1. 19-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2. 19-2  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3. 19-3  Examinations  Review  Agreed-upon procedures Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

4. 19-4  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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5. 19-5  Reports on compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements.  Letter for Underwriters  Summary Financial Statements Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

6. 19-6  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

7. 19-7  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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

8. 19-8  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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9. 19-9 This includes financial statements prepared  In accordance with special purpose financial reporting frameworks.  Using a financial reporting framework generally accepted in another country Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

10. 19-10  Comprehensive bases of accounting other than GAAP  Cash basis  Tax basis  Regulatory basis  Contractual basis Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11. 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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

12. 19-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13. 19-13  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. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14. 19-14  Single financial statements and specified elements, accounts or items of financial statements  Personal financial statements Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15. 19-15  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16. 19-16  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17. 19-17  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18. 19-18  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19. 19-19 We have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, we do not express such an opinion Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20. 19-20 Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21. 19-21 Accountant’s Responsibility Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our report. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

22. 19-22 Accountant’s Conclusion 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 accordance with accounting principles generally accepted in the United States of America Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

23. 19-23  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24. 19-24  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 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

25. 19-25  Reports provide no explicit assurance that the information constitutes a fair presentation  Types of compilations  Compilation of financial statement for nonpublic companies  Compilations of prospective financial information  Compilation  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  Financial Statement Preparation  Prepare financial statements, which remain management’s representations. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26. 19-26 Management is responsible for the accompanying financial statements of XYZ Company as of, and for the years ended, December 31, 20X2 and 20X1 in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

27. 19-27 Financial Statement Preparation Compilation Agreed- upon Procedures ReviewExamination Explicit Assurance None State findingsLimited (negative) assurance Opinion DistributionGeneral Limited to specified parties General, unless agreed-upon criteria Minimum Procedures Prepare financial statements Read statements Agreed-upon procedures Limited procedures, such as inquiry and analytical procedures Sufficient appropriate evidence to support opinion Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.