NOTES ON HOMEWORK - AUDITING 2:

COMPARATIVE FINANCIAL STATEMENTS

Clark, CPA, compiled and properly reported on the financial statements of Green
Co., a nonissuer, for the year ended March 31, Year 1. These financial statements
omitted substantially all disclosures required by generally accepted accounting
principles (GAAP). Green asked Clark to compile the statements for the year ended
March 31, Year 2, and to include all GAAP disclosures for the Year 2 statements only,
but otherwise present both years' financial statements in comparative form. What is
Clark's responsibility concerning the proposed engagement?

Clark may not report on the comparative financial statements because the Year 1
statements are not comparable to the Year 2 statements that include the GAAP disclosures.
When the prior period has been audited, the accountant should issue the current period
compilation or review report, and any additional paragraph should indicate:

That prior period statements were audited;

The date of the previous report(s);

The opinions expressed, & if other than unmodified, the reasons for the modification;

That no auditing procedures have been performed since the previous report date.

Before reissuing a compilation report on the financial statements of a nonissuer for the prior
year, the predecessor accountant is required to: Compare the prior year's financial statements
with those of the current year.
OTHER REPORTS
The annual financial statements of a publicly held company have been audited, and its interim
financial statements have been reviewed. Which of the following is true about the application of
professional standards to this review?
PCAOB standards apply.
The objective of a review of interim financial information of a public entity is to provide an
accountant with a basis for reporting whether: through inquiries and analytical procedures, with
a basis for reporting whether material modifications should be made to such information to
conform with generally accepted accounting principles.

If a report on a review of interim financial information is presented in a registration statement,

the prospectus should include a statement that the report is not a "report" or "part" of the
registration statement. The accountant should also read the other portions of the registration
statement to ensure that his or her name is not used in a way that indicates greater responsibility
than s/he intends.
A review report on the interim financial information of a publicly held
company does not provide an opinion on the financial statements
Difference between a review of a public entity's interim financial
information and a review of the unaudited financial statements of a
nonissuer?

The guidance for a review of a public entity's interim financial information is provided by
PCAOB standards, whereas a review of a nonissuer's unaudited financial statements is conducted
in accordance with Statements on Standards for Accounting and Review Services.
A review of a public entity's interim financial information requires an evaluation of internal
control while a review of a nonissuer's unaudited financial statements does not.
A review of a public entity's interim financial information requires communication with the
predecessor auditor while review of a nonissuer's unaudited financial statements does not.
AUDITING STANDARDS ON REVIEW SERVICES FOR BOTH ISSUERS AND
NON-ISSUERS require the auditor to perform the following : (U LIAR CPA)
U= understanding with client should be establish (agreement of mgt its
responsibility in the f/s)
L= learn and/or obtain sufficient understanding of the entitym its environment,
including I/C (issuer only)
I=inquiries should be address to appropriate individuals
A=analytical procedures should be performed
R=review - other procedures should be performed
C=client representation letter should be obtained from mgt
P=professional judgment should be used to evaluate results
A=auditor (CPA) should communicate results
When planning a review of an audit client's interim financial statements,
which of the following procedures should the accountant perform to

update the accountant's knowledge about the entity's business and its
internal control?
Considering the results of audit procedures that have previously been performed
and how they correspond to the current year's financial statements is a step that
may be performed during the planning stage to update the accountant's knowledge
of the client.
Analytical procedures performed on specific accounts would be done after the
Understand-Learn-Inquiry phases. Establishing an understanding with the client is
first, followed by learning/obtaining a sufficient understanding of the entity and its
environment, including internal control. The third phase consists of inquiries
addressed to the appropriate individuals, followed by the analytical procedures.
The quarterly data required by SEC Regulation S-K have been omitted. Which of the
following statements must be included in the auditor's report?
If the quarterly data required by SEC Regulation S-K have been omitted,
the auditor's report must include a statement indicating that the company
has not presented such data.
Green, CPA, is aware that Green's name is to be included in the annual report of
National Company, a publicly-held entity, because Green has audited the annual
financial statements included therein. National's quarterly financial statements are
also contained in the annual report. Green has not audited but has reviewed these
interim financial statements. Green should request that:the first quarter interim
financial statements be marked as unaudited. As long as the CPA has
completed his or her review, his name may be included in the annual
report.
Which of the following statements is correct concerning letters for underwriters,
commonly referred to as comfort letters?

Letters for underwriters typically give negative assurance on unaudited interim financial
information on the conformity of the entity's unaudited condensed interim financial information
with generally accepted accounting principles (GAAP).; the accountants express an opinion
(i.e., positive assurance) concerning the financial statements' compliance (as to form) with
the pertinent accounting requirements of the SEC. A letter containing a negative assurance
from the CPA to the underwriter or certain other requesting parties just before the registration of
the client's securities.
ATTEST ENGAGEMENTS
When a CPA examines a client's projected financial statements, the CPA's report
should:

the standard report should include a statement that the examination "
included such procedures as we considered necessary to evaluate both the
assumptions used by management and the preparation and presentation
of the projection."

A CPA is required to comply with the provisions of Statements on Standards for

Attestation Engagements (SSAE) when engaged to:
- Review management's discussion and analysis (MD&A) prepared pursuant to rules and
regulations adopted by the SEC;
- compiling a clients financial projection that presents a hypothetical course of action;
- A WebTrust engagement in which the CPA determines whether the client's web site meets
defined criteria relating to transaction integrity, information protection, and disclosure of
business practices
- a report about a firm's compliance with laws and regulation
- Preparing the income statement and balance sheet for one year in the future based on client
expectations and predictions
- to issue a report on subject matter or on an assertion about the subject matter ex. the square
footage of the warehouse), that is the responsibility of another party (ex. management) or to
provide assurance on investment performance statistics prepared by an investment company on
established criteria.
.
Attestation standards were created to provide assurance on representations other than historical
financial statements and in forms other than the positive opinion.
An attest engagement is one in which a CPA is engaged to issue an examination, a review, or
an agreed-upon procedures report on subject matter, or on an assertion about the subject
matter, that is the responsibility of another party.
One of the conditions/policies that must exist in an agreed-upon procedures attestation
engagement is that the practitioner be independent from the client and other specified parties
pertaining to the engagement.
An agreed-upon procedures engagement is one in which the practitioner is engaged to issue a
report of findings based on specific procedures performed.

Agreed-upon procedure engagements provide no assurance.

Reviews provide limited (negative) assurance.
CPA was engaged by a group of royalty recipients to apply agreed-upon procedures to financial
data supplied by Modern Co. regarding Modern's written assertion about its compliance with
contractual requirements to pay royalties. CPA's report on these agreed-upon procedures
should contain a: List of the procedures performed (or reference thereto) and CPA's
findings.
An examination of a financial forecast is a professional service that involves:
1. Evaluating the preparation of the prospective financial statements,
2. Evaluating the support underlying the assumptions,
3. Evaluating the presentation of the prospective financial statements in conformity
with AICPA guidelines, and
4. Issuing an examination report.
The accountant's compilation report on a client's financial forecast or projected financial
statement should include a caveat on a separate paragraph that the prospective results may
not be achieved or describes the limitations on the usefulness of the projection. This is
included in a separate paragraph that describes the limitations on the usefulness of the
presentation: "...there will usually be differences between the forecasted and actual results...
[that] may be material."
SSARS does not require that the compilation report be printed on the accountant's
letterhead, nor does it require a manual signature. Although a signature is required, it need
not be manual. Also, the report may be presented in the accountant's letterhead, but is not
required.
Compiled financial statements should be accompanied by a report stating that: The accountant
is not required to perform any procedures to verify the accuracy or completeness of
information provided by management.
An accountant may compile financial statements that omit substantially all disclosures
required by GAAP provided the omission is not undertaken to mislead the users of the
financial statements and is properly disclosed in the accountant's report as an additional
paragraph.

When an accountant examines a financial forecast that fails to disclose

significant assumptions used to prepare the forecast, the accountant
should issue an adverse opinion. Per AICPA's SSAE, all significant
assumptions used to prepare the prospective f/s should be included.

A CPA is engaged to examine an entity's financial forecast. If one or more of the significant
assumptions do not provide a reasonable basis for the financial statements, an adverse
opinion would be issued. An unmodified opinion with an explanatory paragraph would not be
sufficient.
A financial forecast is appropriate for general use, but a financial projection is not (for
restricted use).
An accountant's compilation report on a financial forecast should include a statement that: There
will usually be differences between the forecasted and actual results.
No assurance is provided in a compilation of prospective financial statements.
Which procedures should an accountant perform during an engagement to
compile prospective financial statements? should make inquiries about the
accounting principles used in the preparation of the prospective financial
statements.

Which of the following is a conceptual difference between the attestation standards and generally
accepted auditing standards? The requirement that the CPA be independent in mental attitude
is included in both sets of standards.
Attestation standards provide a framework for the attest function beyond historical
financial statements.
Negative assurance may be expressed when an accountant is requested to report on the
results of performing a review of management's assertion.
Partial presentations" are presentations of prospective financial information
which would not ordinarily be appropriate for general use because they omit one
or more of these essential elements: (a) sales or gross revenue, (b) gross
profit or cost of sales, (c) unusual or infrequently occurring items, (d)
provision for income taxes, (e) discontinued operations or extraordinary
items, (f) income from continuing operations, (g) net income, (h) earnings
per share, and (i) significant changes in financial position.
An accountant's report on a review of pro forma financial information should include
a: a reference to the financial statements from which the historical

information is derived and a statement as to whether such financial

statements were audited or reviewed.
Before performing a review of a nonissuer's financial statements, an accountant
should obtain a sufficient level of knowledge of the accounting principles
and practices of the industry in which the entity operates.
Which inquiry procedures does a CPA normally perform first in a review
engagement in accordance with Statements on Standards for Accounting and
Review Services (SSARS)? Inquiry regarding the client's accounting principles
and practices and the method of applying them

An accountant may accept an engagement to apply agreed-upon procedures to prospective

financial statements provided the: Distribution (use) of the report is restricted to the specified
users.
A pro forma financial statement is one that shows historical financial statements as they would
have been if a hypothetical event had occurred..
A qualified opinion might be issued if AICPA presentation guidelines were not followed.
Which of the following is a conceptual similarity between generally accepted auditing standards
and the attestation standards? The requirement that the CPA be independent in mental
attitude is included in both sets of standards
A practitioner has been engaged to apply agreed-upon procedures in accordance with
Statements on Standards for Attestation Engagements (SSAE) to prospective financial
statements. Which of the following conditions must be met for the practitioner to perform the
engagement? The practitioner and specified parties agree upon the procedures to be
performed by the practitioner.
An accountant's report on a review of pro forma financial information should include a:
Reference to the financial statements from which the historical financial information is
derived.
Which of the following components is appropriate in a practitioner's report on the
results of applying agreed-upon procedures? A list of the procedures
performed, as agreed to by the specified parties identified in the report

This statement would be included in an agreed-upon procedures report: An indication that had
the accountants performed additional procedures, other matters might have come to their
attention that would have been reported.

Projected balance sheets, financial forecasts and financial

projections are forms of prospective financial statements.
An accountant may accept an engagement to apply agreed-upon procedures to
prospective financial statements provided the: use of the report is restricted to
the specified users.
The following would be likely to be included in an examination report related to a
financial projection? an opinion that the projection is presented in
conformity with AICPA guidelines; that the report is intended solely for
the information and use of specified parties ; would include an opinion
that the underlying assumptions provide a reasonable basis for the
projection.

Financial projections are hypothetical, "what if" prospective financial statements. Because the
user may need to ask the responsible party questions about the underlying assumptions, financial
projections are "restricted use" reports (NOT FOR GENERAL USE), whose use is restricted to
the responsible party and those third parties with whom the responsible party is negotiating
directly. Therefore should not be included in an offering statement of the entity's initial public
offering of common stock.
Financial projections are appropriate for limited use, such as: a mortgage application for the
purpose of expanding the entity's facilities: a comprehensive document to be used in negotiating
a new labor contract; a report to the audit committee that is not sent to the stockholders.
An accountant's standard report on a compilation of a projection
should include a:
-a statement that a compilation is limited in scope;
-statement that the accountant assumes no responsibility to update the report for
events subsequent to the report date.
-a separate paragraph that describes the limitations on the presentation's
usefulness;
-does not include evaluation of the support of the assumptions underlying the
forecast. (An examination of the financial forecast would include evaluation of the
support).

A financial forecast is appropriate for general use, but a financial projection is

not (for restricted use only).

When an accountant accepts a compilation of a financial projection engagement, he or she

should indicate that it is limited in scope and would not include an opinion or assurance on
the projected financial statements or the related assumptions.
A projection, which is based on hypothetical assumptions may be included in a document
with audited historical financial statements. The compilation report would also be included
with the document to make clear that the accountant provides no opinion or any other form of
assurance.
Any type of prospective financial statements (financial forecasts and financial projections)
would normally be appropriate for limited use.
The standard report issued by an accountant after reviewing the financial
statements of a nonissuer states that: the accountant is not aware of any
material modifications that should be made to the financial statements.
This is known as "negative assurance" (aka limited assurance.)
Each page of the financial statements reviewed by the accountant should
include a reference such as "See Independent Accountant's Review Report."

An accountant has been engaged to review a nonissuer's financial statements that contain several
departures from GAAP. If the financial statements are not revised and modification of the
standard review report is not adequate to indicate the deficiencies, the accountant should:
Withdraw from the engagement and provide no further services concerning these financial
statements.
Which of the following procedures is not usually performed by the accountant during a review
engagement of a nonissuer in accordance with Statements on Standards for Accounting and
Review Services? Communicating any material weaknesses discovered during the
consideration of internal control. Generally there is no consideration of internal control in
a review engagement performed in accordance with SSARS.
An accountant is required to comply with SSARS when he/she prepares, compiles, or
reviews financial statements of a nonissuer. Compilation of financial statements requires
compliance with SSARS. Drafting financial statement notes for the client does not constitute
"preparation" of financial statements.

When reporting on financial statements prepared on the same basis of accounting

used for income tax purposes, the auditor should include in the report a paragraph
that: the auditor should include in the report a paragraph that states that
the income tax basis of accounting is a basis of accounting other than

GAAP. This emphasis of matter paragraph is included after the opinion

paragraph. Examples of an appropriate title for this paragraph are
"Emphasis of Matter" or "Basis of Accounting."
The objective of a review of interim financial information of a public entity
is to provide the accountant with a basis for reporting whether material
modifications should be made to conform with GAAP.
Performing inquiry and analytical procedures is the primary basis for an
accountant to issue a review report on comparative financial statements
for a nonissuer in its second year of operations.
When an independent accountant's report based on a review of interim financial
information is presented in a registration statement, the prospectus should include
a statement clarifying that the accountant's review report is not a "part" of the
registration statement within the meaning of the Securities Act of 1933.
If, during a review of the financial statements of a nonissuer, an accountant
becomes aware of a lack of adequate disclosure that is material to the
financial statements, and management refuses to correct the financial statement
presentations, the accountant should disclose this departure from GAAP in a
separate paragraph of the report.
When an auditor is requested to change the engagement from an audit to a
compilation, the auditor must consider the effort needed to complete the
audit, the cost of completing the audit, and the reasons for the client's
request. If the audit is substantially complete or an insignificant effort is needed to
complete the audit, the auditor should consider the propriety of agreeing to the
request.
In addition, if the reason for the request is to limit the scope of the
auditor's examination, the auditor must consider whether the information
affected by the scope limitation is incorrect, incomplete, or otherwise unsatisfactory.

A change in circumstance (e.g., an audit is no longer necessary) or a

misunderstanding as to the nature of an audit would, on the other
hand, be considered a reasonable basis for the change .
An accountant can prepare a working trial balance and prepare standard
monthly journal entries without being required to comply with SSARS as
long as the performance of these services does not carry forward into the
preparation of financial statements.