Sample of a Financial Audit Engagement Leter

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Sample of a Financial Audit Engagement Leter Powered By Docstoc
					   presents

                        Mastering SSARS No. 19 on
                            p
                        Compilations and Reviews
                Preparing for the New Engagement Framework and
                       Emphasis on Practitioner Judgment

             Live 110 Mi t Teleconference/Webinar with Interactive Q&A
           A Li 110-Minute T l    f      /W bi     ith I t    ti

                                                 Today's panel features:
                    Mike Glynn, Technical Manager, Audit and Attest Standards Team, AICPA, New York
                ,    ,                g ,          g
Kurt Oestriecher, CPA, Partner-In-Charge, Accounting and Auditing Services, Oestriecher & Company, CPA’s, Alexandria, La.
                                                                g         ,                  p y,       ,           ,


                                          Wednesday, June 2, 2010
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                    Mastering SSARS No. 19 On
                    Compilations And Reviews
                             Webinar

                            June 2, 2010



Mike Glynn, AICPA         Kurt Oestriecher, Oestriecher & Co.
mglynn@aicpa.org          kurt@oandcocpas.com
                     Today s
                     Today’s Program

Review Of SSARS No. 19 Background, Terms     Slides 6-31
(Mike Glynn)


Drill-Down On Key Issues For Businesses      Slides 32-49
(Kurt Oestriecher)


Drill-Down On Key Issues For Practitioners   Slides 50-53
(Mike Glynn)



                                                            5
Review Of SSARS No. 19
  Background, T
  B k       d Terms



Mike Glynn, AICPA
               Session Objective



• Discuss the changes to the compilation and review
  literature as a result of the issuance of SSARS 19,
  Compilation and Review Engagements in December
  2009




                                                        7
           Compilation – What It Is


• A compilation is:
   – A service provided by an accountant
   – Objective is to assist management in presenting
     financial information in the form of financial
     statements
   – Accountant does not obtain or provide any
     assurance that there are no material modifications
     that should be made to the financial statements.



                                                          8
        Compilation – What It Is Not


• A compilation is not an assurance engagement.
   – Does not contemplate:
      • Performing inquiries
      • Performing analytical review procedures
      • Obtaining an understanding of internal control
      • Assessing fraud risks
        Testing         ti
      • T ti accounting records  d




                                                         9
               Review – What It Is



• A review is:
   – A limited assurance engagement
      • Accountant accumulates review evidence
        (primarily through analytical procedures and
        inquiries).




                                                       10
           Review – What It Is Not


• A review is not:
   – An audit (high level of assurance engagement)
      • As such, does not contemplate:
         – Obtaining an understanding of internal control
         – Assessing fraud risk
         – Testing accounting records




                                                            11
                     SSARS 19


• Effective for comps and reviews of f/s ending on or
  after 12/15/10
     Early implementation permitted f new reporting
   –E l i l            i       i d for             i
     option for comps when independence is impaired

• Replaces AR 20, 50 and 100

• Will be codified as AR 60, 80 and 90



                                                        12
 SSARS 19 – Separating Compilation
  Guidance From Review Guidance
• In place of AR 20, 50 and 100, the SSARSs will include
  new sections:
    – AR 60, Framework for Performing and Reporting on
      Compilation and Review Engagements
    – AR 80, Compilation of Financial Statements
         90
    – AR 90, Review of Financial Statements
• AR sections 110 (Elements), 120 (Pro Forma), 200
  (     p        )
  (Comparatives), 300 (                   )
                       (Prescribed Forms), 400
  (Successor/Predecessor Communications), and 600
  (Personal Financial Statements) will be conformed.


                                                           13
    SSARS 19 – Separating Compilation
  Guidance From Review Guidance (Cont.)


• Change made in response to member comments that
  literature was difficult to use

• Members performing compilations can now just look at
  the compilation section without having to look at review
  guidance




                                                             14
 SSARS 19 – Clarification Of Review
     Performance Procedures
• Is intended as a clarification, and most accountants
  should see minimal impact on how they perform their
  engagements.
• A review is not:
   – An AUP engagement
   – Canned analytical procedures and inquiries
   – A compilation plus a few extra procedures
• A review is:
   – An assurance engagement
       • As such, has certain similarities to an audit
                ,
         engagement
                                                         15
16
 SSARS 19 – Clarification Of Review
                           (Cont.)
  Performance Procedures (Cont )

• A review requires the accumulation of review evidence
  that will provide the accountant with limited assurance
  that there are no material modifications that should be
  made to the f/s.
   – In an audit, the auditor accumulates audit evidence
     in order to obtain reasonable assurance.

• The accountant uses professional judgment to
  determine specific procedures.


                                                            17
 SSARS 19 – Clarification Of Review
                           (Cont.)
  Performance Procedures (Cont )
• Review procedures are tailored based on the
  accountant’s:
   – Understanding of the industry
   –K      l d      f h li
     Knowledge of the client
   – Awareness of the risk that he or she may
                                      accountant’s
     unknowingly fail to modify the accountant s review
     report on f/s that are materially misstated

• May include procedures other than analytical
  procedures and inquiries


                                                          18
    SSARS 19 – Documenting The
   Understanding With Management

• Does not change the requirement to establish an
  understanding with management regarding the
                 performed.
  services to be performed
   – Previously, the SSARSs stated that it was
     preferable that the understanding be in writing.
   – SSARS 19 requires that the understanding be
     documented in writing.
      • This may result in a change in practice for some
        accountants.


                                                           19
      SSARS 19 – Documenting The
  Understanding With Management (Cont.)


• Leaves open the engagement that the written
  understanding should cover.
     Can        bi    h      hl      il i
   – C combine the monthly compilation engagements
     and annual review in one engagement letter
   – Engagement letters can cover multiple years
      • Is discouraged, since the understanding may lose
        clarity as time passes
              y         p
      • Recommendation is that the understanding be
        documented at least annually


                                                           20
  SSARS 19 – Enhanced Requirements
    For Compilation Documentation



• Previously, accountant was only required to document:
   – The understanding with management regarding
     services to be performed if in a SSARS 8
     engagement
   – Communications to management regarding
     suspected fraud or illegal acts
        p                   g




                                                          21
 SSARS 19 – Enhanced Requirements For
   Compilation Documentation (Cont.)


• Requirements are expanded
  – Understanding with management regarding services
       be    f     d for ll
    to b performed f all engagements
  – Any findings or issues that, in the accountant’s
    judgment,
    judgment are significant
  – Communications regarding fraud and illegal acts




                                                       22
 SSARS 19 – Review Documentation
             Changes
• New documentation requirements
  – The establishment of an understanding with
    management regarding the services to be
    performed
  – Management’s responses to inquiries involving
    fluctuations or relationships that are inconsistent
    with other information or differ significantly from
    expected amounts
  – Significant matters covered in the inquiry
    procedures and the responses received
                          memorandum,
      • Can be done via memorandum checklist or other
        means
                                                          23
SSARS 19 – Review Documentation
                 (Cont.)
        Changes (Cont )


– Any significant findings or issues
   • The results of procedures that indicate the f/s
     could be materially misstated
   • Actions taken to address such findings
   • The basis for final conclusions




                                                       24
      SSARS 19 – New Compilation
          Reporting Option

• Pursuant to current literature (AR 100.23), with respect
  to a comp, the accountant is required to disclose when
  he or she is not independent but is precluded from
  disclosing the reasons.
   – SSARS 1 theory (from 1978) was that reasons were
     not relevant and would cause confusion.




                                                             25
      SSARS 19 – New Compilation
                         (Cont )
        Reporting Option (Cont.)
• Many smaller companies need the accountant to
  perform certain non-attest services, such as:
   – Preparing and posting payroll and payroll reports
      Maintaining h /l
   – M i i i the g/l
   – Preparing and recording j/es
   – Preparing bank recs
   – Maintaining fixed asset ledger
   – Preparing deferred tax calculations
   – Preparing f/s
• If the accountant establishes or maintains internal
  controls for the client, independence is impaired.
                                                         26
SSARS 19 – New Compilation Reporting
                  (Cont )
           Option (Cont.)

• In 2005, the ARSC issued a survey that set forth
  specific questions that the ARSC used to further
  consider the independence in compilation
  engagements issue.
   – Survey was live on aicpa.org from October 2005 to
     May 2006.
   – 4,336 responses received




                                                         27
 SSARS 19 – New Compilation Reporting Option
                  (     )
                  (Cont.)

• If the existing independence requirements with
  respect to compilation engagements are retained,
  should the Accounting and Review Services
  Committee consider amending Statements on
  Standards for Accounting and Review Services No.
  1, Compilation and Review of Financial Statements
  to allow the accountant to describe the reason(s)
  for a lack of independence in the accountant’s
  compilation report?




                                                      28
 SSARS 19 – New Compilation Reporting Option
                  (     )
                  (Cont.)

• Yes
   – 2,477 responses
   – 57.9%

• No
   – 1,391 responses
   – 32.5%

      sure/don’t
• Not sure/don t know
   – 412 responses
   – 9.6%

                                               29
 SSARS 19 – New Compilation Reporting Option
                  (     )
                  (Cont.)

• CPAs in public practice
   – Yes 56%; No 35%
• CPAs in industry
   – Yes 67%; No 27%
• Non-CPA client of a CPA in public practice
   – Yes 86%; No 0%
• Third-party user (i.e., lender or creditor)
   – Yes 88%; No 9%
• Other
   – Yes 63%; No 28%



                                                30
   SSARS 19 – New Compilation
                      (Cont )
     Reporting Option (Cont.)
– Accountant has the option, but is not required to,
  disclose the reasons for an independence
  impairment in a comp.
– If the accountant does decide to disclose the
  reasons for an independence impairment, all of the
  reasons must be disclosed.
– No limitation on what the report can say
– The accountant may disclose the reasons in one
  period and then not disclose in a subsequent period.
    • Exercise professional judgment in making the
      decision
– Results in more transparent and useful reports
                                                         31
           Drill-Down On Key
          Issues F Businesses
          I      For B i



Kurt Oestriecher, Oestriecher & Co.
  Engagement Letters - Compilations


• Should have written communication that documents
  the understanding with management

• Reduces the following risks:
   – Management inappropriately relies on the
     accountant to protect against risks.
   – Management has misguided expectation that the
     accountant performs management responsibilities.



                                                        33
Engagement Letter – Required Elements

• Objectives of the engagement
• No assurance is provided
• Management responsibilities:
   – Financial statements and fair presentation
   – Designing and implementing internal controls
   – Preventing and detecting fraud
   – Compliance with laws and regulations
     Providing         to ll financial records and related
   – P idi access t all fi         i l      d    d l t d
     information to the accountant



                                                             34
Engagement Letter - Required Elements
              (Cont.)
              (Cont )
• Accountant’s responsibilities
    – Conduct engagement in accordance with SSARS
• Limitations of a compilation
      Not        dit       i
    – N t an audit or review
    – No testing
    – No internal control assessment
• Cannot rely on engagement to disclose errors, fraud or
  illegal acts
• Communication responsibilities to management
    – Errors, fraud, illegal acts
• Effect of independence impairments on report

                                                           35
     Engagement Letter – Required
                    (Cont )
          Elements (Cont.)


• Optional elements
  – Fees and billings
  – Liability limitations
  – Conditions under which access to compilation
    documents may be granted to others (peer review)
  – Any additional services




                                                       36
Engagement Letter - Management Use-
       Only Engagements

• Additional required elements
   – Material departures from reporting framework and
       ff     fd              k            li bl
     effects of departures if known, if applicable
   – Disclosure of omission of disclosures and cash
     flows,
     flows if applicable
   – Reference to supplementary information, if
     applicable
       pp




                                                        37
      Engagement Letters - Reviews



• Should establish an understanding, and such
    d      di    h ld be documented i a written
  understanding should b d           d in    i
  communication with management.

• Risk reductions are similar to compilations.




                                                  38
Engagement Letters – Reviews (Cont.)

• Required elements
   – Objectives of a review
      • Limited assurance that no material modifications
                d d
        are needed
   – Management responsibilities
      • Preparation and fair presentation of financial
        statements
      • Designing, implementing and maintaining internal
        controls
      • Prevention and detection of fraud


                                                           39
Engagement Letters – Reviews (Cont.)

 – Management responsibilities (Cont.)
    • Compliance with laws and regulations
    • Availability of all financial records
    • Provide accountant with representation letter
 – Accountant’s responsibilities
    • Conduct engagement in accordance with SSARS
 – Characteristics of a review
      Principally inquiry and analytical procedures
    • P i i ll i       i      d      l ti l   d
    • Substantially less in scope than an audit
   Accountant s
 – Accountant’s communication responsibilities

                                                      40
Engagement Letter – Reviews (Cont.)



• Optional features
  – Fees and billings
  – Liability or indemnification issues
  – Access to review documentation (workpapers)
  – Additional services for regulatory requirements




                                                      41
                Review Evidence

• Analytical procedures
   – Financial and non-financial relationships
   – Purpose of analytical procedures
   – Limitations of analytical procedures

• Three-step process
   – Development of expectations
   –C        i    f     d d       t to     t ti
     Comparison of recorded amounts t expectations
   – Follow up based on comparison


                                                     42
           Review Evidence (Cont.)


• Inquiries
   – Focus inquiries at the appropriate level
   – Certain required inquiries
   – Inquiries to follow up on analytical procedures

• Not required to obtain evidence to support
  management response to inquiries




                                                       43
    Reporting Lack Of Independence


• Accountant must disclose lack of independence.

• Accountant may disclose reasons for lack of
  independence:
   – Must disclose all reasons for lack of independence
   – Election is for each report issued
   – Samples are provided in SSARS 19




                                                          44
  SSARS 19 – New Compilation And
         Review Reports

• Reports are revised to make clearer to users

• A title is now required
   – Accountant’s Compilation Report
   – Independent Accountant’s Compilation Report
   – Independent Accountant’s Review Report
         The     i        t title is i d to include the
       • Th review report titl i required t i l d th
         word “independent.”



                                                          45
   SSARS 19 – Compilation Reports

• Compilation reports
  – Three paragraphs
     • Introductory paragraph:
         – Identifies the entity
         – States that the f/s have been compiled
         – Identifies the f/s that have been compiled
         – Specifies the date or period covered by the f/s
           Includes     t t       t th t th f/ h
         – I l d a statement that the f/s have not   t
           been audited or reviewed – no opinion or
           assurance

                                                             46
SSARS 19 – Compilation Reports (Cont.)

   • Second paragraph
      – Management is responsible for the f/s and for
        internal control over financial reporting.
     Third
   • Thi d paragraphh
      – Accountant is responsible to conduct the
                                          SSARSs.
        compilation in accordance with SSARSs
      – States the objective of a compilation




                                                        47
      SSARS 19 – Review Reports

• Review reports
  – Four paragraphs
     • Introductory paragraph:
         – Identifies the entity
         – States that the f/s have been reviewed
         – Identifies the f/s that have been reviewed
         – Specifies the date or period covered by the f/s
         – Includes a statement that a review consists of primarily
           applying analytical procedures and making inquiries
         – Includes a statement that a review is substantially less in
           scope than an audit and the accountant does not express
           an opinion


                                                                         48
 SSARS 19 – Review Reports (Cont.)

• Second paragraph
  – Management’s responsibility for the f/s and for internal control
    over financial reporting
• Third paragraph
  – Accountant’s responsibility is to conduct the review in accordance
    with SSARSs.
  – SSARSs require the accountant to perform procedures to obtain
    limited assurance.
  – The accountant believes that the results of the procedures
                                        report.
    provide a reasonable basis for the report
• Fourth paragraph
            p               ,
  – Based upon the review, the accountant is not aware of any  y
    material modifications that should be made to the f/s (other than
    modifications indicated in report).
                                                                         49
   Drill-Down On Key
 Issues F Practitioners
 I      For P titi



Mike Glynn, AICPA
       SSARS 19 – Implementation
              Resources
• New compilation and review guide
• May 2010 Journal of Accountancy article
• CPE
• White paper providing Q&As on new compilation
  reporting option at
  http://www aicpa org/download/auditstd/SSARS 19 W
  http://www.aicpa.org/download/auditstd/SSARS_19_W
  hite_Paper.pdf.
         p p                   g
• White paper on understanding internal control and
  internal control services at
  http://www.aicpa.org/download/acctstd/Revised_Intern
  al_Control_Services_Whitepaper.pdf
  al Control Services Whitepaper pdf

                                                         51
  Helpful Information And Resources

• Authoritative standards for non-issuers (SASs,
  SSARSs, SSAEs, SQCSs) as of June 1 are available
  at
  http://www aicpa org/Professional+Resources/Accou
  http://www.aicpa.org/Professional+Resources/Accou
  nting+and+Auditing/Audit+and+Attest+Standards/Aut
  horitative+Standards+and+Related+Guidance+for+N
  on-Issuers/default.htm




                                                      52
Helpful Information And Resources (Cont.)

• AICPA accounting and auditing technical hotline
   – (877) 242-7212
            q y@ p
   – techinquiry@aicpa.orgg
   – http://www.aicpa.org/Professional+Resources/Acco
     unting+and+Auditing/Accounting+and+Auditing+Tec
     hnical+Help/
     h i l H l /




                                                        53

				
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