Chapter 22: Assurance Services: Review and Compilation Engagements

1. Chapter 22: Assurance Services: Review and Compilation Engagements

2. Chapter 22 objectives • Identify similarities and differences between the assurance general standard and the audit general standard • Explain the importance of review and compilation services • Relate evidence collection procedures to assurance level desired • List the types of reports provided for interim financial information and future-oriented information

3. Review of assurance services

4. Assurance engagements are broad • They include financial statement audits, review engagements, certain types of management consulting, and specialized reports such as Eldercare • The three (or more) parties to such engagements are: the user(s), the practitioner, and management (or another accountable party)

5. Practice problem 22-23 (pp. 638-39) • Identify additional testing required for a special report on royalties • Write the audit report

6. Assurance engagement general standards • Practitioner should have a reasonable basis for believing the engagement can be completed in accordance with assurance standards • Management must acknowledge the responsibility for the subject matter • Adequate proficiency to perform the engagement and adequate knowledge of the subject matter

7. Assurance engagement general standards (cont’d) • Engagement performed with due care and an objective state of mind • Criteria for evaluating the subject matter should be identified or developed

8. Comparison to the general standard for audits of financial statements • This general standards (S 5100) requires that the audit be performed and the report prepared by a person or persons having adequate technical training and proficiency in auditing • Requires due care and an objective state of mind

9. Similarities in general standard • Both require competence and technical training in the field of the engagement (audit or assurance) • Both require due care and an objective state of mind

10. Differences in general standard • Additional requirements for the assurance general standards: • Believing that the engagement can be completed • Management acknowledgement • Identification or development of criteria • Why do you think these differences exist?

11. Review and compilation services • Financial statement reviews provide some assurance for clients that do not require an audit • Review engagements can also be completed for other financial information (e.g. verifying sales for lease agreements) • Compilations provide no assurance, but enable the accountant to prepare financial statements or tax returns, or compile other types of financial information

12. Terms of the engagements • It is advisable that an engagement letter be completed for ALL engagements • Helps the accountant and the client clarify the nature of the work to be completed, the cost, and clearly set boundaries around what will not be completed

13. Review engagement • Consists primarily of enquiry, analytical procedures and discussion • Objective is to assess whether the information being reported on is PLAUSIBLE • Within the framework of appropriate criteria (GAAP for financial statements)

14. Procedures suggested for reviews • Obtain knowledge of the client’s business • Make enquiries of client personnel • Perform analytical procedures • Have discussions with management concerning information received and the information being reported on

15. Practice problem 22-22 (p. 638) • What should be done before accepting a review engagement? • Outline the process for conducting the review engagement for a church

16. Types of reviews • Financial statements • Financial information other than financial statements • Compliance with agreements and regulations

17. Practice problem 22-15 (p. 636) • Discuss three reporting approaches with respect to the examination of sales information for lease agreements

18. Compilation engagement • These are bookkeeping services that lead to the completion of financial statements • Statements may be prepared monthly, quarterly, or annual • Also includes tax services • No assurance is provided

19. Procedures conducted during a compilation engagement • The accountant assembles the information • Ensures that it is arithmetically correct • Although the accountant should not be associated with false or misleading financial statements, it may be difficult to make this determination because of the limited involvement

20. Professional standards for compilation engagements • Should have adequate technical training and proficiency in accounting • Complete with due care • Work should be adequately planned and properly executed • If assistants are employed, they should be properly supervised

21. Interim financial information • May be audited, reviewed, or compiled • Estimates may be required to prepare the information on a timely basis • This means the information may not be as reliable as year-end financial information

22. Practice problem 22-14 (p. 636) • Identify your responsibilities with respect to interim financial statements • List the work that you would need to perform with respect to a review of such statements

23. Future-oriented financial information • There are two general types of future-oriented information in S 4250: • Forecast: uses assumptions reflection management’s judgment as to the most probable courses of action • Projection: Is prepared using one or more assumptions (hypotheses) that do not necessarily reflect the most likely course of action of the entity

24. A third type of future-oriented information • Prospective financial information: • These are financial statements that are prepared with expected future information, normally for a particular expected event, such as the sale of shares or the retirement of debt

25. Professional standards • With respect to the examination of future-oriented information, it is important that the accountant: • Have adequate technical training and proficiency in auditing • Requires due care • Work adequately planned and assistants properly supervised • Sufficient evidence obtained for report issued

26. Prior to accepting a future-oriented engagement: • Public accountant needs to ensure that: • There is adequate support for the assumptions used to prepare the financial information • Any hypotheses do not significantly impair the quality of the financial information • Management is willing to disclose all significant assumptions

27. Prior to accepting a future-oriented engagement (cont’d): • Public accountant needs to ensure that: • The period to be covered by the forecast or projection does not extend beyond the point where future results can be reasonably estimated • Any hypotheses are not false or misleading

28. Practice problem 22-20 (pp. 637-38) • Three year forecasts to obtain additional financing • Can you accept the engagement? • What issues need to be discussed with management?

29. Examination of prospective financial statements • Involves evaluating the preparation of future-oriented financial information and the underlying assumptions and assessing the plausibility of the hypotheses • PA would evaluate the presentation of the financial information for conformity with CICA presentation and disclosure guidelines

30. Examination of prospective financial statements (cont’d) • In developing a knowledge of the industry and business, the PA would focus on: • Availability and cost of resources needed for continuing operations • Nature and conditions of markets in which the client operates • Specific industry factors such as competition • Past performance by the client and its competitors