These lectures cover attestation services, compilation of financial statement, reviews interim financial reporting, limited assurance, negative assurance.
Assurance Service Review Compilation
Compilation of Financial Statements
Review of Interim Financial Reporting
Internal Control at Service Organization SOC Reports
Prospective Financial Statements Forecasts and Projections
Agreed Upon Procedures
Assurance Engagement Related to Historical Financial Statements
Example: Review and Compilation Engagement
Preparation is defined in SSARS as a service where the CPA is engaged by the client to prepare or assist in preparing financial statements, but the CPA does not provide any assurance on the financial statements or issue a report, even if the financial statements are expected to be used by, or provided to, a third party.
Compilation is defined in SSARS as a service, the objective of which is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.
Review is defined by SSARS as a service, the objective of which is to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. In a review engagement, the accountant should accumulate review evidence to obtain a limited level of assurance.
There is no level of assurance provided in a preparation or compilation engagement. Reviews provide limited assurance, but considerably less than a typical audit.
The following types of procedures are emphasized for review services:
- Obtain agreement on engagement terms with management or those charged with governance. This is generally in the form of an engagement letter or other suitable form of written agreement.
- Obtain knowledge of the accounting principles and practices of the client’s industry. The level of knowledge for reviews should be somewhat higher than that for a compilation.
- Obtain knowledge of the client. The information should be about the nature of the client’s business transactions, its accounting records and employees, and the basis, form, and content of the financial statements. The level of knowledge should be higher than that for compilation.
Make inquiries of management. The objective of these inquiries is to determine whether the financial statements are fairly presented,
assuming that management does not intend to deceive the accountant. Inquiry is the most important of the review procedures. The following are illustrative inquiries:
- Inquire as to the accounting standards framework used and the company’s procedures for recording, classifying, and summarizing transactions, and disclosing information in the statements.
- Inquire as to whether unusual or significant transactions have occurred during the year, including important actions taken at meetings of stockholders and the board of directors.
- Inquire of persons having responsibility for financial and accounting matters whether the financial statements have been prepared in conformity with accounting standards.
- Inquire as to whether they have knowledge of an actual or suspected fraud, communications from regulatory agencies, subsequent events, or actions taken by those charged with governance.
- Perform analytical procedures. The analytical procedures are meant to identify relationships and individual items that appear to be The appropriate analytical procedures are no different from the ones already studied in Chapters 7 and 8 and in those chapters dealing with tests of details of balances.
- Read the financial statements. The accountant should read the financial statements to determine whether they conform with the financial reporting framework.
- Reconcile the financial statements to the underlying accounting records. The accountant should obtain evidence that the financial statements agree or reconcile with the accounting records.
- Obtain a letter of representation. The accountant is required to obtain a letter of representation from members of management who are knowledgeable about financial matters.
- Prepare documentation. The accountant should prepare documentation of procedures performed, sources of evidence obtained, and conclusions reached.
Attestation standards provide a general framework for and set reasonable boundaries around the attestation function. They provide guidance to AICPA standard-setting bodies for establishing detailed standards and interpretations of standards for specific types of services. They also provide practitioners useful guidance in performing new and evolving attestation services where no specific guidance exists.
The attestation standards, therefore, provide a conceptual framework for various types of services. Auditing standards do the same thing for the conduct of the ordinary audit of financial statements prepared in accordance with accounting standards.
Levels of assurance represent the degree of certainty the practitioner has attained, and wishes to convey, that the conclusions stated in his or her report are correct.
Audits of historical financial statements prepared in accordance with accounting standards are one type of examination. They are governed by auditing standards. An audit results in a conclusion that is in a positive form. In this type of report, the practitioner makes a direct statement as to whether the presentation of the assertions, taken as a whole, conforms to the applicable criteria. The level of assurance is high.
In a review, the practitioner provides a conclusion in the form of a negative assurance. In this form, the practitioner’s report states whether any information came to the practitioner’s attention to indicate that the assertions are not presented in all material respects in conformity with the applicable criteria. The level of assurance is limited.
A compilation is defined in SSARS as presenting, in the form of financial statements, information that is the representation of management without undertaking to express any assurance on the statements. A preparation engagement is defined in SSARS as a service where the CPA is engaged by the client to prepare or assist in preparing financial statements, but the CPA does not provide any assurance on the financial statements or issue a report, even if the financial statements are expected to be used by, or provided to, a third party.
A negative assurance states, along with factual statements, that nothing came to the accountant’s attention that would lead the accountant to believe that the financial statements were not prepared in accordance with accounting standards. The reason for including such a statement in a review report is to provide financial statement users with some level of assurance that the financial statements are fairly stated. The level of assurance is less than that for an audit of historical financial statements, but more than the “no assurance” provided for a compilation.