The level of assurance provided in an audit of historical financial statements is

Chapter 25 - Notes

Other Assurance Services

and Nonassurance Services

Levels of Assurance with the Financial Statements

Levels of assurance represent the degree of certainty the practitioner has attained, and wishes to convey, that the conclusions stated in his or her report are correct.  Audits of historical financial statements prepared in accordance with generally accepted accounting principles are one type of examination. They are governed by auditing standards. An audit results in a conclusion that is in a positive form. In this type of report, the practitioner makes a direct statement as to whether the presentation of the assertions, taken as a whole, conforms to the applicable criteria. The level of assurance is high.  In a review, the practitioner provides a conclusion in the form of a negative assurance. In this form, the practitioner's report states whether any information came to the practitioner's attention to indicate that the assertions are not presented in all material respects in conformity with the applicable criteria. The level of assurance is moderate.A compilation is defined in SSARS as presenting, in the form of financial statements, information that is the representation of management without undertaking to express any assurance on the statements.

Review Engagements under Statements of Standards of Accounting and Review Services (SSARS)

Reviews provide limited assurance, but considerably less than a typical audit.

A negative assurance states, along with factual statements, that nothing came to the auditor's attention that would lead the auditor to believe that the financial statements were not prepared in accordance with GAAP or other comprehensive basis of accounting. The reason for including such a statement in a review report is to provide financial statement users with some level of assurance that the financial statements are fairly stated. The level of assurance is less than that for an audit of historical financial statements, but more than the zero-level assurance for a compilation.

The following types of procedures are emphasized for review services:

<       Obtain knowledge of the accounting principles and practices of the client's industry. The level of knowledge for reviews should be somewhat higher than that for compilation.

<       Obtain knowledge of the client. The information should be about the nature of the client's business transactions, its accounting records and employees, and the basis, form, and content of the financial statements. The level of knowledge should be higher than that for compilation.

<       Make inquiries of management. The objective of these inquiries is to determine whether the financial statements are fairly presented, assuming   that   management   does   not   intend   to  deceive  the 

accountant. Inquiry is the most important of the review procedures. The following are illustrative inquiries:

�           Inquire as to the company's procedures for recording, classifying, and summarizing transactions, and disclosing information in the statements.

�           Inquire into actions taken at meetings of stockholders and board of directors.

�           Inquire of persons having responsibility for financial and accounting matters whether the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied.

<       Perform analytical procedures. The analytical procedures are meant to identify relationships and individual items that appear to be unusual. The appropriate analytical procedures are no different from the ones already studied in Chapters 7 and 8 and in those chapters dealing with tests of details of balances.

For review services, if a client fails to follow generally accepted accounting principles, a modification of the report is needed. The accountant is not required to determine the effect of a departure if management has not done so, but that fact must also be disclosed in the report. For example, the use of replacement cost rather than FIFO for inventory valuation would have to be disclosed, but the effect of the departure on net earnings does not require disclosure.

Reviews are issued on quarterly information of publicly held companies as a part of the client's reporting requirements to the SEC and are subject to PCAOB standards. Although there are some minor differences in the wording on a review report for a nonpublic company and a public company review report, they are substantively the same.

The review procedures are essentially the same for public company and SSARS 1 reviews. Some additional procedures are required for public company reviews that are beyond the scope of SSARS 1 as follows:

<       The level of knowledge the accountant has about the client's internal control is likely to be higher for public company reviews. Because an annual audit is done for public companies that have an interim review, the accountant must also obtain sufficient information about the client�s internal control for both annual and interim financial information.

*           The auditor's knowledge of the results of the audit procedures performed during the annual audit will affect the scope of the procedures performed during the review of interim financial information.

<       The accountant will also have a good idea whether the quarterly statements were  accurate  after the  annual audit is complete. This information will be useful in determining the review procedures in subsequent years.

<       Under SSARS, the auditor makes inquiries about actions of directors and stockholder meetings; for public companies the auditor reads the minutes of those meetings.

<       For public companies, the accountant must also obtain evidence that the interim financial information agrees or reconciles with the accounting records.

Compilation Engagements under Statements of Standards of Accounting and Review Services (SSARS)

Compilation is defined in SSARS No. 1 as presenting in the form of financial statements information that is the representation of management, without undertaking to express any assurance on the statements. Review is defined by SSARS No. 1 as performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP.  There is no level of assurance provided by a compilation.  

One of three forms of compilation can be provided to clients:

<       Compilation With Full Disclosure Compilation of this type requires disclosures in accordance with generally accepted accounting principles, the same as for audited statements.

<       Compilation That Omits Substantially All Disclosures  This type of compilation is acceptable if the report indicates the lack of disclosures and the absence of disclosures is not, to the CPA's knowledge, undertaken with the intent to mislead users.

<       Compilation Without Independence  A CPA firm can issue a compilation report even if it is not independent with respect to the client, as defined by the Code of Professional Conduct.  However, the CPA firm must state its lack of independence in the report.

The following five things are required by SSARS No. 1 for compilation. The preparer of the statements must:

<         Know something about the accounting principles and practices of the client's industry.

<         Know the client, the nature of its business transactions, accounting records and employees, and the basis, form, and content of the financial statements.

<         Make inquiries to determine if the client's information is satisfactory.

<         Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles.

<         Disclose in the report any omissions or departures from generally accepted accounting principles of which the accountant is aware. This requirement does not apply to a compilation that omits substantially all disclosures.

For a compilation, the accountant does not have to make inquiries or perform other procedures to verify information supplied by the entity beyond those identified in the answer to Review Question 25-5. But if the auditor becomes aware that the statements are not fairly presented, he or she should obtain additional information. If the client refuses to provide the information, the auditor should withdraw from the compilation engagement.

Compilations and reviews under SSARS No. 1 can only be issued for nonpublic companies for which an audit has not been performed. They may be for monthly, quarterly, or annual statements.

Attestation Standards

Attestation standards provide a general or conceptual framework for and set reasonable boundaries around the attestation function. They provide guidance to AICPA standard-setting bodies for establishing detailed standards and interpretations of standards for specific types of services. They also provide practitioners useful guidance in performing new and evolving attestation services where no specific guidance exists.  Generally accepted auditing standards do the same thing for the conduct of the ordinary audit of financial statements prepared in accordance with generally accepted accounting principles.

A prospective financial statement is a predicted or expected financial statement in some future period or at some future date. There are two general types of prospective financial statements: forecasts and projections. A forecast is a prospective financial statement that presents an entity's expected financial position, results of operations, and cash flows for future periods, to the best of the responsible party's knowledge and belief. A projection is a prospective financial statement that present an entity's financial position, results of operations, and cash flows, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions.

            An examination of prospective financial statements involves:

<      Evaluating the preparation of the prospective financial statements.

<      Evaluating the support underlying assumptions.

<      Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines.

<      Issuing an examination report.

The purpose of an engagement of specified elements, accounts, or items is like that of an ordinary audit, but it is limited only to certain accounts or parts of the financial statements. An example is the audit of the sales account for a retail store in a shopping mall.

            The following are four specific requirements for reports on specified elements, accounts, or items:

<       The specified elements, accounts, or items must be identified.

<       The basis on which the specified elements, accounts, or items are presented and the agreements specifying the basis must be described.

<       The source of significant interpretations made by the client about the provisions of a relevant agreement must be indicated and described.

<       If the specified element, account, or item is presented on a basis that is not in conformity with GAAP or another comprehensive basis of accounting, a paragraph that restricts the distribution of the report to those within the entity and the parties to the contract or agreement must be added.

Special Types of Assurance Services

In a WebTrust assurance services engagement, a client engages a CPA to provide reasonable assurance that a company�s Web site complies with one or more of the following five Trust Services principles:

1.            Security � Security practices ensuring that the system is protected against authorized access (both physical and logical).

2.            Availability � Availability practices, ensuring that the system is available for operation and use as committed or agreed.

3.            Processing Integrity � Processing integrity, ensuring that system processing is complete, accurate, timely, and authorized.

4.            Online Privacy � Online privacy practices, ensuring that personal information obtained as a result of e-commerce is collected used, disclosed, and retained as committed or agreed.

5.            Confidentiality � Confidentiality practices, ensuring that information designated as confidential is protected as committed or agreed.

A licensed CPA can issue a WebTrust opinion on an individual principle or on combinations of principles.

The purpose of a SysTrust engagement is for the licensed accountant to evaluate a company�s information technology system using Trust Services principles and criteria and to determine whether controls over the system exist. The accountant then performs tests to determine whether those controls were operating effectively during a specified period. See the solution to Review Question 25-12 for the five Trust Services principles.

The reporting requirements for statements prepared on a basis other than GAAP include the following paragraphs: introductory, scope, middle, opinion, and restriction of distribution paragraph. The introductory, scope, and opinion paragraphs are essentially the same as for statements prepared in conformity with GAAP. The middle paragraph states the basis of presentation and refers to a note to the financial statements that describes the basis of accounting followed. The restriction of distribution (final) paragraph is used when the financial statements are prepared in conformity with requirements of a governmental regulatory agency. Distribution of the report is then restricted to those within the entity and for filing with the regulatory agency.

What level of assurance is provided by financial statement audit?

On what level of assurance are financial statements prepared?

What does assurance mean in the audit of the financial statements?

How does the level of assurance differ for an audit of historical financial statements a review and a compilation?