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    Auditing and Assurance Services Global Edition 17th Edition-Part-1-72-97

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    林芷瑜

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    OTHER ASSURANCE SERVICES LEARNING OBJECTIVES ‘After studying this chpter, you should be obe to Skepticism Appl s to All Types of Engagements Barnhart Construction Company was a contractor specaling in apartment complexes in the Southwest. The owner of the construction company, David Barnhart reached an agreement vith a promoter named Alton Leonard to serve asa contractor on three construction projects Leonard was currently marketing. One problem with the agreement was that Barnhart would not receive final payment for the construction work uni all the partnership units were sold The first partnership offering was completely sold and Barnhart was paid. Unfor- tunately, the next cwo part- nerships were not completely sold. To solve this problom, Barnhart loaned money to relatives and key employees, ‘whe bought the necessary in- terests for the partnerships to close so that Barnhart would receive the final payment Renee Lathrup, CPA, a sole practitioner, was engaged to conduct a review of Barnhart Construction’ financial statements. She noticed that the ac- counting records showed loans receivable from a number of employees and individuals ramed Barnhart, She also observed that the loans were made just before the second and third part- nerships closed and that they were in multiples of $15,000, the cost of a partnership unit Lathrup asked Barnhart to explain what had happened. Barnhart told Lathrup, “When I received the money from the frst partnership escrow, | wanted to do something ice for relatives and employees who had been loyal to me over the years” He told Lathrup, “This is just my way of sharing my good fortune with the ones I love. The equality of the amounts i ust a coincidence.” ‘When Lathrup considered the reasonableness of this scenario, she found it hard to believe First, the timing was odd. Second, the amounts seemed to be an unusual coincidence. Third, if he really had wanted to do something special for these folks, why hadnt he given them some- thing, rather than loaned them money? Lathrup asked that the promoter, Leonard, send her detailed information on the subscriptions for each partnership. Leonard refused, stating chat he was under legal obligation to keep all nformation confidential. When Lathrup pressed Barnhart he also refused further cooperation, although he did say he would “represent” to Lathrup that the loans had nothing to do with closing the partnerships so that he could get his money. At this point, Lathrup withdrew from the engagement. 34 32 33 34 35 36 37 CHAPTER Understand the level of sesurance and evidence requirements for review, ‘compilation. and preparation Describe speci ‘engagements to review {ncerim fac nfrmation for public companies. Distinguish AICPA, testation standards from auditing standards and know the types of engagements ‘0 which hoy apply Describe engagements to report on internal controls st eerviceorganaation®| {OC reports Understand special engagements to test to prospective fiancil statements, Define agreed-upon procedures engagements Describe other aude an limited assurance ‘engagements related 1 historical financial White the book does focus on audits of historical financial statements prepared in accordance with applicable accounting standards, other types of assurance services offered by CPAs involving historical financial statements are discussed. These include reviews of historical financial statements and limited assurance engagements involv- ing historical financial statements to meet specific needs of financial statement users. The chapter also examines assurance services for several types of attestation engagements that do not involve historical financial statements, such as reports on service organizations and reports on forecasted financial statements REVIEW, COMPILATION, AND PREPARATION SERVICES Many nonpublic companies have their financial statements reviewed, compiled, or naan a ToT prepared by a CPA, instead of having them audited. The opening story about Barnhart tae Construction Company is an example of a review service. A company’s management Fequrements for revew, may believe that an audit is unnecessary because no bank or regulatory agency requires compilation, and preparation one and management sees no need for audited statements for internal use. Instead, the servers. company may engage the CPA to assist in the preparation of financial statements, either for internal use or to provide to creditors or lenders under loan agreements. Depending oon the size of the loan, a lender may require a nonpublic entity to engage a CPA to compile or review financial statements and issue a related report, rather than conduct, an audit. A review provides limited assurance on the financial statements, whereas a compilation report provides no expressed assurance. Other nonpublic entities may en- ‘gage a CPA to prepare the financial statements without having the CPA issue a report. The standards for preparation, compilation, and review engagements of financial statements, called Statements on Standards for Accounting and Review Services (SSARS), areissued by the Accounting and Review Services Committee of the AICPA. This committee has authority equivalent to the Auditing Standards Board for services, involving unaudited financial statements of nonpublic companies. The SARS, codi- fied in the AICPA Professional Standards as AR-C sections, include. section on general principles for all engagements performed in accordance with the SARS and separate sections on preparation of financial statements, compilation engagements, and review of financial statements. Because they are not doing audits, SSARS refer to CPAs per- forming review, compilation, and preparation services as accountants, not auditors. Because the assurance provided in a preparation, compilation, or review engage- ment is considerably below that of audits, ess evidence is required for these services and they can be provided at a lower fee than an audit. Figure 3-1 illustrates the differences in evidence accumulation and level of assurance for audit, review, compilation, and prepa- ration engagements. The amount of evidence and assurance needed for each engagement isnot defined by the profession and therefore depends on the accountant's judgment. Relationship Between Evidence Accumulation and Assurance Attained igh (aut Level of Lumtvod Assurance (Rovlow) ‘Attained None (Compilation oF Preparation) Miia Sinieane Excenaive (Complsion or (eviow) sd) Preparation) Amount of Evidence Accumulated n Pare THE AUDITING PROFESSION Because review, compilation, and preparation services provide less assurance than audits, the accountant should establish an understanding with the client about the ser- vices to be provided through a written engagement letter. The understanding should include a description of the objectives of the engagement, management's responsibil ties, the accountant's responsibilities, the type and limitations of the service to be pro- vided, and a description of the type of compilation or review report expected to be issued. The requirements for review, compilation, and preparation services are now discussed in greater de ‘A review service (SSARS review) engagement allows the accountant to express limited assurance that the financial statements are in accordance with applicable ac counting standards, including appropriate informative disclosures, or other compre- hensive basis of accounting (OCBOA), such as the cash basis of accounting. CPAs must be independent of the client for review service engagements. Procedures Suggested for Reviews The evidence for a review engagement consists primarily of inquiries of management and analytical procedures, substantially fewer proce- dures than those required for an audit. For reviews, accountants do not obtain an un- derstanding of internal control, test controls, assess fraud risk, or do substantive tests of transactions or tests of balances, such as confirmation of receivables or physical examination of inventory. SSARS require the accountant to obi a review engagement: evidence that consists of the following for + Obtain agreement on engagement terms. The accountant should agree upon the terms of the engagement with management or those charged with governance. SSARS require that the agreement of terms be documented in an engagement letter or other suitable form of written agreement. Obtain knowledge of the accounting principles and practices of the client's industry. The accountant can study AICPA industry guides or other sources to obtain indus- try knowledge. The level of knowledge for reviews can be somewhat less than for an audit, Obtain knowledge ofthe client. The information should be about the nature of the

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