1. Electronic Presentations in Microsoft ® PowerPoint ® Prepared by Brad MacDonald SIAST © 2003 McGraw-Hill Ryerson Limited

2. Copyright © 2003 McGraw-Hill Ryerson Limited Chapte r 1515 2 Other Public Accounting Services and Reports

3. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 3 Learning Objective 1 Prepare reports for review and compilation of unaudited financial statements, given specific fact circumstances.

4. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 4 Unaudited Financial Statements Small business wants some level of assurance but without full GAAS and high cost. –“Big GAAS-Little GAAS” –Small clients want to receive some level of assurance even though a GAAS audit is not performed. Review engagements Compilation engagements

5. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 5 Review Engagements Review services apply specifically to accountant’s work on unaudited financial statements. –Reviews are distinguishable from audits in that the scope of a review is less than that of an audit and therefore the level of assurance provided is lower.

6. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 6 Review Engagements A review consists primarily of enquiry, analytical procedures, and discussion related to information supplied by the enterprise with the limited objective of assessing whether the information being reported on is plausible. “Plausible” is used in the sense of appearing to be worthy of belief.

7. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 7 Review Engagement Standards General standard: –The review should be performed and the review engagement report prepared by a person or persons having adequate technical training and proficiency in conducting reviews, with due care and with an objective state of mind.

8. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 8 Review Engagement Standards Review standards –( i) The work should be adequately planned and properly executed. If assistants are employed, they should be properly supervised. –( ii) The public accountant should possess or acquire sufficient knowledge of the business carried on by the enterprise so that intelligent enquiry and assessment of information obtained can be made.

9. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 9 Review Engagement Standards –(iii) The public accountant should perform a review with the limited objective of assessing whether the information being reported on is plausible in the circumstances within the framework of appropriate criteria. Such a review should consist of the following: (a) enquiry, analytical procedures, and discussion; and (b) additional or more extensive procedures when the public accountant's knowledge of the business carried on by the enterprise and the results of the enquiry, and analytical procedures and discussion cause him or her to doubt the plausibility of such information.

10. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 10 Review Engagement Reporting Standards i.The review engagement report should indicate the scope of the review. The nature of the review engagement should be made evident and be clearly distinguished from an audit. ii.The report should indicate, based on the review: a.whether anything has come to the public accountant's attention that causes him or her to believe that the information being reported on is not, in all material respects, in accordance with appropriate criteria; or b.that no assurance can be provided. –The report should provide an explanation of the nature of any reservations contained therein and, if readily determinable, their effect.

11. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 11 Review Engagements - Procedures Review work primarily consists of enquiry and analytical procedures. –Obtain knowledge of clients business. –Make enquiries concerning control systems. –Perform analytical procedures which could include: enquiring concerning matters discussed at meetings, if any, of shareholders and directors and committees thereof that may affect the financial statements.

12. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 12 Review Engagements - Procedures Review work is primarily consisting of enquiry and analytical procedures. –Read financial statements for indications they are in accordance with GAAP. –Obtain reports from other accountants who audit or review significant components. –Enquire of officers and directors regarding: conformity to GAAP, consistency of accounting principles and changes in client business

13. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 13 Review Engagements - Procedures Review work is primarily consisting of enquiry and analytical procedures: –Perform other procedures, prepare written papers, and obtain management representation letter. Firms may do additional procedures, although there are no formal requirements to do so.

14. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 14 Report: Review Review does not provide a basis for expressing an opinion on the financial statements. –Each page of the financial statements should be conspicuously marked “unaudited.” –It should provide negative assurance, and no expression of an opinion is made.

15. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 15 Report: Review Review report includes the following statements: –Scope of the review Review consists primarily of enquiries and analytical procedures applied to financial data. Review does not constitute an audit. –Accountant is not aware of any material modifications that should be made or disclosure of departures from GAAP (negative assurance).

16. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 16 Review Engagement Report REVIEW ENGAGEMENT REPORT To (person engaging the public accountant) I have reviewed the balance sheet of Client Limited as at......, 20... and the statements of income, retained earnings and changes in financial position for the year then ended. My review was made in accordance with generally accepted standards for review engagements and accordingly consisted primarily of enquiry, analytical procedures and discussion related to information supplied to me by the company.

17. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 17 Review Engagement Report A review does not constitute an audit and consequently I do not express an audit opinion on these financial statements. Based on my review, nothing has come to my attention that causes me to believe that these financial statements are not, in all material respects, in accordance with Canadian generally accepted accounting principles. City(signed)................. DatePUBLIC ACCOUNTANT

18. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 18 Compilation Engagement A compilation engagement is one in which a public accountant receives information from a client and arranges it into the form of a financial statement. –The public accountant is concerned that the assembly of information is arithmetically correct; however, the public accountant does not attempt to verify the accuracy or completeness of the information provided.

19. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 19 Compilation Engagement –Unlike an audit or a review engagement, no expression of assurance is contemplated in a compilation engagement. –Compilation is a synonym for the older term “write-up” work.

20. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 20 Compilation Engagement No assurance credibility is provided –This limits the public accountant for action to be taken. –Accountant has a responsibility to be associated with misleading statements. May withdraw from the engagement. –Each page of the statement should be marked “Unaudited – See Notice to Reader.”

21. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 21 Notice to Reader NOTICE TO READER I have compiled this statement from information provided by the management (proprietor) of (name of client). I have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Readers are cautioned that this statement may not be appropriate for their purposes. City(printed or signed)........................... DatePUBLIC ACCOUNTANT

22. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 22 Other Review and Compilation Topics Prescribed forms –Industry trade associations, banks, government agencies, and regulatory agencies often use prescribed forms (standard reprinted documents) to specify the content and measurement of accounting information required for special purposes. –Such forms may not request disclosure required by GAAP or may specify measurements that do no conform to GAAP. –The notice to reader control contains the caution that the financial statements may not be appropriate for the purposes of the reader.

23. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 23 Other Review and Compilation Topics Communication between predecessors and successors: –Successor auditors are required to make certain enquiries of predecessors auditors when a new client is obtained. (Rule 302 of Professional Conduct of ICAO)

24. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 24 Other Review and Compilation Topics Personal Financial Plans: –Personal financial planning has become a big source of business for PA firms. –Ordinarily, an accountant associated with such statements would need to give the standard compilation report (disclaimer).

25. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 25 Other Review and Compilation Topics A note on GAAP departures and review engagement reports: –An accountant’s report of known GAAP departures must be treated carefully in review reports. –As in audit reports, the accountant can and should add an explanatory paragraph pointing out known departures from GAAP, including omitted disclosures.

26. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 26 Learning Objective 2 Identify interim information review procedures and write a report on a review of interim financial information.

27. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 27 Interim Financial Information Accounting principles do not require interim financial information as a basic and necessary element of financial statements conforming to GAAP. –When interim information is presented it should, however, conform to GAAP. –Interim financial statements that might be prepared include buy/sell situations for a business, or to fulfill reporting requirements of regulatory authorities.

28. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 28 Interim Financial Information A common review engagement is the review of interim financial statements. –Assess whether accounting principles have been applied on a consistent basis. Ensure statements are not misleading relative to the annual statements. –Procedures presume that the accountant has knowledge of the business from the annual audit.

29. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 29 Nature of Review Procedures Review procedures consist mainly of enquiry and analytical procedures. –The Handbook, paragraph 8200.02 suggests checklists including several procedures. Timing of review procedures: –Review procedures should be performed at or near the date of the interim information.

30. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 30 Nature of Review Procedures Extent of review procedures: –The accountant needs to acquire a sufficient knowledge of the client’s business, just as if the engagement were a regular audit. Reporting on a review of interim information –Only negative assurance is provided. –Interim financial statements should be marked “Unaudited.”

31. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 31 Learning Objective 3 Define, explain and give examples of “another appropriate disclosed basis of accounting” (AADBA) distinguishing them from GAAP.

32. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 32 Special Reports and AADBA Reports may be prepared on another appropriate basis of accounting (AADBA). –Users may have special needs or requirements. –Regulatory requirements may not be according to GAAP. –Contractual requirements may require reporting on another basis. –US studies indicate that AADBA may be less expensive to prepare and easier to interpret than full GAAP statements.

33. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 33AADBA Examples include: treatment applied by financial institutions conforming to (OFSI) rules tax basis accounting cash basis accounting constant-dollar or price-level adjusted financial statements –AADBA financial statements utilize different titles for the financial statements.

34. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 34AADBA AADBA statements can be audited, reviewed, or compiled like any other financial statements. –General and examination standards for auditing or review engagements apply. –Reporting standards apply, except there will be reference to AADBA rather than GAAP.

35. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 35 GAAP, Other than Historical Cost Recall that for some items, GAAP is not historical cost. defined benefit pension plans investment companies personal financial statements –Use of current value accounting, not historical cost, is GAAP.

36. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 36 Learning Objective 4 Compare an auditor’s report on supplementary current value financial statements with a standard report on historical cost financial statements.

37. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 37 Current Value Financial Statements Current value financial statements: –Discounted present value of cash flows, entry or exit values could be used as measurement basis. –Statements can be audited or reviewed if measurement and disclosure criteria are reasonable, and measurements and disclosures are reliable –Current value statements are not considered a standalone AADBA.

38. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 38 Special Reports – Additional Topics Auditors perform additional services in the capacity of an auditor that requires reports. –specified elements accounts or items: rents, royalties, profit participations Section 5805 –Compliance with regulatory or contractual agreements: restrictive covenants, regulations Section 5815

39. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 39 Special Reports – Additional Topics Auditors perform additional services in the capacity of an auditor that require reports. –applying agreed-upon procedures: Perform specific set of procedures to examine a particular element. Section 9100 Limited scope, not all auditing standards apply

40. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 40 Learning Objective 5 Describe the various reports on internal control and their connection with public reporting and reporting to a client’s audit committee.

41. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 41 Reporting on Internal Control Derivative reports: The auditor must sometimes communicate to regulators certain transactions or conditions that come to his/her attention. The auditor is not required to carry out procedures to provide positive assurance. There is no comprehensive and precise interpretation of the matters or conditions. The financial statement audit may not be designed to address these matters.

42. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 42 Reporting on Internal Control Nonderivative report: Auditor is required to carry out procedures in addition to those required by GAAS –Involves a reporting requirement separate from the audit of the financial statements. Provide an opinion without a specific management assertion. Report directly to the regulator. Matter may be subjective and subject to interpretation.

43. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 43 Public and Restricted Reports Several different kinds of public and restricted use reports on control have evolved in practice. –Guidance is provided for some restricted use reports. Public reports have little authoritative guidance in Canada. –The scope of controls to be covered in a public report is an issue. Accounting / operational / management

44. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 44 Public and Restricted Reports In order to evaluate controls, a systems criteria for control is required. –CICA issued Guidance on Criteria of Control (COCO). 20 control criteria are identified. –COCO committee has also issued Guidance for Directors – Governance. –Sarbanes-Oxley will require companies to issue audited reports on control.

45. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 45 Special Reports: Service Organizations Service Organization – a business that executes or records transactions on behalf of its client. –Auditor may need information about a service organization’s controls. May not be able to get the information directly if the service organization is not also an audit client. –Certain special-purpose reports can be relied on by the user auditor.

46. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 46 Other Communication on Control and Other Matters Auditing standards require auditors to report any reportable matters they encounter. –Report is to be addressed to the board or audit committee. –Reportable matters include significant control deficiencies. –The auditor may also communicate other matters, including control matters to management in a management letter. This is considered as part of the audit, and not as a separate consulting engagement.

47. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 47 Learning Objective 6 Define the various financial presentations and levels of service involved in association with financial forecasts and projections, and write compilation and examination reports.

48. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 48 Presentation Guides Prospective financial statements can take one of two forms: –financial forecast: presents an entity’s expected financial position. –financial projection: depends on hypothetical assumptions – “What if…?” –Either can be prepared in the same format as historical statements, or can be less than complete provided minimum presentation requirements are met.

49. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 49 Reporting on Prospective Financial Statements Auditor can report on prospective statements by performing an examination of prospective financial statements: Equivalent to an audit of the forecast Accountant will provide an opinion on the statements preparation, given the client’s projections and assumptions. The accountant does not audit the assumptions.

50. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 50 Reporting on Prospective Financial Statements Auditor can report on prospective statements by performing a compilation of prospective financial statements. The auditor will facilitate the mechanical preparation. Report will indicate that no assurance is provided. –Application of agreed-upon procedures. There is a wide variety of client specifications.

51. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 51 Learning Objective 7 Describe the new umbrella standards for assurance engagements.

52. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 52 Financial Statements for Use in Other Countries Canadian auditors are often asked to report on financial statements that are intended for use in other countries. –Foreign-GAAP financial statements used only outside Canada: use the Canadian style report modified to refer to GAAP of another country, or use the report form used by auditors in that country

53. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 53 Financial Statements for Use in Other Countries –Foreign-GAAP financial statements that have more than limited distribution in Canada: use the standard CICA report, qualified or adverse for GAAP departures with a separate paragraph for conformity to foreign GAAP, or use two reports, one Canadian GAAP, one foreign GAAP

54. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 54 Financial Statements for Use in Other Countries –Two sets of financial statements, foreign GAAP and Canadian GAAP. On each, Report as if no other statement was produced, add a note to the report that another statement has been issued.

55. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 55 Assurance Framework The Assurance Framework: –Accountability relationship: When one party is answerable to another party about a subject matter –Assurance engagements only exist where there is an accountability relationship. Attestation engagements: There is a written assertion by the accountable party. Direct reporting engagements: There is no written assertion.

56. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 56 Assurance Framework Novel aspects of assurance framework deal with criteria, significance, and engagement risk. –Suitable criteria include: relevance, reliability, neutrality, understandability, and completeness appropriate communication of extent of involvement with the information

57. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 57 Assurance Framework –Significance can be viewed as an extension of materiality. –Engagement risk implicitly includes risk of reporting significant items that are not, in fact, significant.

58. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 58 Learning Objective 8 Identify assurance engagements unique to e-business.

59. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 59 Assurance for E-business Three sets of guidelines are in various stages of development: –WebTrust –SysTrust –ISP Trust

60. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 60WebTrust Purpose of WebTrust is to provide assurance to users of websites that they can trust a company for online transactions –WebTrust criteria encompass three principles: Business Practices Disclosures Transactions Integrity Information Protection –Practitioner will perform tests under professional standards and provide an opinion.

61. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 61SysTrust SysTrust focuses on the reliability of systems themselves. –Can be applied to simple or complex systems –58 criteria for controls in three categories need to be met. –SysTrust is broader than WebTrust as WebTrust is restricted to Internet-based systems. SysTrust reports can be qualified.

62. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 62 ISP Trust Developed to evaluate Internet service providers (ISPs).

63. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 63 Learning Objective 9 Explain the concept of environmental audits.

64. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 64 Environmental Audits An environmental audit is used to compile and report all pertinent information related to the environment. –No standards currently exist. Assurance standards can be applied. –Broad scope requires a multidisciplinary audit team.

65. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 65 Learning Objective 10 Describe the association framework.

66. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 66 Describe the Association Framework Association can arise: –when the accountant performs services in respect of information –when the accountant consents to use of name in connection with information –when an entity indicates that an accountant was involved with the information or –when a third party assumes an accountant is involved with the information

67. Copyright © 2003 McGraw-Hill Ryerson Limited Chapter 15 67 Appendix 15A: A Critical Analysis of Section 5025 –Example Report 1 –CAAA Committee Input on Assurance Standards –Clarification of the Assurance Engagement Framework –Issues Regarding the Written Assertion –Objective of The Engagement –Evolution of the Assurance Concept Outside of Canada