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Chapter 19 - Additional Assurance Services: Historical Financial Information

CHAPTER 19
Additional Assurance Services:
Historical Financial Information
Review Questions
191 This statement is incorrect. An audit can e a si!nificant e"pense to a small compan#. The audit fee
must e $ustified # the enefits received from the audit. The needs of the users of the financial
statements of man# small nonpulic companies are satisfied # financial statements that have een
revie%ed or compiled # the C&As.
19' The term auditor is most fre(uentl# used %hen discussin! C&As) role of attestin! to the annual
historical financial statements and %hen the# are performin! an operational audit. The term
accountant refers to C&As %hen the# are performin! other attestation services and accountin!
services. Thus* %hile auditors do perform the attestation service of audits* the statement that auditors
perform attestation services and accountants perform accountin! services is incomplete.
19+ In communications %ith clients* C&As should refer to themselves as auditors onl# %hen the service the#
are renderin! is an audit performed in accordance %ith auditin! standards. ,hen renderin! other
services* the# should refer to themselves as -accountants*- or as -C&As.- The purpose of this
distinction is to avoid leadin! the client to elieve that the C&As are actin! as auditors %hen the#
actuall# are renderin! other attestation or accountin! services.
19. /es. Auditors ma# e"press opinions on financial statements that are presented in accordance %ith a
financial reportin! frame%or0 other than 1AA& 2e.!.* a special purpose frame%or0* such as the cash
asis3. Such auditors) reports state indicate the frame%or0 ein! used and that the frame%or0 is a
asis of accountin! other than 1AA&.
194 Four t#pes of special-purpose financial reportin! frame%or0s are:
Cash basis. The cash receipts and disursements asis of accountin!* and modifications of the
cash asis havin! sustantial support* such as recordin! depreciation on fi"ed assets or accruin!
income ta"es.
Tax basis. The asis of accountin! that the entit# uses or e"pects to use to file its income ta"
return for the period covered # the financial statements.
Contractual basis. A asis of accountin! in accordance %ith an a!reement et%een the entit# and
one or more third parties other than the auditor.
Regulatory basis. A asis of accountin! in accordance %ith the re(uirements or financial reportin!
provisions of a re!ulator# a!enc# to %hose $urisdiction the entit# is su$ect. An e"ample is a asis
of accountin! that insurance companies use pursuant to the rules of a state insurance commission.
19-1
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Chapter 19 - Additional Assurance Services: Historical Financial Information
19; The statement is incorrect. <nl# contractual asis and some re!ulator# asis special purpose financial
reportin! frame%or0s result in a restricted use report. Also the report=s use is not restricted onl# to
those %ithin the entit#>parties to the contract or a!reement* or the re!ulator# a!encies to %hose
$urisdiction the entit# is su$ect also ma# use the report.
19? ,hen the financial statements are intended for use only outside the @nited States the auditor should
issue one report* usin! either
A @.S. st#le form of report* ut one %hich indicates that the financial statements have een
prepared in accordance %ith a financial reportin! frame%or0 !enerall# accepted in another countr#*
or
The other countr# audit report.
19A :o* !enerall# accepted accountin! principles for personal financial statements re(uire the valuation of
assets at estimated current values* not at historical cost. A (ualified or adverse opinion %ould e
appropriate.
199 The procedures applied durin! a revie% of the (uarterl# financial statements include: 213 procedures to
otain an understandin! of the client=s usiness and internal controlB 2'3 anal#tical procedures applied
to the interim financial data to identif# and provide a asis for in(uiries aout relationships that appear
unusual and that ma# indicate a misstatementB 2+3 in(uires of mana!ement aout such matters as
unusual anal#tical relationships* si!nificant transactions occurrin! around period end* suse(uent
events* and the occurrence or alle!ations of fraudB 2.3 readin! minutes of meetin!s of stoc0holders and
directors and the interim financial informationB 243 otainin! evidence that the interim financial
information a!rees to the accountin! records* and 2;3 otainin! %ritten representations from
mana!ement re!ardin! the presentation and completeness of the statements.
1916 A uni(ue aspect of the re(uired revie% of the (uarterl# financial information is the fact that the C&As
are not re(uired to report on the en!a!ement. Therefore* for a pulic compan#* the C&As must notif#
the S8C if the client files materiall# misstatement information. Another uni(ue aspect* as compared to
a SSACS revie% is the re(uired understandin! of internal control that must e otained.
1911 The C&As assist audit committees # communicatin! matters that assist them in performin! their
functions* includin!:
Instances of fraud and ille!al actsB
Si!nificant deficiencies related to the preparation of interim financial statementsB
Si!nificant revie% ad$ustments found # the C&AsB
The (ualit# of accountin! principles and estimatesB
Disa!reements %ith mana!ement over accountin! principles or revie% proceduresB and
An# other difficulties encountered performin! the revie%.
191' In reco!nition of the fact that man# small nonpulic companies do not need audits of their financial
statements* the AIC&A estalished the Accountin! and Cevie% Services Committee. That committee
estalishes standards for the compilation and revie% of the financial statements of nonpulic
companies. C&As ma# perform a compilation* a revie%* or an audit of the financial statements of a
nonpulic compan#.
191+ A revie% of financial statements of a nonpulic compan# does not involve a consideration of internal
control* tests of the accountin! records* or otainin! corrooratin! evidence* %hich are performed
durin! an audit. Therefore* a revie% does not provide a asis for an opinion as to %hether the financial
statements are fairl# presented in accordance %ith !enerall# accepted accountin! principles.
19-'
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Chapter 19 - Additional Assurance Services: Historical Financial Information
191. The primar# procedures for a revie% of financial statements include in(uir# of client mana!ement* and
anal#tical procedures performed on the financial information # reference to prior financial statements*
ud!ets* and other operatin! data. The C&As also in(uire concernin! the actions ta0en in meetin!s of
stoc0holders* the oard of directors* and committees of the oard. The accountants) in(uiries should
focus on %hether the financial statements conform to !enerall# accepted accountin! principles* chan!es
in usiness activities* and si!nificant suse(uent events. The accountants are also re(uired to otain a
representation letter from mana!ement of the compan#.
1914 8n!a!ement letters 2or some other %ritten form of communication %ith mana!ement3 are re(uired for
accountin! and revie% services. 8stalishin! an understandin! %ith the client is of particular
importance in this area since accountin! and revie% services are (uite different from audit.
191; A comfort letter is desi!ned to aid securities under%riters in the investi!ations of re!istration statements
re(uired under the Securities Act of 19++. In the letter* the C&As provide assurances re!ardin! various
financial information included in the re!istration statement.
191? The auditors %ill normall# provide an opinion on %hether the summar# financial statements are fairl#
stated in all material respects in relation to the asic financial statements.
191A The minimum procedures re(uired include readin! the compiled statements for appropriate format and
ovious material misstatement. Eut* %hen performin! this service C&As !enerall# are as0ed to prepare
the financial statements. Also* prior to performin! a compilation the C&As must have 0no%led!e of the
accountin! principles and practices used %ithin the client)s industr# and must have a !eneral
understandin! of the client)s usiness transactions and accountin! records.
1919 /es. ,hen performin! compilations* C&As ma# issue a compilation report that indicates that
mana!ement has elected to omit sustantiall# all of the disclosures re(uired # 1AA&. ,hen
performin! a revie%* the C&A %ho is a%are of a departure from 1AA& 2includin! ade(uate disclosure3
must consider modif#in! the report to e issued to reflect such information or* if the statements appear
to e misleadin!* consider resi!nation. In the case of audits* omission of such disclosures leads to
either a (ualified or an adverse opinion ased on the inade(uate disclosure.
19'6 If the accountants discover a material departure from 1AA&* the# should re(uest that mana!ement
revise the financial statements. If mana!ement refuses to do so* the C&As should modif# their report to
descrie the departure and its effect on the financial statements* if 0no%n. If the C&As do not elieve
that report modification is ade(uate* the# should %ithdra% from the en!a!ement.
19'1 ,hen compiled financial statements are not e"pected to e used # a third part#* the C&As must still
perform the standard compilation procedures. Ho%ever* the# have the follo%in! t%o reportin! options:
213 Issue a compilation report* or
2'3 Issue no report and document in an en!a!ement letter the understandin! %ith the client that the
financial statements %ill not e used # a third part#. Also* the accountants should ma0e sure
that the financial statements include a restrictin! phrase* such as FCestricted for 7ana!ement=s
@se <nl#.G
19'' If the C&A firm discovers that it is not independent* the firm cannot issue a revie% report. The C&A
firm can either resi!n from the en!a!ement or perform a compilation of the financial statements %ith a
report that discloses that the firm is not independent.
Questions Reuirin! Anal"sis
19'+ a. Since Amassador Hard%are Co. is a nonpulic compan#* its financial statements ma#
e audited* revie%ed* or compiled. A revie% of financial statements involves the performance
of in(uir# and anal#tical procedures. The o$ective of a revie% is to e"press limited assurance
19-+
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Chapter 19 - Additional Assurance Services: Historical Financial Information
that there are no material modifications for the financial statements to e accordance %ith
!enerall# accepted accountin! principles 2or some other comprehensive asis of accountin!3.
The accountants do not perform procedures to corroorate the financial statement information
and the# do not perform an assessment of internal control. A compilation of financial
statements involves the preparation of financial statements from representations #
mana!ement. The accountants provide no assurance re!ardin! the -fairness- of the financial
statements.
b. In selectin! the t#pe of service* Amassador)s mana!ement should consider the needs of the
users of the compan#)s financial statements. For e"ample* Amassador)s creditors ma# e
%illin! to e"tend necessar# capital to the compan# on the asis of compiled or revie%ed
financial statements. Ho%ever* if the o%ners of the compan# are considerin! issuin! shares of
stoc0 to the pulic in the near future* the# should consider the need to otain audited financial
statements to compl# %ith S8C re!ulations.
19'.
#$inion
In our opinion* the financial statements referred to aove present fairl#* in all material respects* the
assets and liabilities arising from cash transactions of Dale* Eooster H Co. as of Decemer +1*
'6I1* and its revenue collected and expenses paid durin! the #ear then ended in accordance %ith the
cash receipts and disbursements basis of accounting descried in :ote I.
%asis of Accountin!
,ithout modif#in! our opinion* %e dra% attention to :ote I to the financial statements* %hich descrie
the asis of accountin!. The financial statements are prepared on the cash asis of accountin!* %hich is
a asis of accountin! other than !enerall# accepted accountin! principles.
Em$&asis'of'(atter
As discussed in :ote / to the financial statements* the Compan# is involved in continuin! liti!ation
relatin! to an a!e discrimination la%suit. The amount of dama!es* if an#* resultin! from this liti!ation
cannot e determined at this time.
19'4 a. C&As ma# report on specified elements* accounts* or items of a financial statement in
the follo%in! %a#s:
213 An audit ma# e performed* resultin! in an opinion as to %hether the information
is fairl# presented on the asis indicated. In such en!a!ements* the auditors must
appl# auditin! procedures and materialit# must e $ud!ed in relation to the items
presented.
2'3 A report ma# e e"pressed on the application of a!reed-upon procedures to the
information. In such circumstances* the auditors must e assured that the parties
involved understand the nature and e"tent of the procedures. The report should
indicate the procedures performed* state the intended distriution of the report* the
C&As) findin!s* provide a disclaimer of an opinion on the information* and indicate
that the report does not e"tend to the financial statements ta0en as a %hole.
2+3 A revie% of the information ma# e performed. In such a circumstance the
auditors %ould appl# the appropriate anal#tical revie% and in(uir# procedures to
allo% them to provide limited assurance 2e.!.* F%e are not a%are of an# material
modificationsG3 on the information.
19-.
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Chapter 19 - Additional Assurance Services: Historical Financial Information
b. /es. Such reports should indicate that the# are intended solel# for the use of certain
specific parties. <nl# individuals that have a clear understandin! of the nature and e"tent of
the auditors) procedures should have access to the reports.
19'; a. The ma$or procedures for a revie% of financial statements include:
213 In(uiries concernin! the compan#)s accountin! principles and practices.
2'3 In(uiries concernin! the compan#)s s#stem of accountin!.
2+3 Anal#tical procedures to identif# relationships and items that appear to e unusual. The
procedures include comparisons of accountin! data %ith prior financial statements and
ud!ets and a stud# of relationships et%een accounts that can e e"pected to conform to
predictale patterns.
2.3 In(uiries concernin! actions ta0en at meetin!s of stoc0holders* oard of directors* and
committees of the oard.
243 Ceadin! the financial statements for conformit# %ith !enerall# accepted accountin!
principles.
2;3 <tainin! reports from other accountants* if an#* %ho have audited or revie%ed the
financial statements of components of the compan#.
2?3 In(uiries of mana!ement concernin! the conformit# of the financial statements %ith
!enerall# accepted accountin! principles and material suse(uent events.
2A3 <tainin! a representation letter from mana!ement.
b. The report on a revie% of financial statements should indicate that:
213 A revie% %as performed in accordance %ith AIC&A standards.
2'3 The financial statements are representations of mana!ement.
2+3 A revie% consists of in(uiries of mana!ement and anal#tical procedures.
2.3 A revie% is sustantiall# less in scope than an auditB therefore* no opinion is e"pressed
re!ardin! the financial statements ta0en as a %hole.
243 The accountants are not a%are of an# material modifications that should e made in the
financial statements for them to e in conformit# %ith !enerall# accepted accountin!
principles.
:ote to Instructor: The aove are the Fi! pictureG items. Students %ill include var#in! other
points.
c. If the accountants discover a material departure from !enerall# accepted accountin!
principles* the# should re(uest that the client revise the financial statements. If the financial
statements are not revised* the departure should e disclosed in a separate para!raph of the
accountants) report* includin! the effects of the departure on the financial statements* if 0no%n.
19'? a. The accountants can provide ne!ative assurance that the unaudited financial
statements compl# %ith the 19++ Act and S8C pronouncements* and are fairl# presented in
accordance %ith !enerall# accepted accountin! principles on a asis consistent %ith that of the
audited financial statements and schedules included therein.
b. Comfort letters also t#picall# contain the assurances as to:
213 The independence of the accountants.
2'3 Compliance of audited financial statements and schedules %ith the Securities Act and
related rules and re!ulations.
2+3 Chan!es in selected financial statement items durin! a specified period from the date of the
latest financial statements included in the re!istration statement.
2.3 Tales* statistics* and other financial information in the re!istration statement.
243 &ro forma financial information* financial forecasts.
19-4
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Chapter 19 - Additional Assurance Services: Historical Financial Information
2;3 Certain nonfinancial information included in the re!istration statement complies %ith S8C
re!ulations.
19'A a. ,hen accountants are associated %ith the financial statements of a nonpulic
compan#* the# should loo0 for !uidance in the Statements on Standards for Accounting and
Reviewer Servicesparticularl# the compilation standards.
b. ,ilson is responsile for follo%in! the compilation standards. Included here are
re(uirements to have 0no%led!e of accountin! principles used %ithin the industr# and a !eneral
understandin! of the client=s usiness transactions and accountin! records. If the information
appears to e incorrect* incomplete or other%ise unsatisfactor#* actions must e ta0en. A
properl# prepared compilation report must accompan# the financial statements in
circumstances in %hich it is li0el# that a third part# mi!ht use them
#)*ective Questions
19'9 7ultiple Choice Juestions
a. 2+3 Audits of financial statements include confirmations of accounts receivale*
revie%s !enerall# do not.
b. 213 Eoth a representation letter and an en!a!ement letter are re(uired.
c. 2'3 Independence is onl# re(uired for attestation services. Since compilation is not an
attestation service* independence is not re(uired. Independence is re(uired on a revie%
en!a!ement.
d. 2+3 In(uiries of mana!ement ordinaril# included those on suse(uent events*
si!nificant $ournal entries and other ad$ustments* and unusual or comple" situations affectin!
the financial statements. In(uiries aout communications %ith related parties are not
specificall# re(uired.
e. 2+3 The auditors= report on summari9ed financial statements includes an opinion on %hether
the summari9ed information is fairl# stated in all material respects in relation to the asic
financial statements.
f. 2'3 7ana!ement of pulic companies must en!a!e C&As to revie% their compan#=s (uarterl#
financial information.
g. 2+3 The appropriate report on compiled financial statements that omit disclosures includes an
indication that mana!ement has elected to omit the disclosures and the financial statements are
not intended for individuals not informed of such matters.
h. 2.3 A!reed-upon procedures en!a!ements al%a#s result in a restricted use 2limited
distriution3 report.
i. 2+3 Completeness is !enerall# the most difficult assertion %ith respect to personal financial
statements due to poor internal control and motivation # some individuals to omit assets and
income.
j. 2.3 The special purpose financial reportin! frame%or0s include cash asis* ta" asis*
re!ulator# asis* and contractual asis.
19-;
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Chapter 19 - Additional Assurance Services: Historical Financial Information
. 213 A compilation report contains a disclaimer re!ardin! the financial statementsB it should not
include the e"pression of ne!ative assurance.
l. 213 A comfort letter is issued # the independent auditors to the under%riters. Accordin!l#*
such letters are normall# si!ned # the independent auditors.
19+6
Statement Correct Incorrect
1. A special-purpose financial reportin!
frame%or0 is an# frame%or0 other than 1AA&.
I
2. Some* ut not all* special-purpose frame%or0s
re(uire an indication that the financial
statements are intended solel# for certain
specified users.
I
3. An audit report on financial statements that are
prepared usin! a special-purpose frame%or0
must include an emphasis-of-matter para!raph
alertin! users that the financial statements %ere
prepared in accordance %ith the frame%or0.
I
4. An audit report on financial statements that are
prepared usin! a special-purpose frame%or0
must in all circumstances include a description
of the purposes for %hich the statements are
prepared.
I
5. An audit opinion on financial statements that
use a special-purpose frame%or0 ma# e
unmodified.
I
6. The Attestation Standards* not the Statements
on Auditing Standards appl# to en!a!ements
involvin! special purpose frame%or0s.
I
7. If a re!ulator# a!enc# re(uires a particular
la#out for the audit report* the auditor ma# e
ale to use that la#out rather than the su!!ested
report included in the !rofessional Standards.
I
8. An audit report on financial statements that are
prepared usin! a special-purpose frame%or0
%ill indicate that the audit %as conducted in
accordance %ith the special-purpose financial
reportin! frame%or0 auditin! standards.
I
19+1
Question +es ,o
1) Is this considered an audit of financial
statements usin! a special-purpose financial
reportin! frame%or0K
I
'3 In performin! the audit* must #our firm
consider 1AAS to the e"tent the standards
are appropriateK
I
3) If the financial statements are intended for
use onl# outside the @nited States* must an
audit report include an opinion on %hether
@.S. 1AA& are follo%edK
I
19-?
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Chapter 19 - Additional Assurance Services: Historical Financial Information
4) If the financial statements are intended for
use oth in the @nited States and in Laos*
must an audit report include an opinion on
%hether @.S. 1AA& are follo%edK
I
5) ,hen the financial statements are intended
for use onl# outside the @nited States* if
Laotian !enerall# accepted auditin!
standards do not re(uire the Laotian form
of audit report ma# #our firm use the @.S.
st#le form and modif# it as necessar#K
I
6) ,hen the financial statements are intended
for use onl# outside the @nited States* if
Laotian !enerall# accepted auditin!
standards do not re(uire the Laotian form
of audit report ma# #our firm use the
Laotian st#le formK
I
7) 7ust a para!raph e added to the audit
report 2or audit reports3 indicatin! that the
financial statements are solel# for certain
specified usersK
I
19+'
a. Disa!ree 2International Financial Ceportin! Standards are considered a !eneral purpose
financial reportin! frame%or03.
b. Disa!ree 2Cash asis financial statements use need not e restricted3.
c. A!ree.
d. A!ree.
e. A!ree.
19-A
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Chapter 19 - Additional Assurance Services: Historical Financial Information
19++ Tas0-Eased Simulation
Service
7a# &rovide*
Independence
Is Ce(uired
7a# &rovide*
Independence
Is :ot
Ce(uired
7a#
:ot
&rovide
a. &rovide an opinion on %hether financial statements are pre-
pared follo%in! the cash asis of accountin!.
I
. Compile the financial statements for the past #ear and issue a
pulicl# availale report.
I
c. Appl# certain a!reed-upon procedures to accounts receivale
for purposes of otainin! a loan* and e"press a summar# of
findin!s relatin! to those procedures.
I
d. Cevie% (uarterl# information and issue a report that includes
limited assurance.
I
e. &erform an audit of the financial statements on %hether the#
are prepared follo%in! !enerall# accepted accountin! princi-
ples.
I
f. Compile the financial statements for the past #ear* ut not is-
sue a report since the financial statements are onl# for the
compan#=s use.
I
19+. Tas0-Eased Simulation
a. 1
b. '
c. +
d. '
e. 1
f. 1
g. +
h. '
i. +
Pro)lems
19+4 S<L@TI<:: Miff# Clerical Services 28stimated time: +6 minutes3
a. Audit report
Inde$endent Auditors- Re$ort
The Eoard of Directors
Miff# Clerical Services
,e have audited the accompan#in! financial statements of Miff# Clerical Services* %hich comprise the
statement of assets and liabilities arising from cash transactions as of Decemer +1* '6I1 and the
related statement of revenue collected and expenses paid for the #ear then ended.
(ana!ement.s Res$onsi)ilit" for t&e Financial Statements
7ana!ement is responsile for the preparation and fair presentation of these financial statements in
accordance with the cash receipts and disbursements basis of accounting described in "ote #B this
includes determinin! that the cash receipts and disursements asis of accountin! is an acceptale
asis for the preparation of the financial statements in the circumstances. 7ana!ement is also
19-9
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Chapter 19 - Additional Assurance Services: Historical Financial Information
responsile for the desi!n* implementation* and maintenance of internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement*
%hether due to fraud or error.
Auditor.s Res$onsi)ilit"
<ur responsiilit# is to e"press an opinion on these financial statements ased on our audit. ,e
conducted our audit in accordance %ith auditin! standards !enerall# accepted in the @nited States of
America. Those standards re(uire that %e plan and perform the audit to otain reasonale assurance
aout %hether the financial statements are free from material misstatement.
An audit involves performin! procedures to otain audit evidence aout the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor=s $ud!ment* includin! the
assessment of the ris0s of material misstatement of the financial statements* %hether due to fraud or
error. In ma0in! those ris0 assessments* the auditor considers internal control relevant to the
partnership=s preparation and fair presentation of the financial statements in order to desi!n audit
procedures that are appropriate in the circumstances* ut not for the purpose of e"pressin! an opinion
on the effectiveness of the partnership=s internal control. An audit also includes evaluatin! the
appropriateness of accountin! policies used and the reasonaleness of si!nificant accountin! estimates
made # mana!ement* as %ell as evaluatin! the overall presentation of the financial statements.
,e elieve that the audit evidence %e have otained is sufficient and appropriate to provide a asis
for our audit opinion.
#$inion
In our opinion* the financial statements referred to aove present fairl#* in all material respects* the
assets and liabilities arising from cash transactions of Miff# Clerical Services as of Decemer +1*
'6I1* and its revenue collected and e"penses paid durin! the #ear then ended in accordance %ith the
cash receipts and disbursements basis of accounting descried in :ote I.
%asis of Accountin!
,ithout modif#in! our opinion* %e dra% attention to :ote I to the financial statements* %hich
descries the asis of accountin!. The financial statements are prepared on the cash receipts and
disursements asis of accountin!* %hich is a asis of accountin! other than !enerall# accepted
accountin! principles.
Elue* 1ra# H Co.
Cit#* State
Feruar# '+* '6I4
b. The report must e modified ecause the statements are not in conformit# %ith the meanin! of
-!enerall# accepted accountin! principles- as used in the conventional standard report. :o opinion
is e"pressed as to the statements) conformit# to !enerall# accepted accountin! principles ecause
cash asis statements omittin! assets or liailities of material amount are not in accordance %ith
such principles.
Further* the financial statements are not called balance sheet or income statement
ecause of material differences from accrual statements. Special care must e ta0en to avoid
leadin! the reader to incorrect inferences. Cash asis statements should e titled to reveal clearl#
%hat the# represent and to avoid impl#in! that the# present financial position or operatin! results
in accordance %ith !enerall# accepted accountin! principles.
19-16
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Chapter 19 - Additional Assurance Services: Historical Financial Information
19+; S<L@TI<:: Eroad%all Corporation 28stimated time: '4 minutes3
a. A revie% of interim financial statements does not provide a asis for the e"pression of an
opinion ecause a revie% is not an audit performed in accordance %ith !enerall# accepted
auditin! standards>that is* it does not include the collection of sufficient competent evidence
to support an opinion.
b. The procedures that Loman must perform consist primaril# of in(uiries and anal#tical
procedures concernin! si!nificant accountin! matters relatin! to the financial information to
e reported. The procedures that Loman should appl# ordinaril# ma# e limited to the
follo%in!:
Procedure Pur$ose of Procedure
Cevie%in! documentation of the most recent
audit and financial statements* and considerin!
the results of auditin! procedures.
To update the understandin! of the
usiness and internal control.
In(uir# concernin! an# si!nificant chan!es in
the compan#=s usiness activities.
To update the understandin! of the
usiness and internal control.
&erformin! anal#tical procedures. To identif# potential misstatements and
provide a asis for in(uiries to
mana!ement and certain other procedures.
7a0in! in(uiries of mana!ement re!ardin!
unusual relationships.
To otain assurance that unusual
relationships are not the result of
misstatements of the interim information.
&erformin! additional procedures if the C&As
ecome a%are that interim information ma# e
incorrect* incomplete* or other%ise
unsatisfactor#.
To otain assurance that the interim
information is not materiall# misstated.
In(uirin! of officers and other e"ecutives
havin! responsiilit# for financial and
accountin! matters concernin!:
a. ,hether the interim financial
statements have een prepared in
conformit# %ith !enerall# accepted
accountin! principles consistentl#
applied.
b. @nusual or comple" situations
affectin! the interim financial
information.
c. Si!nificant transactions occurrin!
around the end of the period.
d. Suse(uent events.
e. ,hether mana!ement has 0no%led!e of
fraud havin! een committed.
f. ,hether alle!ations of fraudulent
In order to ecome a%are of si!nificant
matters affectin! the interim financial
statements.
19-11
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Chapter 19 - Additional Assurance Services: Historical Financial Information
financial reportin! have een made #
emplo#ees* former emplo#ees* or other
individuals.
Ceadin! the minutes of meetin!s of
stoc0holders* oard of directors* and
committees of the oard of directors.
To identif# actions that ma# affect the
interim financial statements.

Ceadin! the interim financial statements. To consider* on the asis of information
comin! the accountants) attention*
%hether the information to e reported
conforms %ith !enerall# accepted
accountin! principles.
<tainin! reports from other accountants %ho
ma# have een en!a!ed to ma0e a revie% of the
interim financial information of si!nificant
components of the compan#.
As a asis* in part* for the report.
<tainin! evidence that the interim financial
information reconciles %ith the accountin!
records.
To otain assurance that the interim
information is not materiall# misstated.
19+? S<L@TI<:: :orman Le%is 28stimated time: '4 minutes3
Deficienc# Ceason Correction
213 The report does not
identif# the
financial statements
that %ere compiled.
2'3 A compilation
report should not
indicate that
anal#tical
procedures %ere
applied to the
financial
statements.
To avoid reader mis-
understandin! as to %hich
financial statements %ere
compiled.
A compilation involves the
preparation of financial
statements from representations
of mana!ement* %ithout
performin! procedures to audit
or revie% the information. To
indicate that procedures %ere
applied to the financial
statements could confuse the
readers to the nature of the
accountant)s service.
The report should clearl#
identif# the compiled
statements* includin! the
compan# name* the individual
statements* and their dates.
Ceference to the performance
of anal#tical revie%
procedures should e deleted
from the report
.
19-1'
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This document ma# not e copied* scanned* duplicated* for%arded* distriuted* or posted on a %esite* in %hole or part.
Chapter 19 - Additional Assurance Services: Historical Financial Information
2+3 The report does
not indicate the
nature of a
compilation of
financial statements.
The reader should e clearl#
informed as to the nature of the
accountants) service.
The report should indicate
that a compilation is limited
to presentin! in the form of
financial statement
information that is the
representation of
mana!ement.
2.3 The report
provides ne!ative
assurance re!ardin!
the financial
statementsB it states
that nothin! came to
the accountants)
attention to indicate
the financial
statements are in
error.
A compilation of financial
statements does not provide a
asis for the e"pression of
ne!ative assurance re!ardin!
the statements. The
accountants report on the
compilation should disclaim an
opinion on the financial
statements.
The statement of ne!ative
assurance should e altered to
indicate that the accountants
do not e"press an opinion or
an# other form of assurance
on the financial statements.
In'Class Team Case
19+A S<L@TI<:: ,estar 28stimated time: ;6 minutes3
a. Review of financial statements
213 /es.
2'3 The procedures applied durin! a revie% of the (uarterl# financial statements of a
pulic compan# include: procedures to otain an understandin! of internal controlB
anal#tical procedures applied to the interim financial data # reference to prior interim
information* ud!ets* and other dataB readin! minutes of meetin!s of stoc0holders and
directorsB and otainin! %ritten representations from mana!ement re!ardin! the
presentation and completeness of the statements.
2+3 Limited 2ne!ative3 assurance.
2.3 Departures from !enerall# accepted accountin! principles. Cevie% reports are not
re(uired to e altered in cases involvin! consistenc# or uncertainties* includin! !oin!
concern. In addition* %hen a scope limitation is involved* the revie% is considered
incomplete and no revie% report should e issued.
243 ,illiams has confused the pulic compan# re(uirement of a revie% of interim
information %ith a revie% of a nonpulic compan#)s annual statements. ,estar is not
re(uired to have a revie% of its financial statements.
b. Compilation of financial statements
213 /es.
2'3 The minimum procedures re(uired include readin! the compiled statements for
appropriate format and ovious material misstatement. Eut* %hen performin! this
service C&As !enerall# are as0ed to prepare the financial statements. Also* prior to
performin! a compilation the C&As must have 0no%led!e of the accountin! principles
and practices used %ithin the client)s industr#* and must have a !eneral understandin!
of the client)s usiness transactions and accountin! records.
19-1+
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Chapter 19 - Additional Assurance Services: Historical Financial Information
2+3 A compilation report need not e issued if the financial statements are not intended to
e used # a third part#. In such case* the C&As must document in an en!a!ement
letter this fact* and the financial statements should e laeled as ein! restricted to
mana!ement=s use.
2.3 A compilation report includes a disclaimer %ith no e"plicit assurance.
243 Compilation reports are modified for 2a3 departures from !enerall# accepted
accountin! principles* 23 lac0 of all disclosures* and 2c3 a lac0 of independence.
c. $inancial statements
213 /es.
2'3 This is considered a report on a special-purpose financial reportin! frame%or0.
2+3 The titles to the financial statements %ill e modified and a para!raph %ill e added to
the report indicatin! that a comprehensive asis of accountin! other than !enerall#
accepted accountin! principles has een used.
19-1.
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Chapter 19 - Additional Assurance Services: Historical Financial Information
d. Auditing a small portion of the financial statements
213 /es.
2'3 This is a -report on specified elements* accounts or items. Audits* a!reed-upon
procedures* and revie% are possile.
2+3 ,hen e"pressin! an opinion as a result of an audit on specified elements* accounts* or
items* positive assurance ma# e provided. An a!reed-upon procedures report
includes a summar# of findin!s. A revie% provides limited 2ne!ative3 assurance.
Researc& and /iscussion Case
19+9 Dallas 7cEain 28stimated time: .4 minutes3
a. The undocumented disursements should e of concern to the auditor even thou!h this
en!a!ement is a -alance sheet onl#- audit. Fores appears to have complete personal control
over 7cEain)s assets* includin! access to lar!e amounts of cash. This constitutes an internal
control si!nificant deficienc#* %hich an auditor should communicate to his or her client
27cEain3. Furthermore* Fores is not properl# e"ecutin! his fiduciar# responsiilities as he is
disursin! 7cEain)s funds %ithout either direct authori9ation or proper documentation. Some
ris0 e"ists that Fores is eme99lin! assets from 7cEain. The %%&' Tenants Case illustrates
the prolems that an accountant 2or an auditor3 ma# encounter as a result of failin! to advise a
client of undocumented disursements made # a mana!in! a!ent.
There is a possiilit# that the undocumented disursements are related to material
misstatements in 7cEain)s statement of assets and liailities. For e"ample* the disursements
could e for pa#ments on material unrecorded liailities. Also* the appro"imatel# N+;4*666
represents onl# the funds accounted for durin! the current #ear. If 7cEain is accumulatin!
hidden assets* the amount of these assets mi!ht e (uite material if the practice has een !oin!
on for a numer of #ears. Therefore* the auditor has reason to e concerned aout the
completeness of the statement of assets and liailities.
b. The auditor should !ive consideration to the follo%in! courses of action:
213 Advise 7cEain in %ritin! of the %ea0nesses in internal control over the star)s
assets. This action is re(uired # AIC&A A@ ';4* and # the concept of due
professional care. 7cEain should si!n a cop# of this communication to ac0no%led!e
receiptB this cop# should e retained in the auditor)s %or0in! papers.
2'3 Ce(uest that 7cEain si!n a representation letter re!ardin! the completeness of the
financial statement and ac0no%led!in! a%areness and approval of the undocumented
disursements and the diversion of the proceeds of the sale of securities. This letter is
necessar# to assist the auditor in formin! an opinion as to the completeness of the
statement of assets and liailities and also to prevent the auditor from ein! personall#
liale in the event that Fores is perpetratin! a fraud a!ainst 7cEain.
2+3 Issue an unmodified auditor)s report. This action %ould e appropriate onl# if the
auditor %as satisfied that the undocumented disursements %ere personal
e"penditures* not related to unrecorded assets or liailities. ,hether the auditor
personall# approves of the %a# in %hich 7cEain spends mone# is not relevant to the
auditor)s report on 7cEain)s financial statements.
2.3 Issue a (ualified opinion or a disclaimer of opinion. The ar!ument for this course
of action is that the %ea0 internal control and the lac0 of documentation in the
accountin! records ma# e vie%ed as a scope limitation that prevents the auditor from
ein! satisfied as to the completeness of the statement of assets and liailities.
243 ,ithdra% from the en!a!ement. The ar!ument for this course of action %ould
depend upon %hether the auditor concluded that Fores andOor 7cEain appeared so
lac0in! in inte!rit# that the auditor should not e associated %ith them. ,ithdra%in!
19-14
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Chapter 19 - Additional Assurance Services: Historical Financial Information
from the en!a!ement* ho%ever* %ould not eliminate the auditor)s responsiilities to
advise 7cEain of the undocumented disursements* unaccounted for proceeds of the
sale of securities* and %ea0nesses in internal control.
c. <ur recommendation:
,e %ould definitel# advise 7cEain in %ritin! of the %ea0ness in internal control and re(uest
that 7cEain si!n a letter representin! the a%areness and approval of the undocumented
disursements. ,e %ould then have to ma0e a $ud!ment call as to %hether to issue an
unmodified or a (ualified 2scope limitation3 auditors) report. Earrin! an# other indications of
unrecorded assets or liailities* %e lean to%ard the unmodified opinion. ,e reco!ni9e that
individuals !enerall# do not maintain stron! internal control or accountin! records comparale
to those found in usiness entities. Also* %e do not consider it hi!hl# unusual for an individual
in 7cEain)s position to spend mone# lavishl#* often %ith little or no documentation. <ur
principal concern is that our auditors) report not e used to assist Fores in concealin! the
misuse of assets from 7cEain. This concern* ho%ever* can etter e resolved # %ritten
communication %ith 7cEain than # (ualification of the auditors) report.
d. The purpose in posin! this last (uestion is to spar0 a discussion of the -real-%orld-
pressures upon a C&A to retain important clients. As the case %as ori!inall# stated* the C&A
%as #oun! and $ust startin! a practice. @nder these circumstances* the auditor mi!ht feel ver#
uncomfortale in anta!oni9in! either Fores or 7cEain. 8ither of these individuals mi!ht e
so influential in the communit# as to prevent the C&A)s practice from !ettin! off the !round.
E# ma0in! the C&A %ell-estalished and independentl# %ealth#* and # ma0in! this
en!a!ement onl# a small part of the C&A)s total practice* %e remove much of this pressure.
Theoreticall#* this should ma0e no difference in the %a# that a C&A resolves a professional
$ud!mental decision. In realit#* ho%ever* such factors ma# e"ert !reat pressure on a sole
practitioner or on an individual partner %ithin a C&A firm. Such pressure to 0eep an important
client is one reason that lar!e C&A firms often re(uire a -second partner revie%- of the %or0in!
papers of each audit # a partner %ho has no responsiilities %ith respect to that client.
19-1;
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