Reporting on attestation engagements Flashcards
(11 cards)
During a consulting engagement, a CPA must maintain
Objectivity Independence
A. Yes Yes
B. Yes No
C. No Yes
D. No No
B. Yes No
When performing attestservices, CPAs issue reports on the reliability of information provided by clients. If report users do not trust that the CPA can give an impartial analysis of the subject matter (eg, because of a conflict of interest), they may not trust the report. Therefore, CPAs performing audits and other attest services (eg, examinations, reviews, agreed-upon procedures) must be independent from the client in fact and appearance.
In consulting services, on the other hand, CPAs develop findings, conclusions, or recommendations to present to their clients. Because a consulting engagement does not result in a report attesting to anything on which third parties rely, there is no need for independence.
However, all CPAs are required to maintain integrity and objectivity and to be free of conflicts of interest in their work (regardless of the nature of that work), including consulting services. The difference between independence and objectivity is that independence requires both objectivity and the appearance of objectivity, as well as a higher degree of professional skepticism.
Things to remember:
All CPAs are required to act with integrity and objectivity in their work, including consulting services. Independence is required only when CPAs in public practice perform attest services.
Which of the following statements best describes management’s assertion of completeness in an MD&A presentation?
A. Information included in the presentation is properly classified and described.
B. Nonfinancial data aligns with the financial statements.
C. Reported transactions took place during a given period.
D. Descriptions of transactions are included to understand financial condition.
D. Descriptions of transactions are included to understand financial condition.
Management Discussion and Analysis (MD&A) is one of many sections that accompany the entity’s financial statements (F/S) and is required by the SEC for publicly held entities. The four general assertions of MD&A are occurrence, consistency with the F/S, completeness, and presentation and disclosure.
Completeness in the MD&A asserts that all information needed to help users of F/S understand the financial condition of the entity has been included. For example, it would be misleading to discuss only an increase in revenue and profit and omit information regarding an increase in debt, other liabilities, or possible losses. Including a description of transactions so users can understand an entity’s financial condition is an example of completeness.
(Choice A) Proper classification and description of information refer to the assertion of presentation and disclosure.
(Choice B) Financial and nonfinancial information that is aligned with the F/S refers to the assertion of consistency.
(Choice C) Reporting only transactions that took place during the year refers to the assertion of occurrence.
Things to remember:
The four general assertions of a Management Discussion and Analysis (MD&A) are occurrence, consistency with the financial statements (F/S), completeness, and presentation and disclosure. Completeness in the MD&A means that all information needed to help users of F/S understand the financial condition of the entity has been included.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to
A. Provide assurance on investment performance statistics prepared by an investment company on established criteria.
B. Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities.
C. Compile financial statements in conformity with a comprehensive basis of accounting other than GAAP.
D. Communicate with an audit committee regarding management’s consultations with another CPA.
A. Provide assurance on investment performance statistics prepared by an investment company on established criteria.
CPAs performing examination, review, and agreed-upon procedure engagements must adhere to Statements on Standards for Attestation Engagements (SSAEs). A CPA can provide assurance on investment performance statistics prepared by an investment company based on established criteria when conducting either an examination or a review.
In an examination, the practitioner obtains reasonable assurance (positive assurance) and expresses an opinion about whether the underlying subject matter adheres to certain criteria). This can be either an assertion-based examination or a direct examination.
In a review, the practitioner obtains limited assurance (negative assurance) and reports their conclusion about whether the underlying subject matter (eg, investment statistics) adheres to certain criteria.
(Choice B) Auditing standards, not attestation standards, provide guidance for the issuance of a comfort letter.
(Choice C) Statements on Standards for Accounting and Review Services (SSARS), not SSAEs, provide guidance for compilations.
(Choice D) Communications with an audit committee regarding management’s consultation with a CPA other than its auditor are required by auditing standards, not attestation standards. These consultations usually involve discussing material transactions of which both the auditor and audit committee should be aware.
Things to remember:
A CPA provides assurance about whether the underlying subject matter adheres to specified criteria when conducting either an examination (reasonable assurance) or a review (limited assurance). Examination, review, and agreed-upon procedure engagements are governed by Statements on Standards for Attestation Engagements (SSAEs).
When a practitioner reports on a direct examination engagement, the report should include a statement that the practitioner is responsible for
A. Determining whether the criteria are suitable for the purpose of the engagement.
B. Expressing an opinion that conveys the results of the practitioner’s measurement or evaluation of the underlying subject matter against the criteria.
C. Obtaining negative assurance by measuring or evaluating the underlying subject matter against the criteria.
D. Applying the specific procedures as determined by the responsible party.
B. Expressing an opinion that conveys the results of the practitioner’s measurement or evaluation of the underlying subject matter against the criteria
The Statements on Standards for Attestation Engagements (SSAE) guide CPAs in attestation engagements. Such engagements are designed to evaluate the accuracy of data or information against a stated purpose or criteria for subject matters other than historical F/S.
Direct examination attestation engagements provide reasonable assurance on information by directly measuring or evaluating the underlying subject matter against established criteria and expressing an opinion on the results in a written report. For example, a direct examination engagement could be used to provide assurance that a licensee is adhering to requirements set in a contract agreement.
(Choice A) The responsible party or engaging party, as applicable, is responsible for determining that the criteria are suitable, will be available to the intended users, and are appropriate for the purpose of the engagement.
(Choice C) A practitioner obtains negative assurance by measuring or evaluating the underlying subject matter against the criteria during a review engagement, not an examination.
(Choice D) A practitioner applies specific procedures as determined by the responsible party during an agreed-upon procedures engagement, not an examination.
Things to remember:
Direct examination reports express an opinion based on the practitioner’s measurement or evaluation of the underlying subject matter against criteria established by the responsible party or engaging party.
Each of the following engagements may be performed by a CPA in connection with prospective financial statements except:
A. Agreed-upon procedures.
B. Examinations.
C. Reviews.
D. Preparation.
C. Reviews.
CPAs may be asked to attest to, compile, or prepare prospective financial statements. These statements include financial forecasts and financial projections.
Forecasts present an expected financial position based on the conditions management anticipates will exist and the course of action management wants to take.
Projections are “what if” scenarios evaluating hypothetical assumptions and courses of action.
The AICPA specifically prohibitsreviews on prospective financial statements because the procedures generally would consist of only inquiries and analytical procedures, a substantially lower scope than a full examination. Conclusions expressed in a review are based on less evidence than an audit opinion and therefore provide only limited assurance (ie, negative assurance). For prospective financial statements, CPAs are permitted to perform either lower-level engagements, which offer no assurance, or full examinations, which provide reasonable assurance (ie, positive assurance).
(Choice A) Agreed-upon procedures may be performed because the client and a third party are solely responsible for the testing procedures and no assurance is provided.
(Choice B) Examinations are allowed because the CPA would obtain reasonable assurance about all material aspects of the prospective financial statements and express an opinion.
(Choice D) CPAs may prepare prospective financial statements if they do not also perform an examination or compilation on the same statements.
Things to remember:
The AICPA specifically prohibits reviews on prospective financial statements because the procedures generally would consist of only inquiries and analytical procedures, a substantially lower scope than an examination.
Which of the following sets of standards do not apply to any form of attest engagements?
A. Statements on Standards for Consulting Services.
B. Statements on Standards for Accounting and Review Services.
C. Statements on Quality Control Standards.
D. Statements on Auditing Standards.
A. Statements on Standards for Consulting Services.
An attest engagement is one in which a CPA assesses the assertions (claims) of another party and issues an opinion on the subject matter to users of that information. Attest engagements include audits, reviews, and agreed-upon procedures. Each attest engagement has a different set of standards with similar requirements, such as independence, objectives of procedures, and reporting. The standards establish requirements that enable a CPA to adequately report on the subject matter in question.
Nonattest services are any services other than to issue a report to users of information on subject matter for which another party is responsible. A consultation engagement is a nonattest engagement because the CPA provides advice to a client but does not issue an opinion on any subject matter to external users.
(Choices B and D) Statements on Standards for Accounting and Review Services (SSARs) and Statements on Auditing Standards are both standards related to attest engagements. In both engagements, the CPA renders an opinion on assertions that are the responsibility of another party to users who rely on that information. Notably, a review engagement provides less assurance than an audit.
(Choice C) Statements on Quality Control Standards (SQCSs) are applicable to both attest and nonattest services performed by a CPA firm. These standards outline a firm’s responsibility to ensure it maintains a system of quality controls in its auditing (attestation) and other accounting practices, such as consulting.
Things to remember:
Attest services are those services in which a CPA is engaged to render an opinion on any subject matter that is the responsibility of another party. They include audits, reviews, and agreed-upon procedures; each service has its own standards. Nonattest services are any services that a CPA firm provides to a client other than attest services (eg, consulting services). Quality control standards apply to both attest and nonattest services.
A CPA is engaged to examine an entity’s financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an)
A. Adverse opinion.
B. Pro forma opinion.
C. Qualified opinion.
D. Unqualified opinion with an explanatory paragraph.
A. Adverse opinion.
An examination is an attestation service in which a CPA is engaged to obtain reasonable assurance about whether information measured or evaluated against certain criteria is free from material misstatement. Forecasted financial statements (F/S) represent an entity’s financial position based on expected results of operation (eg, certain sales are met). The objective of an examination on forecasted F/S is to obtain reasonable assurance that:
the prospective F/S are presented in adherence with AICPA guidelines
the assumptions underlying the forecast are suitable and provide a reasonable basis for the responsible party’s forecast
After examining the forecast, a CPA expresses a written opinion. If the CPA believes that several significant assumptions do not provide a reasonable basis for the forecast (eg, an entity experiences a decrease in demand but forecasts sales increases), an adverse opinion is issued.
(Choice B) There is no opinion called a pro forma opinion.
(Choice C) A qualified opinion is only issued when there are problems arising because information does not meet certain AICPA presentation guidelines, not when the reasonableness of assumptions is in question. For example, AICPA presentation guidelines require significant accounting policies be disclosed; failure to do so results in a qualified opinion.
(Choice D) An unqualified opinion with an explanatory paragraph is issued when F/S are fairly stated.
Things to remember:
An adverse opinion will be issued if, when examining forecasted financial statements, a CPA believes several significant assumptions do not provide a reasonable basis for the forecast.
A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner issue?
A. Unmodified.
B. Qualified.
C. Adverse.
D. Disclaimer.
C. Adverse.
An examination is an attestation service in which a CPA provides reasonable assurance about whether the subject matter is free from material misstatement. Prospective F/S represent either an entity’s expected F/S for a future period (ie, forecast) or expected F/S given one or more hypothetical circumstances (ie, projection).
The objective of an examination of forecasted F/S is to obtain reasonable assurance that:
Prospective F/S are presented in accordance with AICPA guidelines
Assumptions underlying the prospective F/S are suitably supported and provide a reasonable basis for the forecast or projection
After examining prospective F/S, a CPA issues a report expressing an opinion. If the underlying assumptions do not provide a reasonable basis for the prospective F/S, an adverse opinion is issued (Choice A). For example, if the assumptions include increasing sales although the largest sales contracts were not renewed, the CPA may conclude that the assumptions are unreasonable and issue an adverse opinion.
(Choice B) A qualified opinion is issued for a misstatement in an examination only if the misstatement is material but not pervasive. In this case, the phrase “do not provide a reasonable basis for the F/S” indicates that the F/S as a whole are affected.
(Choice D) A disclaimer of opinion is issued only if the CPA is unable to obtain sufficient appropriate evidence to support an opinion.
Things to remember:
An adverse opinion will be issued in an examination of prospective F/S if the assumptions made by management do not provide a reasonable basis for the F/S.
Which of the following should a practitioner include in an agreed-upon procedures report?
A. Negative assurance about whether the subject matter is fairly stated based on the criteria.
B. All findings from application of the agreed-upon procedures.
C. The statement that “Nothing came to my attention that caused me to believe that the subject matter is not presented based on the criteria.”
D. Positive assurance about whether the subject matter is fairly stated based on the criteria.
B. All findings from application of the agreed-upon procedures.
Agreed-upon procedure engagements involve a practitioner (eg, a CPA) performing specified processes (as requested by the engaging parties) and issuing a report outlining the findings.
For example, when acquiring a business, a buyer may request that the practitioner verify that assets are what the seller claims. Once procedures are completed, practitioners communicate the results of their work by including a list of procedures performed and stating the findings (eg, amounts are correct) of each procedure in the report.
(Choices A and C) A review engagement provides negative assurance. The statement “Nothing came to my attention that caused me to believe that the subject matter is not presented based on the criteria” is a type of limited or negative assurance. Agreed-upon procedures engagements do not provide any level of assurance because no opinion or conclusion is issued.
(Choice D) Examinations, not agreed-upon procedures, provide users with positive assurance about whether the subject matter is fairly stated based on certain criteria (eg, AICPA reporting guidelines).
Things to remember:
When reporting on an agreed-upon procedures engagement, the practitioner’s report will include a list of procedures performed and findings. This type of engagement provides neither positive nor negative assurance.
Which of the following procedures is most likely to be an appropriate procedure when performed as an agreed-upon procedures engagement under the attestation standards?
A. Evaluation of the competence or objectivity of another party.
B. Interpreting documents outside the scope of the practitioner’s professional expertise.
C. Obtaining an understanding about a particular subject.
D. Performance of mathematical computations.
D. Performance of mathematical computations.
(Choice A) This answer is incorrect because an agreed-upon procedures engagement is to present specific findings to assist users in evaluating management’s assertions about an entity’s compliance with specified requirements, not to evaluate the competence or objectivity.
(Choice B) This answer is incorrect because a CPA should not interpret any documents, rather, only use specific findings.
(Choice C) This answer is incorrect because an accountant may (1) compare procedures to written requirements, (2) discuss procedures to be applied with specified users, and/or (3) review relevant contracts or communication from specified users to report on management’s assertions. In reporting to users, only specific information will be presented.
(Choice D) This answer is correct because an accountant may perform mathematical computation in an agreed-upon procedures engagement.
In which of the following engagements would a practitioner evaluate subject matter against criteria and provide an opinion without an assertion from the responsible party?
A. Agreed-upon procedures engagement.
B. Assertion-based examination engagement.
C. Direct examination engagement.
D. Review engagement.
C. Direct examination engagement.
Attestation engagements are designed to evaluate how accurate data or information are when compared to a given criteria. In such engagements, the subject matter is data other than historical financial statements. Attestation engagements include examinations, reviews, and agreed-upon procedures (ERA). There are two different types of examination engagements: direct examination and assertion-based examination.
In direct examinations, the practitioner measures or evaluates the underlying subject matter against the criteria and performs other procedures to obtain sufficient appropriate evidence to express an opinion (reasonable assurance) that conveys the results of that measurement or evaluation. The responsible party does not provide an assertion. For an assertion-based examinations, the responsible party provides an assertion about the outcome of the measurement or evaluation (Choice B).
Review engagements provide a lower level of assurance than examinations. For reviews, the responsible party provides an assertion about the outcome of the measurement or evaluation (Choice D). With an agreed-upon procedures engagement, the actual procedures performed will vary depending on the agreement reached between the parties involved and the practitioner does not provide assurance (Choice A).
Things to remember:
In a direct examination attestation engagement, the practitioner measures or evaluates subject matter against criteria and provides an opinion without an assertion from the responsible party.
