TOPIC 14 AUDIT RELATED SERVICES

Prepared by: Aida Hazlin Ismail & Kamaruzzaman Muhammad Shah Alam

Discussion topics
Audit Related Services

Introduction

Assurance level for audit related services

Review of financial information Agreed upon procedures Compilation The examination of prospective financial information

Introduction Relationship among Assurance Services

Assurance Services Non- Assurance Services
Other Management Consulting

Attestation Services
Audits Review Certain Management Consulting

Accounting and Bookkeeping

Internal Control

Other Assurance services

Tax Services & Secretarial

Introduction

Assurance services provided by CA firms is attestation services, which CA issues a report about the reliability of an assertion that is made by another party. Attestation services fall into four categories:

Audit of historical financial statements Effectiveness of internal controls over financial reporting Review of historical financial information Other attestation services that may be applied to a broad range of subject matter, for example: Agreed Upon procedures Compilation The examination of prospective financial information

Concept: Primary purpose of assurance services is to improve the quality of information for the users to make a decision, while the primary purpose of non assurance services is to generate recommendation/providing services to management in discharge their duties..

Introduction

Audit of historical financial statements

Is a form of attestation service in which the auditor issues a written report expressing an opinion about whether the financial statements are fairly statement according with FRS.

Effectiveness of internal controls

Auditors also attest to the effectiveness of internal control. This evaluation, provides forward-looking information, because effective internal control reduce likelihood of future misstatement in the financial statement.

Review of historical financial information

Audit will provide high level of assurance but review of historical financial information provides moderate level of assurance on the financial statement, less evidence to accumulate necessary to support the opinion.

Other attestation services that may be applied to a broad range of subject matter.

Basically natural extension of the audit of historical financial information, as users seek independent assurance about other types of information.

Introduction

This topic (14) will cover other assurance services while next topic (15) will cover non assurance services.

The international framework for assurance engagements:

Was issued by International Auditing and Assurance Standards Board (IAASB) in 2004 to provide a frame of reference for professional accountants providing assurance services.
Applicable to all assurance engagements. The standard covers two main groups:
1. 2.

The audit and review of historical financial information (ISA 200 and ISA 800) and Assurance engagements other than audits and review of historical financial information
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Framework of auditing assurance and other related services

Auditing
Nature of Service
Comparative level of assurance provided by the auditor Report provided

Related Services
Review
Moderate assurance

Audit
High assurance, but not absolute Positive assurance on assertion (s) In our Opinion

Agreed-Upon Procedures

Compilation

No assurance No assurance

Negative assurance on assertion (s) Nothing has come to our attention

Factual findings of procedures

Identification of information complied. Not attempt to verify

Introduction

Framework of auditing assurance and other related services Explain the general meaning of the three levels of assurance.

Audit

Review

Compilation

Levels Of Assurance

Introduction

In this topic we will discuss about the assurance engagements other than audits and review of historical financial information
They are: Review of financial information Agreed-upon procedures Compilation The examination of prospective financial information The standards related to assurance engagements other than audit of historical financial information does not provide a standardized format of reporting for the assurance engagements covered since the subject matter can be quite broad. The report has to be tailored to the specific circumstances of the review assurance engagements therefore has to be tailored to the specific circumstances of the engagement. Engagement Letter is important, to agreed about the services required..

TOPIC 14 AUDIT RELATED SERVICES

ISRE 2400: Engagement to Review Financial Statement

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Review Financial Statement

In a review engagement, the auditor provides a moderate level of assurance that the information subject to review is free of material misstatement.
Review comprises inquiry and analytical procedures which are designed to review reliability of an assertion, which responsibility of one party, for use by another party. Review of financial statement will involve the application of audit skills and techniques and the gathering evidence BUT it does not involve and assessment of accounting and internal control systems, tests of records and other procedures in auditing such as obtained third party confirmation and physical observation. Therefore moderate level of assurance is express compensate to the scope of work and may be lower fees will be received
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Review Financial Statement

Objective of a Review Engagement To enable the Chartered Accountant to state whether, in all material respects, the financial statements are prepared in accordance with an identified financial reporting framework.
General Principles of a Review Engagement The accountant should comply with the Code of Ethics for Professional Accountants issued by IFAC. i.e. integrity, objectivity.. Auditor should plan and perform the review with an attitude of professional skepticism that may exist of circumstances which cause the financial statement to be materially misstated. For the purpose of expressing negative assurance in the review report, the auditor should obtain sufficient evidence through inquiry and analytical procedures to be able to draw conclusion..

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Review Financial Statement

Terms of the Engagement: The auditor should ensure that there is a clear understanding between the client and the auditor regarding the engagement. i.e. clear engagement letter..
Procedures a. Obtain an understanding of the entitys business and the industry in which the entity operates
b.

Obtain understanding of the accounting systems and the nature of the entitys assets, liabilities, revenues and expenses Inquires of the entitys personnel responsible for the financial reporting about all the material assertions in the financial statements and whether all the transactions have been recorded, any changes in accounting policies and practice
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c.

Procedures to review financial statements (Example: Table 21-1)

The procedures involve:

d.

Inquire about the actions taken at meetings of the BOD, shareholders and other relevant board committees Perform analytical procedures to identify relationships and individual items that appear to be unusual Read financial statements to determine if they conform to the identified financial reporting framework For every balance sheet items, perform certain level of audit technique but not extent to getting confirmation from third party or physical observation. If appropriate, obtain written representations from managementpertaining all matter including subsequent event..
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e.

f.

g.

h.

Review Financial Statement

Reporting: A review engagement provide a moderate level of assurance that the information subject to review is free of material misstatement, this is expressed in the form of negative assurance.

Example Report (After the scope paragraph): Form of Unqualified Review Report:

Based on our review, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respect) in accordance with International Accounting Standards.

Also qualified report (with except for) if not pervasive effect Also adverse report of pervasive effect
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Review Financial Statement

Reporting:

Also qualified report (with except for) if not pervasive effect Management has informed us that inventory has stated at its cost which is in excess of its net realisable value. Managements computation which we have reviewed shows that inventory, if valued at the lower of cost and net realisable value as required by Approved Accounting Standards, would been decreased by RMXXXX. Based on our review, except for the effects of the overstatement of inventory described in the previous paragraph, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view (or are not presented fairly, in all material respect) in accordance with International Accounting Standards.

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Review Financial Statement

Reporting:

Also adverse report of pervasive effect As noted in the note 23 of financial statements, these financial statement do not deflect the consolidation of the financial statement of subsidiary companies, the investment in which is accounted for on a cost basis. Under the Approved Accounting Standards, the financial statements of the subsidiaries are required to be consolidated. Based on our review, because of the pervasive effect on the financial statements of the matter discussed in the preceding paragraph, the accompanying financial statements are not presented fairly, in all material respects, in accordance with Approved Accounting Standards..

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TOPIC 14 AUDIT RELATED SERVICES

ISRS 4400: Engagement to perform Agreed-Upon Procedures Regarding Financial Information

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Agreed upon procedures

Chartered accountant is engaged by a client to issue a report of actual findings based on specific procedures performed on financial or other information and no assurance is express.
Agreed upon procedures is an engagement may involve the auditor in performing certain procedures concerning individual items of financial data (for example, account payable, account receivable, purchase from related parties and sales and profits of a segment of an entity), a financial statement (for example, a balance sheet) or even a complete set of financial statements.

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Agreed upon procedures

Objective of an Agreed-upon Procedures Engagement The objective of an agreed-upon procedures engagement is for the auditors to carry out procedures of an audit nature to which the auditor and the entity and any appropriate third parties have agreed and to report on factual finding and no assurance is expressed..
General Principles of an Agreed-upon Procedures Engagement: The accountant should comply with the Code of Ethics for Professional Accountants issued by IFAC. i.e. integrity, objectivity..

Terms of the Engagement: The auditor should ensure that there is a clear understanding between the client and the auditor regarding the agreed-upon procedures and the condition of the engagement. i.e. clear engagement letter..
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Agreed upon procedures

Documentation The auditor should document matters which are important in providing evidence to support the report of factual finding.
Procedures and Evidence, Include: Inquiry and analysis Re-computation, comparison, and other clerical accuracy clerk Observation, Inspection and obtaining confirmation.. Depends on what has been agreed with client..

Reporting: The report on an agreed-upon procedures engagement need to describe the purpose and the agreed-upon procedures of the engagement in sufficient detail to enable the reader to understand the nature and the extent of the work performed.
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Agreed upon procedures

Reporting (example): REPORT OF ACTUAL FINDINGS To .

We have performed the procedures agreed with you about the account payable of ABC Company.. The procedures were performed solely to assist you in evaluating the validity of the account payable and are summarized as follows:1.

We obtained suppliers statement OR if statement not available, we should requested suppliers to confirm balances owing as at 31 December 2007..

We report our finding below: With respect to item 1, we found there were suppliers statement for all such suppliers and the amount owing is in agreement with the creditors listing.

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TOPIC 14 AUDIT RELATED SERVICES

ISRS 4410: Engagements to Compile Financial Information

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Compilation of financial information

For Example: Business entities registered as partnership or sole proprietorship are not required to have annual audit of their financial statements under the Malaysian Law
However, these entities may sometimes engage an accountant to assist them with the preparation of their accounts, tax returns or other financial documents Compilation services include the collecting, classifying and summarizing of financial information

No assurance express on the financial statement

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Compilation of financial information

The objective of a Compilation Engagement: is for accountant to use accounting expertise, as opposed to auditing expertise, to collect, classify and summarize financial information, produce a report and no assurance is expressed. General Principles of a Compilation Engagement: The accountant should comply with the Code of Ethics for Professional Accountants issued by IFAC. Integrity, objectivity, professional competence, due care, confidentiality, professional behavior and technical standards.. Terms of the Engagement: The accountant should ensure that there is a clear understanding between the client and the accountant regarding the terms of engagement. i.e. clear engagement letter for a compilation engagement
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Compilation of financial information

Procedures: a. Obtained general knowledge of the business and operations of the entity
b.

Obtained knowledge about the accounting policies and practices of the industry in which the entity operates A general understanding of the nature of the entitys business transactions, the form of its accounting records and the qualifications of its accounting personnel

c.

d.

The accounting basis on which the financial statements are to be presented and the form and content of the financial statements
The accountant should obtain an acknowledgment from management of its responsibility for the appropriate presentation of the financial information.

e.

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Compilation of financial information

Reporting on a Compilation Engagement: COMPILATION REPORT TO. On the basis of information provided by management we have compiled, in accordance with the International Standard on Auditing applicable to compilation engagements, the balance sheet of ABC Company as of 31 December 2007 and statements of income and cash flows for the year then ended. Management is responsible for these financial statements. We have not audited or reviewed these financial statements and accordingly express no assurance thereon With modified report, if any.. We draw attention to Note 10 to the financial statement because management has elected not to capitalise the leases on plant and machinery which is departure from approved accounting standards.
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TOPIC 14 AUDIT RELATED SERVICES

ISAE 3400: The examination of prospective financial information

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Review of financial forecast and projection

Prospective financial information means financial information based on assumptions about events that may occur in the future events and possible actions of an entity. An example is managements predictions of the income statement and balance sheet one year in the future. It is highly subjective and can be in the form of a forecast, a projection or a combination of both, for example: one year forecast and a five year projection. Financial forecasts means prospective financial information prepared, to the best of responsible partys knowledge and believe, an entitys expected financial position, result of operation and the cash flow. It is based on the assumptions as to future events which management expects to take place. (Best-assumptions). For example: forecast for next sales will be RM1,000,000 and to achieve the forecast, the company will launch a new product.
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Review of financial forecast and projection

Financial projections means prospective financial information prepared to the best of responsible partys knowledge and believe, given one or more hypothetical assumptions, an entitys expected financial position, result of operation and the cash flow. (What would happen if) The financial position of the company based one or more situation Different of the two: Forecast is based on conditions expected to exist and the course of action to be taken. Projection involves one or more hypothetical courses of action. Example of assumption for profit forecast: Actual sales for Jan to Dec 2007 estimated increase by 5% of 2006 sales due opening another two outlets in January 2006. Cost of sales is 35% of sales. Staff welfare at 1% of sales. Advertising expenses is 2% of sales
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Review of financial forecast and projection

Management is responsible for the preparation and presentation of financial forecast and projection, including assumption used. The purpose of Prospective financial statements are for either general or limited use.

General use: to included in a prospectus in relation to initial public offering (IPO). Limited use: As an internal management tool, for example to assist in evaluating a possible capital investment, to negotiation for bank loan facilities.

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Review of financial forecast and projection

The auditor, before accepting the engagement would consider;

Ensure his competency in undertaking task and the client business The intended use of the information, for IPO, loan facility Whether the information will be for general or limited distributions The nature of the assumptions, that is best-estimate or hypothetical assumptions The period covered by the information, 2008 -2020?/

The auditor and client should agree on the terms and engagement. Clear engagement letter.

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Review of financial forecast and projection

ISAE 3400 requires the practitioners to ascertain the following (procedures):
1.

Whether the best-estimate assumptions used for preparing the prospective financial information are reasonable;

2.

Whether the hypothetical assumptions are consistent with the purpose of the information;
Whether the prospective financial information is properly prepared on the basis of the assumptions; Whether the prospective financial information is prepared on a basis consistent with historical financial statements using appropriate accounting standards The underlying data are adequate and reliable and the calculation are accurate.

3.

4.

5.

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Review of financial forecast and projection

Reporting consideration There are two important element details relating to the conclusion in the report: On the reasonableness of the management assumptions, express in negative form Nothing has come to our attention which cause

us to believe that the assumptions do not provide a reasonable basis for the preparation of the profit forecast and ..

On whether the prospective financial information is properly prepared based on the assumptions and consistent with historical financial statement, express in positive form In our opinion

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Review of financial forecast and projection

Reporting consideration 1. Unmodified Opinion: When the auditor believes that the presentation and disclosure of the prospective financial information is adequate, the auditor should express unmodified report on a forecast and projection:-

For example:
a.

Based on our examination of the evidence supporting the assumption, nothing has come to our attention which causes us to believe that these assumptions do not provide a reasonable basis for the preparation of the profit forecast; and Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in accordance with applicable approved accounting standards in Malaysia.
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b.

Review of financial forecast and projection

Reporting consideration
2.

Modified Opinion: When the auditor believes that the presentation and disclosure of the prospective financial information is NOT adequate, the auditor should express a qualified or adverse opinion on the prospective financial information or withdraw from the engagement.

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Framework of auditing assurance and other related services

Auditing
Nature of Service
Comparative level of assurance provided by the auditor Report provided

Related Services
Review
Moderate assurance

Audit
High assurance, but not absolute Positive assurance on assertion (s) In our Opinion

Agreed-Upon Procedures

Compilation

No assurance No assurance

Negative assurance on assertion (s) Nothing has come to our attention

Factual findings of procedures

Identification of information complied. Not attempt to verify

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END OF TOPIC 14
Audit related services

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