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Notes Chapter 2 AUD
Notes Chapter 2 AUD
http://www.cpa-cfa.org
Quality Control Standards
The five interrelated elements of quality control are:
A – Acceptance and continuance of client’s engagement
I – Independence, integrity and objectivity
C – Continuous monitoring
P – Personnel management
A – Assurance regarding engagement performance
Continuous monitoring
• What the title implies
Peer review
- One CPA firm reviews another CPA firms quality control system, occurs every 3 years for a CPA firm
that is a member of the AICPA.
- Purpose is to determine and report whether CPA firm being reviewed has developed adequate policies
and procedures for quality control and they are following them
- Upon completion, a report is issued with conclusions and recommendations
Personnel Management
• Criteria for hiring, assignment of the firms personnel to engagements, professional development and
advancement
GAAS relate to the conduct of each individual engagement, whereas quality control relate to the conduct of all
professional activities of the firms practice as a whole
The quality control standards of a firm affect both the performance of each audit and the performance of the
audit practice as a whole
Deficiencies in a firm’s quality control do not necessarily mean/indicate a lack of GAAS compliance.
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AUD - Notes Chapter 2
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2. Specific elements, accounts or items of a F/S – The auditor expresses an opinion on each of the specified
elements, if the element is far-reaching or pervasive (NI, STK EQ, or any item based thereon) the auditor must
audit the complete set of financial statements.
A piecemeal opinion may be expressed if the items do not constitute a major portion of the F/S. A piecemeal
opinion cannot be issued if the auditor has expressed a disclaimer or adverse opinion.
3. Issue special report on a clients compliance with contractual agreements or regulatory requirements
Auditor must have audited the F/S and may only issue negative assurance. Cannot be issued if the auditor has
expressed a disclaimer or adverse opinion. Limitedly distributed
4. Special purpose financial presentations to comply with contractual agreements or regulatory provisions
5. Financial information presented in prescribed forms or schedules – the auditor may attest to the fairness on
financial information presented in prescribed forms such as loan applications or regulatory filings.
The auditor may make modifications to an unqualified special report by adding an explanatory paragraph after
the opinion paragraph
Compilation engagement – No assurance or opinion. CPA does not perform any audit or review procedures.
A Review – Limited (negative) assurance. CPA performs inquiry and analytical procedures
When a CPA performs more than one service (such as complication and an audit) the CPA should issue a report
that is appropriate for the highest level of service rendered.
Statements on Standards for Accounting and Review Services – pronouncements issued by the accounting and
review services committee of the AICPA
A compilation engagement may involve compiling and reporting on only one financial statement
The compilation engagement report should include: ALARD
A – Statement that a compilation has been performed in accordance with SSARS issued by the AICPA
L – Statement that a compilation is limited to presenting, in the form of F/S, information that is the
representation of mgmt
A – Statement that the accountant has not audited the F/S
R – Statement that the accountant has not reviewed the F/S
D – Disclaimer of opinion and a statement that the accountant gives no assurance on the F/S
You’re A LARD when all you do is compile F/S
Compilation with limited disclosures are labeled “Selected Information – Substantially All Disclosures
Required By GAAP Are Not Included”
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AUD - Notes Chapter 2
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An opinion, even qualified or adverse, requires and audit. When an accountant performing a compilation or
review becomes aware of a GAAP departure, the report should be modified or the CPA with withdraw from the
engagement. An opinion would not be expressed
An accountant who submits unaudited F/S to the client that are not expected to be used by a third party may use
an engagement letter rather than a compilation report
Review of F/S – a higher level of service than compilation because it results in an expression of limited
assurance. Reviews include inquiry and analytical procedures. However, no required to obtain an understanding
of internal control or assess control risk
The objective of a review of financial information is to determine whether material modifications are necessary
for the information to be in conformity with GAAP.
Client representation letter from mgmt is required which covers all F/S’s and periods covered by the review
report
Downgrade in service (last yr we reviewed, this yr we compile). Issue a compilation report and add a paragraph
to describe prior period responsibility assumed. Or issue both a review report and compilation report
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AUD - Notes Chapter 2
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Whenever prior accountants are asked to reissue a prior report (audit, review or compilation) they should reas
the new F/S and obtain a representation letter from the new accountant
Likely misstatement – best estimate of the total misstatement in an account balance or class of transactions. The
accountant should:
• Accumulate all such estimates for further evaluation
• Consider that the aggregated effect of several immaterial misstatements
• Evaluate potential effect on current and future periods
A review of interim F/S of a public company is conducted in accordance with AICPA auditing standards not
SSARS
Should modify their report if, during the review, they become aware of a departure from GAAP
When a comfort letter is issued, the CPA is required to perform a review of interim financial information in
accordance with auditing standards
To obtain a comfort letter, parties other than the names underwriter must provide the CPA with an attorney’s
opinion or representation letter, confirming that such a party has a “due diligence defense”
A comfort letter is solely to assist the underwriters in conducting and documenting their investigation of the
company in connection with the offering
Attest Engagements
Attest engagements – CPA is engaged to issue or does issue an examination, a review, or an agreed-upon
procedures report on subject matter, or an assertion that is the responsibility of another party (usually mgmt).
Major attest services:
• Agreed-upon procedures
• Financial forecasts and projections
• Pro forma F/S
• Internal control over financial reporting
Agreed-upon procedures – CPA is engaged to issue a report of findings based on specific agreed upon
procedures (example is mutual fund performance). Agreed upon procedures may be performed is the following
conditions exist:
I – Independence of the practitioner
A – Agreement of the parties
M – Measurability and consistency
S – Sufficiency of the procedures
U – Use of the report is restricted to the specified parties
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AUD - Notes Chapter 2
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R – Responsibility for the subject matter rests with the client
E – Engagements to perform agreed upon procedures on prospective financial statements
I AM SURE you can perform these agreed upon procedures
Financial forecasts – the expected financial results of a future period, based on expected conditions (i.e.
budget)
Financial projection – financial results based on a “what if” scenario, based on hypothetical assumptions
Forecasts and projections are two types of prospective F/S. Pro forma F/S are different, because it shows what
past financial results of an expired period would have been if something had been different.
Only a financial forecast is appropriate for general use. While both, forecasts and projections are appropriate
for limited use.
Compilation of prospective F/S – the proper assembling of financial data based on the party’s assumptions
• No assurance of any kind given
• The practitioner is not required to gather supporting evidence
• Significant assumptions must be disclosed otherwise cannot issue compilation