation for independence. The client may want the benefits that
accrue from an independent analysis of the entitys business risks.
CPAs have experience with quality control and have systems in place to ensure
uniformly high service.
c.
Risk Identification
Strategic environment risk
Threats due to the changing
economic climate that may result in a
downturn in a construction of new
homes.
Threats due to direct competitors in
larger markets.
Threats due to economic forces that
may dry up sources of capital needed
to fund expansion.
Operating environment risk
Threats due to difficulty obtaining an
adequately trained workforce to
deliver the quality of service
expected by customers.
Threats due to the challenges of
marketing to the construction
Solutions Manual to Modern Auditing: Copyright
20-23
Risk Identification
industry that may already have strong
existing relationships with suppliers.
Information risk
Threats due to poor information
about new markets and marketplace
needs.
Threats due to poor information
about the cash flow that will be
needed to fund expansion.
Cases
20-30. (Estimated time -30 minutes)
Inappropriate Action
1.
2.
3.
4.
5.
6.
20-24
Inappropriate Action
7.
8.
9.
10.
Brown's attempt at a
disclaimer did not clearly
indicate that the statements had
not been audited.
20-25
Professional Simulation
Various Assurance
Engagements
Research
Situation
Following is the solutions regarding the assurance engagements discussed in items 1-8 based on the
following four types of standard that would apply.
a. Statements on Auditing Standards
b. Statements on Standards for Attestation Engagements
c. Statements on Standards for Accounting and Review Services
d. The engagement is not appropriate under current professional standards
a. b. c. d.
1. A private company client would like to have your accounting firm provide
reasonable assurance that a financial forecast of the next years financial
position, results of operations, and cash flows will be achieved.
2. A private company needs to provide a bank with financial statements. It
does not want to pay for an audit, and the bank is willing to accept less than
audited financial statements. Can your firm provide negative assurance that
your firm is not aware of any material modifications that need to be made to
the financial statements in order for them to be in accordance with GAAP.
3. A public company would like you to perform agreed-upon procedures
regarding a royalty payable where the client owes royalties based on the
number of parts produced under a licensing agreement.
4. A private company would like to have you audit financial statements
prepared on a federal income tax basis of accounting.
5. A public company would like to have you provide a report to lenders
providing them with some level of assurance that the company complied
with terms, covenants, and provisions of a debt agreement.
6. A local casino would like to provide a report to the public that provides
reasonable assurance that that payout rate on its slot machines was greater
than or equal to 97%.
7. A private company client would like to you compile a financial projection,
with no assurance, that would project financial position, results of operations
and cash flows based on assumptions agreed-upon by the client and the bank.
8. A public company in the petroleum industry would like to have your firm
conduct an agreed-upon procedures engagement to the Environmental
Protection Agency (EPA) that it complied with the EPA regulation that its
gasoline product contained at least 2% oxygen.
20-26
Research
Situation
Various Assurance
Engagements
Following is the solutions regarding the assurance engagements discussed in items 1-8
Professional
Standard
Reference
1. A private company client would like to have your accounting firm provide
reasonable assurance that a financial forecast of the next years financial
AT 301.33
position, results of operations, and cash flows will be achieved. (Note: A CPA
can not provide assurance on the achievability of a forecast.)
2. A private company needs to provide a bank with financial statements. It does
not want to pay for an audit, and the bank is willing to accept less than
audited financial statements. Can your firm provide negative assurance that
AR 100.04
your firm is not aware of any material modifications that need to be made to
the financial statements in order for them to be in accordance with GAAP.
3. A public company would like you to perform agreed-upon procedures
regarding a royalty payable where the client owes royalties based on the
AT 201
number of parts produced under a licensing agreement.
4. A private company would like to have you audit financial statements prepared
AU 326.04
on a federal income tax basis of accounting.
5. A public company would like to have you provide a report to lenders
providing them with some level of assurance that the company complied with AU 623.19-.22
terms, covenants, and provisions of a debt agreement.
6. A local casino would like to provide a report to the public that provides
reasonable assurance that that payout rate on its slot machines was greater
AT 101
than or equal to 97%.
7. A private company client would like to you compile a financial projection,
with no assurance, that would project financial position, results of operations
AT 301
and cash flows based on assumptions agreed-upon by the client and the bank.
8. A public company in the petroleum industry would like to have your firm
conduct an agreed-upon procedures engagement to the Environmental
AT 601
Protection Agency (EPA) that it complied with the EPA regulation that its
gasoline product contained at least 2% oxygen.
20-27