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AUD - Notes Chapter 2

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Quality Control Standards


The five interrelated elements of quality control are:
A Acceptance and continuance of clients engagement
I Independence, integrity and objectivity
C Continuous monitoring
P Personnel management
A Assurance regarding engagement performance
Acceptance and continuance of clients and engagements
Considers the risk associated with clients (dont accept a client whose mgmt lacks integrity)
Undertakes only those engagements that the firm can reasonably expect to complete with professional care
Independence, integrity and objectivity
Policies and procedures which help maintain personnel independence in fact and appearance
Lead partner and the reviewing partner must rotate off the audit every five years
Routine tax return preparation, tax planning and employee personal tax services are allowed under
Sarbanes-Oxley but must be approved by the audit committee in writing
Continuous monitoring
What the title implies
Peer review
- One CPA firm reviews another CPA firms quality control system, occurs every 3 years for a CPA firm
that is a member of the AICPA.
- Purpose is to determine and report whether CPA firm being reviewed has developed adequate policies
and procedures for quality control and they are following them
- Upon completion, a report is issued with conclusions and recommendations
Personnel Management
Criteria for hiring, assignment of the firms personnel to engagements, professional development and
advancement
Assurance regarding engagement performance
Policies and procedures that assure that the engagement work meets professional standards, regulatory
requirements, and the firms own standards of quality
GAAS relate to the conduct of each individual engagement, whereas quality control relate to the conduct of all
professional activities of the firms practice as a whole
The quality control standards of a firm affect both the performance of each audit and the performance of the
audit practice as a whole
Deficiencies in a firms quality control do not necessarily mean/indicate a lack of GAAS compliance.

Other Engagements, Reports and Accounting Services


Auditing standards have restricted special reports to the following 5 areas
1. OCBOA use of other comprehensive basis of accounting F/S (cash basis, price-level adjusted F/S)
The use of non-GAAP requires the auditor to issue either a qualified or adverse opinion unless the non-GAAP
method is an OCBOA (in which case an unqualified opinion is appropriate)

AUD - Notes Chapter 2


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2. Specific elements, accounts or items of a F/S The auditor expresses an opinion on each of the specified
elements, if the element is far-reaching or pervasive (NI, STK EQ, or any item based thereon) the auditor must
audit the complete set of financial statements.
A piecemeal opinion may be expressed if the items do not constitute a major portion of the F/S. A piecemeal
opinion cannot be issued if the auditor has expressed a disclaimer or adverse opinion.
3. Issue special report on a clients compliance with contractual agreements or regulatory requirements
Auditor must have audited the F/S and may only issue negative assurance. Cannot be issued if the auditor has
expressed a disclaimer or adverse opinion. Limitedly distributed
4. Special purpose financial presentations to comply with contractual agreements or regulatory provisions
5. Financial information presented in prescribed forms or schedules the auditor may attest to the fairness on
financial information presented in prescribed forms such as loan applications or regulatory filings.
The auditor may make modifications to an unqualified special report by adding an explanatory paragraph after
the opinion paragraph

Compilation and Review of Financial Statements


CPAs can perform two levels of service (compilation and review) with respect to unaudited F/S of a non-public
company.
A Revie
Review of F/S a higher level of service than compilation because it results in an expression of limited
assurance. Reviews include/ Evidence mainly comes from inquiry and analytical procedures.
The accountant is not required to obtain an understanding of internal control or assess control risk.
Review Procedures should be tailored
An auditor is required to perform these in a Review:
U Understanding with client must be established
L Learn and or obtain sufficient knowledge of the entitys business
I Inquires
A Analytical procedures
R Review, other procedures
C Client representation letter required from mgmt (dont need with a compilation)
P Professional judgement should be used
A Auditor should communicate results
The objective of a review of financial information is to determine whether material modifications are necessary
for the information to be in conformity with GAAP.
Not required to communicate with predecessor auditor
Make inquires of internal personnel, not external people or entities.
Client representation letter from mgmt is required which covers all F/Ss and periods covered by the review
report
Audit test work, including testing internal controls, is not performed
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AUD - Notes Chapter 2


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The accountants report in a review engagement should include:


A the review has been performed in accordance with SSARS standards established by the AICPA
M All F/S information is the representation of mgmt
I a review consists principally of inquiries of company personnel
A a review consists of analytical procedures applied to financial data
S a review is substantially less in scope than an audit
N no opinion is expressed
M accountant is not aware of any material modifications that should be made to the F/S in order for
them to be in conformity with GAAP
AM I A SNM
Review
Engagement letter is mandatory. Client Representation Letter is also mandatory
Accountant is not required to:
Test internal control- understanding of internal control not required
Perform audit tests
Assess fraud risk- if become aware, consider effect and request management
Communication with predecessor accountant- can but not required
The accountant only need to inquiry with internal personnel not external
Analytical procedures
Compare the current statement with prior period; current ratio with prior
Compare actual statement with budgets or forecast
Compare financial and relevant nonfinancial information
Compare ratio and indicators with those of other entities in industry
Compare relationship among elements in FS
Client representation letter should be obtained. The letter should be dated of the accountant report
Update the management representation letter
Significant amount of time passed between the procedures peformed and the
issurance of the report
Material subsequent event between completion of procedures and issurance of
the report
A former client request the accountant to reissue prior period report
An updated letter should include any previous representation should be modified
and subsequent events
Communicate Result
1. Title independence on the title
2. Addressee
3. Introductory paragraph
a. Identify entity
b. State the FS reviewed
c. Identify FS
d. Specify the period covered
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AUD - Notes Chapter 2


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e. Applied analytical procedures to management data and made inquiry


f. Substantial less in scope than audit, and does not express opinion
4. Management Responsibilities
a. Fair presentation of FS
b. Maintained internal control
5. Auditor Responsibilities
a. Accordance with SSAR by AICPA
b. Limited assurance
6. Engagement result
a. Not aware of any material modification that should be made for FS to be
conformity with the applicable framework
7. Signature of Accountant
8. Date date completed review
9. Each page of the statement should be marked as See Independent Accountant
Review Report
10.
Uncertainties and inconsistencies do not require medication of review report
as long a the FS include adequate disclosure
11.
Accountant must be independent
Report Modification due to departure of GAAP
Separate paragraph should be added to the end of the report
Report Modification not Adequate due to departure of GAAP
If disclosures is not adequate, then the accountant should withdraw
Reporting on fraud
Inconsequential matter- no need to communicate
Documentation oral and written need to be documented
Other options withdraw or consult legal counsel
Confidentiality obligation of confidentially preclude disclosure outside entity
except in certain limited
If accountant become aware of subsequent events, he or she should first confirm or investigate the
issue

Reporting on Comparative F/S


When the continuing auditor performs a higher level of service (service upgrade) in the current period, the
report on the prior period should be updated and issued as the last paragraph of the current periods report
Downgrade in service (last yr we reviewed, this yr we compile). Issue a compilation report and add a paragraph
to describe prior period responsibility assumed. Or issue both a review report and compilation report
Whenever prior accountants are asked to reissue a prior report (audit, review or compilation) they should reas
the new F/S and obtain a representation letter from the new accountant
Reporting when one period is audited
Reissue the prior period report, or
Include an additional paragraph in the current report describing the responsibility assumed for the prior
period statements

AUD - Notes Chapter 2


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Review of Interim Financial Information


In an initial review of interim financial information, the accountant should make inquires of the predecessor
auditor, and if allowed, review the predecessors documentation
Inquiry of clients lawyer is not required but may be appropriate in certain circumstances
Going concern is not required but may be appropriate
Likely misstatement best estimate of the total misstatement in an account balance or class of transactions. The
accountant should:
Accumulate all such estimates for further evaluation
Consider that the aggregated effect of several immaterial misstatements
Evaluate potential effect on current and future periods
A review of interim F/S of a public company is conducted in accordance with AICPA auditing standards not
SSARS
Should modify their report if, during the review, they become aware of a departure from GAAP
Going concern no modification if disclosed
Lack of Consistency no modification if disclosed

Letters for Underwriters


A comfort letter is a letter from the CPA to the named underwriter. It covers the period from the date of the last
auditors report to the effective date of the registration.
When a comfort letter is issued, the CPA is required to perform a review of interim financial information in
accordance with auditing standards
To obtain a comfort letter, parties other than the names underwriter must provide the CPA with an attorneys
opinion or representation letter, confirming that such a party has a due diligence defense
Comments in a comfort letter a limited to:
Financial info expressed in dollars, and
Financial info derived from accounting records
A comfort letter is solely to assist the underwriters in conducting and documenting their investigation of the
company in connection with the offering
Provide positive assurance on:
CPAs independence
Compliance of the F/S with the SEC Act, assuming the F/S are audited
Provide negative assurance on:
Unaudited F/S if a review has not been performed, procedures performed and findings obtained should be
listed
Changes in selected financial information during subsequent period
Whether non-financial data in the registration statement complies with regulation S-K
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AUD - Notes Chapter 2


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