Attest / Assurance & Nonattest Services Archives - Page 2 of 2

What is the difference between an audit and a review engagement?

There are significant differences between an audit and a review regarding the amount of test work required and the cost of the engagement. An audit provides greater assurance to the end user than the limited assurance provided by a review engagement. Because of this, considerably more test work must be performed during an audit to achieve this higher level of assurance. Auditors will avail themselves of all the tools in the audit toolbox. This includes vouching, tracing, scanning, observation, inspection, confirmation, inquiry, recalculations, reperformance, testing of details, and analytical procedures.

Additionally, the standards require the auditor to perform a more robust risk assessment and gain a deeper understanding of the Company’s system of internal controls than is necessary for a review engagement. Because a review engagement is substantially less in scope than an audit and therefore provides less assurance to the end-user than an audit, it requires fewer procedures and less time to perform. Generally, a review engagement only borrows two tools from the audit toolbox: inquiries and analytical procedures. In some cases, other procedures are performed to obtain the limited assurance required in a review engagement.

Are there other nonattest services?

Yes. CPAs can provide certain nonattest services for a company’s management and still maintain their independence to perform attest services, such as audit, examination, review, agreed-upon-procedures, and compilation engagements, as long as they comply with specific stringent ethical requirements. For example, at Cooper, Travis & Company, we often assist our clients with nonattest services, such as drafting their financial statements, preparing tax returns, depreciation schedules, job schedules, and assisting with year-end close.

What is a preparation engagement?

A preparation engagement is conducted in accordance with the AICPA Statements on Standards for Accounting and Review Services and is a nonattest service. Therefore, the CPA is not required to be independent. In a preparation service, the CPA uses their knowledge of the Company’s financial reporting framework (generally GAAP) and business knowledge to prepare financial statements or prospective financial information. The CPA is not required to verify the accuracy or completeness of the information provided by management. Therefore, the CPA does not provide any assurance regarding the financial statements or the financial information and, accordingly, does not express an opinion or conclusion. However, the CPA adds value in a preparation engagement by assisting management with significant judgments regarding amounts or disclosures to be reflected in the financial statements.

What is a compilation engagement?

A compilation engagement is conducted in accordance with the AICPA Statements on Standards for Accounting and Review Services. In most states, a compilation engagement is a non-assurance attest engagement. Accordingly, only CPAs can perform a compilation engagement in those states. A CPA may be engaged to compile financial statements, prospective financial information, pro forma financial information, or other historical financial information. Unlike an audit or review, a compilation does not include performing any procedures to verify the accuracy or completeness of the information provided by management. Instead, the CPA applies accounting and financial reporting expertise to assist management in presenting financial statements without undertaking to obtain or provide any assurance that there are no material misstatements in the financial statements. As a result, a compilation may be more cost-beneficial in some cases. However, it is rare for some end-users, such as a bonding company, to accept a compilation at year-end. However, sometimes smaller bonding programs can and do accept compiled financial statements.

What is an agreed-upon-procedures engagement?

Agreed-upon-procedure engagement is one of the three types of engagements performed in accordance with the AICPA Statements on Standards for Attestation Engagements. (The other two types described above are the examination engagement and certain review engagements.) An agreed-upon-procedures engagement is an attest service. Accordingly, the CPA must be independent. However, it is not an assurance engagement because the CPA does not express an opinion or conclusion on the subject matter. Instead, the client engages the CPA to issue a report of findings based on procedures agreed to between the CPA and the engaging party. The subject matter may be financial or nonfinancial information. An example of an agreed-upon-procedures scenario is when a CPA is engaged to recalculate employee bonuses based on the terms of employment agreements.

What is a Review Engagement?

In a review of financial statements, the CPA seeks to obtain limited assurance whether any material modifications should be made to the financial statements for them to be presented in accordance with generally accepted accounting principles, i.e., GAAP or, in some engagements, other applicable financial reporting framework. A review engagement is substantially less in scope than an audit. A review consists primarily of two procedures borrowed from the audit toolbox: inquiries and analytical procedures. The CPA may occasionally apply other procedures when necessary to obtain limited assurance. Reviews of historical financial statements or other historical financial information are conducted in accordance with the AICPA Statements on Standards for Accounting and Review Services. However, reviews of certain interim financial information are conducted in accordance with the AICPA Statements on Auditing Standards. Review engagements of information other than historical financial statements, including pro forma financial information, are performed in accordance with AICPA Statements on Standards for Attestation Engagements.

What is an Examination?

Examinations are performed in accordance with the AICPA Statements on Standards for Attestation Engagements. An examination is an audit-level engagement applied to information other than historical financial statements. There is very little difference in approach between an audit and an examination; the most significant difference is the subject matter being examined. An examination, like an audit, is designed to provide a high level of assurance (i.e., reasonable assurance). An example of an examination engagement would include an examination of prospective financial information.

What is an audit?

An audit of a nonpublic company is performed in accordance with the AICPA Statements on Auditing Standards, also referred to as generally accepted auditing standards, aka GAAS. Those standards are applied to historical financial statements to obtain reasonable assurance that the financial statements are free from material misstatement. Reasonable assurance is a high level of assurance under GAAS. The nature, timing, and extent of procedures performed are based on the auditor’s judgment. Such procedures may include confirmations of balances and other information with outside sources, attorney representations regarding litigation and unasserted claims, an inspection of documents, inquiries with the Company’s personnel, recalculations, analytics, and written representations from the Company’s management documenting specific responses made to the auditor during the engagement. Reasonable assurance is the highest level of assurance that a CPA can provide. Under reasonable assurance, however, the auditor does not guarantee that the financial statements are 100% correct. Instead, the auditor opines that the financial statements present fairly, in all material respects, the Company’s financial position, results of operations, and cash flows. Audited financial statements give the end-users, such as banks, sureties, and parties involved in business acquisitions, high assurance that the financial statements used to make decisions are fairly presented.

What are assurance services?

For an assurance service, the CPA expresses an opinion or a conclusion on the subject matter so the user can make informed decisions. Assurance services include audits, examinations, and review engagements.

What are attest services?

Attest services can only be performed by a CPA who works within a CPA firm. The hallmark of an attest service is that the CPA must be independent to provide the service. Attest services include audits, examinations, reviews, agreed-upon-procedures, and, in most states, compilation engagements.