Additional Assurance Services: Historical Financial Information Chapter 19 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

19-2 Engagements that involve historical information  Audit based services: assurance on additional information Reporting on compliance Letters for underwriters Summary financial statements  Auditing financial statements that use a financial reporting framework other than GAAP Special purpose frameworks Another country’s framework  Additional GAAS Audits Single financial statements and specified elements Personal financial statement  Reviews of historical financial statements  Compilations of historical financial statements

19-3 Types of Attestation Services  Examinations  Review  Agreed-upon procedures

19-4 Professional Literature Terms  Auditor is used for most engagements under the generally accepted auditing standards.  Accountant is also used for financial statement review and compilation engagements of nonpublic companies.  Practitioner is the term used in the attestation standards and in most other assurance services.

19-5 Audit Based Services: Assurance on Additional Information  Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.  Letter for Underwriters  Summary Financial Statements

19-6 Reports on Compliance  Regulatory requirements and debt agreements Example: Report prepared for bond trustees as evidence of company’s compliance with restrictions contained in bond indenture.  To provide this service auditor must have first performed an audit of related financial statements  Report provides negative assurance

19-7 Letters for Underwriters  Comfort Letter Investment banking firms that underwrite a securities issue request letter from independent auditors who audited financial statements in registration statement Includes 1. The independence of the auditors. 2. Whether the audited financial statements and financial statement schedules included in the registration statement comply with the accounting requirements of the Securities Act of 1933 and related regulations. 3. Unaudited financial statements, condensed interim financial information, and pro forma financial information. 4. Changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the registration statement. 5. Tables, statistics, and other financial information included in the registration statement. 6. Negative assurance as to whether certain nonfinancial statement information included in the registration statement complies with SEC regulations.

19-8 Summary Financial Statements  Also referred to as condensed financial statements  Include less detail than the audited financial statements  Auditors who have issued an audit report on the audited financial statements may issue a report on the summary financial statements Report indicates whether they are consistent, in all material respects, with the audited financial statements.

19-9 Auditing Financial Statements using Frameworks other than GAAP This includes financial statements prepared  In accordance with special purpose financial reporting frameworks.  Using a financial reporting framework generally accepted in another country

19-10 Special Purpose Financial Reporting Frameworks 1/3  Comprehensive bases of accounting other than GAAP Cash basis Tax basis Regulatory basis Contractual basis

19-11 Sample Introductory Paragraph--Cash Basis We have audited the accompanying statement of assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. Special Purpose Financial Reporting Frameworks 2/3

19-12 Special Purpose Financial Reporting Frameworks 3/3

19-13 Financial Reporting Framework Generally Accepted in Another Country  US company prepare financial statements for use in other countries Example: US company with subsidiary in Germany may prepare financial statements for that subsidiary  Auditors follow general and fieldwork standards of AICPA to the extent appropriate  Report depends on the expected use of the financial statements Only outside the US Issue a US report modified to reflect accounting principles of other country OR Issue a report form of the other country Use in the US and outside the US—2 reports US unmodified report with emphasis of matter paragraph indicating basis of accounting. Either option from “Only outside the US” above.

19-14 Additional GAAS Audits  Single financial statements and specified elements, accounts or items of financial statements  Personal financial statements

19-15 Audits of Single Financial Statements and Specified Elements of Financial Statements  Auditors may be engaged to attest only to (1) a single financial statements (e.g., balance sheet) or (2) specified elements, accounts or items of a financial statement Example of specified elements: Report on lessee’s revenue requested by lessee. May be required by provisions of lease agreement.  Materiality for specified elements is generally less than would be in audit - in relation to other information presented

19-16 Audits of Personal Financial Statements  Examples: Politicians or large loan applications  GAAP to personal financial statements Assets shown at estimated current values Liabilities presented at estimated current amounts Balance sheet = statement of financial condition shown individual net worth Income statement = statement of changes in net worth  Completeness of statements is audit concern

19-17 Reviews for Nonpublic Companies  Nonpublic companies may not need an audit of annual financial information  CPAs follow Statement on Standards for Accounting and Review Services (SSARS)  Review Attest service in which the accountants Perform analytical procedures Make inquiries of management and others Obtain representation from management relating to financial statements Report provides limited (negative) assurance

19-18 Review Procedures for a Nonpublic Company  Screen clients  Engagement letters  Review Procedures No knowledge of client’s internal control required Analytical procedures Inquiries of management  Obtain representation letter in which management acknowledges Responsibility for financial statements conformity with GAAP Responsibility to prevent and detect fraud and to divulge knowledge of actual or suspected fraud Responsibility to respond fully and truthfully to all inquiries

19-19 Review Report for Nonpublic Companies--First Paragraph We have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of XYZ Company.

19-20 Review Report for Nonpublic Companies--Second Paragraph A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

19-21 Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Review Report for Nonpublic Companies--Third Paragraph

19-22 Nonpublic Company Review Report Modifications  Departure from GAAP Modify third paragraph and describe departure in separate paragraph  No modifications required for: Lack of consistent application of GAAP Existence of major uncertainties including going-concern uncertainties Scope limitation – no review report

19-23 Review of Public Companies  Public companies required to file quarterly financial information with SEC on 10-Q  Auditor reviews not audits information  Objective of review Provide accountants a basis for communicating whether they are aware of any material modifications to conform with GAAP  Steps in review Engagement letter to document understanding Understand the client’s business and internal control This required understanding of internal control for public company reviews is not required for nonpublic company reviews. Other Review procedures—similar to nonpublic companies

19-24 Accounting Services  Reports provide no explicit assurance that the information constitutes a fair presentation  Types Compilation of financial statement for nonpublic companies Compilations of prospective financial information  Compilation Nonattest service in which accountants assist in the preparation of financial statements without providing any assurance on them Must at least read compiled statements for appropriate format and obvious material misstatements

19-25 Compilation Report--First Paragraph We have compiled the accompanying balance sheet of XYZ Company as of December 31, 19XX, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

19-26 Compilation Report--Second Paragraph A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

19-27 Comparison of Audits, Reviews and Compilations Compilation Agreed-Upon ProceduresReviewExamination Explicit assuranceNoneState findings or negative assurance Limited (negative) assurance Opinion Distribution of reportGeneral when a report is issued (limited when none issued) Limited to specified parties involved General, unless based on agreed- upon criteria Minimum procedures Read statementsAgreed-upon procedures Limited procedures, such as inquiry and analytical procedures Collection of sufficient evidence to support opinion CommentsReferred to as “audits” for financial statements