McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 21 CHAPTER 21 ASSURANCE, ATTESTATION, AND OTHER FORMS OF SERVICES

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved THE RELATIONSHIP BETWEEN AUDITING, ATTESTATION, AND ASSURANCE SERVICES Attestation Auditing Assurance

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ATTESTATION ENGAGEMENTS Attestation services occur when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved TYPES OF ATTESTATION ENGAGEMENTS Examination Review Agreed-upon procedures

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved OVERVIEW OF ATTESTATION ENGAGEMENTS Type of Engagement Level of Assurance Attestation Risk Type of Report Distribution Examinationhighlowpositivegeneral or limited Reviewmoderate negative assurance general or limited Agreed-upon Procedures variable summary of findings limited

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ATTESTATION STANDARDS GENERAL STANDARDS

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ATTESTATION STANDARDS STANDARDS OF FIELDWORK

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ATTESTATION STANDARDS STANDARDS OF REPORTING

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved REPORTING ON AN ENTITY'S INTERNAL CONTROLS OVER FINANCIAL REPORTING Section 404 of S-O requires each annual report of an issuer contain an “internal control report” which shall: (1)State responsibility of management for establishing and maintaining an adequate internal control structure; and (2)Contain an assessment of the effectiveness of the internal control structure Auditors shall attest to, and report on, the assessment made by management and is not to be considered a separate engagement.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved CONDITIONS FOR CONDUCTING AN ENGAGEMENT Management accepts responsibility for the effectiveness of the entity's internal control The responsible party evaluates the effectiveness of the entity's internal control using suitable criteria Sufficient competent evidence must exist or could be developed to support responsible party's evaluation Management provides to the practitioner its written assertion based on control criteria

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved AUDITORS REPORTING ON AN ENTITY'S INTERNAL CONTROL OVER FINANCIAL REPORTING Management may present its written assertion about the effectiveness of internal control in: Separate Report Representation Letter

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved AUDITORS REPORTING ON AN ENTITY'S INTERNAL CONTROL OVER FINANCIAL REPORTING The practitioner can express an opinion on: Effectiveness of the entity’s internal control, in all material respects, based on control criteria, or Whether management’s assertion about the effectiveness of internal control is fairly stated Types of attestation reports: Examination Agreed-upon procedures

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved STEPS OF EXAMINATION ENGAGEMENT (Internal Control Reporting) 1.Planning 2.Obtaining an understanding of internal control 3.Evaluating the design effectiveness of the controls 4.Testing and evaluating the operating effectiveness of the controls 5.Forming an opinion on the effectiveness of the internal controls or management’s assertion

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS Title that includes the word independent Identification of subject matter (I/C over reporting) Statement that management is responsible for maintaining effective internal control over reporting Statement that auditor’s responsibility is to express an opinion based on examination Statement that examination was conducted in accordance with standards established by AICPA

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ELEMENTS OF EXAMINATION REPORT ON INTERNAL CONTROLS Statement that the auditor believes the examination provides a reasonable basis for his or her opinion Paragraph stating that, because of the inherent limitations of internal control, errors or fraud may occur and not be detected Opinion on whether the entity has maintained, in all material respects, effective internal control Exhibits 21-3 and 21-4

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved FINANCIAL FORECASTS AND PROJECTIONS A practitioner's involvement with financial forecasts and projections may include (1) assembling or assisting the client in assembling prospective financial statements or (b) reporting on client-prepared prospective financial statements.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved TYPES OF PROSPECTIVE FINANCIAL STATEMENTS Financial Forecasts - prospective financial statements that present an entity's expected financial position, results of operations, and cash flows Financial Projections - prospective financial statements that present, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows (e.g. “What would happen if….?”)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved DISTRIBUTION OF PROSPECTIVE FINANCIAL STATEMENTS General use prospective financial statements refer to the use of the statements by persons with whom the responsible party is not negotiating directly (Only financial forecasts) Limited use prospective financial statements refers to use of the statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly (Forecasts or Projections)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ACCOUNTING AND REVIEW SERVICES Many nonpublic businesses do not need an audit of their financial statements for the following reasons: These entities may employ a CPA to assist with preparation of their financial statements, tax returns, or other financial documents.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved TYPES OF ACCOUNTING AND REVIEW SERVICES Compilation Review

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved COMPILATION OF FINANCIAL STATEMENTS A compilation is defined as presenting, in the form of financial statements, information that is the representation of management or owners without undertaking to express any assurance on the statements.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved COMPILATION OF FINANCIAL STATEMENTS Accountants must have the following knowledge about the entity:

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved COMPILATION PROCEDURES Auditor is not required to conduct any inquiries or perform any procedures to verify or corroborate information supplied by the client Auditor should read the compiled financial statements to determine whether they are in appropriate form and free from obvious errors (e.g. mathematical mistakes or mistakes in the application of accounting principles)

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved FORMS OF COMPILATION REPORTS Compilation with full disclosure Compilation that omits substantially all disclosures Compilation when the accountant is not independent

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved REVIEW OF FINANCIAL STATEMENTS A review is defined as performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP or OCBOA.

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved REVIEW PROCEDURES

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved REVIEW PROCEDURES

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved ELEMENTS OF REVIEW REPORT Identify the financial statements being reviewed Procedures are conducted in accordance with SSARS Scope paragraph identifying review procedures (inquiry and analytical procedures); substantially less in scope than an audit Limited Assurance: We are unaware of any material modifications that should be made for the financial statements to be in conformity with GAAP

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved REVIEW REPORT The financial statements should include all required disclosures under GAAP The report should be dated as of the completion of the review procedures Each page of the financial statements should contain “See Accountant’s Review Report” Exhibit

McGraw-Hill/Irwin © 2003 The McGraw-Hill Companies, Inc., All Rights Reserved CONDITIONS THAT MAY RESULT IN MODIFICATIONS OF A COMPILATION OR REVIEW REPORT Departure from generally accepted accounting principles ---Should be disclosed in separate paragraph of the report Going concern uncertainty ---Add going concern paragraph at end of report