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2011 Auditing 2 Update

Auditing 2

Update for the 2011 Edition Last Updated September 2, 2011

SECTION A: TEXT AND LECTURE ERRATA

Item A.1 Pg. A2-103, Chart: Reports Include a Statement Regarding: The statements listed in the first column of this chart are not aligned correctly with the other three columns. The chart should appear as follows:

Reports Include a Statement Regarding: 1. Identification of PFS 2. Compliance with AICPA standards 3. Limitation of scope of examination 4. An enumeration of procedures performed 5. A caveat that prospective results may not be achieved 6. CPA has no responsibility for updating report 7. PFS conformity with AICPA presentation guidelines 8. Limited use of report

AgreedCompilation Examination upon Report Report Procedures Yes Yes Yes -Yes Yes -Only required for projection Yes Yes --Yes Yes Yes Only required for projection Yes Yes Yes Yes Yes Yes -Yes

Item A.2 Pg. A2-7, Item E.5. Peer Review, National Instructor Comments: After the National Lecturer asks you to put "Peer review every 3 years" in the margin of your textbook, he makes the following comment: "Now incidentally, if you are an auditor in a CPA firm like the Big Four accounting firms and you audit more than I believe it's 10 publically traded companies, then the PCAOB (the Public Company Accounting Oversight Board) is going to be doing an internal investigation of your quality control every year." The National Instructor should have said 100 publically traded companies, not 10 publically traded companies. To expand on the National Instructor's comment, the annual inspection for all firms that regularly provide audit reports for more than 100 publically traded companies (issuers) includes an inspection of the firms'

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2011 Auditing 2 Update

compliance with SOX, the rules of the PCAOB, and professional standards (including the quality control standards). Firms that regularly provide audit reports for 100 or fewer issues must have such inspections at least every three years. Item A.3 Pg. A2-79 to A2-80, Item C. Review Report on Interim Financial Information The detail given on A2-79 regarding the required elements of the review report on interim financial information and the sample interim review report on A2-80 are correct for an interim review of a nonissuer's financial statements under SAS. The interim review report of an issuer differs only in that report states that the review was conducted in accordance with the standards of the PCAOB (note that the PCAOB has adopted the SAS interim review standards), rather than in accordance with the standards of the AICPA. As a result, the textbook should be modified as follows (changes highlighted): Pg. A2-79, Item C. 1.d: d. For the interim review of a nonissuer's financial statements, a statement that the review was conducted in accordance with the standards of the AICPA; for the interim review of an issuer's financial statements, a statements that the review was conducted in accordance with the standards of the PCAOB; The review report of an issuer would appear as follows:

Report of Independent Registered Public Accounting Firm We have reviewed the accompanying [ describe the interim financial information or statements reviewed ] of X Company as of September 30, 20X3 and 20X2, and for the three-month and nine-month periods then ended. This (these) interim financial information (statements) is (are) the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 interim financial (statements) for it (them) to be in conformity with U.S. generally accepted accounting principles. [ Signature ] [City and State or Country] [ Date ]

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2011 Auditing 2 Update

Item A.4 Pg. A2-31 and A2-57, Item 5. Analytical Procedures Must be Performed This item should be titled: 5. Analytical Procedures SHOULD be Performed. The performance of analytical procedures in a review engagement is a presumptively mandatory requirement, not an unconditional requirement. Item A.5 Flashcard Audit 2-7 This flashcard states the following: The auditor should: · Establish an understanding (engagement letter required). To clarify, the engagement letter was NOT required under the old SSARS compilation and review standards, which are testable through June 2011. Under the new SSARS compilation and review standards (testable after June 2011), an engagement letter is a presumptively mandatory requirement. Item A.6 Pg. A2-82, Reporting Summary Chart The row titled Engagement Letter states that the engagement letter is presumptively mandatory in all compilation, review, and audit engagements. To clarify, the engagement letter was NOT required under the old SSARS compilation and review standards, which are testable through June 2011. Under the new SSARS compilation and review standards (testable after June 2011), an engagement letter is a presumptively mandatory requirement. Item A.7 Pg. A2-52, Sample ­ Compilation Engagement Letter (financial statements not intended for thirdparty use) (Added September 2, 2011) The following edits need to be made (changes highlighted): 3. Sample ­ Compilation Engagement Letter (financial statements not intended for thirdparty use) [Appropriate Salutation] This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide. We will perform the following services: We will compile, from information you provide, the [monthly, quarterly, or other frequency] financial statements of XYZ Company for the year 20XX. The objective of a compilation is to assist you in presenting financial information in the form of financial statements. We will utilize information that is your representation 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 the statements to be in conformity with [the applicable financial accounting framework (for example, accounting principles generally accepted in the United States of America)].

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2011 Auditing 2 Update

You are responsible for: a. The preparation and fair presentation of the financial statements in accordance with [the applicable financial reporting framework (for example, accounting principles generally accepted in the United States of America)]. Designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements. Preventing and detecting fraud. Identifying and ensuring that the entity complies with the laws and regulations applicable to its activities. Making all financial records and related information available to us.

b.

c. d. e.

We are responsible for conducting the engagement in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation differs significantly from a review or an audit of financial statements. A compilation does not contemplate performing inquiry, analytical procedures, or other procedures performed in a review. Additionally, a compilation does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, the examination of source documents (for example, cancelled checks or bank images); or other procedures ordinarily performed in an audit. Therefore, a compilation does not provide a basis for expressing any level of assurance on the financial statements being compiled. Our engagement cannot be relied upon to disclose errors, fraud, or illegal acts that may exist. However, we will inform the appropriate level of management of any material errors and of any evidence or information that comes to our attention during the performance of our compilation procedures that fraud may have occurred. In addition, we will report to you any evidence or information that comes to our attention during the performance of our compilation procedures, regarding illegal acts that may have occurred unless they are clearly inconsequential. We are not independent with respect to XYZ Company. We will disclose that we are not independent in our compilation report.

(continued)

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2011 Auditing 2 Update

(continued)

The financial statements will not be accompanied by a report and are for management's use only and are not to be used by a third party. If, during the period covered by the engagement letter, the accountant's independence is or will be impaired, insert the following: We are not independent with respect to XYZ Company. Our fees for these services ... We will be pleased to discuss this letter with you at any time. If the foregoing is in accordance with your understanding, please sign the copy of this letter in the space provided and return it to us. Sincerely yours, [Signature of accountant] Accepted and agreed to: XYZ Company Title Date

SECTION B: PASSMASTER, SIMULATIONS, & QUIZZES ERRATA None SECTION C: TEXT AND LECTURE ADDITIONAL OR ENHANCED INFORMATION Item C.1 Pg. A2-99, Item a.(2) - top of the page Item a.(2) at the top of pg. A2-99 states the following: (2) The practitioner is not required to gather supporting evidence, but should be aware of obvious inappropriate assumptions used to construct the statements. Independence is not required, but lack of independence should be disclosed. In December 2010, the AICPA's Accounting and Review Services Committee issued SSAE #17, Reporting on Compiled Prospective Financial Statements When the Practitioner's Independence is Impaired. According to SSAE #17, lack of independence should be disclosed in a separate paragraph of the compilation report using wording such as: We are not independent with respect to XYZ Company.

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2011 Auditing 2 Update

The practitioner is permitted, but not required, to disclose the reason(s) for the lack of independence in the report. All reasons must be included in the disclosure. This statement is effective for compilations of prospective financial statements for periods ending on or after December 15, 2010, with early application permitted. This statement will be testable on the CPA Exam starting in June 2011.

Item C.2 Pg. A2-73, Item B. Applicability - Nonissuers (SAS) Item B.2. on pg. A2-73 states that an accountant may conduct a review of the interim financial information of a nonissuer if: 2. The continuing accountant expects to audit the current year financial statements (or a successor accountant has been engaged to do so); In February 2011, the AICPA's Auditing Standards Board issued SAS #121, Revised Applicability of Statement on Auditing Standards No. 100, Interim Financial Information. Based on this new SAS, the wording of Item B.2 should be changed to the following: 2. The accountant either has been engaged to audit the entity's current year financial statements, or audited the entity's latest annual financial statements and the appointment of another accountant to audit the current year financial statements is not effective before the beginning of the period covered by the review. This statement is effective for interim reviews of interim financial information for periods beginning after December 15, 2011, with early application permitted. This statement will be testable on the CPA Exam starting in September 2011.

SECTION D: PASSMASTER, SIMULATIONS, & QUIZZES ADDITIONAL OR ENHANCED INFORMATION Item D.1 Audit 2 Simulation - Other Professional Engagements - Tab 3 - Research Question The solution to this research question can be found in both AU 623.05 and AU 623.08.

EDITORS' COMMENTS Some of the Items above have come from our internal review process, some have come from questions and comments from Becker instructors around the world, and some have come from questions asked by various candidates, either from Becker Profhelp or in online or live classes. We wish to thank all of these individuals as a group for their efforts to improve our materials.

© 2010 DeVry/Becker Educational Development Corp. All rights reserved.

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