Book cover for Principles of auditing & other assurance services

Principles of auditing & other assurance services

Pany, Kurt; Whittington, Ray

ISBN #9780077729141

20th Edition

930 Questions

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Summary
Learning Objectives
Key Concepts
Example Problems
Explanations
Common Mistakes

Summary

This chapter broadens the scope of traditional audits by introducing additional assurance services such as compliance reporting, comfort letters, audits of special-purpose frameworks, and personal financial statement audits. It emphasizes understanding the limitations and levels of assurance inherent in each engagement, and stresses the necessity for rigorous documentation and clear client communication to ensure that all parties understand the nature and extent of the services provided.

Learning Objectives

1

Explain the different types of additional assurance and nonattest services provided by CPAs.

2

Differentiate between various specialized engagements such as compliance reporting, comfort letters, and personal financial statement audits.

3

Evaluate the scope and limitations inherent in each type of engagement.

4

Apply best practices in documenting and communicating the nature of services to clients.

Key Concepts

CONCEPT

DEFINITION

Additional Assurance Services

Services beyond the traditional audit that include various nonattest and specialized assurance engagements.

Compliance Reporting

An engagement where a CPA evaluates and reports on a company’s adherence to contractual agreements or regulatory requirements in conjunction with audited financial statements.

Comfort Letters

Letters issued by CPAs that provide assurance on specified financial information, typically used in connection with securities offerings.

Audits of Special-Purpose Financial Reporting Frameworks

Audits performed on financial reports prepared under frameworks other than the generally accepted accounting principles (GAAP) to meet specific reporting needs.

Reviews and Compilations under SSARS

Services that involve limited assurance (review) or no assurance (compilation) of financial statements, as guided by the Statements on Standards for Accounting and Review Services (SSARS).

Personal Financial Statement Audits

Audits focusing on personal financial statements, which require specialized approaches distinct from business audits.

Example Problems

Example 1

Evaluate this statement: "All companies should be audited annually."

Example 2

Evaluate this statement: "Auditors perform attestation services and accountants perform accounting services."

Example 3

In communications with clients, should CPAs refer to themselves as auditors or as accountants? Explain.

Example 4

Can auditors express an unmodified opinion on financial statements that are not presented on the basis of generally accepted accounting principles? Explain.

Example 5

Provide four types of special-purpose financial reporting frameworks.

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Step-by-Step Explanations

QUESTION

How does a CPA report on a company’s compliance with contractual agreements in connection with audited financial statements?

STEP-BY-STEP ANSWER:

Step 1: Identify the specific contractual agreements or regulatory requirements that need compliance verification.
Step 2: Review the audited financial statements alongside the terms of the contractual agreements to assess adherence.
Step 3: Evaluate the processes and internal controls that ensure compliance with these requirements.
Step 4: Document findings clearly, distinguishing between areas of compliance and areas where limitations exist.
Step 5: Communicate the results to relevant stakeholders with appropriate qualifiers regarding the assurance level provided.
Final Answer: The CPA produces a detailed report on compliance, highlighting both adherence and any exceptions or limitations in compliance with contractual or regulatory requirements.

Reporting on Compliance with Contractual or Regulatory Requirements

QUESTION

What are the key steps involved in preparing a comfort letter in relation to a securities offering?

STEP-BY-STEP ANSWER:

Step 1: Understand the requirements of the securities offering and the specific assurances needed by the underwriters or investors.
Step 2: Gather and review the relevant financial information and supporting documentation.
Step 3: Assess the reliability of the financial information and determine the level of assurance that can be provided.
Step 4: Draft the comfort letter, clearly outlining the scope of the review and any limitations on the assurance provided.
Step 5: Discuss the letter with the client to ensure clarity on the services rendered and document all communications.
Final Answer: The comfort letter is finalized and issued, providing appropriate assurances while clearly stating any limitations or disclaimers concerning the financial information reviewed.

Comfort Letters

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Common Mistakes

  • Confusing additional assurance services with traditional audit engagements, leading to a misunderstanding of the level of assurance provided.
  • Failing to clearly communicate the scope and limitations of the engagement, which can result in misinterpretation by clients.
  • Underestimating the importance of thorough documentation in explaining the nature, scope, and limitations of the services rendered.
  • Assuming that all additional services provide the same level of assurance as a full audit without considering the specific framework or engagement type.