1. Chapter 19
Additional Assurance Services: Historical Financial Information
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

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
19-2

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

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.
19-4

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
19-5 3 3

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
19-6

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.
19-7

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.
19-8

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
19-9

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

11. Special Purpose Financial Reporting Frameworks 2/3
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.
19-11

12. Special Purpose Financial Reporting Frameworks 3/3
19-12

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.
19-13

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

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
19-15

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
19-16

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
19-17

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
19-18

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.
19-19 4 4

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.
19-20 5 5

21. Review Report for Nonpublic Companies--Third Paragraph
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.
19-21 6 6

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
19-22

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
19-23

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
19-24

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.
19-25 12 12

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.
19-26 13 13

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