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CHAPTER29

PROCEDURESANDREPORTSONSPECIALPURPOSE
AUDITENGAGEMENTS
Questions
1.

The report simply states: The financial statements are not intended to be
presented in conformity with financial reporting standards. The opinion
expression thereafter refers to a description of the comprehensive basis used.
Non-PFRS accounting bases include:

2.

3.

1.

Statutory or regulatory accounting requirements

2.

Tax basis accounting

3.

Cash and modified cash bases

4.

General price level-adjusted statements

5.

Any other basis having substantial support (Auditing standards do not


explain how non-PFRS accounting can have substantial support. In
practice, accountants will report on any reasonable accounting basis, which
explains why reports exist on diverse types of current value financial
statements.)

The following are four comprehensive bases of accounting other than PFRS:
1.

A basis of accounting to comply with the requirements of a governmental


regulatory agency (for example, insurance companies use a basis of
accounting pursuant to the rules of the insurance commission)

2.

A basis of accounting used to file an income tax return

3.

The cash receipts and disbursements basis of accounting (cash basis) and
modifications to the cash basis, such as recording depreciation on fixed
assets or accruing income tax.

4.

A definite set of criteria having substantial support that is applied to all


material items in the financial statements, such as the price-level basis of
accounting.

A CPA may be asked to report on the application of PFRS by another auditors


client who disagrees with the auditors view of proper accounting for the

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transaction. Auditing standards apply when a CPA in public practice, either in
connection with a proposal to obtain a new client or otherwise, provides oral or
written advice on the application of accounting principles to a specific
transaction or the type of opinion that may be rendered on an entitys financial
statements. In forming a judgment, the CPA should perform the following
procedures:

4.

Obtain an understanding of the form and substance of the


transaction(s).

Review applicable PFRS.

If appropriate, consult with other professionals or experts.

If appropriate, perform research or other procedures to ascertain and


consider the existence of creditable precedents or analogies.

The reporting CPA is required to consult with an entitys continuing


CPA to ascertain all the relevant facts. The continuing CPA can
provide information about the form and substance of the transaction,
how management has applied accounting principles to similar
transactions, and whether the method of accounting recommended by
the continuing CPA is disputed by management.

The following difficulties might arise:


Prior-year statements were unaudited: The auditor should label the prior-year
columns Unaudited and modify the report by adding a paragraph that
disclaims an opinion on the statements.
Audited by another auditor:

Alternative 1: Predecessor auditor reissues report.

Alternative 2: If predecessors report is not presented, the auditor


indicates in the introductory paragraph (1) that the financial statements
of the prior period were audited by another auditor (but does not name
the predecessor auditor), (2) the date of the report, (3) the type of report
issued by the predecessor auditor, and (4) if the report was not a
standard unqualified report, the substantive reasons therefor. When
the predecessor auditors report is not presented, the audit report would
have an added sentence at the end of the first paragraph, and the
opinion paragraph would refer only to the current-year statements.

Different reports on comparative statements: An auditor may issue modified


reports on either of the financial statements reported on comparatively. In this
situation, the auditor must exercise care to relate the opinion to the appropriate
years financial statements.

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Multiple Choice Questions


1.
2.
3.
4.

b
a
c
a

5.
6.
7.
8.

b
a
a
a

9.
10.
11.
12.

a
a
d
d

13.
14.
15.
16.

d
a
a
a

17.
18.
19.
20.

b
c
b
a

Cases
1.
To the Board of Directors of Neiny Ltd.:
We have reviewed the accompanying statement of financial position of
Neiny Ltd. as of December 31, 2014, and the related statements of
income, retained earnings, and cash flows for the year then ended, in
accordance with standards established by the Auditing Standards and
Practices Council. All information included in these financial statements is
the representation of the management of Neiny Ltd.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an examination in accordance with auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying 2014 financial statements in order
for them to be in conformity with financial reporting standards.
The financial statements for the year ended December 31, 2013, were
audited by us, and we expressed an unqualified opinion on them in our
report dated February 27, 2014, but we have not performed any auditing
procedures since that date.
Modelle & Co.
March 3, 2016

2.

a.

The assertions that are incorrect and should otherwise be deleted are the
following:
1. Report should be addressed to Ms. Clean Corporations Board of
Directors.
2. Delete the entire paragraph describing the scope except for the
reference to cash in banks and accounts receivable.

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3.
4.
b.

Delete the opinion rendered on cash in banks and accounts receivable.


Delete the recommendation to acquire Ajacks.

The assertions that are missing and should be inserted are the following:
1. Date of the report.
2. Statement limiting the distribution of the report to Ms. Cleans
management.
3. Description of the procedures performed.
4. Statement that the agreed-upon procedures applied are not adequate to
constitute a PSA audit.
5. Description of the accountants findings.
6. Disclaimer of an opinion concerning cash in banks and accounts
receivable.
7. Statement limiting the report only to cash in banks and accounts
receivable and indicating that the report does not extend to the
financials taken as a whole.

3.
Independent Auditors Report
[Addressee]
We have audited the statement of assets, liabilities, and capital (income
tax [cash] basis) of Vanda & Corona, a partnership, as of December 31,
2014, and the related statements of revenue and expenses (income tax
[cash] basis) and statement of changes in partners capital accounts
(income tax [cash] basis) for the year then ended. These financial
statements are the responsibility of the companys management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards. Those
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, the partnerships policy is to prepare its financial
statements on the accounting basis used for income tax purposes;
consequently, certain revenue and related assets are recognized when
received rather than when earned, and certain expenses are recognized
when paid rather than when the obligation is incurred. Accordingly, the
accompanying financial statements are not intended to present financial

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position and results of operations in conformity with financial reporting


standards.
In addition, the company is involved in continuing litigation relating to
patent infringement. The amount of damages resulting from this litigation,
if any, cannot be determined at this time.
In our opinion, the financial statements referred to above present fairly the
assets, liabilities, and capital of the Vanda & Corona partnership as of
December 31, 2014, and its revenue and expenses and changes in its
partners capital accounts for the year then ended, on the income tax
(cash) basis of accounting as described in Note X, which basis has been
applied in a manner consistent with that of the preceding year.
[Sterling & Co.]
[Date]