Moduel_A

Module A - Other Public Accounting Services

MODULE A

Other Public Accounting Services

LEARNING OBJECTIVES

ReviewCheckpoints

Exercises, Problems, and Simulations

1. Explain and provide examples of attestation engagements.

1, 2, 3, 4 35, 37, 38, 55

2. Describe review and compilation of unaudited financial statements, and write appropriate reports, given specific fact circumstances.

5, 6 36, 39, 40, 41, 43, 44, 53

3. Explain the auditors’ responsibilities related to reporting on interim financial information.

7, 8 45, 46

4. Define, explain, and give examples of other special reports provided by auditors, including specified elements of financial statements, special purpose frameworks (SPF), and application of accounting principles.

9, 10, 11 42, 47, 54

5. Explain and give examples of assurance services. 12, 13, 14 48, 49, 50, 51, 52

SOLUTIONS FOR REVIEW CHECKPOINTS

A.1 An attestation engagement is defined as “an engagement in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter or an assertion about the subject matter, that is the responsibility of another party.” Attestation engagements include: Agreed Upon Procedures Engagements (AT 201) Financial Forecasts and Projections (AT 301) Reporting on Pro Forma Financial Information (AT 401) Reporting on an Entity’s Internal Control over Financial Reporting (AT 501) Compliance Attestation (AT 601) Management’s Discussion and Analysis (AT 701) Reports on controls at Service Organizations (AT##)

A.2 a. Both require management assertions to begin--an assertion(s) of compliance with specified laws and regulations, or assertions in financial statements.

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b. Both require adherence to professional standards that are themselves very similar regarding training and proficiency, independence, due care, planning and supervision, and sufficient competent evidence.

c. Both require consideration of materiality.

d. Both require consideration of inherent, control, and detection risk.

e. Both require tests of controls when assessing control risk below the maximum.

f. Both require audit procedures--audit of balances for financial audits, tests of compliance for compliance work.

g. Both require written management representation letters.

h. Both require consideration of subsequent events (of both "types"--subsequent information that bears on the management assertion and subsequent events of noncompliance after the assertion date.)

i. Both require a report, and the standard unqualified report is almost identical to the standard unqualified report on financial statements.

A.3 A service organization is a business that executes or records transactions on behalf of the client.They have their auditors provide reports on controls to provide comfort to user entities and the user entities’ auditors that the controls can be relied on by the user entity to prevent a material misstatement in the user entity’s financial statements.

A.4 In order to understand the contents of reports on projections, agreed upon procedures and service organizations, users must be familiar with the assumptions, procedures and nature of the particular service. This information is not generally available to the public.

A.5 Accounting and Review Services Committee pronouncements are applicable for unaudited financial statement engagements of nonpublic companies.

A.6 Both review and compilation engagements are less than an audit. A comparison of the three amounts to a hierarchy of assurance:

a. Audit engagement--The audit team obtains sufficient appropriate evidence that serves as a basis for an opinion on financial statements. The audit team provides reasonable assurance within the inherent limitations of the audit process.

b. Review engagement--Accountant provides moderate assurance through inquiry and analytical procedures that there are no material modifications that should be made to financial statements.

c. Compilation engagement--Accountant puts client information in financial statement form without providing any assurance (because no significant procedures are performed) that material modification should or should not be made to the financial statements.

d. Additionally, an accountant who is not independent may report on a compilation service (providing that lack of independence is disclosed), but not on a review service or audit engagement. However, and accountant may report on a review engagement if independence is impaired because the accountant provided internal control services.

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A.7 A review of interim financial information is similar to a review of the unaudited annual financial statements of a nonpublic company in these respects:

a. Both reviews are less in scope than a GAAS audit.b. Procedures in both are limited to inquiry and analytical procedures.c. In the report, an audit opinion is disclaimed.d. In the report, the level of assurance is "negative assurance."

A.8 a. No, U.S. GAAP (APB 28) does not require presentation of interim financial information.

b. However, the SEC requires (Regulation S-K) interim financial information. Thus in reports filed with the SEC, omission of interim information or failure to review it must be noted in an explanatory paragraph.

A.9 An auditors’ report on annual financial statements would be modified with respect to the interim financial information in these circumstances:

The interim information is omitted (SEC companies only). The review cannot be completed (SEC companies only). The interim information departs from APB 28 (GAAP), including adequate disclosures. In the note to the annual financial statements, the management indicates the audit team performed

procedures without also saying the audit team expresses no opinion. Management fails to label interim financial information note "unaudited"

A.10 a. SPF exists because some accountants and business managers do not want to incur the expense and trouble to produce full-scale GAAP financial statements using some of the complicated accounting standards.

b. Yes, SPF financial statements can be audited. The only differences are that (1) the financial statements carry different, descriptive titles, (2) the auditors’ report contains a sentence warning that the financial statements are on an SPF, and (3) the opinion paragraph refers to the SPF instead of GAAP.

A.11 Some examples of SPF include: (1) insurance company statements conforming to state regulatory agency accounting rules, (2) tax basis accounting, (3) cash basis accounting, and (4) other fairly well-defined methods such as constant-dollar, price-level-adjusted financial statements and current-value financial statements.

A.12 a. Opinion shopping is suspect because it has occurred in situations wherein clients have attempted (and sometimes succeeded) in finding a new public accounting firm that will agree with a questionable accounting treatment (early revenue recognition or unwarranted expense or loss deferral).

b. It can be beneficial, like getting a second medical opinion, to help solve a difficult accounting and financial reporting problem. When reporting on the application of accounting principles, the public accounting firm must undertake an engagement with proficiency, care, planning, and supervision, and:

Consider the circumstances of the request for advice, its purpose, and the intended use of the report of the advice

Obtain an understanding of the form and substance of the transaction in question Review the applicable financial reporting framework Consult with other professionals if necessary

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Perform research to determine the existence of creditable analogies and precedents (e.g. find the authoritative support)

Consult with the other public accounting firm, if the client has one, to learn all the facts and circumstances.

Prepare a written report or oral advice that contains these elements:o Description of the engagement and a statement that it was performed in accordance with

standards (SAS 50).o Description of the transactions and circumstances.o Statement of the advice--the conclusion about appropriate accounting principles or the

type of auditors’ report, including reasons for the conclusions, if appropriate.o Statement that an entity's management is responsible for proper accounting treatments, in

consultation with its own auditors.o Statement that any differences in facts, circumstances, or assumptions might change the

conclusions.

A.13 1. Public accountants serve as intermediaries who lend credibility to information. Hence, assurance services are natural extensions of the well-regarded audit and attest services.

2 Public accountants can use their expertise in internal control and measurement methods.

3. The SCAS maintains that assurance services are natural extensions of attestation services, which earlier evolved from financial statement audit services. Attestation and audit services are highly structured (hence all those standards!) and intended to be useful for large groups of decision makers (e.g., investors, lenders). On the other hand, assurance services are more customized and intended to be useful to smaller, targeted groups of decision makers. In this sense, assurance services bear resemblance to consulting services.

A.14 1. CPA WebTrust is an assurance service provided by a CPA to respond to the customers' concerns about Internet security. While CPA WebTrust focuses on external (Internet) systems,

2. CPA SysTrust instead focuses on internal systems as a means of increasing the comfort of management, customers, and business partners with the client systems.

SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS

A.15 d. Correct All public accounting firms do some form of work on unaudited financial information.

A.16 a. Incorrect Audit standards issued by the PCAOB govern audits of public companies. b. Incorrect Audit standards issued by both the ASB and PCAOB govern the nonaudit practice for

public companies.c. Correct The keys are (1) unaudited and (2) nonpublic companies.d. Incorrect Audit standards by ASB govern audits of non-public companies.

A.17 b. Correct Attestation standards require that you have adequate technical knowledge in the subject matter because the subject matter for an attestation can be very diverse. Since GAAS covers only financial audits performed by accountants, accountants are assumed to have adequate subject knowledge.

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A.18 d. Correct Management should not provide a probability of attaining results in accordance with prospective financial information.

A.19 b. Correct Accountants are required to perform many procedures on pro forma financial information. Accountants are not required to understand the internal controls used to generate pro forma information.

A.20 a. Incorrect PCAOB standards only apply to public companiesb. Correct This is the standard for auditing internal controls for a non public companyc. Incorrect This standard applies to understanding and testing controls in a financial statement auditd. Incorrect FASB concepts are important to understand, but they give guidance for proper financial

accounting, not auditing.

A.21 a. Incorrect Reviews are not more work than audits.b. Correct Review work extent lies between compilation and audit.c. Incorrect Reviews are more work than a compilation and less work than an auditd. Incorrect Reviews are more work than a compilation and less work than an audit

A.22 a. Correct Notice of lack of independence is enough.b. Incorrect Must be independent to give the standard auditors’ report.c. Incorrect Must be independent to give the examination report on a forecast.d. Incorrect Must be independent to give the examination report on internal control.

A.23 d. Correct Management is not required to provide a report regarding satisfactory compliance.

A.24 a. Incorrect Negative assurance is prohibited in auditors’ reports.b. Incorrect A disclaimer and no negative assurance is specified for a compilation report.c. Correct The standard review report calls for negative assurance as well as the disclaimer.d. Incorrect Negative assurance is prohibited in auditors’ reports.

A.25 a. Correct Management presents its assertion about the effectiveness of its internal control in a written report.

b. Incorrect Management does not have to represent that there are no internal control deficiencies.c. Incorrect The accountant must also conduct an audit of the financial statements.d. Incorrect The accountant cannot design a significant portion of the internal controls and remain

independent.A.26 a. Correct As long as nothing is wrong, the auditors’ report does not mention the interim

information.b. Incorrect The report should contain an extra paragraph mentioning the departure from GAAP, but

it is not an audit opinion paragraph.c. Incorrect See (a). If nothing is wrong, nothing is mentioned in the auditors’ report. The negative

assurance is for the situation where the interim financial information is presented outside (stand-alone) the annual financial statements.

d. Incorrect The note labeled "unaudited" is proper, and no mention need be made.

A.27 b. Correct Review standards do not require that the accountant inquire about internal control deficiencies

A.28 b. Correct The financial statements are supposed to describe in general how the special purpose framework differs from generally accepted accounting principles.

A.29 b. Correct The statement specifies that the report should cover at least six months.

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A.30 a. Incorrect Accountants must have relevant knowledge to provide assurance services, but knowledge cannot guarantee good conduct of accountants.

b. Correct By maintaining integrity and objectivity, accountants preserve their reputations and competitive advantages in assurance services.

c. Incorrect Due professional care is a requirement for accountants providing assurance services, but independence is not required.

d. Incorrect Professionalism helps accountants to provide quality assurance services, but is not a unique trait of accountants.

A.31 a. Correct Decreasing natural resources is not a mega trend identified by the AICPA special committee on Assurance Services.

A.32 c. Correct Assurance Services are defined as independent professional services that improve the quality of information, or its context, for decision makers.

A.33 a. Correct WebTrust provides reasonable assurance that there is adequate system protection to ensure that the user receives the product correctly.

b. Incorrect Audited annual report does not provide assurance for the company’s website and internet services.

c. Incorrect If the company is not reliable, its guarantee is not reliable, either.d. Incorrect A partial payment does not guarantee the user to receive the correct product as ordered.

A.34 b. Correct Principles of Trust Services include security, availability, processing integrity, privacy, and confidentiality. Authentication is not a principle of Trust Services.

SOLUTIONS FOR EXERCISES, PROBLEMS, AND SIMULATIONS

A.35 Attestation Evaluation Criteria

One of the most difficult things in an attestation may be establishing the criteria for evaluation. Criteria may include (but are not limited to):

Establish several schools in the state with similar demographics to use a benchmark for the school district.

How many students graduated as scheduled and how does this compare to the benchmark schools?

What are the standardized test score trends and how does this compare to the benchmark schools?

How many students are going on to four year colleges and universities and how does this compare to the benchmark schools?

How many students are going to two-year colleges and how does this compare to the benchmark schools?

How many students that graduated in the last year are unemployed and how does this compare to the benchmark schools? Last 2 years? Last 5 years?

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What programs have been established to retain students in school and how does this compare to the benchmark schools?

What programs have been established to prepare students going to college and how does this compare to the benchmark schools?

What programs have been established to help students that are not going to college and how does this compare to the benchmark schools?

A.36 Errors in an Accountants’ Review Report

1. C The audit reference belongs in the last paragraph.2. C The statements are named properly, but the identification of review and auditing them is

not proper.3. I The AICPA should be cited as source of SSARS.4. I A review report does not contain an accountant's responsibility statement.5. I The review report should compare review and audit.6. I Negative assurance should be in the third paragraph.7. C The second paragraph is supposed to contain the opinion disclaimer.8. C Yes, GAAP should be the standard cited in the negative assurance sentence.9. C Standard review reports are not restricted.10. I "Material modifications" is the standard negative assurance language.11. C Yes, the type of prior opinion needs to be cited.12. C Yes, standard modification is to mention no subsequent audit when the current service is

a review.13. C The modification in SSARS does not call for additional audit-related warnings.14. C The scope paragraph should mention analytical procedures and inquiries.

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A.37 Review of Forecast Assumptions

Assumption Evidence Sources and Procedures

a. Sale of real estate 1. Determine market value of real estate: Review appraisals (if any); inquire of real estate broker for the selling price

of similar pieces of land.2. Determine cost and tax basis of land:

Examine underlying documents (use financial statement cost presentations, if previously audited)--deeds, purchase contracts.

Review Internal Revenue Code and appropriate publications to determine proper tax basis, tax rates, treatment.

3. Determine after-tax profit and proceeds: Based on above information, compute profit and proceeds. Compare amounts to client representations to determine reasonableness.

4. Determine authority for use of proceeds: Examine minutes of directors' and officers' meetings for evidence of

authority to sell the real estate and a formal plan for using the proceeds to retire bonds.

b. Retire outstanding debentures

1. Determine probable cost of repurchasing bonds: Examine amount, terms of bonds outstanding. Review current forecasted market for bonds, in light of terms, amount. Compute estimated cost of repurchase

2. Determine adequacy of funding for repurchase: Compare amount of proceeds [computed in(a)] to amount estimated for

repurchase3. Determine authority for retirement:

Examine minutes of executive's and officers' meetings for evidence of approval of retirement

c. Labor contract 1. Determine probable wage increase: Examine prior contract settlements, including subjective analysis of labor-

management relations. Confer with union officials. Examine documents, memos and minutes regarding upcoming labor

negotiations. Examine management's proposed contract

2. Determine effect of higher than predicted wage settlement: Recompute effect of percent change in wage increase to net income and

correlate to management's figures.

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d. Sales projections 1. Determine estimated completion date of Portsmouth facility: Examine contract plans, consult with contractor, and observe facility. Examine contracts for machinery, installation; consult with vendor--dates,

type of equipment, productive capacity. Compare the audit team’s estimated completion date to management's for

reasonableness. Consider if company can meet personnel requirements of the new facility.

2. Estimate financial impact of Portsmouth production: Compare productive capacity to forecasted sales figure (presumed

determined reasonable by the audit team). Recompute probable effect of delay in Portsmouth's completion date and

compare to management's figures.

A.38 Internet Exercise: Reporting on Service Organizations(Note to instructors, the actual reports are very difficult to find. However students can find press releases about the reports at organizations like Bankers Bank, LendingTools, SecurePipe, etc.)a. Reports on controls of service organizations are supposed to be restricted to the service

organization and user entities. However, some service organizations release their auditors’ reports as marketing tools.

b. Deficiencies often include lack of segregation of duties and poor access controls.c. Service organizations often use their auditors’ reports as marketing tools to show potential users

they are trustworthy and reliable

A.39 Compilation and Review Procedures

a. required in all review engagementsb. not required in review engagements c. required in all compilation engagements d. not required in compilation engagements

1. a, c2. a, d3. b, d4. a, c5. b, d6. a, d7. b, d8. b, d9. a, d10. a, d

A.40 Compilation Presentation Alternatives

a. Jimmy has no accounting staff and has little expertise in preparing financial statements himself. However, he needs them occasionally, apparently for credit purposes.

b. Three kinds of compiled financial statements are available:

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1. Compilation Without Independence . Brother Bill can prepare the compiled financial statements (with or without all disclosures), but he will need to disclose in this report his lack of independence.

2. Compilation With Full Disclosure . CPA Bert can compile the statements and present them in the complete form used for audited financial statements.

3. Compilation That Omits Substantially All Disclosures . CPA Bert can compile statements without footnote disclosures, but his report will indicate the lack of disclosure and will warn users.

A.41 Negative Assurance in Review Reports

a. Yes, this is a negative assurance.

b. Negative assurance is generally prohibited in auditors’ reports because the profession wishes such reports to contain positive assertions based on evidence instead of negative statements based on "what did not come to my attention."

c. A review service is less than an audit; hence the report can be less than positive assurance. Clients get what they pay (less) for.

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A.42 Reporting on a special purpose framework

Note 2

Financial Statement Presentation

The financial statements have been prepared using the cash basis of accounting which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States of America (“U.S. GAAP”). Consequently, inflows or receipts are recognized when received rather than when earned and expenses or disbursements are recognized when paid rather than when the obligation is incurred. Cash basis accounting excludes accounts receivable, prepaid expenses, accounts payable, fixed assets accrued liabilities, and long-term debt.

A.43 Prepare a Compilation Report

Mr. James CoffinCoffin Auto Speed Shop

I have compiled the accompanying balance sheet of Coffin Auto Speed Shop as of June 30, 20XX, and the related statements of income and cash flows for the year then ended. These financial statements are the responsibility of the owners of Coffin Auto Speed Shop.

I conducted my compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain any assurance that there are no material modifications that should be made to the financial statements

I have not audited or reviewed the accompanying financial statements and accordingly, do not express an opinion or any other conclusion as to whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.

Users of these financial statements should also be aware that the owners have elected to omit substantially all of the disclosures required by generally accepted accounting principles. If the omitted disclosures were included in the financial statements, they might influence the user's conclusions about the Coffin Auto Speed Shop's financial position, results of operations and cash flows. Accordingly, these financial statements are not designed for those who are not informed about such matters.

/s/ Student CompilerCertified Public AccountantJuly 15, 20XX

A.44 Reporting on Comparative Unaudited Financial Statements

To the Directors of Independence Company

I have reviewed the accompanying balance sheet of Independence Company as of December 31, 2010, and the related statements of income, retained earnings and changes in financial position for the year then ended. These statements are the responsibility of the management of Independence Company.

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I conducted my review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require me primarily to perform analytical procedures applied to financial data and make inquiries of company personnel designed to obtain moderate assurance that there are no material modifications that should be made to the financial statements. I believe that my r review provides a reasonable basis for our conclusion. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, I do not express such an opinion.

Based on my review, I am not aware of any material modifications that should be made to the 2010 financial statements in order for them to be in conformity with generally accepted accounting principles.

The accompanying 2009 financial statements of Independence Company were compiled by other accountants whose report dated January 11, 2010, stated that they did not express any opinion or any other form of assurance of those statements.

Anson Jones, CPAJanuary 15, 2011

d. Note: This report presumes:

Jones is independent.

Able Associates made no modifications in its 2009 compilation report.

Able Associates was independent.

The 2009 statements contained all necessary disclosures.

A.45 Audit Simulation: Interim Financial Information

1. Inquiry of management:

a. Procedures for recording revenue.b. Difficulties with customers.c. Adjustments required at the end of the period or immediately subsequent to the period.d. Subsequent events.e. Changes in procedures.f. Changes in key positions.g. Internal control strengths and weaknesses.h. Unusual relationships or related party relations with customers and suppliers.i. Conformity with GAAP.

2. Read the minutes of the board of directors meetings (or the minutes of an equivalent managing committee).

3. Analytical procedures

a. Perform a trend analysis of coffee service revenue. Compare this quarter with prior quarters and with the same quarter in previous years.

b. Calculate revenue per store and (i) compare the trend analysis in revenue per store and (ii) evaluate customers that appear to be unprofitable.

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c. Compare cost of goods sold as a percent of revenue. Compare the percentage of cost of goods sold to prior periods.

4. Obtain written representations from management concerning:

a. Management’s responsibilities for financial statements and internal controls.

b. Disclosure of internal control weaknesses, knowledge of frauds and violations of laws or regulations, and contingent liabilities and contingent losses.

c. Statement that all information was made available.

d. Significant estimates.

5. Note: other procedures of inquiry, analytical analysis, and representation are possible.

A.46 A.46 Erroneous Reporting on Interim Financial Information

a. Explain the errors in the report:

1. The report should not carry the title with the word "auditors." It suggests audit work, which was not performed. They are acting in the capacity of "accountants," not auditors.

2. In the second paragraph, the report fails to tell that a review is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Also, an interim review report should not mention an understanding of the company's control.

3. The report fails to give the disclaimer of opinion in the second paragraph.

4. The final paragraph is virtually identical to the standard audit opinion paragraph. It should not be. Baker & Baker should not be giving an audit opinion. The conclusion paragraph should contain the "negative assurance: "Based on our review, we are not aware of any material modifications than should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles."

5. The review work generally should extend beyond the date of the balance sheet, yet Baker & Baker dated the report on the balance sheet date (March 31). It probably should have been dated later as of the end of the interim review field work.

b. Rewrite the report:

Independent Accountant's Report

The Board of Directors and Stockholders,Micro Mini Company

We have reviewed the balance sheet of Micro Mini Company at March 31, 2010, the related statement of income for the three-month period ended March 31, 2010, and the statement of cash flows for the three-month period ended March 31, 2010. These financial statements are the responsibility of the company's management.

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We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. These standards require us primarily to perform applying analytical procedures applied to financial data and making inquiries of company personnel designed to obtain moderate assurance that there are no material modifications that should be made to the financial statements. We believe that our review provides a reasonable basis for our conclusion. A review is substantially less in scope than an audit, 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 in order for them to be in conformity with accounting principles generally accepted in the United States of America.

Baker & Baker, CPAsApril 15, 2010

A.47 A47. Report on Special Purpose Framework

NOTE TO INSTRUCTOR: You may wish to review AU 544 on the subject of regulatory-basis accounting.

To the Board of Directors and Shareholders Brooklyn Life Insurance Company:

We have audited the balance sheet (statutory basis) of the Brooklyn Life Insurance Company as of December 31, 2010, and the related statements (statutory basis) of income and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

(Standard scope paragraph goes here)

The company presents its financial statements in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of New York. The effects on the accompanying financial statements of the variances between such practices and generally accepted accounting principles are described in Note 10. The aforementioned financial statements are not intended to be a presentation of the financial position Brooklyn Life Insurance Company at December 31, 2010, or the results of its operations or changes in its cash flows for the year then ended in conformity with generally accepted accounting principles. In our opinion, these statutory basis financial statements do not present fairly the financial position of Brooklyn Life Insurance Company as of December 31, 2010, or its results of operatives or its cash flows for the year then ended in conformity with generally accepted accounting principles.

In our opinion, the accompanying statutory financial statements present fairly the financial position of the Brooklyn Life Insurance Company at December 31, 2010, and results of its operations and cash flows for the year then ended, in conformity with accounting practices prescribed or permitted by the Insurance Department of the State of New York.

Major-Major AssociatesNew York, New YorkFebruary 20, 2011

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A.48 Internet Exercise: CPA WebTrust

a. CPA Web Trust is a special program that allows specially licensed Certified Public Accountants to examine an entity's Web site to ensure that its Web transactions meet specified standards in three key areas:

Information protection Business practices Transaction integrity

b. With the rapid growth of e-commerce, Internet shoppers are concerned about protecting personal information and making sure that their Internet transactions are processed efficiently and accurately. CPA WebTrust provides a means of increasing consumer confidence in the sites that they visit.

c. If a Web site complies with the WebTrust Principles and Criteria for online business, the site will bear the CPA WebTrust Seal.

d. Copies of Trust service principles can be found on the CPA WebTrust website: http://www.cpawebtrust.org.

A.49 Assurance Services

a. This is one acceptable answer. Students should be encouraged to discuss their answers and acceptable answers may vary. The five global trends and their relevance are as follows:

The shift from the industrial age to the knowledge age

The recent debate over “mark to market” illustrates clearly how important soft information is in financial reporting.

Information technology

Certainly, our dependence on various information devices and data continues to grow. However, the ability to buy large amounts of data capacity inexpensively and the number of computer specialists in this area have limited the public accounting firms’ ability to take a share of this market. While the trend continues, the AICPA may need to reconsider the CPA’s role in this market.

Globalization The convergence to IFRS is one result of globalization. Understanding the financial effects of global risks will be important in determining appropriate financial reporting. The competition to CPAs from outsourcing has already been a factor in the profession.

Demands for transparency and new focus on corporate governance

The demand for accountability continues, increased by government regulation. Public accounting firms have prospered from this demand which will continue in the foreseeable future. Added regulations prompted by the banking crisis offer accountants new opportunities to serve their clients.

New social structures As companies reduce pension risk by placing more control in the hands of the employee for pension choices in defined contribution plans; as 401Ks and IRAs are utilized in more pension planning; as pensions become more portable (i.e. you can take your pension with you to your next job), the need for more assistance in making financial decisions will continue. This trend will increase as the “baby boom’ generation retires.

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http://www.cpawebtrust.org/


b. Additional trends that may be discussed include:

Greater global competition requiring assurance regarding product quality and company warrantiesIncreased costs for resources such as oil and gasPrivacy issues that may require independent verificationConcerns about environmental and other social responsibility issues that will require added reporting by companies


Customers may be reluctant to purchase baseball cards from Dave’s website for the following reasons.

They have never heard of Dave’s company, so they are concerned whether it is authentic.

Even if they believe that the company is real, they do not know whether it is trustworthy because the customer has no business practice history with the company.

Customers may doubt whether the website is technically and financially supported to ensure that customers’ personal information is secured.

Dave and Karen may take the following steps to reduce customers’ reluctance to purchase on the Internet. First, Dave and Karen should consider the customers’ concerns when they design the website. Secondly, they can develop a system that will effectively process transactions and protect customers’ privacy at the same time. Then they can pursue a CPA WebTrust seal. By providing such a seal on their website, they clearly convey the information that accountants have provided reasonable assurance for their website and internet services. Therefore, by gaining the WebTrust assurance, Dave and Karen will increase customers’ confidence in their website and win more business.


a. This arrangement has advantages for Henry as follows.

Timely supply of inventories. If the supplier has access to the inventory file and is permitted to automatically ship an established amount of product that is under reorder point, the store will be refilled with adequate inventory right before specific items are out of stock.

Reduced reorder cost. This arrangement shifts the burden of reordering to the supplier. The supplier needs to keep an eye on Henry’s inventory record and ship items Henry needs. Henry thus avoids incurring cost to count his own inventory and place an order.

Reinforcement of the relationship with the supplier. This arrangement interrelates the sales performance of Henry’s store to the supplier’s business, thus encouraging both parties to be more cooperative.

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b. Advantages for A-Plus Vitamins are as follows.

First-hand information of customer’s inventory. Whenever Henry’s inventory is short, A-Plus Vitamins knows simultaneously and can make decision instantly.

Reduced selling cost. The sale is automatically generated after Henry’s inventory record indicates a short of specific items. It is not necessary for A-Plus Vitamins sales representatives to contact Henry and sell items.

Important market information for manufacturing. By analyzing Henry’s inventory information, A-Plus Vitamins can keep track of consumers’ taste, thus manufacturing products according consumers’ requirements. At the same time, products in stock may decline in a pattern according to the sales performance of Henry’s store. Therefore, the manufacturing at A-Plus Vitamins may be adjusted to the pattern.

c. Henry’s concerns concerning this arrangement are as follows.

System security. o A-Plus Vitamins is only permitted access to the inventory file, not other files. Henry must

ensure A-Plus cannot access other computerized files.o Henry needs to be assured that only authorized employees are access his computer

system through A-Plus’ computer system

Confidentiality. Because the system is connected to the supplier, it is critical to make sure that the inventory information is safeguarded from unauthorized users.

Availability of the supplier. Henry needs to be concerned that the supplier is appropriately reviewing the inventory.

Proper process. It is very important for Henry’s store to receive the correct items that are short.

d. Henry’s concerns can be addressed if A-Plus Vitamins asks for the SysTrust assurance. SysTrust Service is used as a means of increasing the reliability of business-to-business transactions. SysTrust practitioners will provide opinions on the issues that concern Henry, after they examine the system.

A.52 Internet Assignment: Try XBRLSOP 09-1 suggests that management may be interested in assessing whether:

The taxonomy tags or extensions selected are appropriate. The rendering accurately reflects the source document The XBRL files comply with other aspects of XBRL that cannot be assessed solely by looking at a

rendering (for example, whether contexts are used appropriately or whether tags are used consistently from period to period).

A.53 Kaplan CPA Exam Simulation: Compilation Presentation Alternative

MODA-17


T If a review is being conducted and a material misstatement is uncovered, the report should have an extra paragraph added prior to the final paragraph unless the problem is corrected.

(Even in a review, if a material problem is encountered, the CPA must alert the user of the financial statements by inserting an extra paragraph before the final paragraph.)

T The CPA should inquire of the entity’s management as to whether any communications have been received from regulatory agencies.

(The CPA is making an overview of the financial statements and the financial reporting for any material modifications that are needed. This type of inquiry helps the CPA to spot potential problems.)

F The CPA should gain corroborating information about account balances that constitute a material amount.

(This is an audit procedure and not performed in a review. A review is basically an overview of the statements and the financial reporting and does not go into this specific level of testing.)

F The CPA becomes concerned that a contingent liability is not being reported. The CPA can indicate this concern in the review report but cannot seek confirmation from the entity’s outside attorney.

(Because of the important of disclosing contingencies, the CPA has the right, even in a review, of contacting the entity’s attorney if the CPA suspects that contingencies are not being reported.)

T In the standard review report, the management’s responsibility in connection with the financial statements is indicated in the first paragraph.

(The financial statements are identified as being the representation of management.)

F In the standard review report, the CPA’s responsibility in connection with the review is indicated in the first paragraph.

(In a review report, the purpose and procedures of a review are spelled out in the second paragraph to help ensure that the outside reader notices them.)

T In performing either a review or a compilation on Ferreira Company, the work of the CPA should be guided by the Statements on Standards for Accounting and Review Services issued by the AICPA.

(Obviously, auditing standards do not apply to these types of engagements. Guidance is obtained from this particular set of standards.)

A.

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54 Kaplan CPA Exam Simulation: Special Reports

Report on Prospective Financial

Statements

Report on Internal Control

Report of Findings Based on Specific

Procedures

1. CPA examines and makes certain that all assumptions are disclosed and followed.

X

2. The standard report must have four specific paragraphs.

X

3. CPA must always be independent.

X X

4. CPA may specifically be able to provide a level of positive assurance.

X X

5. The matter to be examined must be subject to consistent measurement, and the criteria must be agreed on by all parties.

X

6. CPA may apply certain agreed upon steps but provide no level of assurance.

X X

7. CPA specifically performs a compilation engagement and provides no level of assurance.

X

Detailed explanations for selected items:

3. The key word is “always.” With prospective financial statements, one of the three possibilities is for the CPA to compile statements (no assurance provided), and therefore, independence would NOT be required.

5. In a report of findings based on specific procedures, the CPA is limited to indicating its findings. There is no level of assurance provided in such a case. With prospective financial statements, one of the three possibilities is for the CPA to examine the statements and give positive assurance that the assumptions are reasonable. With a report on internal control, the fourth paragraph provides an opinion (assurance) as to whether the entity has maintained effective internal control over financial reporting.

6. A report on internal control never merely reports its findings; it goes further and provides an opinion (assurance) – see #6 above. One of the three possibilities of reporting on prospective financial statements is to apply agreed-upon procedures and indicate its findings.

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7. One of the three possibilities of reporting on prospective financial statements is to merely compile statements and provide no level of assurance. Compilations are not possible for the other two types of reports.

A.55 Kaplan CPA Exam Simulation: Special Reports: Service Organizations

Considerations in Using a Service Auditor Report The service auditors' professional reputation. Whether the service auditors' report (in both scope and results) is sufficient to meet the user

auditors’ objectives. Assessment of policies and procedures in conjunction with the user's internal control structure

policies and procedures.

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