Lech 3

OTHER ASSURANCE
SERVICES
CHAPTER 25
Copyright © 2017 Pearson Education, Ltd. 25-1
CHAPTER 25 LEARNING OBJECTIVES
25-1 Understand the level of assurance and evidence requirements for review,
compilation, and preparation services.
25-2 Describe special engagements to review interim financial
information for public companies.
25-3 Distinguish AICPA attestation standards from auditing standards and
know the types of engagements to which they apply.
25-4 Describe engagements to report on internal controls at service
organizations (SOC reports).
25-5 Understand special engagements to attest to prospective financial
statements.
25-6 Define agreed-upon procedures engagements.
25-7 Describe other audit and limited assurance engagements related to
historical financial statements.

OBJECTIVE 25-1
Understand the level of assurance
and evidence requirements for
review, compilation, and preparation
services.

REVIEW, COMPILATION, AND PREPARATION
SERVICES
Statements on Standards for Accounting and Review Services (SSARS),
• Represent the standards for preparation, compilation, and review
engagements of financial statements
• Issued by the Accounting and Review Services Committee of the
AICPA.
Because the assurance provided in a preparation, compilation, or review
engagement is considerably below that of audits, less evidence is required
for these services and they can be provided at a lower fee than an audit.
The relationship between evidence accumulation and assurance attained is
shown in Figure 25-1.

SERVICES (CONT.)
1 Review Services: A review services (SSARS Review) engagement allows
the accountant to express limited assurance that the financial statements
are in accordance with applicable accounting standards, or other
comprehensive basis of accounting (OCBOA).
Procedures Suggested for Reviews: Consists primarily of
1. Inquiries of management and
2. Analytical procedures.
For reviews, accountants do not obtain an understanding of internal
control, test controls, assess fraud risk, or do substantive tests of
transactions or tests of balances.

SERVICES (CONT.)
SSARS requires the auditor to obtain the following for a review:
• Obtain agreement on engagement terms.
• Obtain knowledge of the accounting principles and practices of the client’s
industry.
• Obtain knowledge of the client.
• Make inquiries of management.
• Perform analytical procedures.
• Read the financial statements.
• Reconcile the financial statements to underlying accounting records.
• Obtain letter of representation.
• Prepare documentation.

REVIEW, COMPILATION, AND PREPARATION SERVICES (CONT.)
Form of Report: The standard review report includes four paragraphs:
1. An introductory paragraph that identifies the entity, the period of financial
statements subject to review, and explicitly notes that the accountant has
conducted a review.
2. The second paragraph specifies that management is responsible for the
preparation and fairness of the financial statements and for designing,
implementing, and maintaining internal controls relevant to financial reporting.
3. The third paragraph notes the accountants responsibility to conduct a review of
management’s financial statements in accordance with SSARS. It should include
the heading “Accountant’s Responsibility.”
4. The fourth paragraph, which is preceded with the heading “Accountant’s
Conclusion,” expresses limited assurance in the form of negative assurance that
“we are not aware of any material modifications that should be made to the
accompanying financial statements.”

SERVICES (CONT.)
Form of Report (cont.):
The date of the review report should be the date on which the accountant
has accumulated review evidence sufficient to provide a reasonable basis
for the report conclusion.
An example of a review report is shown in Figure 25-2.
Failure to Follow Applicable Accounting Framework: If a client has failed
to follow applicable accounting standards in a review engagement, the
report must be modified. Suggested wording:
Known Departures from Accounting Principles Generally Accepted in the
United States of America. Then give a description of the departure from GAAP.

SERVICES (CONT.)
2 Compilation Services: A compilation engagement is defined in SSARS as
one in which accountants apply accounting and financial reporting
experience to assist management in the preparation of financial
statements and issue a report to a client or a third party without providing
any CPA assurance about the statements.
Requirements for Compilation:
• Establish an understanding with the client in a written engagement letter
about the objectives of the compilation engagement.
• Possess knowledge about the accounting principles and practices of the
client’s industry.
• Know the client, the nature of its business transactions, accounting
principles and practices, and content of its financial statements.

SERVICES (CONT.)
Requirements for Compilation (cont.):
• Make inquiries to determine whether the client’s information is satisfactory.
• Read the compiled financial statements and be alert for any obvious omissions
or errors in arithmetic or in the application of accounting standards.
• Request management to provide additional or corrected information if the
accountant becomes aware that the records, documents, or explanations are
incomplete, inaccurate, or otherwise unsatisfactory.
• Prepare documentation in sufficient detail to provide a clear understanding of
the work performed and any findings or issues that are significant.
• Request management to revise the financial statements, if the accountant
becomes aware of needed revisions.

SERVICES (CONT.)
Form of Report for Compilation:
SSARS define three types of compilation reports.
1. Compilation with full disclosure
2. Compilation that omits substantially all disclosures
3. Compilation without independence
The first type of report is illustrated in Figure 25-3.
The second type of report is illustrated in Figure 25-4.
The use of each depends on whether management elects to include all the
required disclosures with the financial statements and whether the
accountant is independent.

SERVICES (CONT.)
3 Preparation Services: In a preparation service engagement, the

CPA is engaged by the client to prepare or assist in preparing
financial statements, but the CPA does not provide any assurance
on the financial statements or issue a report.
The CPA’s responsibilities when performing a preparation
service are similar to those performed in a compilation. The key
differences are:
• The CPA does not issue a report.
• The CPA does not need to assess independence.

OBJECTIVE 25-2
Describe special engagements to
review interim financial
information for public companies.

REVIEW OF INTERIM FINANCIAL INFORMATION
FOR PUBLIC COMPANIES
The SEC requires that quarterly financial statements be reviewed
by the company’s external auditor prior to the company filing of
the Form 10-Q with the SEC.
• Because the same CPA must perform both the annual audit and the
quarterly reviews, they are referred to as auditors, not accountants, for the
interim review.
Like a review under SSARS, a public company interim review includes
the same five requirements for review engagements. However, the two
types of reviews have the following differences:
1. Because an annual audit is also performed for the public client, the
auditor must obtain sufficient information about the client’s
internal control for both annual and interim financial information.

REVIEW OF INTERIM FINANCIAL INFORMATION
FOR PUBLIC COMPANIES (CONT.)
The two types of reviews have the following differences (cont.):
2. The auditor’s knowledge of the results of the annual audit procedures is used in
considering the scope and results of the inquiries and analytical procedures for the
review.
3. Under SSARS, the auditor makes inquiries about actions taken at directors’ and
stockholders’ meetings; for a public company, the auditor reads the minutes of
those meetings.
4. The auditor must also obtain evidence that the interim financial information agrees
or reconciles with the accounting records for a public company interim review.
An example of a report for interim financial statements for a public company is

shown in Figure 25-5.

OBJECTIVE 25-3
Distinguish AICPA attestation
standards from auditing standards
and know the types of engagements
to which they apply.

ATTESTATION ENGAGEMENTS
In an attestation engagement, the CPA reports on the reliability of
information or an assertion made by another party.
Attestation Standards: The AICPA has issued 11 attestation
standards that are stated in sufficient general terms to enable CPAs to
apply them to any attestation engagement.
These Generally Accepted Attestation Standards are detailed in Table
25-1 on page 808.
To provide additional guidance, the Auditing Standards Board of the
AICPA issues Statements on Standards for Attestation Engagements
(SSAE).

ATTESTATION ENGAGEMENTS (CONT.)
Types of Attestation Engagements: The Auditing Standards Board
decided not to attempt to define potential boundaries of attestation
engagements in conceptual terms because new services are likely to arise.
Levels of Service: Attestation standards define three levels of service:
1. Examination—Results in a positive conclusion, expressed in the form of an
opinion. An example of this report is included in Figure 25-6 on page 810.
2. Reviews—CPA provides a moderate level of assurance that is expressed as a
negative assurance conclusion.
3. Agreed-upon procedures—The degree of assurance varies with the specific
procedures agreed to and performed.
The types of engagements and related reports are shown in Figure 25-7.

OBJECTIVE 25-4
Describe engagements to report on
internal controls at service
organizations (SOC reports).

REPORTS ON CONTROLS AT SERVICE
ORGANIZATIONS (SOC REPORTS)
There are three types of service organization control (SOC) reports, which
are referred to as SOC 1, SOC 2, and SOC 3 reports.
SOC 1 Reports: Report on Controls at a Service Organization Relevant to User
Entities’ Internal Control Over Financial Reporting, is intended to meet the
needs of entities that use service organizations and their auditors, who are
responsible for understanding internal controls over financial reporting at
service organizations.
There are two types of reports on controls:
1. Report on management’s description of a service organization’s system and the
suitability of the design of controls (Type 1 report).
2. Report on management’s description of a service organization’s system and the
suitability of the design and operating effectiveness of controls (Type 2 report).

REPORTS ON CONTROLS AT SERVICE
ORGANIZATIONS (SOC REPORTS) (CONT.)
SOC 2 Reports: Report on Controls at a Service Organization

Relevant to Security, Availability, Processing Integrity,
Confidentiality, or Privacy.
The auditor uses the criteria in the Trust Services Principles for
evaluating and reporting on controls in these areas. These are
shown in Table 25-2.
SOC 3 Reports: Trust Services Report for Service Organization:
Similar to an SOC 2 Report, except it is intended for wide
distribution to current or potential users of the service
organization.

OBJECTIVE 25-5
Understand special engagements to
attest to prospective financial
statements.

PROSPECTIVE FINANCIAL STATEMENTS
Prospective financial statements refer to predicted or expected
financial statements in some future period (income statement) or at
some future date (balance sheet).
Most CPAs believe that there are significant opportunities and potential
risks for auditors to provide credibility to prospective information.
Forecasts and Projections: AICPA attestation standards define two
general types of prospective financial statements:
1. Forecasts are prospective financial statements that present an
entity’s expected financial position, results of operations, and cash
flows.
2. Projections are prospective financial statements that present an
entity’s financial position, results of operations, and cash flows,
given one or more hypothetical assumptions.
PROSPECTIVE FINANCIAL STATEMENTS (CONT.)
Use of Prospective Financial Statements: Prospective financial statements
are prepared for one of two audiences:
1. General use statements are prepared for use by any third party.
2. Limited use statements are prepared solely for third parties with whom the
responsible party is dealing directly.
Types of Engagements:
• An attestation engagement in which the CPA obtains satisfaction as to the
completeness and reasonableness of all the assumptions
• A compilation engagement in which the CPA is primarily involved with the
computational accuracy of the statements, not the reasonableness of the
assumptions
• An agreed-upon procedures engagement in which the CPA and all users of the
statements agree on specific, limited attestation procedures

PROSPECTIVE FINANCIAL STATEMENTS (CONT.)
Examination of Prospective Financial Statements:
In an examination level engagement, the CPA:
1. Evaluates the preparation of the prospective financial
statements
2. Evaluates the support underlying the assumptions
3. Evaluates the presentation of the prospective financial
statements for conformity with AICPA presentation
guidelines
4. Issues an examination report

OBJECTIVE 25-6
Define agreed-upon procedures
engagements.

AGREED-UPON PROCEDURES ENGAGEMENTS
When the auditor and management or a third-party user

agree that the engagement will be limited to certain specific
procedures, it is referred to as an agreed-upon procedures
engagement.
Agreed-upon procedures engagements appeal to CPAs
because management, or a third-party user, specifies the
procedures they want done and then the CPA issues a report
describing the procedures agreed upon and the findings
resulting from the procedures.

OBJECTIVE 25-7
Describe other audit and limited
assurance engagements related to
historical financial statements.

OTHER AUDITS OR LIMITED ASSURANCE
ENGAGEMENTS
Other Comprehensive Bases of Accounting: Auditors often audit
statements prepared on a basis other than GAAP or IFRS.
Bases other than GAAP or IFRS for which reports may be issued:
• Cash or modified cash basis
• Basis used to comply with the requirements of a regulatory agency
• Income tax basis
• Financial reporting framework for small- and medium-sized
businesses
• A definite set of criterial having substantial support
An example of a report on income tax basis is shown in Figure 25-8.

OTHER AUDITS OR LIMITED ASSURANCE
ENGAGEMENTS (CONT.)
Specified Elements, Accounts, or Items: Auditors are often asked to audit
and issue reports on specific aspects of financial statements.
The audit of specified elements, accounts, or items is much like an ordinary
audit of financial statements except it is applied to less than the full
financial statements.
Debt Compliance Letters and Similar Reports: Auditors may issue reports
on debt compliance and similar engagements as separate reports or, by
adding a paragraph after the opinion paragraph, as part of a report that
expresses their opinion on the financial statements.
An example of a separate report on debt compliance is shown in Figure 25-9
on page 817.

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3 Preparation Services: In a preparation service engagement, the

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An example of a report for interim financial statements for a public company is

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SOC 2 Reports: Report on Controls at a Service Organization

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When the auditor and management or a third-party user

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