Engagement essentials preparation, compilation, and review of financial statements

E NGAGE ME NT E SSE NTIALS: PRE PARATION , COMPILATION , AND R E VIE W OF F INANCIAL STATE ME NTS B Y H UGH PARKE R, CPA, PH D AND KIMBE RLY B URKE , PH D Notice to Readers Engagement Essentials: Preparation, Compilation, and Review of Financial Statements is intended solely for use in continuing professional education and not as a reference It does not represent an official position of the Association of International Certified Professional Accountants, and it is distributed with the understanding that the author and publisher are not rendering legal, accounting, or other professional services in the publication This course is intended to be an overview of the topics discussed within, and the author has made every attempt to verify the completeness and accuracy of the information herein However, neither the author nor publisher can guarantee the applicability of the information found herein If legal advice or other expert assistance is required, the services of a competent professional should be sought You can qualify to earn free CPE through our pilot testing program If interested, please visit aicpa.org at http://apps.aicpa.org/secure/CPESurvey.aspx © 2017 Association of International Certified Professional Accountants, Inc All rights reserved Thisinformation work may not be the copied or otherwise distributed withouttothe express written For about procedure for requesting permission make copies of anypermission part of this of work, please email copyright@aicpa.org with your request Otherwise, requeststoshould the AICPA For information about the procedure for requesting permission make be cop ies of written mailed to Permissions 220 Leigh Farm Road,request Otherwise, written any partand of this work, please emailDepartment, copyright@aicpa.org with your Durham, NC 27707-8110 requests should be mailed USA to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110 Course Code: 746103 FCRE GS-0417-0A Revised: March 2017 T ABLE OF CONTE NTS Chapter 1-1 Introduction to Preparation, Compilation, and Review Engagements 1-1 Reporting on Financial Statements 1-2 Evolution of Engagements to Prepare Financial Statements 1-5 Hierarchy of Standards and Guidance 1-9 Quality Control in Engagements Performed Under SSARSs 1-11 Peer Review 1-16 Summary 1-18 Practice Questions 1-20 Chapter 2-1 Pre-engagement Considerations 2-1 Financial Statement Considerations 2-2 Other Accounting Frameworks 2-4 Independence and Ethics 2-8 Acceptance and Continuance of Client Relationships 2-13 Summary 2-17 Practice Questions 2-18 Chapter 3-1 Performing an Engagement to Prepare Financial Statements 3-1 Objective and Scope 3-2 Copyright 2017 AICPA • Unauthorized Copying Prohibited Table of Contents Performance Requirements 3-5 Documentation for Engagements to Prepare Financial Statements 3-10 Summary 3-12 Practice Questions 3-13 Chapter 4-1 Performing Compilation Engagements 4-1 Compilation Framework and Objectives 4-2 Compilation Performance Standards 4-7 Documentation for Compilation Engagements 4-10 Summary 4-14 Practice Questions 4-15 Chapter 5-1 Reporting on Compilation Engagements 5-1 Standard Compilation Reports 5-2 Common Modifications to Standard Compilation Reports 5-4 Reporting on SPF Financial Statements 5-11 Summary 5-13 Chapter 6-1 Other Compilation Engagements 6-1 Compiling Accounts, Elements, or Items of Financial Statements 6-2 Compilation Engagements for Pro Forma Financial Information 6-4 Compilation Engagements for Prospective Financial Statements 6-8 Compilation Engagements for Interim Financial Statements 6-10 Summary 6-13 Chapter 7-1 Performing Review Engagements 7-1 Review General Principles and Objective 7-2 Table of Contents Copyright 2017 AICPA Unauthorized Copying Prohibited Review Performance Standards 7-7 Documentation for Review Engagements 7-15 Change in Level of Service 7-19 Summary 7-20 Practice Questions and Case Studies 7-21 Chapter 8-1 Inquiry and Analytical Review Procedures 8-1 Analytical Procedures 8-2 Inquiry Procedures 8-10 Summary 8-13 Cases 8-14 Chapter 9-1 Reporting on Review Engagements 9-1 Standard Review Reports 9-2 Some Major Differences From Compilation Engagements 9-4 Common Modifications to Standard Review Reports 9-5 Restricting the Use of Review Reports 9-15 Special Purpose Framework Financial Statements 9-17 Summary 9-19 Cases 9-20 Appendix A A-1 Illustrative Engagements Letters A-1 Appendix B B-1 Sample Compilation Reports B-1 Appendix C C-1 Sample Review Reports C-1 Copyright 2017 AICPA • Unauthorized Copying Prohibited Table of Contents Glossary Glossary Index Index Solutions Solutions Chapter Solutions Chapter Solutions Chapter Solutions Chapter Solutions Chapter Solutions 15 Chapter Solutions 21 Chapter Solutions 23 Chapter Solutions 28 Chapter Solutions 31 Recent Developments Users of this course material are encouraged to visit the AICPA website at www.aicpa.org/CPESupplements to access supplemental learning material reflecting recent developments that may be applicable to this course The AICPA anticipates that supplemental materials will be made available on a quarterly basis Also available on this site are links to the various “Standards Trackers” on the AICPA’s Financial Reporting Center which include recent standard-setting activity in the areas of accounting and financial reporting, audit and attest, and compilation, review and preparation Table of Contents Copyright 2017 AICPA Unauthorized Copying Prohibited Engagement Essentials: Preparation, Compilation, and Review of Financial Statements By Hugh Parker and Kimberly Burke © 2017 Association of International Certified Professional Accountants, Inc Chapter INTRODUCTION TO PRE PARATION , COMPILATION , AND R E VIE W E NGAGE ME NTS L E ARNING OBJE CTIVE S After completing this chapter, you should be able to the following: Identify the types of engagements that require a report on the financial statements Recognize how preparation engagements have evolved Recognize the hierarchy of guidance that applies to preparation, compilation, or review engagements Recognize the elements of a quality control system Identify different forms of peer review Copyright 2017 AICPA Unauthorized Copying Prohibited 1-1 Reporting on Financial Statements Prior to 1978, accountants engaged to report on financial statements had two options: perform an audit of the financial statements or issue a disclaimer of opinion on the financial statements Until that time, there was no option in the literature to offer reporting services that were less in scope than an audit that provided some level of comfort to users of financial statements Accountants could, and still can, prov ide bookkeeping services, but those services are not subject to Statements on Standards for Accounting and Review Services (SSARSs) With the issuance of SSARS No 1, Compilation and Review of Financial Statements, in 1978, accountants were provided other reporting opportunities related to their clients’ financial statements Reporting Options When accountants are engaged to report on financial statements, available options include audit, review, or compilation Each of these engagements is considered an attestation engagement in that the accountant has been engaged to issue a report on a subject matter or assertions (financial statements) that is the responsibility of another party (management) The services offer different levels of assurance, ranging from the reasonable assurance provided by an audit to no assurance provided by a compilation In an audit engagement, the accountant issues a report that expresses an opinion as to whether the financial statements are fairly presented, in all material respects, in accordance with the financial reporting framework used to prepare the financial statements In order to express an opinion on the financial statements, the auditor is required to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement The auditor obtains reasonable assurance based on a rigorous evaluation of the financial statements An audit engagement begins with a set of financial statements that are the responsibility of management In these financial statements, management asserts that the transactions and accounts underlying the financial statements (1) exist or occurred, (2) are complete, (3) represent rights and obligations of the company, (4) are valued and allocated correctly, and (5) are presented and provide disclosure in accordance with an applicable financial reporting framework, such as generally accepted accounting principles (GAAP) In order to obtain reasonable assurance, the such procedures as of the entity’s internal control; assessing auditor must obtain evidence—through evidence fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; and others to corroborate management’s assertions about the financial statements When an engagement requires a lesser level of assurance, a review may be appropriate The objective of a review is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures In addition to accumulating review evidence through inquiries and analytical procedures, a management representation letter is also required for a review engagement There is no requirement to obtain an understanding of or to test the client’s internal controls The lowest level of reporting service on financial statements is a compilation engagement An accountant performing a compilation engagement obtains no assurance on the financial statements The objective of a compilation service is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with this standard without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework Compilation engagements can be performed on full disclosure financial statements; financial statements that omit substantially all disclosures; and accounts, elements, or items of a financial statement 1-2 Copyright 2017 AICPA Unauthorized Copying Prohibited Comparison of Reporting Options The following table highlights several of the significant differences among audit, review, and compilation engagements Most notable is the idea that increasing the level of assurance requires an increased rigor in obtaining evidence regarding the underlying assertions in the financial statements Service Comparison Compilation Review Audit Level of assurance that the financial statements are not materially misstated CPA does not obtain or provide any assurance that there are no material modifications that should be made to the financial statements CPA obtains limited assurance that there are no material modifications that should be made to the financial statements The CPA obtains reasonable (defined as high, but not absolute) assurance about whether the financial statements are free of material misstatement Objective To apply accounting and financial reporting expertise to assist management in the presentation of financial statements To obtain limited assurance as a basis for reporting whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures To obtain reasonable assurance about whether the financial statements as a whole are free of material misstatement, thereby enabling the CPA to express an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework and to report on the financial statements in accordance with the auditor’s findings The CPA is required to be independent No If the CPA is not independent, the CPA is required to indicate lack of independence in the CPA’s compilation report Copyright 2017 AICPA Unauthorized Copying Prohibited 1-3 Compilation Review Audit Situations requiring different levels of service Typically appropriate when initial or lower amounts of financing or credit are sought, or there is significant collateral in place Outside parties may appreciate the business’s association with a CPA, which is readily apparent in the formal compilation report Typically appropriate as a business grows and is seeking larger and more complex levels of financing and credit It is also useful when business owners themselves are seeking greater confidence in their financial statements to evaluate results and make key business decisions An audit is typically appropriate and often required when seeking complex or high levels of financing and credit Also appropriate when seeking outside investors, seeking to sell the business, or considering a merger Differences in cost for each level of service Least time consuming of the services in which the CPA issues a formal report More time consuming than a compilation, but substantially less than an audit Involves the most work and, therefore, the most CPA time The CPA is required to obtain an understanding of the entity’s internal control and assess fraud risk The CPA is required to perform inquiry and analytical procedures The CPA is required to perform verification and substantiation procedures The CPA issues a formal report on the financial statements 1-4 Copyright 2017 AICPA Unauthorized Copying Prohibited Because of the high price of oil, the accountant expects the company will have borrowed additional funds Therefore, an expected increase in loans payable and interest expense, between and 10 percent, is reasonable Yes Although an increase in sales was expected, there does not appear to be an indicator that collection timing should have changed The accountant, at a minimum, should inquire of the controller (or other appropriate client personnel) regarding the increase of collection timing The accountant may also wish to perform additional procedures above and beyond corroboration All work performed, including inquiry, should be documented E xample The following are factors that should affect the relationship between current and prior year amounts: Loss of business from the downtown areas should result in a decrease in revenue Expected decrease is between 15 and 20 percent Because of the decrease in number of people eating at the restaurant, wages and salaries, and inventory costs are all expected to decrease between 10 and 12 percent A spreadsheet analysis would demonstrate that total revenues had declined approximately 22 percent Because the results of the analytical tests not agree with the documented expectations associated with those tests, the accountant should inquire and document why the decrease in sales exceeded expectations The accountant should also document the results of the inquiry Case 8-2 Solutions Materiality is a matter of professional judgment There are no standards that set materiality guidelines for review engagements Thus, it is important to consider those ratios that differed significantly from your expectations, where the expectations are determined either by reference to the prior year or the average for the preceding two years In this case, the authors suggest considering any fluctuations greater than 10 percent over expectations as being material Current Ratio Potential Questions Has the company had working capital provided by operations? Have any significant long-term assets been sold? Have current assets been acquired or short-term debt refinanced using long-term debt? A ctual explanation provided by management: Journal entries have not been made indicating the current portions of long-term debt, causing the working capital to increase dramatically Potential Questions Days’ Cost of Sales in Inventory—Potential Was there a change in inventory purchasing policies? Could this be the result of write-downs of inventory during the year? Was there a change in what was counted in the physical inventory, or how it was counted? Has there been a change in inventory costing policies with respect to cost flow assumptions, overhead allocation, treatment of discounts, and so on? If yes, consider the appropriateness of planned pricing tests Could there have been a poor cutoff of shipments at year-end? If yes, consider expanded cutoff tests A ctual explanation provided by management: Much of the equipment inventory was sold off during the year and not replaced with newer items Other areas of inventory have increased due to the new store located in Anytown Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 29 Gross Profit Percentage Potential Questions Was there a decrease in sales prices or a change in product sales mix? Was there an increase in costs of raw materials, labor, or overhead expenses? If yes, relate this finding to inventory price testing Has there been a change in the method of classifying expenses between cost of goods sold and operating expenses? Could there have been a poor sales cutoff or improper matching, or both, of sales and shipments? If yes, consider expanded cutoff tests A ctual explanation provided by management: The client sold 14 large pieces of equipment to one customer The gross profit margins on this sale were extremely low because the intent of the sale was to maintain good relations with the client and also to profit off of the service work anticipated to be derived on the servicing of the 14 pieces of equipment Altman Z-score: The Z-score is below 2.6 This may indicate that the overall financial condition is such that the continued existence of the company may be in question Further procedures should be performed to assess the company’s ability to continue in existence A ctual explanation provided by management: The score is not an issue The company is heavily in debt due to the large specific identification inventory Floor plan liability is not taken into consideration here Solutions to Knowledge Check Questions a Correct Balance sheet accounts are best analyzed by ratio analysis b Incorrect Reasonableness tests involve estimating a financial amount or change in a financial amount typically using some nonfinancial information c Incorrect Inquiries of management are necessary in a review engagement, but they are not a method to analyze the balance sheet d Incorrect Trend analysis is more appropriate for income statement accounts a Incorrect If current year is compared with prior year, the accountant is implicitly suggesting that, based on knowledge of the client, not much should have changed b Correct This compares the relationship with the expectation of that relationship c Incorrect This is a method of testing the transactions underlying or the balance of the account It is not an analysis of the change in the account’s balance d Incorrect Management’s explanations are not an analysis of the account a Incorrect Expectations may be developed by identifying and using plausible relationships that reasonably expected expected to exist based on the accountant’s understanding of the entity and the are reasonably industry in which it operates b Incorrect Anticipated results prepared by management may be used to develop expectations c Incorrect Prior period financial information may be used to develop expectations d Correct Changes in account balances may be analyzed, but they are not the source for developing expectations 30 Solutions Copyright 2017 AICPA Unauthorized Copying Prohibited a Correct Materiality is always a factor in evaluating management’s assertions b Incorrect The financial reporting framework on which the financial statements are prepared should not define a significant fluctuation c Incorrect Percentage change, when used, is generally percent or greater (1) not required in a review engagement d Incorrect The accountant’s assessment of control risk is (1) and (2) unnecessary for defining which fluctuations are significant a Incorrect This statement is true Analytical procedures provide evidence about assertions underlying the financial statements b Incorrect This statement is true Inquiry and analytical procedures provide evidence for limited assurance c Correct This statement is false Canned analysis and inquiry are not appropriate to ensure that sufficient appropriate review evidence is obtained d Incorrect This statement is true Analytical procedures are not equally effective for every account or assertion a Incorrect While there are often similarities, inquiries should be specifically tailored to each engagement b Correct Responses to inquiries not typically require corroboration as long as they are reasonable and consistent with results of other review procedures c Incorrect Inquiries may also be made of those charged with governance d Incorrect The purpose of inquiries is to provide sufficient evidence to support the limited assurance obtained in a review engagement CHAPTE R Case 9-1 Solutions XYZ COMPANY, INC YE ARS E NDE D DE CE MBE R 31, 20X2, AND 20X1 N OTE S TO FIN AN CIAL STATE ME NTS Note Summary of Significant Accounting Policies Organization and Operations XYZ Company, Inc (the Company) is a technology firm operating in three southeastern states On January 1, 19X2, 93 percent of the then outstanding common stock of the Company was transferred from a stockholder to a holding Company owned by this stockholder The carrying values of the assets and liabilities of the Company were not changed with the transfer Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 31 Property, Plant, and Equipment Property, plant, and equipment are stated at cost Depreciation of plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets Accounts Receivable Receivables are stated at their carrying values, net of a reserve for doubtful accounts Receivables consist primarily of amounts due from customers and banks for customer credit and debit cards The receivable balance from consumer credit products was $304,985, net of a reserve for doubtful accounts of $900 at December 31, 20X2, compared to a receivable balance of $274,251, net of a reserve for doubtful accounts of $0 at December 31, 20X1 Inventory Inventory is stated at cost on a first-in, first-out basis Revenue Recognition Revenues are recognized when billed, which is intended by management to approximate the percentageof-completion method under generally accepted accounting principles Income Taxes The Company accounts for income taxes under FASB A ccounting Standards Codification (ASC) 740, Income Taxes, which requires deferred tax assets and liabilities be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled Under FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date The Company and its parent file a consolidated federal income tax return Income tax expense in the Company’s income statement has been provided by using the Company’s effective income tax rate Advertising Costs The Company expenses advertising costs when incurred The Company had advertising costs of $1,503 in 20X2 and $3,326 in 20X1 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period Actual results could differ from those estimates Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents 32 Solutions Copyright 2017 AICPA Unauthorized Copying Prohibited Investment Securities Management determines the appropriate classification of investment securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date The classification of those securities and the related accounting policies include trading securities Trading Securities Trading securities are held for resale in anticipation of short-term (generally 90 days or less) fluctuations in market prices Trading securities, consisting primarily of actively traded equity securities, are stated at fair value Realized and unrealized gains and losses are included in income Dividends on marketable equity securities are recognized in income when declared Realized gains and losses are included in income Realized gains and losses are determined on the basis of the actual cost of the securities sold Reclassification Certain balances in the 20X2 financial statements have been reclassified to conform with the current year presentation N ote Investment Securities The following is a summary of investment securities at December 31: 20X2 20X1 Marketable equity securities at cost $65,527 $33,567 Gross unrealized (losses) (21,198) (2,569) Marketable Equity Securities $44,329 $30,998 At December 31, 20X2, and 20X1, marketable equity securities consisted solely of trading securities Note Property, Plant, and E quipment A summary of property, plant, and equipment follows: 20X2 20X1 $1,045,846 $996,974 18,187 18,080 6,526 6,526 78,704 63,981 1,149,263 1,085,561 Less accumulated depreciation (787,993) (658,755) Total $361,270 $426,806 Machinery and equipment Furniture and fixtures Leasehold improvements Automobiles Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 33 The estimated useful lives for the current and prior year of significant items of property, plant, and equipment are as follows: Buildings Plant and equipment Furniture and fixtures 40 years 12 years 10 years Depreciation expense for the years ended December 31, 20X2, and 20X1, was $137,161 and $128,944 respectively N ote Long-Term Debt 7.5% note payable to a commercial lender, payable in monthly installments of $9,408, including interest through March 1, 20X6; collateralized by all of the debtor’s equipment The note was refinanced and is now payable in monthly installments of $12,827, including interest through March 5, 20X4 Less current maturities Total 20X2 20X1 $467,940 $561,023 (101,084) (106,303) $366,856 $454,720 A summary of the future maturities of long-term debt follows: Year Ending December 31 Amount 20X2 $101,084 20X3 96,658 20X4 91,524 20X5 56,944 20X6 20,646 Total $366,856 N ote Line of Credit and N otes Payable The Company has a line-of-credit agreement with a commercial bank totaling $100,000 The line of credit, at an interest rate of 10.5 percent, is collateralized by all equipment The amount extended to the Company under this agreement was $67,500 at December 31, 20X2 There was no liability associated with this line of credit at December 31, 20X1 The Company has a note payable to a finance company for financing certain insurance premiums payable in monthly installments of $2,310, including interest at 7.04 percent The balance of the note at December 31, 20X2, and 20X1, was $6,821 and $6,834, respectively 34 Solutions Copyright 2017 AICPA Unauthorized Copying Prohibited Note E mployee Benefit Plans The Company maintains a 401(k) retirement plan and a profit sharing plan The 401(k) plan allows eligible employees to defer up to 15 percent of their salary with the Company matching 100 percent of up ring contribution to percent of the employee’s salary The profit sharing contribution isis not guaranteed guaranteed and isis determined solely at management’s discretion The Company’s 401 (k) contributions for the years ended December 31, 20X2, and 20X1, were $25,518 and $16,282, respectively The profit sharing contribution for the years ended December 31, 20X2, and 20X1, was $20,000 and $20,000, respectively N ote Federal and State Income Taxes The net current and noncurrent deferred tax assets and net noncurrent tax liability as presented in the accompanying balance sheet consists of the following amounts of deferred tax assets and liabilities: 20X2 20X1 Deferred tax assets $3,711 Deferred tax liabilities (28,149) (32,959) $(24,438) $(32,509) Total $450 The deferred tax liability balance is primarily the result of temporary differences in property and equipment, and software costs for financial and tax purposes The deferred tax asset is primarily the result of temporary differences in basis of securities As it is more likely than not that all future tax benefits will be realized, no valuation allowance has been recorded for the deferred tax assets The provision for income taxes consists of the following: 20X2 20X1 Current Federal income taxes $9,015 $4,952 2,793 1,580 Deferred income taxes expense (benefit) (8,070) (3,086) Total $3,738 $3,446 State income taxes N ote Related Party Transactions The Company leases office space from the President of the Company The Company currently leases under a 10-year non-cancelable lease Rent expense related to this lease was $60,000 and $60,064 in 20X2 and 20X1, respectively Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 35 Future minimum rental payments under these leases are as follows: Year E nding December 31 Amount 20X2 $60,000 20X3 60,000 20X4 60,000 20X5 60,000 20X6 and thereafter Total $240,000 The Company provides services to a related company Sales recognized in operations during the years ended December 31, 20X2, and 20X1, were $110,912 and $122,938, respectively N ote Insurance Settlement In 19X1, the Company accounted for the replacement of the equipment lost in the fire under IRS regulations These regulations allow the Company to replace all equipment lost using the insurance proceeds without changing the original basis in the assets Under generally accepted accounting principles, a gain should be recognized for the difference between the carrying value of the inventory and equipment destroyed and the amount of insurance reimbursement The new equipment would have been capitalized and depreciated using its new historical cost Management has not determined the effect of this matter on the 20X2 or 20X1 financial statements Case 9-2 Solutions The disclosure should include the following: PBT suffered a significant net loss during the year The company has a very large inventory of old tablets Significant bank loans will mature within three months and cash flow will not provide sufficient funds to meet this maturing debt; also, it appears likely that extensions will be needed on trade accounts payable The personal assets of Bob and John are not sufficient to repay the bank loans or meet other obligations of PBT Bob and John’s assessment of PBT’s financial problems is that with immediate bank financing the company will be able to continue manufacturing operations (on a reduced volume), move its existing inventory, and modify manufacturing operations to produce more state of the art computers The following are the accountant’s reporting responsibilities when there is uncertainty about going concern: Normally, neither an uncertainty, including an uncertainty about an entity’s ability to continue as a going concern, nor an inconsistency in the application of an accounting principle would cause the accountant to modify the standard compilation or review report, provided that the financial statement adequately discloses such matters The accountant may include an emphasis-of-matter paragraph in the review report The emphasis paragraph focuses the reader’s attention on the issue being emphasized It does not introduce new information about the financial statements, contain information about the procedures the accountant has or has not performed, or contain any conclusions or opinions 36 Solutions Copyright 2017 AICPA Unauthorized Copying Prohibited Therefore, if the matter is adequately disclosed, no report modification is required The accountant may emphasize the going concern issue with a separate paragraph in the report An example of a paragraph might read as follows: Emphasis-of-Matter As discussed in note X, certain conditions indicate that the Company may be unable to continue as a going concern The accompanying financial statements not include any adjustments to the financial statements that might be necessary should the Company be unable to continue as a going concern o If, on the other hand, the accountant concludes that the entity’s disclosures regarding going concern issues are inadequate, this constitutes a known departure from the applicable financial reporting framework and the accountant should modify the report accordingly Solutions to Knowledge Check Questions a Incorrect This paragraph identifies the financial statements reviewed and the entity to which the engagement applies b Incorrect This paragraph reports management’s responsibility for the financial statements and internal control over financial reporting c Incorrect This paragraph identifies the accountant’s responsibility for the reviewed financial statements d Correct This paragraph provides the results of the engagement a Correct The introductory paragraph includes this statement b Incorrect The “Management Responsibilities” section includes a description of management’s responsibilities for the financial statements and internal controls controls over financial reporting c Incorrect The “Accountant’s Responsibilities” section includes a description of the accountant’s obligations under under SSARSs SSARSs d Incorrect The “Accountant’s Conclusion” paragraph provides the results of the engagement a Incorrect Clients may elect to omit substantially all disclosures for compiled, not reviewed, financial statements b Correct Accountants may not issue review reports when they are not independent c Incorrect Clients may not elect to omit some required disclosures in a review engagement without the accountant modifying the review report d Incorrect Accountants are permitted, but not required, to add an emphasis paragraph to the review report when a going concern issue is properly disclosed by the client Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 37 a Incorrect An emphasis-of-matter paragraph is required when financial statements are presented in accordance with an SPF b Incorrect An emphasis-of-matter paragraph is required when required supplementary information is included with reviewed financial statements c Correct The accountant may choose to include an emphasis-of-matter paragraph when the financial statements include significant transactions with related parties d Incorrect When the prior period financial statements were audited and the auditor’s report on those financial statements is not reissued, the accountant should include an other-matter paragraph in the review report a Correct If the going concern disclosure has been appropriately included in the footnotes to the financial statements, the accountant may add an emphasis paragraph b Incorrect If the going concern issue is appropriately disclosed in the notes to the financial statements, it would not be considered a departure from GAAP c Incorrect If the going concern issue is appropriately disclosed in the notes to the financial statements, this would not result in a scope limitation d Incorrect There is no opinion for a review engagement, and therefore, no qualified opinion a Incorrect The accountant may subject the other data to limited procedures, but is not required to b Correct The accountant is neither required nor prohibited from applying limited procedures to the other data c Incorrect The accountant is not required to issue a separate report on supplementary information included with reviewed financial statements d Incorrect The accountant is required to mention the supplementary information and note the degree of responsibility he or she takes for that information a Incorrect Reviewed financial statements can be restricted for other reasons, such as due to the purpose of the report, its potential to be misunderstood, and so on b Incorrect An accountant is not required to restrict reviewed SPF financial statements c Correct Restricted financial statements should include an alert that states the report is only intended for the information and use of specified parties d Incorrect The accountant is not required to restrict reviewed financial statements that have a departure from the financial reporting framework a Incorrect SPF financial statements can be reviewed b Correct If disclosures would be required for GAAP-basis financial statements, they should be provided for SPF financial statements c Incorrect These titles refer to financial statements presented on the GAAP-basis d Incorrect Review reports on SPF financial statements must include an emphasis-paragraph 38 Solutions Copyright 2017 AICPA Unauthorized Copying Prohibited a Incorrect The accountant must reference the SPF in an emphasis-of-matter paragraph even if the SPF is properly disclosed b Correct An emphasis-of-matter paragraph is required for all financial statements prepared in accordance with an SPF c Incorrect An other-matter paragraph is only required under certain circumstances for financial statements prepared in accordance with an SPF d Incorrect The accountant’s review report is not required to disclose management’s reason for selecting the SPF Copyright 2017 AICPA Unauthorized Copying Prohibited Solutions 39 Learn More AICPA CPE Engagement Essentials: Preparation, Compilation, and Review of Financial Statements By Hugh Parker and Kimberly Burke © 2017 Association of International Certified Professional 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Receive free Quarterly updates – Tax, Accounting & Auditing, SEC, Governmental and Not-For-Profit Quantity Purchases for Firm or Corporate Accounts If you have 10 or more employees who require training, the Firm Access option allows you to purchase multiple seats Plus, you can designate an administrator who will be able to monitor the training progress of each staff member To learn more about firm access and group pricing, visit aicpalearning.org/cpexpress or call 800.634.6780 To subscribe, visit cpa2biz.com/cpexpress Group Training From the people who know finance professionals AICPA training evolves continually to bring you a wide range of innovative and effective professional development opportunities designed to meet your needs and keep your staff on the leading edge of financial practices On-site, off-site, online—whatever your preference— we can work with you to develop a training program that fits your organization AICPA Learning training options include: On-Site Training — Focused training at your location for groups of 10+ Learning Management System — Provides your training and compliance needs all in one convenient location CPExpress —24/7 online Firm Access starting at 10 users Conferences — Group discounts for or more Webcasts — Group discounts for or more Publications & Self-Study — Volume discounts aicpalearning.org 800.634.67800 aicpalearning@aicpa.org W hy AI CP A? Think of All the Great Reasons to Join the AICPA CAR EER ADVOCACY PR OFESSIONAL & PER SONAL EL EV A T E Y O U R C A R EER D IS C O U NT S Save on travel, technology, office supplies, shipping and more Five specialized credentials and designations (ABV ®, CFF ®, CITP®, PFS™ and CGMA® ) enhance your value to clients and employers HELPING THE BEST AND GROW YOUR KNOWLEDGE PR OFESSIONAL GUI DANCE THE BRIGHTEST Discounted CPE on webcasts, self-study or on-demand courses & more than 60 specialized conferences & workshops SUPPORT On behalf of the profession and public interest on the federal, state and local level AICPA scholarships provide more than $350,0001 to top accounting students KEEPING YOU UP TO DATE With news and publications from respected sources such as the Journal of Accountancy YOU CAN COUNT ON Technical hotlines & practice resources, including Ethics Hotline, Business & Industry Resource Center and the Financial Reporting Resource Center R ELAT IONSH IPS T HAT COUNT Over 400,000 Members in 145 Countries MAKING MEMBERS HAPPY We maintain a 94%+ membership renewal rate Source: AICPA Academic & Career Awareness FOUNDED ON INTEGRITY Representing the profession for more than 125 years T O JO IN, VIS IT : aicpa.org/join or call 888.777.7077 © 2015 American Institute of CPAs All rights reserved 16789-326 ... types of engagements to report on financial statements The evolution of engagements to prepare financial statements The hierarchy of standards and guidance that apply to preparation, compilation and. .. compilation, review and preparation Table of Contents Copyright 2017 AICPA Unauthorized Copying Prohibited Engagement Essentials: Preparation, Compilation, and Review of Financial Statements By... Copying Prohibited Engagement Essentials: Preparation, Compilation, and Review of Financial Statements By Hugh Parker and Kimberly Burke © 2017 Association of International Certified Professional Accountants,