Transcript Accounting 4P62 - Brock University

Section 4
Other Engagements
Introduction
• Principal type of audit engagement?
• Public accountants also perform
1.
2
3.
Special Auditing Services
• Public accountants must comply with?
• Accounting services, what must public
accountants comply with?
• A number of auditing services besides
financial statements
1. Audit of financial information
2. Compliance with a contractual agreement
3. Cash-basis financial statements
4. Personal financial statements
Special Reports
•
Special reports used to describe the following:
1.
Financial information other than F/S
2.
Compliance with contractual agreements
3.
Results of applying specified auditing procedures
1.Audit Reports on financial information
other than financial statements
•
Specified elements, accounts or items
•
E.g.. Lease agreement provisions
•
Modification of the standard auditors report
AUDITORS’ REPORT ON SCHEDULE OF GROSS SALES
To Landlord Limited:
At the request of Client Limited, we have audited the schedule of gross sales (as defined in
paragraph 2 of the lease agreement dated My 3, 200X, with Landlord Limited) at the King Street
store (city, province) for the year ended December 31, 200X. This financial information is the
responsibility of the management of Client Limited. Our responsibility is to express an opinion
on this financial information based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial information is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial information. An audit
also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial information.
In our opinion, this schedule present fairly, in all material respects, the gross sales of Client
Limited at its King Street store (city, province) for the year ended December 31, 200X, in
accordance with the provisions of paragraph 2 of the lease agreement referred to above.
Carney, Black and Heath, LLP
Chartered Accountants
Hamilton, Canada
March 1, 200Y
2.Audit Reports on compliance with
agreements, statutes and regulations.
•
Debt agreements
•
E.g.. Prepared for bond trustees
•
Again a modification of the standard auditors report
AUDITORS’ REPORT ON COMPLIANCE WITH AGREEMENT
To Trust Company Limited:
We have audited Client’s Limited compliance as at December 31, 200X, with the criteria established by
[describe nature of provisions to be complied with] described in sections
to
inclusive of [name of
agreement] dated
, 200X, with [name of party to agreement] and the interpretation of such
agreement as set out in note 1 attached. Compliance with the criteria established by the provisions of the
agreement is the responsibility of the management of Client Limited. Our responsibility is to express an
opinion on this compliance based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether Client Limited complied with the
criteria established by the provisions of the agreement referred to above. Such an audit includes examining, on
a test basis, evidence supporting compliance, evaluating the overall compliance with the agreement, and
where applicable, assessing the accounting principles used and significant estimates made by management.
In our opinion, Client Limited is in compliance, in all material respects, with the criteria established by [the
provisions to be complied with] described in sections
to
of this agreement.
Carney, Black and Heath, LLP
Chartered Accountants
Hamilton, Canada
Date
3.Reports on the results of applying specified
auditing procedures to financial information
other than financial statements.
•
Different from the previous engagements just discussed
•
Informed individuals must have
•
What should the public accountants report or letter
include?
Items included:
1.
Specifically identify the financial information
2.
Specify procedures
3.
State only factual results
4.
State that an audit has not been performed
5.
Indicate and restrictions on report distribution
6.
Disclose the addressee, accountant name, and date
Other Special Reports
1. Reports prepared on a basis of accounting other
than GAAP
2. Personal financial statements
1.Reports on cash-basis statements.
•
Most common type
•
Why is it not GAAP?
•
More descriptive titles
AUDITORS’ REPORT
To the Shareholders of XYZ Company.
We have audited the accompanying statement of assets and liabilities arising from cash transactions of XYZ
Company as at December 31, 200X, and the statements 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.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
As described in note 1, these financial statements were prepared on the basis of cash receipts and
disbursements and are not intended to be a presentation in accordance with generally accepted accounting
principles.
In our opinion, these financial statements present fairly, in all material respects, the assets and liabilities
arising from cash transactions of XYZ Company as at December 31, 200X, and the revenue collected and
expenses paid during the year then ended, on the basis of accounting described in note 1.
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
March 1, 200Y
2.Reports on personal financial statements.
•
What type of person?
•
GAAP is quite different
•
Different descriptive titles
•
Issue of completeness
Accounting Services
• Review services and compilation
engagements
• What types of companies?
A. Review services.
•
CICA 8100, a review consists of:
1.
2.
3.
• Purpose of a review?
•
Public accounts should ensure that
1.
The subject matter is
2.
Appropriate criteria for
Review Engagement letter
1. Review in accordance with GAAP.
2. Form and content of report.
3. Client’s management responsibility
4. Detection of fraud and error.
Professional standards for a review
CICA 8100

General Standard
•
Adequate technical training and proficiency in conducting
reviews
•
Due care
•
Objective state of mind
 Review standards
i.
Adequate planning and proper execution
ii.
Possess or acquire sufficient knowledge of the
business
iii. Plausibility
 Reporting standards
i.
Scope and nature
ii.
The report should include:
a)
Has anything come to the accountants attention?
b)
That no assurance can be provided
CICA 8100 - Enquiry, analytical procedures, and
discussion
1.
What are enquiries concerned with?
2.
What type of analytical procedures?
3.
Discussions with whom?
Review engagement report
1.
Subject matter reported on.
2.
Review made in accordance with
3.
Review consisted primarily of
4.
Not an audit
5.
When there are no reservations – unqualified negative assurance
Cannot express an unqualified negative assurance?
1.
Departure from appropriate criteria
2.
Inappropriate or unreasonable interpretation
3.
Information not available
Reservation in the report
•
1.
Qualification
2.
Adverse statement
3.
Denial of assurance
A reservation paragraph
Paragraph on restriction of use
• CICA suggests the following:
• This report is intended to be used solely for [indicate
specific use] and is not to be referred to nor distributed
to any person not a member of management of Client
Limited or [name of person to whom the report is
addressed].
Types of review engagements
1. Interim and annual F/S
2. Financial information other than F/S
3. Compliance with agreements and regulations
1. Interim and Annual F/S
• Should follow additional requirements of
CICA 8200
• Some specific procedures
• Enquiries:
1.
2.
3.
4.
• Analytical procedures:
1.
2.
• Previous engagements:
• Other public accountants:
• Discussing the F/S:
• Letter of representation:
REVIEW ENGAGEMENT REPORT
To [person engaging the public accountant]:
We have reviewed the balance sheet of XYZ Limited as at ……………200X, and the statements of income
retained earnings, and cash flows for the year then ended. Our review was made in accordance with generally
accepted standards for review engagements and accordingly consisted of enquiry, analytical procedures and
discussion related to information supplied to us by the company.
A review does not constitute an audit, and consequently, we do not express an audit opinion on these financial
statements.
Nothing has come to our attention as a result of our review that causes us to believe that these financial
statements are not, in all material respects, in accordance with generally accepted accounting principles.
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
Date
2. Financial information other than F/S
• Includes specific financial statement items
• Same review procedures but should also look at
CICA 5805
• Report should include:
REVIEW ENGAGEMENT REPORT
To ABC Company
At the request of Client Limited, we have reviewed [name of financial information] of XYZ Limited as at
……………200X, (calculated in accordance with the provisions of Section X of the ……. agreement with
ABC Company dated May 5, 199X, and the interpretations set out in Note 1). Our review was made in
accordance with generally accepted standards for review engagements and accordingly consisted of enquiry,
analytical procedures and discussion related to information supplied to us by the company.
A review does not constitute an audit, and consequently, we do not express an audit opinion on this [name of
financial information].
Nothing has come to our attention as a result of our review that causes us to believe that this [name of
financial information] is not, in all material respects, in accordance with [the basis of accounting].
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
Date
3. Compliance with agreements and regulations
• What does this type of engagement include?
• CICA 8600:
1.
2.
3.
4.
REVIEW ENGAGEMENT REPORT
To [person engaging the public accountant]
We have reviewed Client Limited's compliance as at December 31, 200X, with [covenants or conditions to be
complied with] described in sections ….. to ….. inclusive of the agreement dated November 3, 199X, with
[party to the agreement] and the following interpretations of certain provisions of such agreement: [describe
interpretations].Our review was made in accordance with generally accepted standards for review
engagements and accordingly consisted of enquiry, analytical procedures and discussion related to information
supplied to us by the company.
A review does not constitute an audit, and consequently, we do not express an audit opinion on this matter.
Nothing has come to our attention as a result of our review that causes us to believe that the company is not in
compliance with [covenants or conditions to be complied with] described in sections ….. to ….. inclusive of
the agreement [and related interpretations] referred to above.
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
Date
B. Compilation services.
•
A compilation involves
•
The purpose
•
Not intended to provide any assuarnace
•
When should accountant be involved?
•
1.
•
2.
•
Need an agreement letter
The agreement letter.
1.
The conduct of the engagement
2.
Client's responsibility
3.
Cannot detect fraud or error
4.
Appropriateness of F/S
5.
No assurance
6.
Uninformed readers
7.
Notice to reader
CICA 9200.
•
1.
Adequate technical training and proficiency in
accounting
1.
Adequate planning and proper execution
Must not accept unreasonable information
The Notice To Reader.
•
Should include the following matters:
1.
Source of information for the compilation
2.
No audit or review
3.
Caution readers
4.
Should not express what?
NOTICE TO READER
To [person engaging the public accountant]
We have compiled the balance sheet of Client Limited as at December 31, 200X, and the statements of
income, retained earnings, and cash flows for the [period] then ended from information provided by
management (the proprietor). We have not audited, reviewed or otherwise attempted to verify the accuracy or
completeness of such information. Readers are cautioned that these statements may not be appropriate for
their purposes.
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
Date
• Lack of Independence
I am not independent of X Limited because my spouse owns 25 percent of the shares of the company.
C. Comfort letters & Letters of consent.
•
Prospectus
•
Purpose of a comfort letter
•
Addressed to a regulatory authority
•
Does the following:
1.
Identifies company
2.
Specifies the F/S
3.
States the status of the examination
4.
Provides negative assurance
5.
State the use of the letter
•
Purpose of a letter of consent
•
Auditors consenting to the use of their
audited F/S
•
Comply with CICA 7100
•
Underwriters
•
Comfort letter to underwriters
1.
Auditor’s independence
2.
An opinion
3.
If no audit performed?
4.
Negative assurance
5.
Use of the letter
D. Reporting on Future-Oriented F/S.
•
Who is interested in future-oriented F/S?
•
Most common types?
•
What do users want?
•
What types of evidence does the accountant
gather?
•
Must not vouch for achievability
AUDITORS’ REPORT ON FINANCIAL FORECAST
To the Directors of X Limited:
The accompanying financial forecast of X Limited, consisting of a balance sheet as at [date] and the
statements of income, retained earnings, and cash flow for the [period(s)] then ending, has been prepared by
management using assumptions with an effective date of [effective date]. We have examined the support
provided by management for the assumptions, and the preparation and presentation of this forecast. Our
examination was made in accordance with the applicable Auditing Guideline issued by the Canadian Institute
of Chartered Accountants. We have no responsibility to update this report for events or circumstances
occurring after the date of our report.
In our opinion:
• As at the date of this report,the assumptions developed by management are suitably supported and
consistent with the plans of the company, and provide a reasonable basis for the forecast;
• This forecast reflects such assumptions; and
• The financial forecast complies with the presentation and disclosure standards for forecasts established by
the Canadian Institute of Chartered accountants.
Since this forecast is based on the assumptions regarding future events, actual results will vary from the
information presented and the variations may be material. Accordingly, we express no opinion as to whether
this forecast will be achieved.
Carney, Black and Heath, LLP
Chartered Accountants
Toronto, Canada
Date
E. Reports on Internal Control.
•
Internal control letter
•
Written for internal use
•
Groups outside client companies
•
Regulatory agencies
•
Report on internal control
•
Opinions on internal control
•
Material weaknesses in internal control?
•
Reviewing internal control for the
purposes of expressing and opinion
1. Plan
2. Review
3. Test
4. Evaluate
Problem 1.
You are a public accountant retained by the manager of a cooperative retirement
village to do write-up work. You are expected to compile unaudited financial statements
accompanied by a standard compilation communication. In performing the work you
discover that there are no invoices to support $25,000 of the manager’s claimed
disbursements. The manager informs you that all the disbursements are proper.
Required: Explain the steps you should take in this situation.
Problem 2.
Jiffy Clerical Services is a company that furnishes temporary office help to its
customers. The company maintains its accounting records on a basis of cash receipts
and cash disbursements. You have audited the company for the year ended December
31, 200X, and have concluded that the company's financial statements represent a fair
presentation on the basis of accounting described above.
Required:
a) Draft an unqualified auditor’s report you would issue covering the financial
statements for the year ended December 31, 200X.
b) Briefly discuss and justify your modifications of the conventional standard auditors’
report on accrual-basis statements.
Problem 3.
The following report on the basic financial statements was drafted by a staff assistant
at the completion of the review engagement of Delano Limited, a continuing client
for the year ended September 30, 200X.
To the Board of Directors of Delano Limited:
We have reviewed the balance sheet of Delano Limited at June 30, 200X, and
the statements of income and retained earnings for the year then ended, in
accordance with generally accepted auditing standards. Our review included such
tests of the accounting records as we considered necessary in the circumstances
A review consists principally of enquiries of company personnel. It is
substantially less in scope than an audit, but more in scope than a compilation.
Accordingly, we express only limited assurance on these financial statements.
Based on our review, we are not aware of any material modifications that should
be made to these financial statements in order for them to be in accordance with
generally accepted accounting principles applied on a consistent basis.
Sandwich
July 4, 200X
Anston & Co. CAs
Required: Identify the deficiencies in the draft of the proposed report on the financial
statements. Group these deficiencies by paragraph.
Problem 4.
The limitations on the public accountant's professional responsibilities when they are
associated with unaudited financial statements are often misunderstood. These
misunderstandings can be substantially reduced if the public accountants follow
professional pronouncements in the course of their work, and take other appropriate
measures.
Required: The following list describes several situations public accountants may
encounter, or contentions they may have to deal with, in association with and preparation
of unaudited financial statements. Briefly discuss the extent of the public accountant’
responsibilities and, if appropriate, the actions they should take to minimize any
misunderstandings. Number your answers to correspond with the numbering in the
following list.
1.
The public accountants were engaged by telephone to perform write-up work,
including the compilation of financial statements. The client believes that the public
accountants have been engaged to audit the financial statements and examine the
records accordingly.
2.
A group of investors who own a farm that is managed by an independent agent
engage public accountants to compile quarterly unaudited financial statements for
them. The public accountants prepare the financial statements from information given
to them by the independent agent. Subsequently, the investors find the statements
were inaccurate because their agent was embezzling funds. They refuse to pay the
public accountants’ fees and blame them for allowing the situation to go undetected,
contending that they should not have relied on the representations from the
independent agent.
3.
In comparing the trial balance with the general ledger, the public accountants find an
account labeled Audit Fees in which the client has accumulated the public
accountants’ quarterly billings for accounting services, including the review of
quarterly unaudited financial statements.
4.
To determine appropriate account classification, the public accountants looked at a
number of the client’s invoices. They noted in their working papers that some
invoices were missing, but did nothing further because it was felt that the invoices did
not affect the unaudited financial statements they were compiling. When the client
subsequently discovered that invoices were missing, he contested that the public
accountants should not have ignored the missing invoices when compiling financial
statements and had a responsibility at least to inform him that thy were missing.
5.
The public accountants were engaged to review the financial statements of a client.
While reviewing the draft of financial statements with their client, the CAs learned
that the land and buildings were recorded at appraisal value.