Audit, Review, Compilation, and Preparation of Financial Statements

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American Institute of CPAs

Audit, Review, Compilation, and Preparation of

Financial Statements

DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

Copyright © 2011 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please email copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.

American Institute of CPAs

Speaker Biography

Michael P. (Mike) Glynn is a Senior Technical Manager in the AICPA Audit and Attest Standards Team. In this capacity, Mike serves as the staff liaison to the Accounting and Review Services Committee (ARSC). In addition, Mike supports the activities of Auditing Standards Board (ASB) and its subcommittees by assisting members in drafting and deliberating authoritative professional standards and interpretations.

Prior to joining the Audit and Attest Standards Team, Mike was a technical manager in the AICPA SEC Practice Section (SECPS). In that capacity, Mike supported the Quality Control Inquiry Committee (QCIC) by participating in deliberations of QCIC cases and participating in meetings with the Securities and Exchange Commission regarding the SEC’s oversight of the self-regulatory process. Prior to joining the SECPS, Mike was a technical manager in the AICPA Professional Ethics Division.

Prior to joining the AICPA in April 1998, Mike worked at Ernst & Young LLP in New York. Mike also serves as a member of the New York State Society of CPAs’ Accounting and Review Services Committee.

Mike is a graduate of Pace University with a BBA in public accounting.

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American Institute of CPAs

DISCLAIMER

Views expressed by AICPA employees are expressed

for purposes of deliberation, providing member

services and other purposes exclusive of practicing

public accounting. Views expressed by AICPA staff do

not necessarily represent the official views of the

AICPA unless otherwise noted. Official AICPA

positions are determined through certain specific

committee procedures, due process and deliberation.

American Institute of CPAs

Session Objectives

Discuss standards for audits, reviews,

compilations, and financial statement

preparation.

• Discuss the changes to practice expected as a result of the ARSC’s project to clarify the literature for compilations and reviews – including significant revisions to the requirements for financial statement preparers.

• Discuss recently issued auditing standards including SAS 126,

The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern; SAS 127, Omnibus Statement on Auditing Standards – 2013; and SAS 128, Using the Work of Internal Auditors.

• Discuss implementation issues related to the clarified standards on initial audits and group audits.

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SSARSs Clarity Project:

Overview

American Institute of CPAs

Clarity Project Goals

Same as ASB’s Clarity Project Goals

• Address concerns over length and complexity of standards • Make standards easier to read, understand and implement • Lead to enhancements in engagement quality

Same format and drafting guidelines

• No inclusion of special considerations for smaller, less complex entities or governmental entities

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SSARSs Clarity Project:

Significant Changes to

Standards for Financial

Statement Preparers

American Institute of CPAs

Submission of Financial Statements

AR section 80 applies when an accountant is

engaged to report on compiled financial statements

or submits financial statements to the client or to

third parties.

• Submission is defined as “prepare and present”

Determining Whether Financial Statements Have

Been Prepared by the Accountant

• Cloud computing and other applications have made it difficult to determine who (or what) has prepared the financial statements:

- The accountant? - Management?

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American Institute of CPAs

Submission of Financial Statements

ARSC proposes to revise the applicability so that

the standard applies when an accountant is engaged

to perform a compilation service.

American Institute of CPAs

Clarifying the Comp. & Review Standards

New Exposure Draft, Proposed SSARSs

• “Preparation of Financial Statements; • Compilation Engagements;

• Association With Financial Statements” - Issued October 23, 2013

- Available on AICPA website at

http://www.aicpa.org/Research/ExposureDrafts/Compilation Review/Pages/EDofSSARS.aspx

- Comment period ends May 2, 2014

- Proposed effective date for calendar 2015 engagements – with early implementation permitted

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American Institute of CPAs

New Proposed SSARSs

Preparation of Financial Statements

• Would apply when an accountant is engaged to prepare financial statements

Compilation Engagements

• Would apply when an accountant is engaged to perform a compilation engagement

Association With Financial Statements

• Applies when an accountant permits the use of his or her name in a report, document, or written communication containing financial statements that the accountant did not issue an audit, review or compilation report on.

• Accountant may or may not have prepared the financial statements.

American Institute of CPAs

Proposed New Preparation Standard

Would apply when the accountant is

engaged to prepare f/s but not engaged to

perform an audit, review, or compilation on

those f/s

Would not require a report – even when f/s

are expected to be used or presented to third

parties

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American Institute of CPAs

Proposed New Preparation Standard

Would require a legend on each page of the

f/s stating that no assurance is being

provided

• If management refuses or cannot include the legend, the accountant could issue a disclaimer report, a compilation report, or resign.

Would not require the accountant to

consider whether he or she is independent

Can be applied to f/s with or without

disclosures

American Institute of CPAs

Significant Changes to Compilation Standard

Report would always be required.

• Report is shortened to differentiate from audit and review (assurance) reporting

• Management use only financial statements would be covered by the preparation standard

Would require an engagement letter.

Would retain the independence requirements

from the current compilation standard.

Can be applied to financial statements with

or without disclosures.

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American Institute of CPAs

Comparison of Proposed SSARS

Compilation Preparation

When does the standard apply? Engaged to compile

Engaged to prepare Is an engagement letter required? Yes Yes Is the accountant required to determine

if he or she is independent of the client?

Yes No If the accountant is not independent, is

that fact required to be disclosed?

Yes N/A Does the engagement require a report? Yes No1

May the financial statements go to users outside of management?

Yes Yes May the financial statements omit notes? Yes Yes

1legend required that no assurance provided.

American Institute of CPAs

Compilation and Preparation SSARSs

Would result in a bright line between

accounting services and reporting services.

Accountant would not have to be concerned

about whether the financial statements

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American Institute of CPAs

Other New Proposed SSARS

FRAMEWORK FOR PERFORMING AND REPORTING

ON COMPILATION AND REVIEW ENGAGEMENTS

• (To supersede paragraphs .01 .04 and .09 .51 of AR section

60, Framework for Performing and Reporting on Compilation

and Review Engagements [AICPA, Professional Standards]) • No substantive changes from existing standard

SSARSs Clarity Project:

Proposed Review

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American Institute of CPAs

Proposed Review SSARS

Proposed SSARS: Review of Financial Statements

Proposed SSARS: Review of Financial Statements—

Special Considerations

• Issued November 2012

• Comment period ended April 2013 • 14 comment letters received

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Proposed Changes to the Review

Literature

The SSARSs review literature will be converged with

the requirements of AU-C section 930, Interim

Financial Information

• Will result in consistency between limited assurance engagements.

Scope

• The Standard may be applied to historical financial information other than historical financial statements, such as:

- Specified elements, accounts, or items of a f/s - Supplementary information

- Required supplementary information

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Proposed Changes to the Review

Literature

Requirement to exercise professional judgment

• Is implicit in extant SSARSs

Requirement to obtain a signed engagement letter

• Signed by the accountant/accountant’s firm AND management/those charged with governance

Reporting on financial statements

• Requires the use of headings in the accountant’s review report • Required to name the city and state of the issuing office

- May be included on letterhead

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SSARSs Clarity Project - Timeline

May 2014 – Comment period ends with respect to all

of the following proposed clarified SSARSs:

• Association With Financial Statements • Preparation of Financial Statements • Compilation Engagements

• Framework for Performing and Reporting on Compilation and

Review Engagements

ARSC to consider comments received on the 4

proposed clarified SSARS

ARSC to consider voting to finalize the proposed

clarified SSARS, Review Engagements

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SSARSs Clarity Project - Timeline

August 2014 – ARSC to consider voting to finalize

the following proposed clarified SSARSs:

• Framework for Performing and Reporting on Compilation and

Review Engagements

• Association With Financial Statements • Preparation of Financial Statements • Compilation Engagements

ARSC to issue the above standards as one SSARSs

along with the finalized Review SSARS

American Institute of CPAs

Clarifying the Comp. & Review Standards

Final clarified SSARS containing all compilation and

review standards

• One SSARS (SSARS 21) even though two or more exposure drafts

- Expected issuance in second half 2014 (estimate) - Proposed effective date:

- effective for calendar 2015 engagements – early implementation is expected to be permitted

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American Institute of CPAs

Recent and Upcoming

Auditing Standards

American Institute of CPAs

SAS No. 126 - Overview

The Auditor’s Consideration of an Entity’s

Ability to Continue as a Going Concern

(Redrafted)

• Issued June 2012

• Effective for audits of financial statements for periods

ending on or after December 15, 2012

• Clarity redraft of AU section 341 of the same title

• Not converged with ISA 570, Going Concern

• Convergence postponed pending expected FASB

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American Institute of CPAs

SAS No. 126 – Differences From AU 341

Changes, Not Expected to Affect Practice

• New requirement to obtain written representation

from management if conditions or events have been

identified that indicate there could be substantial

doubt about the entity’s ability to continue as a going

concern.

- Not previously required, but included in illustrative going concern representation in appendix B of AU section 333,

Management Representations.

• Interpretation No. 1, “Eliminating a Going-Concern

Explanatory Paragraph From a Reissued Report,” of

AU section 341, incorporated into AU-C section 570

(paragraph .21).

American Institute of CPAs

SAS No. 127 - Overview

Omnibus Statement on Auditing Standards - 2013

• Issued January 2013

• Effective for periods ending on or after December 15, 2012 • Amends:

- AU-C section 600, Special Considerations - Audits of Group

Financial Statements (Including the Work of Component Auditors)

- AU-C section 800, Special Considerations - Audits of

Financial Statements Prepared in Accordance With Special Purpose Frameworks

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American Institute of CPAs

SAS 127 – Amendments to AU-C 600

Amended preconditions to making reference

to others’ work, relating to

• Basis of component f/s preparation when financial

reporting frameworks differ*

• Auditing standards followed by component auditor, if

not GAAS

*

exception in application paragraphs for GASB and

FASAB, which address this

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American Institute of CPAs

SAS 127: AU-C 600 Amendments

Making Reference

• Other audit report restricted as to 

use

NO

• Component F/S use different 

financial reporting framework 

MAYBE

• Other auditor met the relevant 

requirements of GAAS

YES

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American Institute of CPAs

When frameworks differ

• Disclose the financial reporting framework used by component

• Disclose that the auditor of the group financial

statements is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group.

When other auditing

standards used but

GAAS requirements met

• Disclose in report the set of auditing standards used and

• That the other auditor performed additional procedures to meet the relevant requirements of GAAS

Making Reference – Additional Reporting

Requirements

American Institute of CPAs

Cash Tax Contractual Regulatory Other Basis

Other Basis

A definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements

SAS No. 127 – Amendment to AU-C 800

Special Purpose Frameworks

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American Institute of CPAs

SAS No. 128

Using the Work of Internal Auditors

Clarity redraft of AU section 322, The Auditor's

Consideration of the Internal Audit Function in an

Audit of Financial Statements

• Issued February 2014

• Effective for audits of financial statements for periods ending on or after December 15, 2014

American Institute of CPAs

SAS No. 128 - Internal Audit

Converged with ISA 610 (Revised 2013), Using the

Work of Internal Auditors, to reflect

• developments in the internal auditing environment

• changes in practice regarding the interactions between the external and internal auditors

Amendments to several AU-C sections

• Conform language used to describe internal audit function • Guidance added to AU-C 315, Understanding the Entity and Its

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American Institute of CPAs

SAS No. 128 - Internal Audit

Introduces the concept of a systematic and

disciplined approach

New requirement, as a prerequisite to being able to

use the work of the internal audit function, that the

external auditor evaluate the application by the

internal audit function of a systematic and

disciplined approach, including quality control.

aicpa.org/FRC Month 5, 2011

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American Institute of CPAs®

aicpa.org/FRC

Other Acceptance Considerations

Initial Audits

• Looking at predecessor workpapers is useful but can’t be the only procedure to verify opening balances

• What else is needed?

- Prior year balances correctly brought forward. - Prior year balances correctly accounted for. - Evidence from current year and

- Look at prior year workpapers and/or - Do work in current year

American Institute of CPAs®

aicpa.org/FRC

Group Audits

Biggest source of implementation questions

Issues include

• Identifying components • Equity investments • Setting materiality

• EBP audits – investments accounted for at fair value are NOT defined as components!

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American Institute of CPAs®

aicpa.org/FRC

Group Audits

Does AU-C section 600 still apply if my firm is the

only firm performing the audit of a parent and all

subsidiaries?

• Yes, the requirements of AU-C section 600 would still apply, even if the same firm is performing the work of the group as well as the component entities

Does AU-C section 600 apply only when the auditor

makes reference to another auditor in their report on

the group financial statements?

• No. AU-C section 600 applies to all audits of group financial statements.

American Institute of CPAs®

aicpa.org/FRC

Group Audits

Do the requirements of AU-C section 600 apply if a

company holds equity method investments?

• Yes. An investment accounted for under the equity method constitutes a component for purposes of AU-C section 600.

If I make reference to the auditor of the equity

method investee, what additional procedures might

be necessary?

• Obtain their report

• Reviewing information in the group (investor’s) files that relate to the equity method investee such as minutes, budgets, cash flow information

• Making inquiries of management about the equity method investee’s financial results

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American Institute of CPAs®

aicpa.org/FRC

Group Audits

Am I required to calculate separate component

materiality if I am the only firm auditing both the

group as well as the component units?

• You would have to apply judgment. Factors to consider might include:

- Whether the components are material to the group as a whole

- Whether the component and group share the same location, internal control policies and procedures

- Whether the accounting and finance functions are centralized

- Whether there are any significant risks or accounts that only reside at the component level

American Institute of CPAs®

aicpa.org/FRC

Special Considerations—Audit of Group

Financial Statements (AU-C 600)

Understanding the Responsibilities of Auditors for

Audits of Group Financial Statements - AICPA

Audit Risk Alert

• Contains a decision making flowchart

• Examples for not-for-profit organizations and a local government

Product# ARAGRP12P

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American Institute of CPAs®

aicpa.org/FRC

Technical Practice Aids for Group Audits

41 Technical Questions and Answers

Nonauthoritative guidance to address various

questions

Available

• in TIS Section 8800, Audits of Group Financial Statements and

Work of Others (AICPA, Technical Practice Aids)

• on AICPA Website at http://www.aicpa.org/interestareas/frc/pages/recentlyissuedtechn icalquestionsandanswers.aspx aicpa.org/FRC Month 5, 2011

Statements on Standards

for Attestation

Engagements

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Commonly known as attestation standards

Apply to engagements that address subject matter

other than historical financial statements, e.g:

• an entity’s compliance with laws or regulations

• the effectiveness of an entity’s controls over the privacy of information

• a financial forecast

Address examination, review and agreed-upon

procedures (AUP) engagements

American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

4 “general” AT sections that provide a framework for

developing an attestation engagement

• AT 20, Defining Professional Requirements in Statements on

Standards for Attestation Engagements

• AT 50, SSAE Hierarchy

• AT 101, Attest Engagements (which addresses examination and review engagements)

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Currently: 6 “topic-specific” AT sections for

reporting on

• prospective financial information (AT 301) • pro forma financial information (AT 401)

• internal control over financial reporting (AT 501) • compliance with laws and regulations (AT 601) • management’s discussion and analysis (AT 701) • controls at service organizations (AT 801)

American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Objective: to make AT sections easier to read,

understand and apply

Redraft in clarity format

New structure (objective is to eliminate repetition)

• Chapter 1: Concepts common to all attestation engagements • Chapters 2-4: Levels of service (examination, review,

agreed-upon procedures).

- Each chapter addresses a specific level of service and builds on the common concepts chapter

• Subject-matter specific chapters

- Each chapter builds on common concepts and level of service chapters

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American Institute of CPAs®

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Clarifying the Attestation Standards

Example – Reporting on an examination of

prospective financial information under current

structure,

• Currently, the following AT sections apply: - AT 20

- AT 50 - AT 401

• Proposed structure, the following sections would apply: - Chapter 1, Common Concepts

- Chapter 2, Examinations - Chapter X, Forecasts

American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Convergence with standards of the International

Audit and Assurance Standards Board (IAASB)

• Foundation for the common concepts, examination, and review sections of the proposed attestation standards:

- AICPA’s existing attestation standards

- IAASB exposure draft, International Standards on Assurance

Engagements (ISAE) 3000, “Assurance Engagements Other than Audits or Reviews of Historical Financial Information”

(April 2011)

- ISAE 3000 is IAASB’s framework standard for assurance engagements (equivalent of attestation engagements) - ISAE 3410, Assurance Engagements on Greenhouse Gas

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Convergence with standards of the International

Audit and Assurance Standards Board (IAASB)

• AT 801 was converged with ISAE 3402, Assurance Reports on

Controls at a Service Organization, when SSAE No. 16, Reporting on Controls at a Service Organization, was issued in

April 2010

• Proposed “Reporting on Pro Forma Financial Information,” includes elements of ISAE 3420, Assurance Engagements to

Report on the Compilation of Pro Forma Financial Information Included in a Prospectus

American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

July 2013, the ASB issued an exposure draft of the

first four “chapters”

• Common Concepts • Examinations • Reviews

• Agreed-upon Procedures

October 2103, the ASB voted to ballot for exposure

the following subject-specific chapters:

• Financial Forecasts and Projections

• Reporting on Pro Forma Financial Information • Compliance Attestation

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

AT 801 exposure vote on May 2014 ASB agenda

• Reporting on Controls at Service Organization • Delayed to include guidance from AAG

Two sections not being clarified:

• An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements (AT 501)

- Will be moved to auditing standards

• Management’s Discussion and Analysis (AT 701) - Will remain unclarified

American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Final clarified SSAE will contain all attestation

standards

• One SSAE (SSAE No. 18) even though two exposure

drafts

- Expected issuance in first half of 2015 (estimate)

- Proposed effective date (estimate):

- No earlier than for reports dated September

15, 2015

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Attestation Standards

Exposure drafts

http://www.aicpa.org/Research/ExposureDrafts/AccountingandAudi ting/Pages/ExposureDrafts_ASB.aspx

More information

Dedicated ASB Attest Clarity page on AICPA Website at

http://www.aicpa.org/InterestAreas/FRC/AuditAttest/Pages/AttestCl arityProject.aspx

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Helpful Information and

Resources

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American Institute of CPAs®

aicpa.org/FRC

Clarifying the Comp. & Review Standards

More information

• Dedicated ARSC Clarity page on AICPA Website at

http://www.aicpa.org/InterestAreas/FRC/Review/Pages/ARSCCl arityProject.aspx

• Summary of significant differences between the clarified and existing standards, and effect on practice (to come)

American Institute of CPAs®

aicpa.org/FRC

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/A

ccounting+and+Auditing/Audit+and+Attest+Stan

dards/Authoritative+Standards+and+Related+G

uidance+for+Non-Issuers/default.htm

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American Institute of CPAs®

aicpa.org/FRC

Helpful Information and Resources

AICPA Accounting and Auditing Technical Hotline

• (877) 242-7212

• techinquiry@aicpa.org

• http://www.aicpa.org/Professional+Resources/Accounting+and+ Auditing/Accounting+and+Auditing+Technical+Help/

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References