Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 3
Other Assurance Services

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objectives (1 of 2)
3.1 Understand the level of assurance and evidence
requirements for review, compilation, and preparation
services
3.2 Describe special engagements to review interim
financial information for public companies
3.3 Distinguish A I C P A attestation standards from auditing
standards and know the types of engagements to which
they apply

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objectives (2 of 2)
3.4 Describe engagements to report on internal controls at
service organizations (S O C reports)
3.5 Understand special engagements to attest to
prospective financial statements
3.6 Define agreed-upon procedures engagements
3.7 Describe other audit and limited assurance
engagements related to historical financial statements

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.1
Understand the level of assurance and evidence
requirements for review, compilation, and preparation
services

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.1 Relationship Between Evidence
Accumulation and Assurance Attained

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review, Compilation, and
Preparation Services (1 of 4)
• Standards for Accounting and Review Services
(SSARS) are:
– The standards for preparation, compilation, and review
engagements of financial statements
– Issued by the Accounting and Review Services
Committee of the A I C P A

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review, Compilation, and
Preparation Services (2 of 4)
• A review service (SSARS review) engagement allows the
accountant to express limited assurance that the financial
statements are in accordance with applicable accounting
standards
• The evidence for a review engagement consists
primarily of:
– Inquiries of management
– Analytical procedures

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review, Compilation, and
Preparation Services (3 of 4)
• A compilation service engagement is defined in
SSARS as one in which accountants:
– Apply accounting and financial reporting expertise to
assist management in the preparation of financial
statement
– Issue a report to a client or third party without
providing any CPA assurance about those statements

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review, Compilation, and
Preparation Services (4 of 4)
• In a preparation service engagement, the C P A is
engaged by the client to prepare or assist in preparing
financial statements
• The C P A does not:
– Provide any assurance on the financial statements
– Issue a report
– Need to determine whether he or she is independent

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.2 Example of Review Report

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.3 Compilation Report with
Full Disclosure

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.4 Compilation That Omits
Substantially All Disclosures

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (1 of 6)
• What is meant by the term level of assurance?
– How does the level of assurance differ for an audit of
historical financial statements, a review, a compilation,
and a preparation engagement?
• What is negative assurance?
– Why is it used in a review engagement report?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.2
Describe special engagements to review interim financial
information for public companies

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.5 Example of a Report for
Interim Financial Statements for a Public
Company

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review of Interim Financial
Information for Public Companies
(1 of 2)
• The S E C requires that quarterly financial statements be
reviewed by the company’s external auditor prior to the
company’s filing of the Form 10-Q
• A public company interim review includes five
requirements for review service engagements. The
auditor must (1 of 2):
– (1) obtain knowledge of the accounting principles of
the client’s industry

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Review of Interim Financial
Information for Public Companies
(2 of 2)
• A public company interim review includes five
requirements for review service engagements. The
auditor must (2 of 2):
– (2) obtain knowledge of the client
– (3) make inquiries of management
– (4) perform analytical procedures
– (5) obtain a letter of representation

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (2 of 6)
• Distinguish among engagements to prepare, compile, and
review financial statements.
– What is the level of assurance for each?
• What procedures should the auditor use to obtain the
information necessary to give the level of assurance
required of reviews of financial statements?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.3
Distinguish A I C P A attestation standards from auditing
standards and know the types of engagements to which
they apply

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Attestation Engagements (1 of 3)
• The purpose of an attestation engagement is to provide an
opinion, conclusion, or findings to users of information
regarding the reliability of information or an assertion
about a subject matter, measured against stated criteria
• The Auditing Standards Board of the A I C P A issues
Statements on Standards for Attestation Engagements (S
S A E)

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Attestation Engagements (2 of 3)
• In all services provided under the attestation
standards, practitioners are responsible for:
– Having the appropriate competence and capabilities to
perform the engagement
– Complying with relevant ethical requirements
– Maintaining professional skepticism

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Attestation Engagements (3 of 3)
• The Auditing Standards Board decided not to attempt to
define the potential boundaries of attestation
engagements
• The attestation standards define three levels of
engagements:
– Examinations
– Reviews
– Agreed-upon procedures

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.7 Types of Engagements
and Related Reports

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (3 of 6)
• Explain why a review of interim financial statements for a
public company may provide a greater level of assurance
than an SSARS review.
• Explain the purpose of an attestation engagement and
provide an example of an assertion a C P A could attest
to.
• You have been asked to provide assurance on information
contained in New Dominion’s Corporate Sustainability
Report.
– What standards would you use to perform this
engagement?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.4
Describe engagements to report on internal controls at
service organizations (S O C reports)

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Reports on Controls at Service
Organizations (S O C Reports) (1 of 2)
• There are three types of service organization control
(S O C) reports, which are referred to as (1 of 2):
– S O C 1 report: used to plan and perform audits of the
user entity’s financial statements by their auditors, who
are referred to as user auditors

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Reports on Controls at Service
Organizations (S O C Reports) (2 of 2)
• There are three types of service organization control
(S O C) reports, which are referred to as (2 of 2):
– S O C 2 report: intended to meet the needs of a broad
range of users who need information and assurance
about controls at a service organization
– S O C 3 report: intended for wide distribution to
current or potential users of the service organization

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Table 3.1 Five Trust Services
Categories
Category Description
Security Information and systems are protected against unauthorized
access, unauthorized disclosure of information, and damage to
systems that could compromise the availability, integrity,
confidentiality, and privacy of information or systems and affect
the entity’s ability to meet its objectives.

Availability Information and systems are available for operation and used to
meet the entity’s objectives.
Processing System processing is complete, valid, accurate, timely, and
Integrity authorized to meet the entity’s objectives.
Confidentiality Information designated as confidential is protected to meet the
entity’s objectives.
Privacy Personal information is collected, used, retained, disclosed, and
disposed to meet the entity’s objectives.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.5
Understand special engagements to attest to prospective
financial statements

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Prospective Financial Statements
(1 of 4)

• Prospective financial statements refer to predicted or

expected financial statements in some future period
(income statement) or at some future date (balance sheet)
• A I C P A attestation standards define two general
types of prospective financial statements:
– Forecasts
– Projections

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Prospective Financial Statements
(2 of 4)

• Prospective financial statements are prepared for one

of two audiences:
– General use statements are prepared for use by any
third party
– Limited use statements are prepared solely for third
parties with whom the responsible party is dealing
directly

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Prospective Financial Statements
(3 of 4)
• The following types of attestation engagements may
be performed for prospective financial statements:
– An examination engagement in which the C P A
obtains satisfaction as to the completeness and
reasonableness of all the assumptions
– An agreed-upon procedures engagement in which the
C P A and all users of the statements agree on
specific, limited attestation procedures

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Prospective Financial Statements
(4 of 4)
• In an examination level engagement, the CPA:
– Evaluates the preparation of the prospective financial
statements
– Evaluates the support underlying the assumptions
– Evaluates the presentation of the prospective financial
statements for conformity with AICPA presentation
guidelines
– Issues an examination report

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (4 of 6)
• An audit client has engaged a third-party service
organization to host its payroll software package on
servers located at the service organization.
– What options do you have to obtain assurance about
the controls embedded in the payroll application?
• Explain what is meant by prospective financial statements
and distinguish between forecasts and projections.
– What four things are involved in an examination of
prospective financial statements?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.6
Define agreed-upon procedures engagements

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

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 C P As
because management, or a third-party user, specifies the
procedures they want done and then the C P A issues a
report describing the procedures agreed upon and the
findings resulting from the procedures

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Learning Objective 3.7
Describe other audit and limited assurance engagements
related to historical financial statements

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Other Audits or Limited Assurance
Engagements (1 of 3)
• Auditors often audit statements prepared on a basis
other than GAAP or IFRS including:
– Audits of financial statements prepared on another
comprehensive basis of accounting (OCBOA)
– Audits of specified elements, accounts, or items
– Debt compliance letters

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Other Audits or Limited Assurance
Engagements (2 of 3)
• Other comprehensive basis of accounting include:
– 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

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Other Audits or Limited Assurance
Engagements (3 of 3)
• Auditors must extend their audit efforts to include other
elements, accounts, or items that are interrelated with
those that are being audited
• Clients occasionally enter into loan agreements that
require them to provide the lender with a report from a C P
A about the existence or nonexistence of some condition

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.8 Example of a Report on
Income Tax Basis

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Figure 3.9 Example of Debt
Compliance Report

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (5 of 6)
• Define what is meant by attestation standards. Distinguish
between attestation standards and auditing standards.
• Distinguish the three types of service organization reports.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Let’s Discuss (6 of 6)
• The Absco Corporation has requested that Herb Germany,
C P A, provide a report to the Northern State Bank as to
the existence or nonexistence of certain loan conditions.
The conditions to be reported on are the working capital
ratio, dividends paid on preferred stock, aging of accounts
receivable, and competence of management.
– This is Herb’s first experience with Absco.
– Should Herb accept this engagement?

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

Copyright

This work is protected by United States copyright laws and is

provided solely for the use of instructors in teaching their
courses and assessing student learning. Dissemination or sale of
any part of this work (including on the World Wide Web) will
destroy the integrity of the work and is not permitted. The work
and materials from it should never be made available to students
except by instructors using the accompanying text in their
classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and
the needs of other instructors who rely on these materials.

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.