CPA REVIEW SCHOOL OF THE PHILIPPINES. AT-8712 Manila ‘AUDITING THEORY CPA Review REPORTS — OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS TO REVIEW FINANCIAL STATEMENTS (PSRE 2400 — Revised) 1. The objective of a review of financial statements is to enable an auditor to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come'to the auditor's attention that causes the auditor to believe that the financial statements are not prepared, in all material respects, in accordance with Philippine Financial Reporting Standards (negative assurance). . For the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient appropriate audit evidence primarily through inquiry and analytical Procedures to be able to draw conclusions 3. Areview engagement provides a moderate !evel of assurance that the Information subject to review is free of material misstatement. This is expressed in the form of negative assurance. * . In planning a review of financial statements, the auditor should obtain or update the knowledge of the business including consideration of the entity’s organization, accounting systems, operating characteristics and the nature of its assets, liabilities, revenues, and expenses. . Procedures for the review of financial statements will ordinarily include: * Obtaining an understanding of the entity’s business and the industry in which it operates. * Inquiries concerning the entity’s + Accounting principles and practices. + Procedures for recording, classifying, and summarizing transactions, and accumulating information for disclosures. + Actions taken at meetings of stockhalders, the board of directors, and committees. * Analytical procedures designed to identify relationships and individual items that appear unusual, Examples: + Comparison of the financial statemients with those from prior periods. + Comparison of the statements with anticipated results, such as previously prepared budgets or forecasts. + Study of the relationships of the elements of the financial statements that are expected to form a predictable pattem. * Reading the financial statements to consider, on the basis of information coming to the auditor's attention, whether the financial statements appear to conform with the basis of accounting indicated. * Obtaining reports from other auditors, if any and if considered necessary, who have been engaged to audit or review the financial statements of components of the entity. * Inquiries of persons having responsibilty for financial and accounting matters concerning, for example: + Whether all transactions have been recorded. = Whether the financial statements have been prepared in accordance with the basis of accounting indicated. Changes in the entity's business activities and accounting principles and practices. Matters as to which questions have arisen in the course of applying the foregoing procedures. Obtaining written representations from management when considered appropriate. Page 1 of 8 PagesCPAR MANILA arena 6. If the auditor has reason to believe that the information subject to review may be materially misstated, the auditor should carry out additional or more extensive procedures as are necessary to be able to express negative assurance or to confirm that a modified report is required. EXAMPLE OF AN UNMODIFIED REVIEW REPORT We have reviewed the accompanying financial statements of ABC Company which comprise the staternent of financial position as at December 31, 20X1, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant acoounting policies and other explanatory information Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Practitioner's Responsibility Our responsibility is to express a conclusion on the accompanying financial statements. We conducted our review in accordance with Philippine Standard on Review Engagements (PSRE) 2400 (Revised), Engagements to Review Historical Financial Statements. PSRE 2400 (Revised) requires us to conclude ‘whether anything has come to our attention that causes us to believe that the financial statements, taken as a whole, are not prepared in all material respects in accordance with the applicable financial reporting framework. This Standard also requires us to comply with relevant ethical requirements. A review of financial statements in accordance with PSRE 2400 (Revised) is a limited assurance engagement, The practitioner performs procedures, primarily consisting of making inquiries of ‘management and others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence obtained. We believe that the evidence we have obtained in our review is sufficient and appropriate to provide a basis for our conclusion. ‘The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with Philippine Standards on Auditing. Accordingly, we do not express an audit opinion on these financial statements. Conclusion Based on our review, nothing has come to our attention that causes us to believe that these financial statements do not present fairly, in all material respects, the financial position of ABC Company as at December 31, 20X1, and (of) its financial performance and cash flows for the year then ended, in accordance with Philippine Financial Reporting Standards. ENGAGEMENTS ON AGREED-UPON PROCEDURES (PSRS 4400) 1. An engagement to perform agreed-upon procedures may involve the auditor in performing certain procedures conceming: + Individual items of financial data (for example, accounts payable, accounts receivable, purchases from related parties and sales and profits of a segment of an entity). * A financial statement (for example, a balance sheet). A complete set of financial statements. 2. The objective of an agreed-upon procedures engagement Is for the auditor to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual findings. 3. Asthe auditor simply provides a report of the factual findings of agreed-upon procedures, no assurance is expressed. Users of the report assess for themselves the procedures and findings reported by the auditor and draw their own conclusions from the auditor’s work. Page 2 of 8 Pagesee SPAR - MANILA A-9732, 4, The reports restricted to those parties that have agreed to the procedures to be performed since others, unaware of the reasons for the procedures, may misinterpret the results. 5, Independence is not @ requirement for an agreed-upon procedures engagement. REPORTING 6. “The report on an agreed-upon procedures engagement needs to describe the purpose and the agreed-upon procedures of the engagement in sufficient detall to enable the reader to understand the nature and the extent of the work performed, ‘The report of factual findings should contain: + tite; * addressee (ordinarily the dient who engaged the auditor to perform the agreed-upon procedures); + identification of specific Financial or non-financial information to which the agreed-upon procedures have been applied; s * a statement that the procedures performed were those agreed upon with the recipient; a statement that the engagement was performed in accordance with the Philippine Standard on Related Services applicable to agreed-upon procedures engagements; a statement that the auditor is not independent of the entity if such is the case; identification of the purpose for which the agreed-upon procedures were performed; 2 listing of the specific procedures performed; ‘a description of the auditor's factual findings including sufficient details of errors and exceptions ‘found; + a statement that the procedures performed do not constitute either an audit or a review and, as such, no assurance is expressed; * a statement that had the auditor performed additional procedures, an audit or a review, other matters might have come to light that would have been reported; * a statement that the report is restricted to those parties that have agreed to the procedures to be performed; ‘+ a statement (when applicable) that the report relates only to the elements, accounts, items or financial and non-financial information specified and that it does not extend to the entity's financial statements taken as a whole; date of the report; © auditor's address; and * auditor's signature. COMPILATION ENGAGEMENTS (PSRS 4410 ~ Revised) 1 ‘The practitioner's objectives in a compilation engagement under PSRS 4410 (Revised) are to: @) Apply accounting and financial reporting expertise to assist management in the preparation and presentation of financial information in accordance with an applicable financial reporting framework based on information provided by management; and b) Report in accordance with the requirements of PSRS 4410 (Revised). . The practitioner shall obtain an understanding of the following matters suffident to be able to perform the compilation engagement: a) The entity's business and operations, including the entity’s accounting system and accounting records; and b) The applicable financial reporting framework, including its application in the entity's industry. . Prior to completion of the compilation, the practitioner shall read the compiled financial Information in light of the practitioner's understanding of the entity's business and operations, and of the applicable financial reporting framework. If the practitioner Is unable to complete the engagement because management has falled to provide records, documents, explanations or other information, including significant Judgments, as requested, the practitioner shall withdraw from the engagement and inform management and those charged with governance of the reasons for withdrawing. Page 3 of 8 PagesGPA - MANILA ars 8% If the practitioner becomes aware during the course of the engagement that: a) The compiled financial information does not adequately refer to or describe the applicable financial reporting framework; b) Amendments to the complied financial information are required for the financial information not to be materially misstated; or ©) The compiled financial information is otherwise misleading, the practitioner shall propose the appropriate amendments to management. 6. If management declines, or does not permit the practitioner to make the proposed ‘amendments to the compiled financial Information, the practitioner shall withdraw from the engagement and inform management and those charged with governance of the reasons for withdrawing. 7. The practitioner shall obtain an acknowledgement from management or those charged with governance, as appropriate, that they have taken responsibility for the final version of the compiled financial information. Practitioner's report for an engagement to compile financial statements using a general purpose financial reporting framework. General purpose financial statements required under applicable law that specifies that the entity's financial statements are to be prepared applying Philippine Financial Reporting Standards for Small-and Medium-sized entities (PFRS for SMES). We have compiled the accompanying financial statements of ABC Company based on information you have provided. These financial statements comprise the statement of financial position of ABC Company as at December 31, 20X1, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information We performed this compilation engagement in accordance with Philippine Standard on Related Services 4410 (Revised), Compilation Engagements. ‘We have applied our expertise in accounting and financial reporting to assist you in the preparation and presentation of these financial statements in accordance with Philippine Financial Reporting Standards for Small-and Medium-sized Entities (PFRS for SMEs). We have complied with relevant ethical requirements, including principles of integrity, objectivity, professional competence and due care. ‘These financial statements and the accuracy and completeness of the information used to compile them are your responsibility. Since a compilation engagement is not an assurance engagement, we are not required to verify the accuracy ‘or completeness of the information you provided to us to compile these financial statements. Accordingly, wwe do not express an audit opinion or a review conclusion on whether these financial statements are prepared in accordance with PFRS for SMEs. Source: Illustration 1, PSRS 4410 (Revised) ‘THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION (PSAE 3400) 1. “PROSPECTIVE FINANCIAL INFORMATION” means financial information based on assumptions about events that may occur in the future and possible actions by an entity, It can be in the form of a forecast, a projection, or a combination of both, for example, 2 one year forecast plus a five year projection. 2. A“FORECAST” means prospective financial information prepared on the basis of assumptions as to future events which management expects to take place and the actions management expects to take as of the date the Information is prepared (best-estimate assumptions). 3. A“PROJECTION” means prospective financial information prepared on the basis of: Page 4 of 8 Pages(SPAR - MANILA AT + hypothetical assumptions about future events and management actions which are not necessarily expected to take place, such as when some entitles are In a start-up phase or are considering a major change in the nature of operations; or * a mixture of best-estimate and hypothetical assumptions. 4, Prospective financial Information can include financial statements or one or more elements of financial statements and may be prepared: * as an internal management tool, for example, to assist in evaluating a possible capital investment; or * for distribution to third parties. 5. Management is responsible for the preparation and presentation of the prospective financial information, including the identification and disclosure of the assumptions on which it is based. 6. In an engagement to examine prospective financial information, the auditor should obtain sufficient appropriate evidence as to whether: * management's best-estimate assumptions on which the prospective financial information is based are not unreasonable and, in the case of hypothetical assumptions, such ‘assumptions are consistent with the purpose of the information; * the prospective financial information is properly presented and all material assumptions are adequately disclosed, including a clear indication as to whether they are best-estimate assumptions or hypothetical assumptions; and the prospective financial information is prepared on a consistent basis with historical financial statements, using appropriate accounting principles. ~ . The auditor should not express any opinion as to whether the results shown in the prospective financial information will be achieved. 8. When reporting on the reasonableness of management's assumptions, the auditor provides only a moderate level of assurance. 2 . The auditor should not accept, or should withdraw from, an engagement when the assumptions are clearly unrealistic or when the auditor believes that the prospective financial information will be inappropriate for its intended use. 10. The auditor should obtain written representations from management regarding the intended use of the prospective financial information, the completeness of significant management assumptions and management's acceptance of its responsibilty for the prospective financial information. Example of an unmodified report on a forecast We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable identification, such as by reference to page numbers or by identifying the individual statements) in accordance with Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information. Management is responsible for the forecast including the assumptions set out in Note X on which it is based Based on our examination of the evidence supporting the assumptions, nothing has come to our attention. ‘which causes us to believe that these assumptions do not provide a reasonable basis for the forecast. Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in accordance with Philippine Financial Reporting Standards Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected and the variation may be material. Page 5 of ® Pages(PAR - MANILA ater Example of an unmodified report on a projection ‘We have examined the projection (include name of the entity, the period covered by the forecast and provide ‘suitable identification, such as by reference to page mumbers or by identifying the individual statements) in accordance with Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information. Management is responsible forthe projection including the assumptions ‘set out in Note X on which it is based. ‘This projection has been prepared for (describe purpose). As the entity is in a start-up phase the projection thas been prepared using a set of assumptions that include hypothetical assumptions about future events and ‘management's actions that are not necessarily expected to occur. Consequently, readers are cautioned that this projection may not be appropriate for purposes other than that described above. Based on our examination of the evidence supporting the assumptions, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the projection, assuming that (state or refer to the hypothetical assumptions). Further, in our opinion the projection is properly prepared on the basis of the assumptions and is presented in accordance with Philippine Financial Reporting Standards Even ifthe events anticipated under the hypothetical assumptions described above occur, actual results are still Iikely to be different from the projection since other anticipated events frequently do not occur as expected and the variation may be material = When the auditor believes that the presentation and disclosure of the prospective information is not adequate, the auditor should express a qualified or adverse opinion or withdraw from the engagement as appropriate. * When the auditor believes that one or more significant assumptions do not provide a reasonable basis for the prospective financial Information, the auditor should elther express an adverse opinion or withdraw from the engagement as appropriate. ‘When the examination is affected by conditions that preclude application of one or more procedures considered necessary in the circumstances, the auditor should either withdraw from the engagement or disclaim the opinion describe the scope limitation in the report on the prospective financial information. MULTIPLE CHOICE QUESTIONS 1. Financial statements of an entity that have been reviewed by a practitioner should be ‘accompanied by a report stating that ‘A. A review provides only negative assurance that the finandal statements are fairly presented. B, A review indudes examining, on a test basis, information that is the representation of management. C. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit. D. The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with PSAs. 2. A practitioner's report on a review of the financial statements of an entity should state that the practitioner ‘A. Does not express an opinion or any form of limited assurance on the financial statements. B. Obtained reasonable assurance about whether the financial statements are free of material misstatements. C. Bamined evidence, on a test basis, supporting the amounts and disclosures In the financial statements. D. Conducted the review in accordance with the Philippine Standard on Review Engagements, 3. Finandal statements of an entity that have been reviewed by a practitioner should be accompanied by a report stating that Page 6 of 8 PagesCPAR - MANILA atanz ‘A. The scope of the inquiry and anatytical procedures performed by the practitioner has not been restricted. B. Management is responsible for the preparation and fair presentation of the entity’s financial statements. C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. A review is greater in scope than a compilation, the objective of which Is to present financial statements that are free of material misstatements. 4. A practitioner who reviews the financial statements of an entity should Issue a report stating that a review A. Provides negative assurance that internal control is functioning as designed. B. Provides only limited assurance that the financial statements are fairly presented. C. Is substantially more in scope than a compilation. D. Isa limited assurance engagement. 5. If the practitioner determines that the financial statements are materially misstated, he/she shall express a/an A. Unmodified conclusion, B. Qualified conclusion when the practitioner concludes that the effects of the matter(s) giving rise to the modification are material, but not pervasive to the financial statements. C. Adverse conclusion if the practitioner concludes that the possible effects on the financial statements could be both material and pervasive. D. Disclaimer of conclusion when the effects of the matter giving rise to the modification are both material and pervasive to the financial statements. 6. What conclusion is appropriate when the practitioner has obtained limited assurance to be able to conclude that nothing has come to the practitioner’s attention that causes the Practitioner to believe that the financial statements are not prepared, in all material respects, in accordance with the applicable financial reporting framework? ‘A. Unmodified conclusion. C. Disclaimer of conclusion. B. Modified conclusion. D. Qualified conclusion. 7. When compiling the financial statements of an entity, an accountant should A. Review agreements with financial institutions for restrictions on cash balances. B. Understand the accounting principies and practices of the entity's industry. C. Inquire of key personnel concerning related parties and subsequent events. D. Perform ratio analyses of the financial data of comparable prior periods. 8. When compiling an entity’s financial statements, an accountant would be least likely to ‘A. Perform analytical procedures designed to identify relationships that appear to be unusual. B. Read the compiled financial statements and consider whether they appear to include adequate disclosure; . Obtain an acknowledgment from management of its responsibilty for the financial ‘statements. . Plan the work so that an effective engagement will be performed. 9. Which of the following should not be Included in an accountant’s report based upon the ‘compilation of an entity's financial statements? A. A statement that a compilation of the company’s financial statements was made in accordance with the Philippine Standard on Related Services 4410 (Revised), Compilation Engagements, B. A statement that the financial statements and the accuracy and completeness of the information used to compile them are management's responsibility. C. A statement that a compilation engagement is an assurance engagement. o. A Statement that the accountant: does not express ant audit opinion or & review con , Page 7 of 8 PagesGPAR MANIA ATT 10. 12. 14. 15. 16. Negative assurance may be expressed when an accountant Is requested to report agreed- upon procedures to specified Elements of a Accounts of a A Yes Yes B. Yes No G No No Dd. No Yes . An accountant may accept an engagement to apply agreed-upon procedures that are not suffident to express an opinion on one or more specified accounts or items of a financial statement provided that A. The accountant’ report does not enumerate the procedures performed. B. The finandal statements are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. C. Distribution of the accountant’ report is restricted. D. The accountant is also the entity’s continuing auditor. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and cash flows. Such prospective finandal statements are known 2s A. Pro forma financial statements C. Partial presentations B. Finandal projections D. Financial forecasts. . A financial forecast consists of prospective financial statements that present an entity's expected financial position, results of operations, and cash flows. A forecast ._ Is based on the most conservative estimates. Present estimates given one or more hypothetical assumptions. . Unlike a projection, may contain a range. . Ts based on assumptions reflecting conditions expected to exist and courses of action expected to be taken. pomp When an accountant examines prospective financial statements, the accountant’s report should indude a separate paragraph that A. Contains an opinion as to whether the prospective financial statements are property prepared on the basis of the assumptions and are presented in accordance with ‘generally accepted accounting principles in the Philippines. Provides an explanation of the differences between an examination and an audit. States that the accountant is responsible for events and circumstances up to 1 year after the report's date. D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the prospective financial statements. oe ‘The following statements relate to the examination of prospective financial information. Which is false? A. Theauditor should express an opinion as to whether the results shown in the prospective financial information will be achieved. B, Before accepting an engagement to examine prospective financial information, the auditor should consider the intended use of the Information. C. The auditor should not accept, or should withdraw from, an engagement to examine prospective financial information when the assumptions are clearly unrealistic. D. When in the auditor’s judgment an appropriate level of satisfaction has been obtained, the auditor Is not precluded from expressing positive assurance regarding the assumptions. Which of the following {s a prospective financial Information for general use upon which an accountant may appropriately report? A. Finandal projection C. Pro forma financial statement B, Partial presentation D, Finandal forecast END ~ Page 8 of 8 Pages