You are on page 1of 27

CHAPTER 20

ATTEST AND ASSURANCE SERVICES AND
RELATED REPORTS
Learning Check
20-1.

a.

Four levels of assurance that can be rendered by CPAs in a variety of engagements
are (1) audit or examination level assurance, (2) review level assurance, (3) agreedupon procedures level of assurance, and (4) no assurance.

b.

The following table summarizes the 3 groups of professional standards that are
issued by the Auditing Standards Board with examples of engagements that may be
provided under each group of professional standards.
Group of Professional Standards
Statements on Auditing Standards

Example Engagements
Special reports include reports on:
 Financial statement that are prepared in
conformity with a comprehensive basis of
accounting other than GAAP (OCBOA).
 Specified elements, accounts or items of a
financial statement.
 Compliance with aspects of contractual
agreements or regulatory requirements related to
audited financial statements.
 Financial information presented in prescribed
forms or schedules that require a prescribed form
of auditor’s report.

Statements on Standards for
Attestation Engagements

Attest engagements include engagements such as:
 SSAE 101 engagements
 Agreed-upon procedures engagements
 Reporting on Prospective Financial Information
 Reporting on Compliance Attestations
 Reporting on Pro Forma Information
 Reporting on Internal Control
 Reporting on Management’s Discussion and
Analysis
SSARS engagements include issuing the following
levels of assurance on the financial statements of
private companies:
 Review level assurance

Statements and Standards for
Accounting and Review Services

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-1

20-2 a.

Compilation level assurance

The term special reports applies to auditors' reports issued in connection with
 Financial statements that are prepared in conformity with a comprehensive basis
of accounting other than generally accepted accounting principles.
 Specified elements, accounts, or items of a financial statement.
 Compliance with aspects of contractual agreements or regulatory requirements
related to audited financial statements.
 Financial presentations to comply with contractual agreements or regulatory
provisions.
 Financial information presented in prescribed forms or schedules that required a
prescribed form of auditor's report.

b.

A common characteristic of the types of data covered by special reports is that they
are all historical financial data other than financial statements prepared in conformity
with GAAP.

20-3. a.

A basis of accounting is considered to be an "other comprehensive basis of
accounting" (OCBOA) when it is
 A basis used to comply with the requirements or financial reporting provisions of
a governmental regulatory agency.
 A basis used to file an income tax return.
 The cash receipts and disbursements basis of accounting and modifications of the
cash basis having substantial support.
 A basis that uses a definite set of criteria that has substantial support such as the
price-level basis of accounting.

20-4.

b.

The reporting requirements for financial statements prepared on an OCBOA are:
 A title that includes the word independent.
 An introductory paragraph that is the same as in the auditor's standard report
except that more distinctive titles should be used for the financial statements,
such as statement of assets and liabilities arising from cash transactions.
 A scope paragraph that is the same as in the auditor's standard report.
 A paragraph that states (1) the basis of presentation and refers to the note to the
financial statements that describes the basis and (2) the financial statements are
not intended to be a presentation in conformity with GAAP. If the first category
of OCBOA is involved, this paragraph should also indicate that the distribution
of the report is restricted to those within the entity and the regulatory agency.
 An opinion paragraph that expresses the auditor's opinion (or disclaims an
opinion) on whether the financial statements are presented fairly, in all material
respects, in conformity with the basis of accounting described.

a.

An auditor would normally report on a specified element, account, or item in the
financial statements when a contractual arrangement calls for an audit of an element

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-2

such as royalties expense and royalties payable for when rentals are based on and
audited sales amount. Perhaps the audit of profits calculated for profit participation
plans purposes is the underlying reason for the audit.

20-5.

20-6.

20-7.

b.

The auditor report on a specified element, account or item of a financial statements
would include the following:
 A title that includes the word independent.
 An introductory paragraph that is the same as in the auditor's standard report
except that more distinctive titles should be used for the specified element, such
as a schedule of royalties applicable to an agreement, including the date of the
specific agreement.
 A scope paragraph that is the same as in the auditor's standard report.
 The auditor may include a middle paragraph that include significant
interpretations of key contracts made by the company’s management in prepared
the schedule or information subject to audit.
 An opinion paragraph that expresses the auditor's opinion (or disclaims an
opinion) on whether the specified elements or accounts are presented fairly, in all
material respects, the contractual agreement.
 A paragraph limiting the distribution to parties to the contract.

a.

An auditor may issue a negative assurance in a compliance report related to audited
financial statements when
 The auditor has audited the financial statements to which the agreements or
regulatory requirements relate.
 The assurance does not extend to covenants that relate to matters that have not
been subjected to the audit procedures performed in the financial statement audit.
 The audit did not result in an adverse opinion or a disclaimer of opinion.

b.

The auditor's assurance on compliance may be given in a separate report or in one or
more explanatory paragraphs following the opinion paragraph of the report on the
audited financial statements.

a.

An attest engagement is one in which a practitioner (CPA) is engaged to issue or
does issue a written communication that expresses a conclusion about the reliability
of a written assertion that is the responsibility of another party.

b.

The three major activities involved in performing an attest engagement are:
 Gathering evidence to support the assertion.
 Objectively assessing the measurements and communications of the individual
making the assertion.
 Reporting the findings.

a.

The attestation standards are classified into three groups-- general, field work, and
reporting. The classifications, therefore, are the same as for generally accepted
auditing standards.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-3

b.

There are three significant conceptual differences between the attestation standards
and GAAS. The attestation standards:
 Extend the attest function beyond historical financial statements. Thus, the
standards omit references to financial statements and to GAAP.
 Allow the CPA to give assurances on the assertions below the level expressed in
the traditional financial statement audit ("positive opinion").
 Provide for attest services tailored to the needs of specific users for “agreed-upon
procedures” reports and for “limited-use” reports.

20-8. The following table identifies six types of attest engagement that have been recognized
under attestation standards and the levels of assurance associated with each type of attest
engagement.
a. Type of Attest Engagement
Reporting on Agreed-upon Procedures
Engagements
Reporting on Forecasts and Projections
Reporting on Pro Forma Information
Reporting on Internal Controls
Reporting on Compliance Attestations
Reporting on Management’s Discussion
and Analysis
20-9.

b. Level of Assurance
Agreed-Upon Procedures
Examination
Agreed-Upon Procedures
Compilation (no assurance)
Examination
Review
Examination
Agreed-Upon Procedures
Examination
Agreed-Upon Procedures
Examination
Review

a.

In the United States a WebTrust engagement is performed as an attest engagement
under the AICPA’s Statement on Standards for Attestation Engagements (SSAE) No.
101. The WebTrust client makes an assertion about whether they met the WebTrust
principles and criteria, about its business practices, its internal controls related to
executing the transaction as agreed with a customer using e-commerce, and its
internal controls related to the privacy of customer information. The CPA then
attests to management’s assertions regarding these matters.

b.

WebTrust engagements address the following three risks associated with electronic
commerce.
1. An entity’s business and information privacy practices; that is the entity
discloses its business and information privacy practices for e-commerce
transactions and executes transactions in accordance with its disclosed practices.
2. Transaction integrity; that is whether the entity maintains effective controls to
provide reasonable assurance that customers’ transactions using e-commerce are
completed and billed as agreed.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-4

3. Information protection; that is whether the entity maintains effective controls to
provide reasonable assurance that private customer information obtained as a
result of e-commerce is protected from uses not related to the entity’s business.
The WebTrust principles were designed to address these three specific risks.

20-10.

c.

The primary professional standards that apply to a WebTrust engagement in the
United States are the Attestation Standards. Additional standards that apply are the
WebTrust criteria the have been jointly developed by the AICPA and the CICA.

d.

The key components of a WebTrust report include:
 An introductory paragraph that identifies management’s assertions regarding the
WebTrust principles and criteria and is clear that the reports applies to a specific
time period.
 A paragraph describing management’s responsibility.
 A scope paragraph that describes the scope of the engagement and professional
standards that were followed.
 A paragraph on inherent limitations that discusses the risk that error or fraud
might occur and not be detected and the risk that past findings may not apply to
future periods due to the risk of possible changes in (1) the system or controls,
(2) processing requirements, or (3) other changes required by the passage of
time.
 An opinion on management’s assertion regarding the WebTrust principles and
criteria.
 A paragraph that makes the scope of the opinion clear in that it does not related
to the quality of the client’s good or service.

a.

In a SysTrust engagement a CPA provides assurance about the reliability of an
information system rather than reliability about the information itself. In an era of
joint ventures and strategic alliances, many partners make decisions based on
information that is not under their control. SysTrust engagements are designed to
provide assurance about the reliability of the underlying system.

b.

The four broad principles involved in a SysTrust engagement are:
 System availability: Whether the system is available for operation and use at
times set forth in the service level statements or agreements.
 System security: Whether the system is protected against unauthorized physical
and logical access.
 System integrity: Whether the system processing is complete, accurate, timely
and authorized.
 System maintainability: Whether the system can be updated when required in a
manner that continues to provide for system availability, security, and integrity.

c.

The three categories of criteria associated with each of the four broad principles are
as follows:

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-5

1.
2.
3.

The entity has defined and communicated performance objectives, policies,
and standards for system availability (or security, integrity and
maintainability).
The entity utilizes procedures, people software, data, and infrastructure to
achieve system availability (or security, integrity and maintainability)
objectives in accordance with established policies and standards.
The entity monitors the system and takes action to achieve compliance with
system availability (or security, integrity and maintainability) objectives,
policies and standards.

d.

The primary professional standards that apply to a SysTrust engagement in the
United States are the Attestation Standards. Additional standards that apply are the
SysTrust criteria the have been jointly developed by the AICPA and the CICA.

e.

A report on a SysTrust engagement should include the following.
 An introductory paragraph that identifies management’s assertions regarding the
SysTrust principles and criteria and is clear that the reports applies to a specific
time period. The paragraph also describes management’s responsibility and the
auditor’s responsibility to express and opinion on the assertion.
 A scope paragraph that describes the scope of the engagement and professional
standards that were followed.
 A paragraph on inherent limitations of the engagement and the risk that past
findings may not apply to future periods due to the risk of possible changes in (1)
the system or controls, (2) processing requirements, or (3) other changes required
by the passage of time.
 An opinion on management’s assertion regarding the SysTrust principles and
criteria.

20-11. a.

The following conditions should be met in order to accept an agree-upon procedures
engagement.
a. The practitioner is independent.
b. One of the following conditions is met.
(1) The party wishing to engage the practitioner is responsible for the subject
matter, or has a reasonable basis for providing a written assertion about the
subject matter when the nature of the subject matter is such that a
responsible party does not otherwise exist.
(2) The party wishing to engage the practitioner is not responsible for the
subject matter but is able to provide the practitioner, or have a third party
who is responsible for the subject matter provide the practitioner with
evidence of the third party's responsibility for the subject matter.
c. The practitioner and the specified parties agree upon the procedures performed
or to be performed by the practitioner.
d. The specified parties take responsibility for the sufficiency of the agreed-upon
procedures for their purposes.
e. The specific subject matter to which the procedures are to be applied is subject
to reasonably consistent measurement.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-6

f.
g.
h.
i.
j.
k.

b.

Criteria to be used in the determination of findings are agreed upon between the
practitioner and the specified parties.
The procedures to be applied to the specific subject matter are expected to result
in reasonably consistent findings using the criteria.
Evidential matter related to the specific subject matter to which the procedures
are applied is expected to exist to provide a reasonable basis for expressing the
findings in the practitioner's report.
Where applicable, the practitioner and the specified parties agree on any
materiality limits for reporting purposes.
Use of the report is restricted to the specified parties.
For agreed-upon procedures engagements on prospective financial information,
the prospective financial statements include a summary of significant
assumptions.

The practitioners report on agreed-upon procedures should include the following
elements:
 A title that includes the word independent
 Identification of the specified parties.
 Identification of the subject matter (or the written assertion related thereto) and
the character of the engagement
 Identification of the responsible party
 A statement that the subject matter is the responsibility of the responsible party
 A statement that the procedures performed were those agreed to by the specified
parties identified in the report
 A statement that the agreed-upon procedures engagement was conducted in
accordance with attestation standards established by the AICPA
 A statement that the sufficiency of the procedures is solely the responsibility of
the specified parties and a disclaimer of responsibility for the sufficiency of those
procedures
 A list of the procedures performed (or reference thereto) and related findings.
 Where applicable, a description of any agreed-upon materiality limits
 A statement that the practitioner was not engaged to and did not conduct an
examination of the subject matter, the objective of which would be the expression
of an opinion, a disclaimer of opinion on the subject matter, and a statement that
if the practitioner had performed additional procedures, other matters might have
come to his or her attention that would have been reported
 A statement of restrictions on the use of the report because it is intended to be
used solely by the specified parties
 Where applicable, reservations or restrictions concerning procedures or findings.
 Where applicable, a description of the nature of the assistance provided by a
specialist.
 The manual or printed signature of the practitioner's firm
 The date of the report

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-7

20-12. a.

The two types of prospective financial information are
 Financial forecast. Prospective financial statements that present, to the best of
the responsible party's knowledge and belief, an entity's expected financial
position, results of operations, and cash flows.
 Financial projection. Prospective financial statements that present to the best of
the responsible party's knowledge and belief, given one or more hypothetical
assumptions, an entity's expected financial position, results of operations, and
cash flows.

b.

The CPA's standard report on an examination of prospective financial statements
should include
 A title indicating that the accountant is independent.
 An identification of the prospective financial statements presented.
 A statement that the examination of the prospective financial statements was
made in accordance with AICPA standards and a brief description of the nature of
such an examination.
 The accountant's opinion that the prospective financial statements are presented
in conformity with AICPA presentation guidelines and that the underlying
assumptions provide a reasonable basis for the forecast or a reasonable basis for
the projection given the hypothetical assumptions.
 A caveat that the prospective results may not be achieved.
 A statement that the accountant assumes no responsibility to update the report for
events and circumstances occurring after the date of the report.

c.

As in the case of reports on historical financial statements, other types of opinions
may be expressed on prospective financial statements. The following table explains
when the auditor might use various opinions. In each case, the report should contain
an explanatory paragraph that describes the circumstances.
Circumstances
The prospective financial statements depart
from AICPA presentation guidelines
If the presentation departs from the
presentation guidelines because it fails to
disclose assumptions that appear to be
significant
One or more significant assumptions do not
provide a reasonable basis for the forecast, or
a reasonable basis for the projection given the
hypothetical assumptions
The practitioner’s examination is affected by
conditions that preclude application of one or
more procedures he or she considers
necessary in the circumstances

Solutions Manual to Modern Auditing: Copyright 

Opinion
qualified opinion or an adverse
opinion
adverse opinion

adverse opinion

disclaim an opinion and describe
the scope limitation in his or her
report.

2005, John Wiley and Sons, Inc.

20-8

20-13. a.

To reduce the risk of misunderstandings between users and independent accountants,
agree-upon procedures engagements should only be performed when the following
conditions are met: (1) management accepts responsibility for the entity's
compliance with specified requirements and the effectiveness of the entity's internal
control over compliance, (2) management evaluates the entity's compliance with
specified requirements or the effectiveness of the entity's internal control over
compliance and (3) management provides to the practitioner its written assertion
about the entity’s compliance with specified requirements or about the effectiveness
of the entity’s internal control over compliance.

b.

In an agreed-upon procedures engagement, management, users of the accountant’s
report, and the accountant must all agree upon the nature of the agree-upon
procedures.

c.

In an examination of a compliance attestation the CPA should consider attestation
risk the same way he or she would consider audit risk in a financial statement audit.
The attestation standards provide guidance an assessing inherent risk (including the
risk of fraud), control risk, and detection risk. Furthermore, in an examination of
entity’s compliance with specified requirements, the practitioner’s consideration of
materiality is affected by a) the nature of the compliance requirements, which may or
may not be quantifiable in monetary terms, b) the nature and frequency of
noncompliance identified with appropriate consideration of sampling risk, and c)
qualitative considerations, including needs and expectations of the report’s users.
Most of the same logic that is used in an audit, including the consideration of
subsequent events, applies to an examination of compliance with specified
requirements.

20-14. a.

The objective review of the financial statements of a nonpublic entity is to perform
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 financial statements in order for them to be in conformity with GAAP
or an other comprehensive basis of accounting.

b.

A review of the financial statements of a nonpublic entity normally includes:
 Making certain prescribed inquiries of management and others with financial and
accounting responsibilities concerning the entity's accounting principles and
practices and any changes therein.
 Performing analytical procedures designed to identify relationships and
individual items in the financial information that appear to be unusual.
 Obtaining information about actions taken at meetings of stockholders and the
board of directors and its committees that may affect the financial information.
 Reading the financial information to consider whether on the basis of information
coming to the accountant's attention, the information appears to conform with
GAAP.
 Obtaining written representations from management concerning the reviewed
financial information and management's responsibility for it.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-9

c.

The accountant’s reports associated with a review of the financial statements of a
nonpublic entity would include:
 A title that includes the word independent.
 An introductory paragraph that describes financial statements that have been
subjected to review procedures and indicates management’s responsibility for the
information. The introductory paragraph also refers to fact that a review was
performed in accordance with Statements and Standards for Accounting and
Review Services issued by the ACIPA.
 A scope paragraph that describes the scope of the accountants review procedures.
 A paragraph that expresses negative assurance on the financial statements.

20-15. a.

The objective of a compilation service is to present, in the form of financial
statements, information supplied by an entity without giving any assurance about the
conformity of the statements with either GAAP or an OCBOA. The nature of the
service is to prepare or assist in preparing the financial statements. A CPA is not
required to verify the information furnished by the client. However, he or she may
deem it necessary to perform other accounting services during the engagement.

b.

The accountant should perform the following procedures when performing a
compilation of financial statements for a nonpublic entity.
 The accountant should possess a level of knowledge of the accounting principles
and practices of the industry in which the entity operates that will enable him to
compile financial statements that are appropriate in form for an entity operating
in that industry.
 The accountant should possess a general understanding of the nature of the
entity's business transactions, the form of its accounting records, the stated
qualifications of its accounting personnel, the accounting basis on which the
financial statements are to be presented, and the form and content of the financial
statements.
 The accountant should read the compiled financial statements and consider
whether such financial statements appear to be appropriate in form and free from
obvious material errors.

c.

The accountant's report on the compilation of historical financial statements should
state that
 A compilation has been performed in accordance with standards established by
the AICPA.
 A compilation is limited to presenting in the form of financial statements
information that is the representation of management (owners).
 The statements have not been audited or reviewed and, accordingly, the
accountant does not express an opinion or any other form of assurance on them.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-10

20-16. a.

The purpose of a risk assessment engagement focuses on the identification of
business risks and steps that management might take to limit business risks. The
most likely customers of a risk assessment engagement are management and the
board of director’s who need to control and respond to business risks on a regular
basis.

b.

Three major types of services associated with a risk assessment engagement are:
 Identification and assessment of primary potential risks faced by a business or
entity
 Independent assessment of risks identified by an entity
 Evaluation of an entity's systems for identifying and limiting risks

c.

A useful way to classify an entity’s business risks is as follows.
 Strategic environment risks - threats from broad factors external to the business
including changes in customers' tastes and preferences, creation of substitute
products, or changes in the competitive environment, political arena,
legal/regulatory rules, and capital availability.
 Operating environment risks - threats from ineffective or inefficient business
processes for acquiring, transforming, and marketing goods and services, as well
as loss of physical, financial, information, intellectual, or market-based (such as a
customer base) assets, loss of markets or market opportunities, and loss of
reputation.
 Information risks - threats from the use of poor quality information for
operational, financial, or strategic decision making within the business and
providing misleading information provided to outsiders.

d.

The auditor likely obtains knowledge of each of these risks while performing the
financial statement audit. For example:
 The auditor might obtain knowledge about strategic environment risks associated
with changes in customers’ tastes and preferences or changes in the competitive
environment when auditing the revenue and production cycles.
 The auditor often obtains knowledge of the risk of adverse changes in the market
for the client’s products in order to evaluate the net realizable value of the client’s
inventory.
 The auditor might obtain knowledge about operating environment risks related to
inefficient business practices when auditing the production cycle.
 The auditor might obtain knowledge about information risks associated with
poor-quality financial information when obtaining an understanding of the
entity’s system of internal control.
 Auditors also consider these types of risks when evaluating whether an entity is
likely to continue as a going concern. Understanding the client’s business risks is
important to making audit judgments regarding accounting estimates and
evaluating the reasonableness of the entity’s profitability.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-11

20-17. a.

The purpose of an assurance engagement on business performance measurement is to
provide assurance regarding an organization's use of both financial and non-financial
measures to evaluate the effectiveness and efficiency of its activities. The most
likely customers of a performance measurement engagement are the board of
directors, as well as management at virtually any level within the entity.

b.

The potential performance measurement services that might be offered by a CPA are
as follows:
Organizations that have performance measurement systems  Assessing the reliability of information being reported from the organization's
performance measurement system.
 Assessing the relevance of the performance measures (that is, how well they
inform management about achievement of the performance objectives they have
set).
Organizations that do not have performance measurement systems  Identifying relevant performance measures.
 Helping design and implement a performance measurement system.
All organizations  Providing advice on how the organization can improve their performance
measurement system and their actual results.

c.

The following table identifies the four elements of the balanced scorecard, along
with examples goals and related measures.
Element of the
Balanced Scorecard

Example Goals

Customer Perspective

New customer acquisition

Internal Perspective
Innovation Perspective

Manufacturing efficiency
Product Innovation

Financial Perspective

Overall financial goals

Example Measures
Report of new customers ranked
by volume of activity or gross
profit margins
Product cycle time
Percent of revenues from new
products
Number of suggestions made and
implemented
Return on investment
Overall cash flow generation

d.

The auditor may learn about each of these perspectives when obtaining an
understanding of the business and industry and using this information to develop
expectations of the financial statements. The auditor might plan to use particular
information to support analytical procedures and may become aware of the absence
of such information in the process.

20-18. a.

The purpose of a CPA ElderCare engagement is assure family members that elderly
relatives no longer able to be totally independent are receiving the type and kind of
care they need. The likely client for this service would possibly be the children of

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-12

elderly tax clients who are unable to personally determine the quality of care
received by their parents who live in a different part of the country.
b.

The following table describes three type of services that might be offered by CPAs
and provides examples of each.
Type of ElderCare Service
Attestation engagements such as a compliance
attestation where the CPA performs tests of a
health care facilities assertion that it complied
with stated regulations or policies in accordance
with AT 500 on Compliance Attestations.
Alternatively the CPA might perform and an
agreed-upon procedure attestation where the CPA
issues a report of procedures and findings
associated with the measurable care-giving
performance (AT 600 on Agreed-Upon
Procedure Engagements). An attest service
might also include a review of the financial
performance of a trust in accordance with AR
100, Compilation and Review of Financial
Statements.
Direct services such as paying bills for elderly
individuals or ensuring that expected revenues
are received in the process of managing an
elderly individual’s checking account.
Performing direct services for an elderly client
may impair independence associated with other
services for that client.

Consulting services such as assisting the elderly
or their families in determining the range of
housing and care alternatives. Consulting
services might also include performing such
services as helping a family member monitor
care or financial services such as estate planning
or establishing a trusteeship.

Example
Financial
Review and report on financial transactions
Test for asserter’s adherence to established criteria
Review investments and trust activity
Audit third-party calculations, such as pension,
insurance and annuity payouts
Review reports from fiduciaries
Nonfinancial
Measure and report on care provider performance
against established goals
Evaluate and report on the performance of other
outside parties, such as contractors
Financial
Receive, deposit and account for client receipts
Ensure expected revenues are received
Make appropriate disbursements
Submit claims to insurance companies
Nonfinancial
Arrange for transportation, housekeeping and
other services
Manage real estate and other property
Visit and report on elderly on behalf of children in
distant locations
Financial
ElderCare Planning for
Housing and support service needs
Death or disability of one or both spouses
Alternative costs of retirement communities and
other housing
Nonfinancial Consulting Services
Help family monitor care
Establish standards of care expected
Communicate expectations to care providers
Establish performance measurement systems

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-13

c.

An important trend that motivates the need for CPA ElderCare engagements is the
overall aging of the US population. The proportion over age 65 is increasing, it has a
greater degree of wealth and disposable income available to it, and as the US
population has become more mobile parents may live significant distances from their
children. The combination of these trends leads to an increased need for CPA
ElderCare services.

Comprehensive Questions
20-19. (Estimated time - 25 minutes)
a.
Independent Auditor's Report
We have audited the accompanying statement of assets and liabilities arising from cash
transactions of Jiffy Clerical Services as of December 31, 20XO, and the related statement
of revenue collected and expenses paid for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. 'nose
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note X, these financial statements were prepared on the basis of cash
receipts and disbursements, which is a comprehensive basis of accounting other than
generally accepted accounting principles.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the assets and liabilities arising from cash transactions of Jiffy Clerical Services as of
December 31, 20XO, and its revenue collected and expenses paid during the year then
ended, on the basis of accounting described in Note X.
Signature
Date

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-14

b.

Modifications of standard report:
 The introductory paragraph has more distinctive titles for the financial
statements--e.g., statement of assets and liabilities arising from cash transactions.
 An explanatory paragraph follows the scope paragraph and states the basis of
presentation and refers to the note to the financial statements that describes the
comprehensive basis of accounting other than GAAP.
 An opinion paragraph that expresses an opinion (or disclaims an opinion) on
whether the financial statements are presented fairly, in all material respects, in
conformity with the basis of accounting described.

20-20. (Estimated time - 20 minutes)
Independent Auditor's Report
Board of Directors
XYZ Company, Inc.
We have audited, in accordance with generally accepted auditing standards, the financial
statements of XYZ Company, Inc. for the year ended June 30, 20X3, and have issued our
report thereon dated August 15, 20X3. We have also audited the current and deferred
provision for the Company's federal and state income taxes for the year ended June 30,
20X3, included in those financial statements, and the related asset and liability tax accounts
as of June 30, 20X3. This information is the responsibility of the Company's management.
Our responsibility is to express an opinion on it based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the provision (and related accounts) is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures related to the
provision (and related accounts). An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall
presentation of the provision (and related accounts). We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the XYZ Company, Inc. has paid or, in all material respects, made adequate
provision in the financial statements referred to above for the payment of all federal and
state income taxes and for related deferred income taxes that could be reasonably estimated
at the time of our audit of the financial statements of XYZ Company, Inc., for the year ended
June 30, 20X3.
Young & Young, CPAs
August 22, 20X3

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-15

20-21. (Estimated time - 20 minutes)
a.
Independent Auditor's Report
Board of Directors
ABC Company
We have audited, in accordance with generally accepted auditing standards, the balance
sheet of ABC Company at December 31, 20XO, and the related statements of income,
retained earnings, and cash flows for the year then ended, and have issued our report thereon
dated February 16, 20X1.
In conducting our audit, nothing came to our attention that caused us to believe that the
Company was not in compliance with any of the terms, covenants, provisions, or conditions of
sections 14 to 30, inclusive, of the loan agreement dated July 1, 20XO, with the Main Street
Bank insofar as they related to accounting or auditing matters. It should be noted, however,
that our audit was not directed primarily toward obtaining knowledge of such
noncompliance.
This report is intended solely for the information and use of the board of directors and
management of ABC Company and the Main Street Bank.
(Signature)
(Date)
b.

The second and third paragraphs above would be added following the opinion
paragraph of the auditor's report on the financial statements.

20-22. (Estimated Time: 30 minutes)
a.

The purpose of a WebTrust engagement is to provide customers assurance about
three aspects of electronic commerce. WebTrust addresses an entity’s business and
information privacy practices; issues of transaction integrity; and issues of
information protection. If a customer is satisfied that you have significant
assurances in place to protect and maintain privacy regarding information disclosed
in a transaction, it is likely that a consumer will transact business through that
website. This is one way of ensuring that concerns over information integrity do not
discourage customers from purchasing golf equipment through your website.
Assurance about business practices through a WebTrust engagement might allow you
to extend the size and scope of your marketplace through your internet presence and
focus on the other factors that have make your business a competitive force in the
marketplace.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-16

b.

The client makes three major assertions in a WebTrust engagement about its
electronic commerce practices. The principles involved in a WebTrust engagement
address the following:
 An entity’s business and information privacy practices; that is the entity
discloses its business and information privacy practices for e-commerce
transactions and executes transactions in accordance with its disclosed practices.
 Transaction integrity; that is whether the entity maintains effective controls to
provide reasonable assurance that customers’ transactions using e-commerce are
completed and billed as agreed.
 Information protection; that is whether the entity maintains effective controls to
provide reasonable assurance that private customer information obtained as a
result of e-commerce is protected from uses not related to the entity’s business.
The client needs to represent that it has met the specific criteria related to these
assertions and the CPA will attest to that assertion.

c.

A business may make representations about these three criteria without asking for an
assurance report from a CPA. However, the public may not attach the same degree
of credibility as they would if the assertion was the subject of an attest engagement.
The business needs to make a judgment about the importance of having the assertion
attested to by a CPA.

d.

The inherent limitations involved in a WebTrust engagement include:
 Because of inherent limitations of controls, errors or fraud may occur and not be
detected. Even a strong system of internal control might not find every fraud,
particularly fraud that involves collusion.
 Users should not project any conclusions, based on our findings, to future
periods. There is a risk that changes made to the system or controls, changes in
processing requirements, or failure to make changes required because of the
passage of time, may alter the validity of conclusions on past performance.

20-23. (Estimated Time: 20 Minutes)
a.

The primary clients that would be interested in a SysTrust engagement are entities
that prepare, process, or maintain information that is used by others for decisionmaking. For example, a “supplier” in a strategic alliance may make production
decisions based on information obtained from “customer” about its sales and
inventory levels. The “supplier” may want assurance about the reliability of
information obtained from the “customer” because of its strategic importance to
decisions made by the “supplier.” Hence, the “customer” might engage the CPA to
attest to the reliability of the system. If the end “customer” must coordinate product
obtained from several suppliers, the need for SysTrust engagement may increase to
ensure coordination of strategic decisions by all parties.

b.

The SysTrust principles and criteria address four major concerns about system
reliability: (1) System availability, (2) system security, (3) system integrity, and (4)
system maintainability. A SysTrust engagement provides reasonable assurance that

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-17

these four principles and related criteria were achieved during a specific time period.
Users should understand the inherent limitations associated with the fact that:
 Because of inherent limitations of controls, errors or fraud may occur and not be
detected. Even a strong system of internal control might not find every fraud,
particularly fraud that involves collusion.
 Users should not project any conclusions, based on our findings, to future
periods. There is a risk that changes made to the system or controls, changes in
processing requirements, or failure to make changes required because of the
passage of time, may alter the validity of conclusions on past performance.
c.

A CPA that sells time on its accounting system to small business clients where they
can log onto the system and maintain their own general ledger, could engage another
independent CPA to issues a SysTrust report on the accounting system associated
with the system’s availability, security, integrity and maintainability. The CPA could
not issue an attestation report on its own system as it would not be independent.
Further, there may be a risk that users may misunderstand the SysTrust report and
expect that the CPAs system will ensure that financial statements that result from the
system are prepared in accordance with GAAP. No such assurance could be
provided as the CPA would not know the basis transactions recorded using the
system.

20-24. (Estimated Time - 25 minutes)
Inappropriate Action
Only HDI signed the engagement letter

Only HDI agreed to the procedures to be
performed.
Fred demanded information from HEC and
threatened litigation
Fred advocated HDI’s position
Fred turned information received from HEC
over to HDI

Solutions Manual to Modern Auditing: Copyright 

What Fred should have done to avoid the
Inappropriate Action
Fred should have had both HDI and HEC
sign the engagement letter and agree to the
procedures set forth in the engagement
letter.
Fred should have had both HDI and HEC
sign the engagement letter and agree to the
procedures set forth in the engagement
letter.
Fred should not have threatened litigation
as this violates independence standards.
Fred should not have advocated HDI’s
position. As a client advocate he was no
longer independent.
The work product of an agreed–upon
procedures engagement is an audit report.
The information that would have
supported the report was confidential
client information and could not be shared
with HDI without HEC express
permission.
2005, John Wiley and Sons, Inc.

20-18

20-25. (Estimated time - 20 minutes)
a.

b.

1.

An accountant who reports on or assembles prospective financial statements
for use by third parties should perform any one of three engagements. The
accountant may compile, examine, or apply agreed-upon procedures to the
prospective financial statements.

2.

"General use" of prospective financial statements refers to use of the
statements by persons (creditors, stockholders, etc.) with whom the
responsible party (management) is not negotiating directly. 'Limited use" of
prospective financial statements refers to the use of prospective financial
statements by the responsible party alone or by the responsible party and
third parties with whom the responsible party is negotiating directly.

3.

Only a financial forecast is appropriate for general use, but any type of
prospective financial statements (either a financial forecast or a financial
projection) would normally be appropriate for limited use.

The accountant's standard report on a compilation of a financial projection should
include
 An identification of the projection presented by the responsible party.
 A statement that the accountant has compiled the projection in accordance with
standards established by the AICPA.
 A separate paragraph that describes the limitations on the use of the presentation.
 A statement that a compilation is limited in scope and does not enable the
accountant to express an opinion or any other form of assurance on the projection
or the assumptions.
 A caveat that the prospective results may not be achieved.
 A statement that the accountant assumes no responsibility to update the report for
events and circumstances occurring after the date of the report.

20-26. (Estimated time - 35 minutes)
1.

Write-up work and preparation of financial statements are normally an engagement
for an accounting service and not an audit of the financial statements. It is important
that the client understand this distinction, and, more important, that there be a clear
understanding between the client and the CPA of the nature of each engagement.
Verbal commitments, such as a telephone conversation, can often be misunderstood
and therefore should be followed up with an engagement letter which spells out the
terms, nature, and limitations of the services to be performed. A copy of this letter
should be signed by the client to acknowledge the client's agreement, understanding,
and approval of the scope of the engagement and returned to the CPA.

2.

Even a regular audit engagement cannot be relied upon to disclose defalcations, and
in an engagement for unaudited financial statements the CPA has no responsibility to

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-19

apply any auditing procedures. However, as a professional, the CPA does have a
responsibility to exercise due care in carrying out engagements, to apply professional
judgment in the preparation of financial statements, and to bring to the client's
attention any unusual or suspicious matters noted during the engagement.
In a typical situation of principal and agent, a third party may rely on an agent's
representations. To avoid misunderstanding in this situation, the CPA should have a
clear understanding and written statement from the client (the businessman) that the
CPA may rely on information and representations from the independent agent.
3.

The word "audit" should be avoided in nonaudit engagements. The CPA should
persuade the client to change the account title to 'accounting services," and should be
certain the client understands the difference between an accounting service and an
engagement to examine the financial statements in accordance with generally
accepted auditing standards.

4.

Using language in a covering letter such as "which we have reviewed" can imply that
an examination of some type was made and the CPA may find that he or she has
assumed more responsibility than intended. A short, concise disclaimer of opinion
should always accompany unaudited financial statements with which the CPA is
associated and each page should be clearly and conspicuously marked as unaudited.
If a separate covering letter is used, it should contain no language that would expand
upon the simple disclaimer of opinion. 'The recommended disclaimer is as follows:
"The accompanying balance sheet of X Company as of December 31, 19XX, and the
related statements of income and retained earnings, and cash flows for the year then
ended were not audited by us and accordingly we do not express an opinion on
them."

5.

While the CPA does not have a responsibility to perform any auditing procedures in
an unaudited engagement, he or she does have a responsibility to perform all services
undertaken in a professional capacity with reasonable skill and care.
The fact that the CPA was reviewing invoices only to determine account
classification and the missing invoices did not affect the total financial statements
does not eliminate his or her responsibility to bring to the client's attention any
potential problem areas. The CPA should have advised the client of the missing
invoices and suggested that the client follow up on this matter or, if the client so
desired, the CPA could pursue it further as an additional accounting service.

6.

By definition, unaudited financial statements have not been audited by the CPA and
he or she cannot be expected to have an opinion as to whether they are prepared in
conformity with generally accepted accounting principles. However, the CPA does
have a responsibility to complete the unaudited engagement in a professional
manner, and if he or she concludes on the basis of facts known to him or her that the

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-20

unaudited financial statements are not in conformity with generally accepted
accounting principles, the CPA should insist upon appropriate revisions.
In this situation the land and building should be adjusted to historical cost less
depreciation. If the CPA cannot persuade the client to adjust the land and building, he
or she should set forth clearly in the disclaimer of opinion the departure from
generally accepted accounting principles and the effect, if known, on the financial
statements. Further, if the client refuses to accept the CPA's disclaimer of opinion
with the reservations clearly set forth, the CPA should refuse to be associated with
the financial statements and formally withdraw from the engagement.
7.

The CPA must issue a disclaimer of opinion on the client's unaudited financial
statements since, by assisting in their preparation, he or she has become associated
with them. Additionally, if the client cannot be persuaded to add the footnote
disclosures recommended by the CPA, the disclaimer of opinion should set forth
clearly this departure from generally accepted accounting principles.
If the statements are only for internal use by the client's the footnote disclosures may
not be necessary, but then the CPA must add to the disclaimer a sentence that the
financial statements are restricted to internal use by the client and therefore do not
necessarily include all disclosures that might be required for a fair presentation in
conformity with GAAP.
If the client refuses to accept the CPA's disclaimer of opinion with the reservations
clearly set forth, the CPA should refuse to be associated with the financial statements
and formally withdraw from the engagement.

20-27. (Estimated time - 20 minutes)
a.

In a compilation engagement, the accountant prepares the financial statements from
information provided by the client. The CPA is not required to verify the information
that is furnished. However, he or she may deem it necessary to perform other
accounting services during the compilation engagement. Before issuing a report, the
accountant should read the compiled statements to determine that they are
appropriate in form and free from obvious material misstatements. A compilation
service cannot result in any expression of assurance on the financial statements.

b.

The report is as follows:
I (we) have compiled the accompanying balance sheet of Adams Cleaners as of
December 31, 19X1, and the related statements of income, retained earnings, and
cash flows for the year then ended in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified Public
Accountants

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-21

A compilation is limited to presenting in the form of financial statements information
that is the representation of management [owners]. I [we] have not audited or
reviewed the accompanying financial statements and, accordingly, do not express an
opinion or any other form of assurance on them.
(Signature)
(Date)
c.

In a review engagement, the auditor can give some assurance on the fairness of the
financial statements by stating that he or she is unaware of any material
modifications that should be made in the financial Statements for them to conform
with GAAP.

d.

An opinion cannot be given unless an audit of the financial statements has been
made in accordance with GAAS.

20-28. (Estimated time - 25 minutes)
Deficiencies in the report on the compiled financial statements are as follows:
Within the first paragraph
 The financial statements are not properly identified.
 Standards established by the AICPA should be referred to.
 The expression 'to obtain limited assurance' should not be used.
Within the second paragraph
 The information is not stated to be the representation of management.
 The phrase "less in scope than an audit" is inappropriate.
 Reference to the financial statements not being reviewed is omitted.
 Reference to "any other form of assurance" is omitted.
Within the third paragraph
 Reference to the omission of the statement of cash flows is omitted.
 There should be a statement that the financial statements are not designed for those
uninformed about the omitted disclosures.
 It is inappropriate to refer to changes in financial position.
Within the fourth paragraph
The reason for the accountant's lack of independence should not be described.
Inclusion of the fifth paragraph is inappropriate.
The accountant's compilation report is not dated October 25, 20XO.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-22

20-29. (Estimated Time: 30 Minutes)
a.

The purpose of a risk assessment engagement is to address concerns about business
risk and about a threat that an event or action will adversely affect an organization's
ability to achieve its business objectives and execute its strategies successfully. The
scope of such an engagement must be responsive to the clients existing system for
identifying and assessing business risks. If the new owner-manager has already
assessed the risk of expansion into specific markets, the CPA might evaluate whether
important business risks have been considered and independently assess the risks that
have previously been considered by the owner manager. If the owner-manager has
not engaged in any formal risk assessment the CPA might consider an engagement to
identify and assessment of primary potential risks faced by the business as it expands
into new and larger markets.

b.

Following are several examples of competitive advantages that a CPA who is the
company’s auditor might bring to a risk assessment engagement.
 The CPA may have a reputation as a trusted business advisor. For example, the
CPA may have expertise in the construction industry that is important to this
business client and may have experience in evaluating the impact of industry
trends on the financial position, results of operations, and cash flows of those in
the industry.
 CPAs have a reputation for independence. The client may want the benefits that
accrue from an independent analysis of the entity’s business risks.
 CPAs have experience with quality control and have systems in place to ensure
uniformly high service.

c.
Risk Identification
Strategic environment risk
 Threats due to the changing
economic climate that may result in a
downturn in a construction of new
homes.
 Threats due to direct competitors in
larger markets.
 Threats due to economic forces that
may dry up sources of capital needed
to fund expansion.
Operating environment risk
 Threats due to difficulty obtaining an
adequately trained workforce to
deliver the quality of service
expected by customers.
 Threats due to the challenges of
marketing to the construction
Solutions Manual to Modern Auditing: Copyright 

Service to Assist Client
The likely service in each case will probably
be an independent identification and
assessment of the business risk.

The likely service in each case will probably
be an independent identification and
assessment of the business risk.

2005, John Wiley and Sons, Inc.

20-23

Risk Identification
industry that may already have strong
existing relationships with suppliers.
Information risk
 Threats due to poor information
about new markets and marketplace
needs.
 Threats due to poor information
about the cash flow that will be
needed to fund expansion.

Service to Assist Client
The likely service in each case will probably
be an independent identification and
assessment of the business risk.

Cases
20-30. (Estimated time -30 minutes)
Inappropriate Action
1.

Brown should not have
accepted the assignment
without determining the
intended use of the financial
statements.

2.

Brown should not have
ignored Calhoun's confusion
about the services provided.

3.

There is no indication that
Brown considered policies and
procedures with regard to
acceptance of this new client
Brown should not have
accepted a verbal engagement
without confirming it in
writing.

4.

5.

Brown should not have
accepted the contingent fee
arrangement.

6.

Brown should not have
suggested that the account
name be changed to 'fees "for
limited audit engagement."

Solutions Manual to Modern Auditing: Copyright 

What Brown Should Have Done to
Avoid Inappropriate Action
Brown should have discussed with Calhoun the
intended use of the financial statements Brown
should have appraised Calhoun's needs and
expectations and should have advised Calhoun
about the types of professional services
appropriate in light of Calhoun's objectives.
Brown should have explained to Calhoun that
preparation of financial statements is normally
an engagement for accounting services and not
an audit of financial statements
Brown should have made appropriate inquiries
to minimize any likelihood of association with a
client whose management lacks integrity.
The verbal commitment should have been
followed up with an engagement letter that
included a description, as specific as possible, of
the nature and extent of the accounting service to
be performed.
Brown should have accepted a fee arrangement
that was based on the work to be performed, not
on a contingency such as finishing within a
certain time period.
The word "audit" should not be used on nonaudit
engagements. Brown should not have suggested
any change or should have persuaded Calhoun to
use the words "accounting services" and should
have made certain that Calhoun understood the
2005, John Wiley and Sons, Inc.

20-24

Inappropriate Action

7.

Brown should not have
ignored the missing invoices..

8.

Brown should not have
prepared an incomplete set of
financial statements

9.

Brown should not have
prepared a footnote that failed
to disclose lack of conformity
with generally accepted
accounting principles.

10.

Brown's attempt at a
disclaimer did not clearly
indicate that the statements had
not been audited.

Solutions Manual to Modern Auditing: Copyright 

What Brown Should Have Done to
Avoid Inappropriate Action
difference between an accounting service and an
audit of the financial statements in accordance
with generally accepted auditing standards.
Brown should have advised Calhoun of the
missing invoices. Brown should have suggested
that Calhoun expedite an investigation of the
missing invoices, or, if Calhoun so desired,
Brown could have investigated the matter as an
additional accounting service.
Brown should have prepared a statement of cash
flows which SFAS No. 95 requires to be
presented whenever a balance sheet and income
statement are presented. If Calhoun did not wish
to include a statement of cash flows with the other
basic statements, Brown should have
appropriately referred to the incomplete
presentation in the disclaimer of opinion.
Brown should have insisted on appropriate
revision of the unaudited statements so that they
no longer reflect assets at replacement costs. If
Calhoun did not wish to make revisions, Brown
should set forth reservations in the disclaimer of
opinion with respect to the unacceptable
accounting, lack of disclosure, and the dollar
effect.

Brown should have avoided using the words
without complete audit verification." These
words imply that some type of audit was
performed, and, because of them, Brown may be
assuming more responsibility than originally
intended. Brown's disclaimer of opinion should
have stated that the financial statements "were
not audited by me and accordingly I do not
express an opinion on them." In addition each
page of the financial statements should have
been clearly and conspicuously marked as
"unaudited."

2005, John Wiley and Sons, Inc.

20-25

Professional Simulation
Various Assurance
Engagements
Research
Situation
Following is the solutions regarding the assurance engagements discussed in items 1-8 based on the
following four types of standard that would apply.
a. Statements on Auditing Standards
b. Statements on Standards for Attestation Engagements
c. Statements on Standards for Accounting and Review Services
d. The engagement is not appropriate under current professional standards
a. b. c. d.
1. A private company client would like to have your accounting firm provide
   
reasonable assurance that a financial forecast of the next year’s financial
position, results of operations, and cash flows will be achieved.
2. A private company needs to provide a bank with financial statements. It
does not want to pay for an audit, and the bank is willing to accept less than
   
audited financial statements. Can your firm provide negative assurance that
your firm is not aware of any material modifications that need to be made to
the financial statements in order for them to be in accordance with GAAP.
3. A public company would like you to perform agreed-upon procedures
   
regarding a royalty payable where the client owes royalties based on the
number of parts produced under a licensing agreement.
4. A private company would like to have you audit financial statements
   
prepared on a federal income tax basis of accounting.
5. A public company would like to have you provide a report to lenders
   
providing them with some level of assurance that the company complied
with terms, covenants, and provisions of a debt agreement.
6. A local casino would like to provide a report to the public that provides
   
reasonable assurance that that payout rate on its slot machines was greater
than or equal to 97%.
7. A private company client would like to you compile a financial projection,
with no assurance, that would project financial position, results of operations    
and cash flows based on assumptions agreed-upon by the client and the bank.
8. A public company in the petroleum industry would like to have your firm
conduct an agreed-upon procedures engagement to the Environmental
   
Protection Agency (EPA) that it complied with the EPA regulation that its
gasoline product contained at least 2% oxygen.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-26

Research
Situation

Various Assurance
Engagements

Following is the solutions regarding the assurance engagements discussed in items 1-8
Professional
Standard
Reference
1. A private company client would like to have your accounting firm provide
reasonable assurance that a financial forecast of the next year’s financial
AT 301.33
position, results of operations, and cash flows will be achieved. (Note: A CPA
can not provide assurance on the achievability of a forecast.)
2. A private company needs to provide a bank with financial statements. It does
not want to pay for an audit, and the bank is willing to accept less than
audited financial statements. Can your firm provide negative assurance that
AR 100.04
your firm is not aware of any material modifications that need to be made to
the financial statements in order for them to be in accordance with GAAP.
3. A public company would like you to perform agreed-upon procedures
regarding a royalty payable where the client owes royalties based on the
AT 201
number of parts produced under a licensing agreement.
4. A private company would like to have you audit financial statements prepared
AU 326.04
on a federal income tax basis of accounting.
5. A public company would like to have you provide a report to lenders
providing them with some level of assurance that the company complied with AU 623.19-.22
terms, covenants, and provisions of a debt agreement.
6. A local casino would like to provide a report to the public that provides
reasonable assurance that that payout rate on its slot machines was greater
AT 101
than or equal to 97%.
7. A private company client would like to you compile a financial projection,
with no assurance, that would project financial position, results of operations
AT 301
and cash flows based on assumptions agreed-upon by the client and the bank.
8. A public company in the petroleum industry would like to have your firm
conduct an agreed-upon procedures engagement to the Environmental
AT 601
Protection Agency (EPA) that it complied with the EPA regulation that its
gasoline product contained at least 2% oxygen.

Solutions Manual to Modern Auditing: Copyright 

2005, John Wiley and Sons, Inc.

20-27