108

CHAPTER15
OtherPublicAccountingServicesandReports
LEARNINGOBJECTIVES
Review
Checkpoints

Exercises
Problems

Cases

1. Writeappropriatereportsfor
reviewandcompilationof
unauditedfinancialstatements.

1,2,3,4

37,38

41,42

2. Listsomeinteriminformation
reviewproceduresandwritea
reportonareviewofinterim
financialinformation.

5,6,7

38,43

43

3. Define,explain,andgiveexamples
ofothercomprehensivebasesof
accounting.

8,9,10

4. Explainthecontentofan
auditor'sreportonsupplementary
currentvaluefinancialstatements
incomparisontoastandardreport
onhistoricalcostfinancial
statements.

11,12

5. Describethevariousreportson
internalcontrolandtheir
connectionwithpublicreporting
andreportingtoaclient'saudit
committee.

13,14,15

6. Definethevariousfinancial
presentationsandlevelsof
serviceinvolvedinassociation
withfinancialforecastsand
projections,andwritecompilation
andexaminationreports.

16,17,18

7. Explainauditors'responsibilities
forfinancialstatementsthatwill
beusedinothercountries.

19,20

44

36,40

35,39

POWERPOINTSLIDES
PowerPointslidesareincludedonthewebsite.Pleasetakespecialnoteof:
*
*

ReviewEngagementReport
NoticetoReader

SOLUTIONSFORREVIEWCHECKPOINTS
15.1

TheinfluenceandpressuresthatledtocreationoftheCompilationsand

109
ReviewEngagementStandardsinclude:(1)generalsocialdissatisfactionwith
"bigbusiness,"(2)smallPAfirmswanttogiveserviceandlessthanaudit
assuranceforunauditedstatements,(3)smallPAfirmswanttogetawayfrom
thecomplicatedstandardsinvolvedinunauditedengagements,(4)smallCPA
firmswanttoavoidthenegativismoftheunauditedstatementdisclaimer,(5)
smallbusinessesdonotappreciatethelegalliabilityworriesofPAsand
wantsomethingmorepositivethantheunauditedstatementdisclaimer,and(6)
Congressionalcritics(Moss,Metcalf)accusedtheAICPAofhamperingthe
businessservicesofsmallPAfirms.
15.2

CompilationandReviewEngagementsareapplicableinunauditedfinancial
statementengagements.

15.3

Throughthetitleofthestatementsorinthefootnotesofthestatements.

15.4

Bothreviewserviceandcompilationserviceengagementsarelessthanan
audit.Acomparisonofthethreeamountstoahierarchyofassurance:
1.Auditengagement

2.

Reviewengagement

3.

Compilationengagement

Auditorobtainssufficientcompetentevidence
thatservesasabasisforanopinionon
financialstatements.Theauditorobtains
reasonableassurancewithintheinherent
limitationsoftheauditprocess.
Accountantobtainslimitedassurancethrough
analyticalproceduresthatthereareno
materialmodificationsthatshouldbemadeto
financialstatements.
Accountantputsclientinformationinfinancial
statementformwithoutobtaininganyassurance
(becausenosignificantproceduresare
performed)thatmaterialmodificationshouldor
shouldnotbemadetothefinancialstatements.

Additionally,anaccountantwhoisnotindependentmayreportona
compilationservice(providingthatlackofindependenceisdisclosed),but
notonareviewserviceorauditengagement.
15.5

No,GAAPdoesnotrequirepresentationofinterimfinancialinformation.
However,someregulatorsmayrequireinterimfinancialinformation.Thusin
reportsfiledwiththeSEC,omissionofinteriminformationorfailureto
reviewitmustbenotedinanexplanatoryparagraph.

15.6

Areviewofinterimfinancialinformationissimilartoareviewofthe
unauditedannualfinancialstatementsintheserespects:
1.
BothreviewsarelessinscopethanaGAASaudit.
2.
Proceduresinbotharelimitedtoinquiryandanalyticalprocedures.
3.
Inthereport,anauditopinionisdisclaimed
4.
Inthereport,thelevelofassuranceis"negativeassurance."

15.7

Anauditreportonannualfinancialstatementswouldbemodifiedwithrespect
totheinterimfinancialinformationinthesecircumstances:
1.
Theinteriminformationisomitted(SECcompaniesonly).
2.
Thereviewcannotbecompleted(SECcompaniesonly).
3.
Theinteriminformationdeparts,includingadequatedisclosures.
4.
Inthenotetotheannualfinancialstatements,themanagementindicates
theauditorperformedprocedureswithoutalsosayingtheauditor

110
5.
15.8

expressesnoopinion.
Managementfailstolabelinterimfinancialinformationnote"unaudited"

AADBAexistsbecausesomeaccountantsandbusinessmanagersdonotwantto
incurtheexpenseandtroubletoproducefullscaleGAAPfinancialstatements
usingsomeofthecomplicatedaccountingstandards.Theyaresoldiersinthe
"bigGAAP,littleGAAP"war.
Yes,AADBAfinancialstatementscanbeaudited.Theonlydifferencesarethat
(1)thefinancialstatementscarrydifferent,descriptivetitles,(2)the
auditreportcontainsasentencewarningthatthefinancialstatementsareon
anAADBA,and(3)theopinionparagraphreferstotheAADBAinsteadofto
GAAP.

15.9

WidespreadexemptionsfromcomplicatedGAAPforsmallbusinesseshavenot
beenenactedbecausebankersandotherusersoffinancialstatementsarenot
especiallyeagertohave"littleGAAP"financialstatements.Anyway,many
smallbusinessesaspiretobelargebusinesses,andtheirmanagersmaynot
wanttobestigmatizedby"littleGAAP"beginnings.
15.10 ComprehensivebasisofaccountingotherthanGAAP.
Thefourthstandardisinapplicablewhenthefinancialstatementsare
preparedonacomprehensivenonGAAPaccountingbasis.
Thereportcontainsasentenceexplainingthatthefinancialstatementsare
onacomprehensivebasisotherthanGAAP.Theopinionsentencereferstothe
AADBAinsteadoftheGAAP.
NonGAAPaccountingbasesinclude:
1.
Statutoryorregulatoryaccountingrequirements
2.
Taxbasisaccounting
3.
Cashandmodifiedcashbases
4.
Generalpriceleveladjustedstatements
5.
Anyotherbasishaving"substantialsupport"(Auditingstandardsdonot
explainhownonGAAPaccountingcanhave"substantialsupport."In
practice,accountantswillreportonanyreasonableaccountingbasis,
whichexplainswhyreportsexistondiversetypesofcurrentvalue
financialstatements.)
15.11 SomeexamplesofAADBAinclude:(1)insurancecompanystatementsconforming
toprovincialregulatoryagencyaccountingrules,(2)taxbasisaccounting,
(3)cashbasisaccounting,and(4)otherfairlywelldefinedmethodssuchas
constantdollar,priceleveladjustedfinancialstatements.Maybeliquidation
basisofaccounting.
CurrentvalueisGAAPfordefinedbenefitplans,investmentcompanies,and
personalfinancialstatements.Maybeliquidationbasisofaccounting
TheAICPA(AuditingStandardsBoard)considerscurrentvaluesupplementaryto
thehistoricalcostfinancialstatementsforcompaniesthatdonothave
specialindustryaccountingstandards.Thuscurrentvalueissupplementary
informationforcompaniesinmanufacturing,mostservices,realestate,and
thelike.
15.12 Thedifferenceliesinthereference.Whereasinthestandardauditreport
thereferenceistoconformitywithGAAP:
(1)

ForanAADBA,thereferenceistothe"basisofaccountingdescribedin

111
(2)
(3)

NoteX,"
ForanentityforwhichcurrentvalueisGAAP,thereferenceisthesame
asthestandardreport,"conformitywithGAAP,"
Forpresentationofsupplementarycurrentvalueinformation,thereisa
standardopiniononthehistoricalcostfinancialstatementswiththe
standardreferenceto"conformitywithGAAP,"andanotheropiniononthe
currentvaluewithareferenceto"thebasisofaccountingdescribedin
NoteX."However,theSECwouldpermitareporttobefiledwithoutthe
accompanyinghistoricalcostfinancialstatements,lettingthecurrent
valuestatementsstandaloneasanAADBA.

15.13 Yes,thefinalconclusioninapublicinternalcontrolreportisanopinion
("positiveassurance")onthecontrols,althoughthereportitselfcontains
heavycautionarylanguageabouttheuseandunderstandingofthereporton
control.
15.14 Auditingstandardrequirecommunicationofreportableconditions,control
deficienciesandcommunicationsaboutavarietyofmattersthatreflectthe
cooperationauditorsreceivedfrommanagementbeforeandduringtheaudit.
The"managementletter"givingadviceonvariousmattersisnotrequired.
15.15 Writtenreportsoninternalaccountingcontrol(IAC)forexternaluse.
TypeofEngagement

CharacterofReport

SpecialIACstudy

ReportonIACwithopiniononIAC
systemtakenasawhole.

Serviceauditorengagedtoreportfor
benefitofuserauditorandtheir
mutualclient.

AspecialpurposereportonIACcan
takespecialforms,themainfeatureof
whichincludesanopinionrelatingto
thecontrolsappliedbytheservice
organizationtotheclient
organization'stransactions.

15.16 Prospectivefinancialstatementsaredefinedascompletefinancialstatements
inthesameformastraditionalincomestatements,balancesheetsand
statementsofchangesinfinancialposition(cashflows).However,an
abbreviatedpresentationconstitutesprospectivefinancialstatementsifit
containsalloftheseitems(ifapplicable):
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

Salesorgrossrevenue
Grossprofit
Unusualorinfrequentlyoccurringitems
Provisionforincometaxes
Discontinuedoperationsorextraordinaryitems
Netincome
Primaryandfullydilutedearningspershare
Summaryofsignificantchangesinfinancialposition
Summaryofsignificantassumptions
Summaryofsignificantaccountingpolicies

Omissionofanyitems18makesthepresentationapartialpresentation.
Omissionof9or10makesitadeficientpresentation.
15.17 SimilaritiesandDifferences
ExaminationReportonaForecast

AuditReportonHistorical

112
Statements
a. Identificationoffinancial
statementsandwhattheyintend
torepresent.
b. Warningaboutultimateattainment
ofprospectiveresults.
c. Statementaboutexaminationin
accordancewithCICAstandards.
d. Opinion/assuranceabout
presentationandreasonable
assumptions.
e. Statementaboutnoresponsibility
toupdatethereport.

a. Identificationofstatements
audited.

CompilationReportonaForecast

CompilationReportonHistorical
Statements

a. Identificationoffinancial
statementsandwhatthey
represent.
b. Warningaboutultimateattainment
ofprospectiveresults.

a. Identificationofstatements
compiled.

c. Statementaboutcompilationin
accordancewithAICPAstandards.
d. Disclaimerofopinion/assurance.
e. Statementaboutnoresponsibility
toupdatethereport.

c. Statementthatauditwasin
accordancewithGAAS.
d. Opinionaboutconformitywith
GAAP.

b. Statement/warningthat
informationisthe
representationofmanagement
(owners).
c. Samekindofstatementabout
compilationandCICAstandards.
d. Disclaimerofopinion/assurance.

15.18 Becauseofpoortrackrecordinpastforecasts,auditorsfailuretocomment
onunderlyingassumptions,anduserspreferencetomaketheirownforecasts
basedonreliableinformation.
15.19 InbothAADBAandforeignGAAPfinancialstatements,theissuersusea
"language"ofaccountingprinciplesthatisnotthestandardCanadian
generallyacceptedaccountingprinciples.Reportusers,whomightexpect
standardCanadianGAAP,needtobeputonnotice(justliketheyneedtobe
putonnoticeaboutAADBAstatements)thatthe"language"isdifferentand
theymustpayattentiontothedifferencesinordertoaccomplishdesired
analysisandinterpretation.
15.20 TheCanadianauditorsshouldtakecarethattheforeignGAAPfinancial
statementsarenotmistakenforU.S.GAAPfinancialstatements.Thisis
accomplishedbywritingU.S.styleauditreportsthatarequalifiedor
adverse,AADBAtypereports,givingnoticeofforeignGAAPfinancial
statements,orwritingtheforeignauditreport.
ForeignGAAPfinancialstatementsthatwillhavemorethanlimited
distributionintheUnitedStates.Theoptionsare:
1.
2.

GivetheU.S.standardreport,qualifiedoradversefordeparturesfrom
U.S.GAAP,withanotherseparateparagraphexpressinganopiniononthe
fairpresentationinconformitywiththeCanadianGAAP.
Giveboth(a)thereportformusedbyauditorsintheothercountry(A2
inthechapter)oraCanadianstyleAADBAtypereportmodifiedtorefer
totheGAAPoftheothercountry(A1inthechapter),and(b)the

113
qualifiedoradverseU.S.standardreportwithanadditionalparagraph
expressinganopinionontheforeignGAAP(B1inthechapter).
Whentwosetsoffinancialstatements,CanadianGAAPandU.S.GAAP,are
preparedandbothmaybedistributedinCanadaandintheUnitedStates.
Reportoneachone:
1.

2.

ReportontheCanadianGAAPfinancialstatementswithamodifiedAADBA
typereport(A1inthechapter),withanadditionalparagraphnotifying
usersthatanotherreporthasbeenissuedonU.S.GAAPfinancial
statements.
ReportontheU.S.GAAPfinancialstatementsasnormallydoneforU.S.
financialstatements,butaddaparagraphnotifyingusersthatanother
reporthasbeenissuedonCanadianGAAPfinancialstatements.

SOLUTIONSFORMULTIPLECHOICEQUESTIONS
15.21 a.
b.
c.

Incorrect.
Incorrect.
Correct.

Currentvalueandforecastamountsarenotthesame.
Interimstatementsareusuallyhistoricalcost.
Thisisthebestchoicebecauseitismostlikelytocontain
everythinginthepresentationguides.
Thisisapartialpresentation,notaprospectivefinancial
statement.

d.

Incorrect.

15.22 a.

Incorrect.

b.
c.

Correct.
Incorrect.

d.

Incorrect.

15.23 a.
b.
c.

Correct.
Incorrect.
Incorrect.

d.

Incorrect.

15.24 a.
b.

Correct.
Incorrect.

c.

Incorrect.

d.

Incorrect.

Thebasisofaccountingmustbedescribed.
Currentvalueaccountingisnotofficiallyrecognizedasa
welldefinedAADBA.
Certainlynot,becausethestatementdoesnotconformto
historicalcostGAAP.
Thisisthethrowaway!Forecastguidesarenotrelevant.

15.25 a.
b.
c.
d.

Incorrect.
Incorrect.
Incorrect.
Correct.

LargePAfirmsdonotmonopolizeunauditpractice.
seed.
seed.
AllPAfirmsdosomeformofunauditpractice.

15.26 a.
b.
c.
d.

Incorrect.
Incorrect.
Correct.
Incorrect.

AuditstandardsbyCICAgovernauditpractice.
Therecommendationstoallcompanies.
Thekeyisunaudited.
seea.

15.27 a.
b.
c.

Incorrect.
Correct.
Incorrect.

Reviewsarenotmoreworkthanaudits.
Reviewworkextentliesbetweencompilationandaudit.
Thisisbackwards!

Theybothgiveanopinion,butsayingtheyarethesame
levelofassuranceisnotjustified.
Thereportdisclaimsachievability.
Thecompilationreportdoesnotincludeevaluationofthe
supportforassumptions.
Thereportsexpresslytakenoresponsibilityforupdating.
Theplaintiffbearsthisburdenofproof.
Herenegligenceprobablyisnotenough.
Goodfaithanreasonablebasisdescribethereasonsfornot
beingliable.
Theplaintiffshavetheburdenofproof,notthepersons
connectedwiththeforecast.

114
d.

Incorrect.

sameasc!

15.28 a.
b.
c.

Correct.
Incorrect.
Incorrect.

d.

Incorrect.

Noticeoflackofindependenceisenough.
Mustbeindependenttogivethestandardauditreport.
Mustbeindependenttogivetheexaminationreportona
forecast.
Mustbeindependenttogivetheunauditedreviewreport.

15.29 StudentsmayneedtorememberChapter2and3forthisone.
a.
Incorrect. Negativeassuranceisprohibitedinauditreports.
b.
Incorrect. Adisclaimerandnonegativeassuranceisspecifiedfora
compilationreport.
c.
Correct.
Thestandardreviewreportcallsfornegativeassuranceas
wellasthedisclaimer.
d.
Incorrect. seea..pa
15.30 a.

Correct.

b.

Incorrect.

c.

Incorrect.

d.

Correct.

15.31 a.

Correct.

b.

Incorrect.

c.

Incorrect.

d.

Incorrect.

15.32 a.

Incorrect.

b.

Incorrect.

c.

Incorrect.

d.

Correct.

15.33 a.

Incorrect.

Asnotedinthechapterthewaytodealwiththisisthrough
thefinancialstatementtitleorfootnote.
Theadverseconclusion(opinion)cannotbegiveninareview
orcompilationengagementbecausetheadverseexpression
dependsuponhavingauditevidence.
Itmakesnosensetoexplainthedepartureasnecessaryto
makethestatementsnotmisleading,whichimpliesaudit
knowledge,whenadisclaimerisgiven.
Thepropertreatmentinareviewengagementislikethe
auditreportingtreatmentexplainthedepartureas
necessarytomakethestatementsnotmisleading,thengive
thestandardreviewreportnegativeassurance.
Aslongasnothingiswrong,theauditreportdoesnot
mentiontheinteriminformation.
Thereportshouldcontainanextraparagraphmentioningthe
departurefromGAAP,butitisnotanauditopinion
paragraph.
See(a).Ifnothingiswrong,nothingismentionedinthe
auditreport.Thenegativeassuranceisforthesituation
wheretheinterimfinancialinformationispresentedoutside
(standalone)theannualfinancialstatements.
Thenotelabeled"unaudited"isproper,andnomentionneed
bemade.
Thefinancialstatementsaresupposedtocontainanote
describingtheotherbasisofaccounting.
Thefinancialstatementsaresupposedtodescribeingeneral
howtheotherbasisofaccountingdiffersfromgenerally
acceptedaccountingprinciples.
Thefinancialstatementscanbeaccompaniedbyanaudit
reportthatgivesanunqualifiedopinionwithreferenceto
theotherbasisofaccounting,ifsuchanopinionis
justifiedbytheauditwork.
Thefinancialstatementsarenotrequiredtocontainanote
withaquantifieddollarreconciliationoftheassetsbased
ontheothercomprehensivebasisofaccountingwiththe
assetsbasedongenerallyacceptedaccountingprinciples.
Thestandardreviewreportonunauditedfinancialstatements
containsnegativeassurance.

115
b.

Correct.

c.

Incorrect.

d.

Incorrect.

15.34 a.

Incorrect.

b.

Incorrect.

c.
d.

Correct.
Incorrect.

Negativeassuranceisnotpermittedinanyauditreport,
includingoneonAADBA.
Areportbasedonagreeduponproceduresgivesnegative
assurance.
Thestandardreviewreportoninterimfinancialinformation
containsnegativeassurance.
Auditorsshouldmakesurethattheboardknowsabout
management'ssignificantaccountingpolicies.
Auditorsshouldmakesurethattheboardknowsabout
managementjudgmentsaboutaccountingestimatesusedinthe
financialstatements.
Auditorsarenotrequiredtoburdentheboardwithtrivia.
Auditorsshouldmakesurethattheboardknowsabout
disagreementswithmanagementaboutaccountingprinciples.

SOLUTIONSFOREXERCISESANDPROBLEMS
15.35 ReviewofForecastAssumptions
Assumption

EvidenceSourcesandProcedures

a. Saleofreal
estate

1. Determinemarketvalueofrealestate:
*
Reviewappraisals(ifany),inquireofreal
estatebrokerforthesellingpriceofsimilar
piecesofland.
2. Determinecostandtaxbasisofland:
*
Examineunderlyingdocuments(usefinancial
statementcostpresentations,ifpreviously
audited)deeds,purchasecontracts.
*
ReviewInternalRevenueCodeandappropriate
publicationstodeterminepropertaxbasis,tax
rates,treatment.
3. Determineaftertaxprofitandproceeds:
*
Basedonaboveinformation,computeprofitand
proceeds.Compareamountstoclient
representationstodeterminereasonableness.
4. Determineauthorityforuseofproceeds:
*
Examineminutesofdirectors'andofficers'
meetingsforevidenceofauthoritytosellthe
ealestateandaformalplanforusingthe
proceedstoretirebonds.

b. Retire
outstanding
debentures.

1. Determineprobablecostofrepurchasingbonds:
*
Examineamount,termsofbondsoutstanding.
*
Reviewcurrentforecastedmarketforbonds,in
lightofterms,amount.
*
Computeestimatedcostofrepurchase.
2. Determineadequacyoffundingforrepurchase:
*
Compareamountofproceeds[computedin(a)]to
amountestimatedforrepurchase.
3. Determineauthorityforretirement:
*
Examineminutesofexecutives'andofficers'
meetingsforevidenceofapprovalof

116
retirement.
c. Laborcontract

1. Determineprobablewageincrease:
*
Examinepriorcontractsettlements,including
subjectiveanalysisoflabormanagement
relations.Conferwithunionofficials.
*
Examinedocuments,memos,andminutesregarding
upcominglabornegotiations.
*
Examinemanagement'sproposedcontract.
2. Determineeffectofhigherthanpredictedwage
settlement:
*
Recomputeeffectofpercentchangeinwage
increasetonetincomeandcorrelateto
management'sfigures.

d. Sales
projections

1. DetermineestimatedcompletiondateofPortsmouth
facility:
*
Examinecontractplans,consultwith
contractor,
observefacility.
*
Examinecontractsformachinery,installation;
consultwithvendordates,typeofequipment,
productivecapacity.
*
Compareauditorestimatedcompletiondateto
management'sforreasonableness.
*
Considerifcompanycanmeetpersonnel
requirementsofthenewfacility.
2. EstimatefinancialimpactofPortsmouth
production:
*
Compareproductivecapacitytoforecastedsales
figure(presumeddeterminedreasonablebythe
auditor).
*
Recomputeprobableeffectofdelayin
Portsmouth'scompletiondateandcompareto
management'sfigures.

15.36 AuditingACurrentValueBalanceSheet
a.
ThemainpracticestandardsaretheAttestationStandards.Astoconduct
ofthereview,however,thegeneralandfieldworkstandardsofGAASare
applicable.Also,thestandardonusingtheworkofspecialistsis
applicableinconnectionwiththeappraisalofassetvalues.
b.

Primarycurrentvaluerelatedprocedures:
1.
Reconcileorcorrespondthedescription,quantityorother
characteristicsofappraisedassetstothehistoricalcostbased
accountingrecords.
2.
UtilizetheworkofappraisedspecialistsasguidedbySection
5360.

c.

Yes,additionaldisclosureswillbenecessary.NPCwillneedtowrite
footnotedisclosuresexplainingthe"comprehensivebasisofaccounting
otherthanGAAP."Fulldisclosureofthenatureanddeterminationofthe
currentvalueswillneedtobemade.

d.

Yes,thereisanevidentialproblem.Thelandappraisalistooold.
($250,000wastheappraisalvalue28monthsago.)Thevalueisprobably

117
highernow,butitcouldbelowerthere'snoevidencethatitisupto
date.
Also,thereisaproblemofhowtoaccountfortheincometaxelement
whethertoimputetaxestoallbookcurrentvaluedifferences,justto
thelandvaluedifference(sinceitisa"surplus"asset),ortoimpute
noneatall.Thismatterisoneofwidedisagreementamongaccountants.
15.37 CompilationPresentationAlternatives
Jimmyhasnoaccountingstaffandhaslittleexpertiseinpreparingfinancial
statementshimself.However,heneedsthemoccasionally,apparentlyfor
creditpurposes.
Threekindsofcompiledfinancialstatementsareavailable:
1.

CompilationWithoutIndependence.BrotherBillcanpreparethecompiled
financialstatements(withorwithoutalldisclosures),buthewillneed
todiscloseinthisreporthislackofindependence.

2.

CompilationWithFullDisclosure.CPABertcancompilethestatements
andpresenttheminthecompleteformusedforauditedfinancial
statements.

3.

CompilationThatOmitsSubstantiallyAllDisclosures.PABertcan
compilestatementswithoutfootnotedisclosures,butthefinancial
statementtitleshouldindicatetheseomissions.

15.38 NegativeAssuranceinReviewReports
a.

Yes,thisisanegativeassurance.

b.

Negativeassuranceisgenerallyprohibitedinauditreportsbecausethe
professionwishessuchreportstocontainpositiveassertionsbasedon
evidenceinsteadofnegativestatementsbasedon"whatdidnotcometo
myattention."

c.

Areviewserviceislessthananaudit,hencethereportcanbeless
thanpositiveassurance.Clientsgetwhattheypay(less)for.

15.39 Errorsinaforecastexaminationreport.
1.

2.

3.

Thestatementabouttheunderlyingassumptionsispoorlyphrased.The
auditorshouldnotsay"theunderlyingassumptionof$1.5million
averagerevenueperstoreissufficienttocoverthefixedandvariable
expenses..."Themoregeneralphraseaboutall"underlyingassumptions
provideareasonablebasisformanagement'sforecast"ismore
appropriate.
Inaddition,thereportshouldnotcontainstatementsaboutfactsofthe
deal(thementionthatcertainexpensesaretheobligationsofthe
limitedpartners),becausethisisthekindoffinancialinformation
thatshouldbedisclosedinthetermsofthedeal.Ifthisinformation
wasomittedbyKingston,theauditorsshouldqualifythereportfor
omissionofinformation.
Thefirstmentionofthesufficiencyofthestorerevenueassumptionto
coverexpensesisaninappropriatewaytosaytheassumptionis
reasonable.Thestatementseemstoimplytheforecastresultswillbe

118
4.

achieved.
Thewarningphrase("However,therewillusuallybedifferencesbetween
theforecastedandactualresults,becausestorerevenuesfrequentlydo
notmaterializeasexpected,andtheshortfallmaybematerial.")is
poorlyphrased,becauseitsuggeststhattheonlypotentialdifference
maybeintherevenue,implyingthatotherelementsoftheforecast
(expenses,forexample)willturnouttobetheamountsforecasted.

15.40
The question requires a discussion of the distinctions among transaction-based
audits, strategic systems audits and reviews. Some points that can be discussed
include the following.
Both types of audits result in a positive assurance in the form of an opinion on
whether or not financial statements are presented fairly in accordance with GAAP (or
other disclosed basis of accounting). The review provides a lower level of
assurance, or moderate assurance, in the form a statement that the nothing has
come to the public accountants attention to suggest the financial statements are
not in accordance with GAAP. No reference to fair presentation is made in the
review engagement report.
While it is reasonable to expect that an audit requires a higher level knowledge of
the business than a review, it is interesting to note that the CICA review standards
specifically set out the requirement for the accountant to have adequate knowledge
of the business to conduct the review. In contrast, the GAAS examination standards
make no reference to a requirement for the auditor to have an adequate knowledge of
the business to conduct the audit. Perhaps the GAAS imply this requirement in the
general standard of performing the audit with due care, and recommendations are
provided elsewhere in the Assurance Handbook but it is not explicit in the standards
themselves. GAAS do include a requirement for the auditor to obtain an
understanding of internal control, which also may imply a good understanding of the
business operations. There are no formal professional standards governing strategic
systems audits, but the description in the text implies that this approach involves
obtaining an intense understanding of the business, its operations, risks and
strategic decisions and applying this understanding to achieve audit efficiencies by
performing substantive procedures only when the understanding suggests a high risk
of error.
Finally, a discussion of how much knowledge and how much evidence is enough
involves considering the ubiquitous role of professional judgment in all assurance
engagements. Factors such as those used to set audit risk, and assess inherent and
control risks can be elaborated on in the context of different assurance objectives,
as well as the role of experience, training, supervision and other practical
factors.
15.41
The case involves assessing the costs and benefits of various audit type
procedures in review engagements and considering factors used in exercising
profession judgment in assurance engagement decisions. A possible approach is
outlined below.
a) The report can discuss the opportunity to reduce costs by not performing

119
procedures that are not specifically required in the review engagement standards.
Another perspective to include is that the procedures mentioned in the case are
fairly low cost, and can provide a high level of assurance regarding misstatements
in many aspects of the financial statements since cash transactions are only one
side of the entries. These procedures can also provide some comfort on overall
controls in the organization and may provide a valuable service in a small company
by allowing a segregation of duties and independent review over a key control, the
control over cash.
b) In light of the analysis developed in a), this part requires one to consider why
the partners are doing what they are doing, given they have the most experience and
are the ones taking the risk of providing assurance.
15.42
The question addresses the need for independence in different small company public
accounting engagements. One possible analysis is outlined below.
a) The compilation report that states that the accountant is not independent of the
client company is likely required, but this can depend on the extent to which the
accountant has any financial interest in her sisters company, is involved in the
accounting decisions and other aspect of managing the business.
b) Providing assurance to users that financial statements are in accordance with
GAAP will likely require more assurance that the accountant is independent. While
factors may indicate the accountant is independent in fact, the appearance of
independence becomes more important as the possible reliance of users on the report
implies higher trust in the figures.
15.43
The question requires application of judgment in determining appropriate
communication with a successor auditor. Factors such as professional conduct,
confidentiality and other assumptions about relevant issues not provided in the
scenarios need to be considered to support the recommended communication.
15.44
The case requires understanding and describing typical review engagement procedures
in the context of a quarterly review, and the relation between audit procedures and
review reporting for the same client. Procedures can be listed for part a) and part
b) that assess the extent to which on-going audit procedures for the client cover
some of the review procedures, such as obtaining a knowledge of the business, its
accounting systems, reviewing minutes and other key documents, and analytical
procedures relating to reported financial information.
15.45
This case involves considering how audit or review reports on specific items (e.g.,
CICA s.5805 or s.8500) or performance of specified verification procedures (s. 9100)
can be used to provide useful services to clients in certain situations. In this
case the client is looking for assurance that tenants are providing complete
information on which their rent payments are calculated.
a) Identify the clients needs, list the applicable services and analyse the costs
and benefits of each for the client in term of procedures to be performed and level
of assurance provided

120
b) Additional benefits to note could include improvements in report formats to be
obtained from tenants, identification of additional reporting items or system
requirements that can be included in future lease terms with tenants, etc.
15.46
The case involves applying standards for attestation engagements (CICA s. 5025) to a
public sector funding situation. An example of an approach to the case is below.
a) Homecare accountability is the subject matter. It might be attested to as an
attestation on a written assertion or a direct reporting engagement. Assuming a
report, some categories that would be relevant include training, administration,
payroll and other expenditures related to providing homecare. Some performance
benchmarks and measures of the provinces results against them could also be part of
an accountability reporting framework.
b) Suitable criteria should be relevant, reliable, neutral, understandable and
complete in evaluating the subject matter - accountability for spending federal
healthcare money on homecare initiatives and delivery.
c) Reference can be made here to performance standards - obtaining sufficient
appropriate evidence to support the conclusion, documenting basis for conclusion
including significance (materiality) and engagement risk, and appropriate form of
report for high assurance. Specific procedures would include review of payment
approvals, cost allocations and controls over expenditures and recording, vouching
expenditures to establish proper classification, etc.
15.47
The case involves an audit of financial statements that may be affected by
environmental issues. An approach to analyzing the case is outlined below.
a) Data are provided that can be used to assess expected disposal costs and volumes,
to corroborate the new disposal cost impact and assess the potential for
environmental liability arising from compliance with disposal regulations.
Assumptions are required and will affect the analysis and conclusions.
b) The analysis may support the General Managers information, however additional
independent evidence can be obtained from the disposal company, from review of
industry statistics and examination of payments, etc.
c) To the extent that environmental non-compliance creates a liability, the
estimation of this liability and the need to include it in the financial statements
if it is material and estimable can be relevant to assessing whether the financial
statements are fairly presented. CICA Audit Guideline No. 19 is useful to read to
respond to this question.
15.48
Reasonable responses include:
a) PA has associated him/herself by performing services in connection with company
information
b) PA has associated him/herself by providing advice to the company
c) PA is associated without his/her knowledge, by the company informing its banker

121
that PA is its accountant
d) PA has associated him/herself with the company, assuming permission was given to
include PAs name in the promotional materials
e) PA has associated him/herself by serving as the companys auditor
f) PA has associated him/herself by performing services in connection with company
information
15.49 CurrentCostInformation
a.
Adisclaimerneednotbeaddedtothestandardreport.Itisnot
requiredwhenmanagementhasdisclosedthattheauditorsperformedno
proceduresandoffernoopinion.
b.

Yes,auditorsstillhavethe"otherinformation"responsibilityto
determinewhetherthecurrentcostinformation(1)containsanything
inconsistentwiththeauditedfinancialstatements,or(2)containsa
materialmisstatementoffact.Ifso,anexceptionreportingobligation
toexplainunresolvedfindingsexists.

c.

Proceduresforreviewofcurrentcostchangingpricesinformation.
1.
Inquireofmanagementthesourceofthe$75,000entryprice
quotationandreasonsforchoosingthissource.
2.

Determinewhetherdirectquotationunitpricingisappropriate.

3.

Determinewhetherthedirectquotationunitpricingprocedurehas
beenusedconsistently(throughtime)todeterminecurrentcostof
suchmachinery.

4.

Inquireaboutanyunderlyingassumptionsrelieduponbymanagement
inusingthispricequotation(e.g.,mostlikelyrealisticsource
ofSupply).

5.

Inquirewhetherthemethodofcalculatingdepreciation(straight
line,usefullife,zerosalvage)isconsistentwithmethodusedin
GAAPstatements.

6.

Inquireaboutmanagement'sdeterminationofestimatedrecoverable
amount(netpresentvalueornetrealizablevalue)andconsider
whetherthe$52,500bookvalueneedstobereduced.

7.

Obtainwrittenrepresentationsabout(a)pricingmethod,(b)
depreciationassumptions,and(c)determinationoflower
recoverableamounts.

SOLUTIONSTOREPORTWRITINGCASES
15.50 NoticetoReader:SeeExhibit152andnotethatinthiscasethelast
sentencewouldbeexcluded.Anotheralternativemaybeasfollows:
CompilationReport
Mr.JamesCoffin

122
CoffinAutoSpeedShop
Ihaveperformedacompilationserviceinconnectionwiththe
accompanyingbalancesheetofCoffinAutoSpeedShopasofJune30,20XX,and
therelatedstatementsofincomeandchangesinfinancialpositionforthe
yearended.Allinformationincludedinthesefinancialstatementsarethe
representationsoftheownersofcoffinAutoSpeedShop.
Usersofthesefinancialstatementsshouldbeawarethatacompilation
serviceislimitedtothepresentationintheformoffinancialstatementsof
informationsuppliedbytheowners.Ihavenotauditedorreviewedthe
accompanyingfinancialstatementsand,accordingly,donotexpressanopinion
oranyotherformofassuranceonthem.
Usersofthesefinancialstatementsshouldalsobeawarethattheowners
haveelectedtoomitsubstantiallyallofthedisclosuresrequiredby
generallyacceptedaccountingprinciples.Iftheomitteddisclosureswere
includedinthefinancialstatements,theymightinfluencetheuser's
conclusionsabouttheCoffinAutoSpeedShop'sfinancialposition,resultsof
operationsandchangesinfinancialposition.Accordingly,thesefinancial
statementsarenotdesignedforthosewhoarenotinformedaboutsuch
matters.
/s/

StudentCompiler
PublicAccountant
July15,20XX

15.51 ReportingonComparativeUnauditedFinancialStatements
TotheDirectorsofIndependenceCompany
IhavereviewedtheaccompanyingbalancesheetofIndependenceCompany
asofDecember31,2003,andtherelatedstatementsofincome,retained
earningsandchangesinfinancialpositionfortheyearthenended,in
accordancewithstandardsestablishedbytheAmericanInstituteofCertified
PublicAccountants.Allinformationincludedinthesefinancialstatementsis
therepresentationofthemanagementofIndependenceCompany.
Areviewconsistsprincipallyofinquiriesofcompanypersonneland
analyticalproceduresappliedtofinancialdata.Itissubstantiallylessin
scopethananexaminationinaccordancewithgenerallyacceptedauditing
standards,theobjectiveofwhichistheexpressionofanopinionregarding
thefinancialstatementstakenasawhole.Accordingly,Idonotexpresssuch
anopinion.
Basedonmyreview,Iamnotawareofanymaterialmodificationsthat
shouldbemadetothe2003financialstatementsinorderforthemtobein
conformitywithgenerallyacceptedaccountingprinciples.
Theaccompanying2002financialstatementsofIndependenceCompanywere
compiledbyotheraccountantswhosereportdatedJanuary11,2003,stated
thattheydidnotexpressanyopinionoranyotherformofassuranceofthose
statements.
AnsonJones,PA
January15,2004

123
Note:

Thisreportpresumes:
1. Jonesisindependent.
2. AbleAssociatesmadenomodificationsintheir2002compilation
report.
3. AbleAssociateswasindependent.
4. The2002statementscontainedallnecessarydisclosures.

15.52 ErroneousReportingonInterimFinancialInformation
(a)

Explaintheerrorsinthereport:
1.

Thereportshouldnotcarrythetitlewiththeword"auditors."It
suggestsauditwork,whichwasnotperformed.Theyareactingin
thecapacityof"accountants,"notauditors.

2.

Inthesecondparagraph,thereportfailstotellthatareviewis
substantiallylessinscopethananexaminationinaccordancewith
generallyacceptedauditingstandards,theobjectiveofwhichis
theexpressionofanopinionregardingthefinancialstatements
takenasawhole.

3.

Thereportfailstogivethedisclaimerofopinioninthesecond
paragraph.

4.

Thefinalparagraphisvirtuallyidenticaltothestandardaudit
opinionparagraph.Itshouldnotbe.Baker&Bakershouldnotbe
givinganauditopinion.Theconclusionparagraphshouldcontain
thenegativeassurance:"Basedonourreview,wearenotawareof
anymaterialmodificationsthanshouldbemadetotheaccompanying
financialstatementsforthemtobeinconformitywithgenerally
acceptedaccountingprinciples."

5.

Thereviewworkgenerallyshouldextendbeyondthedateofthe
balancesheet,yetBaker&Bakerdatedthereportonthebalance
sheetdate(March31).Itprobablyshouldhavebeendatedlateras
oftheendoftheinterimreviewfieldwork.

(b)

Rewritethereport:
IndependentAccountant'sReport

TheBoardofDirectorsandStockholders,
MicroMiniCompany
WehavereviewedthebalancesheetofMicroMiniCompanyatMarch31,
2003,therelatedstatementofincomeforthethreemonthperiodendedMarch
31,2003,andthestatementofcashflowsforthethreemonthperiodended
March31,2003.Thesefinancialstatementsaretheresponsibilityofthe
company'smanagement.
Weconductedourreviewinaccordancewithstandardsestablishedbythe
CanadianInstituteofCharteredAccountants.Areviewofinterimfinancial
informationconsistsprincipallyofapplyinganalyticalproceduresto
financialdataandmakinginquiriesofpersonsresponsibleforfinancialand
accountingmatters.Itissubstantiallylessinscopethananauditconducted
inaccordancewithgenerallyacceptedauditingstandards,theobjectiveof
whichistheexpressionofanopinionregardingthefinancialstatements
takenasawhole.Accordingly,wedonotexpresssuchanopinion.
Basedonourreview,wearenotawareofanymaterialmodificationsthat
shouldbemadetotheaccompanyinginterimfinancialstatementsforthemto
beinconformitywithgenerallyacceptedaccountingprinciples.
Baker&Baker,PAs
April15,2003
15.53
TotheBoardofDirectorsandShareholders
BrockvilleLifeInsuranceCompany:
Wehaveauditedthebalancesheet(statutorybasis)oftheBrockville
LifeInsuranceCompanyasofDecember31,2002,andtherelatedstatements
(statutorybasis)ofincomeandcashflowsfortheyearthenended.These
financialstatementsaretheresponsibilityoftheCompany'smanagement.Our
responsibilityistoexpressanopiniononthesefinancialstatementsbased
onouraudits.
(Standardscopeparagraphgoeshere)
Thecompanypresentsitsfinancialstatementsinconformitywith
accountingpracticesprescribedorpermittedbytheCommissionerofInsurance
ofOntario.Theeffectsontheaccompanyingfinancialstatementsofthe
variancesbetweensuchpracticesandgenerallyacceptedaccountingprinciples
aredescribedinNote10.Theaforementionedfinancialstatementsarenot
intendedtobeapresentationofthefinancialpositionBrockvilleLife
InsuranceCompanyatDecember31,2002,ortheresultsofitsoperationsor
changesinitscashflowsfortheyearthenendedinconformitywith
generallyacceptedaccountingprinciples.Inouropinion,thesestatutory
basisfinancialstatementsdonotpresentfairlythefinancialpositionof
BrockvilleLifeInsuranceCompanyasofDecember31,2002,oritsresultsof
operativesoritscashflowsfortheyearthenendedinconformitywith
generallyacceptedaccountingprinciples.

Inouropinion,theaccompanyingstatutoryfinancialstatementspresent
fairlythefinancialpositionoftheBrockvilleLifeInsuranceCompanyat
December31,2002,andresultsofitsoperationsandcashflowsfortheyear
thenended,inconformitywithaccountingpracticesprescribedorpermitted
bytheCommissionerofInsuranceoftheProvinceofOntario.
MajorMajorAssociates
Kingston,Ontario
February20,2003
15.54
Threecircumstanceswhichmaypreventtheauditorfromissuinganopinion
withoutreservationare:
i)

Controlproceduresnecessarytoachievethestatedinternalcontrol
objectivesofthesystemareabsentordeficientindesign.
ii) Controlproceduresincludedinthedescriptiondonotexistordonot
operateeffectively.
iii)Theauditordoesnothaveaccesstoalltheinformationneededto
fulfill
thetermsoftheengagement.
Thetwotypesofengagementsare:
i)
ii)

anengagementtoexpressanopinionabouttheexistenceofcontrol
proceduresatacertainpointintime(EngagementI).
anengagementtoexpressanopinionabouttheexistenceandoperationof
controlproceduresthroughoutaspecifiedperiodoftime(Engagement
II).

Thetwoengagementsmaybecomparedandcontrastedasfollows:

I
II
ProfessionalGeneralStandardsSame
StandardsExamStandards(i),(ii)NA
Audit(a)Obtainandread(a)Same
Proceduresdescriptionofthestated
controlobjectivesofthe
systemandappropriate
controlprocedures
(b)Verifyexistenceof(b)Same
controlproceduresby
observation,enquiryand
tracingtransactions
throughthesystem
(c)Evaluatesuitability(c)Same
ofdesignofcontrol
procedures.
(d)Obtainmanagement(d)Same;obtain
representationletteradditionalmanagement
representationastothe
effectiveoperationofthe
controlproceduresthrough
outtheperiod
(e)Notrequired(e)Carryoutteststo
determinewhethercontrol

proceduresoperatedeffectively
throughouttheperiod.
15.55
a.

b.
c.

Theauditorsoverallobjectiveintheperformanceofanauditisto
determinewhetherthefinancialstatements...presentfairlyinall
materialrespectsthefinancialpositionoftheentity...,whereasthe
accountantsoverallobjectiveintheperformanceofareviewisto
...assess(ing)whethertheinformationbeingreportedonis
plausible...withintheframeworkofappropriatecriteria....
ThereshouldbenomodificationtothestandardaccountantsReview
EngagementReport.
Theappropriatecriteriaorstandardsagainstwhichthefinancial
statementsandrelateddisclosureareusuallymeasuredareasfollows:

i)AuditGenerallyAcceptedAccountingPrinciples(orother

appropriatedisclosedbasisofaccounting).
ii)ReviewEngagementGenerallyAcceptedAccountingPrinciples.
iii)CompilationEngagementthecompiledfinancialstatementsmustbe
notmisleading.
15.56
i)

TheSpecialReportsdiscussedintheCICAHandbookare:
Section5805auditreportsoffinancialinformationotherthan
financialstatements.
ii) Theappropriatestandardsareasfollows:
5805thegeneralandexaminationstandards.
5810thegeneralstandardandexaminationstandard(i).
5815thegeneralandexaminationstandards.
iii)Thegeneraltitleandnatureoftheresultingreportsareasfollows:
5805AuditorsReporton(Forexample,ScheduleofGross
Sales).Theauditorsreportwilldifferfromanopiniononfinancial
statementsonlyinthatitwillidentifyspecifically,onlythe
financialstatementitem(s)towhichitapplies.
5810ReportonSpecifiedAuditingProceduresCarriedOuton
(forexample,Longtermdebt).Theaccountantsreportwill
specifically
listtheprocedurescarriedoutandanyexceptionsfoundasaresultof
applyingthoseprocedures.Itwillspecificallystatethatthisisnot
anauditandthattheauditordoesnotexpressanopiniononthe
financialinformation.
Section5815AuditorsReporton(forexample,
compliancewiththetermsofaRoyaltyAgreement).Theauditorsreport
willdifferfromanopiniononfinancialstatementsinthatitwill:
indicatetothereaderthatthescopeoftheexaminationwas
restrictedtoonlyquestionsofcompliancewiththeagreement.
expressanopiniononlyoncompliance(notfairpresentation).
b.

Whentheauditorisengagedtoreportonthedesign,effectiveoperation
andcontinuityofcontrolproceduresataserviceorganization,the
auditorsadditionalexaminationresponsibilitiesareto:
i)Carryoutteststodeterminethatthecontrolproceduresoperated
effectivelythroughoutthespecifiedperiod.
ii)Obtainanadditionalrepresentationfrommanagementoftheservice
organizationastotheeffectiveoperationofthedescribedcontrol

proceduresthroughoutthespecifiedperiod.
c.

AccordingtotheCanadianComprehensiveAuditingFoundation,thethree
EsofcomprehensiveauditingareEconomy,EffectivenessandEfficiency.

a.

DearMr.Landret:
Iwillbepleasedtoundertakeanengagementtoexaminetherecordsof
yourbusinessforthepastyear.Ihaveoutlinedbelowthefactorsyou
mightwishtoconsiderinchoosingbetweenthethreedifferenttypesof
serviceswhichIcanprovide.

15.57

Audit.Thisisthemostcomprehensiveofthethreetypesof
examinations.TheresultsoftheauditareexpressedinanAudit
Report.Ifmyexaminationrevealsnoproblemstheauditreportwill
expressmyopinionthatbasedonmyexaminationyourfinancial
statementsareinaccordancewithGenerallyAcceptedAccounting
Principles(GAAP).Anauditisnotrequiredbylawforyourbusiness
however,apotentialadvantagetoyouisthatifyoudecidetotakeyour
companypublicorissuedebt,anauditisrequiredanyway.Dependingon
yourfutureplansthismightbeanappropriatethingtodo.Themajor
disadvantagetoyouisthatanauditisthemostcostlyofthethree
alternatives.
Review.Thisisthemiddleofthethreeoptionsintermsofboththe
extentoftheexaminationandthecosttoyou.Thestandardsagainst
whichyourfinancialstatementsareevaluatedarethesameasinan
audithowever,theresultsofmyexaminationsareexpressedina
ReviewEngagementReportwhichstatesthemorelimitednatureofthe
examinationandexpressesamorelimitedformofassurancethatnothing
hascometomyattentionwhichindicatesthefinancialstatementsare
notinaccordancewithGAAP.Ifyouhaveanyplanstoraisefundsby,
say,borrowingmoneyfromabank,aReviewEngagementReportisoften
requiredinsupportofaloanapplication.
Compilation.InsuchanengagementIwillsimplycompilethefinancial
informationprovidedbyyouintofinancialstatements,schedulesor
reports.AcompilationengagementresultsinaNoticetoReaderwhich
doesnotexpressanopinionoranyformofassuranceaboutthefinancial
statements.Forthisreason,thisformofengagementismostlylimited
tosuchthingsasthepreparationoffinancialstatementstoaccompany
returnssubmittedtotheincometaxauthority.Becauseofmylimited
involvement,thisistheleastcostlyalternative.
Ihopethatthisinformationwillbeofassistancetoyouinchoosing
thetypeofengagementwhichbestsuitsyourneedsandwhichyouwould
likemetoundertake.
Sincerely,
A.Person,CGA
b.

Beforeacceptingareviewengagement,thepublicaccountantshouldbe
satisfiedthat:
i)thesubjectmatteriswithintheprofessionalexpertiseofpublic
accountant;and
ii)thereareappropriatecriteriaagainstwhichthesubjectmattercan
beevaluated.

c.

Beforeacceptingacompilationengagement,thepublicaccountantshould
besatisfiedthat:

i)thereisnoreasontobelievethatthefinancialstatementshehas
beenengagedtocompilearefalseormisleading;and
ii) theclientunderstandthat:
i)suchstatementsmaynotbeappropriateforgeneralpurposeuse;
and
ii)uninformedreaderscouldbemisledunlesstheyareawareofthe

possiblelimitationsofthestatementsandof
thepublic

accountantsverylimited
involvement.