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Chapter 20 Other Assurance and Nonassurance Services Concept Check Questions C20-1 What is an important difference between a compilation engagement and a review engagement? In a compilation engagement, no assurance is provided, whereas for a review engagement, moderate assurance is provided. C20-2 Evaluate the following statement: “For a compilation engagement, the accountant does not check the financial statements, so they are very likely to contain material misstatements.” Although it is possible that a compiled financial statement could be materially misstated, it is the practitioner’s responsibility to investigate further if there are warning signs of potential misstatement. C20-3 If reviews provide less assurance than audits, and compilations provide no assurance, why is there a demand for these types of services? A close look at Table 20-1 suggests that the underlying reason is information risk. If the users are able to manage their information risk (say, a closely held company with family members involved), then they are less likely to want high assurance. Although cost is a factor, it usually revolves around some sort of cost-benefit analysis. Although compilations do not provide any assurance, users often would like the added credibility that a professional accountant (there is no requirement to be a public accountant) adds the information. C20-4 What is the difference between the review reports for a private company under CSRE 2400 and the interim financial statements for a public company? There is essentially very little difference. Although the chapter does not go into detail about the rationale for the changes in the new review standards, one factor that the AASB took into consideration was whether or not public company reviews should be included in the umbrella review standard. The board decided it should, since the PA should carry about both engagements in the same manner. Perhaps the biggest difference is that the review report for a public company interim review is clearly restricted in its distribution—it is only issued to the audit committee. C20-5 Why is it so difficult to determine materiality for assurance engagements involving nonfinancial information? Unlike financial statement audits, where quantitative rules of thumbs exist, due to the subject matter and the variety of users, there is no clear consensus on what is “material.” It is partially due to the subject matter itself, which is usually more qualitative in nature; often there is not a clear set of criteria or the criteria is not based upon a rigorous standard-setting process; and the variety of 20-1

users and their reason for relying upon the report all make it much more difficult to determine what is “material.” As a result, many companies use matrices to define materiality. 20-6 If the PA does not issue an opinion or conclusion based upon the audit findings, why would a user request a specified audit procedures engagement? Although the practitioner does not issue an opinion or conclusion, audit procedures are performed and the findings are included in the report —which can provide assurance to the users regarding their specific use of the information. The user would have to decide if the findings provide the assurance necessary. C20-7 How does an engagement to report on supplemental matters differ from a specified audit procedures engagement? The key difference is that the supplemental matters standard applies to those engagements where the practitioner is also engaged to perform the financial statement audit or review engagement and has been asked to report on supplemental information. In the case of specified procedures, the practitioner has not engaged to perform the financial statement audit or review. Both engagements are similar in that the practitioner does not issue an audit opinion or review conclusion on the supplemental matter. C20-8 Why do assurance providers often perform limited assurance engagements for integrated reports? Integrated reporting is mentioned briefly in the chapter. It is a type of reporting whereby the company reports on six different capitals —financial, manufactured, intellectual, human, social and relationship, and natural —and how they create value. It is often difficult to provide high assurance on some of the nonfinancial subject matter, and there are not always clearly defined criteria against which to measure the quality of the reporting. Therefore, assurance providers often provide moderate assurance. Review Questions Note: For a compilation or review engagement, we tend to use the term “practitioner” or “accountant,” whereas for an audit, we use the term “auditor.” Since some of these questions address both types of engagements, the answer guide tends to have some interchangeability of these terms. 20-1 Other Canadian Standards (OCS) cover engagements other than audit of the financial statements – it covers assurance services and related services which PAs often provide (such as compilations) and it also covers financial and nonfinancial information. In contrast, the CASs are solely for the audit of the historical financial statements.

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Chapter 20: Other Assurance and Nonassurance Services

20-2 The assurance provided by an auditor’s report is generally thought to be “high” whereas the assurance provided by negative assurance is ”moderate.” The exact amount of assurance is not stated in the Chapter but some authors have suggested 60%. The main point is that negative assurance is significantly less than that provided by an audit but probably more than 50%. 20-3 A negative assurance states, along with factual statements, that nothing came to the practitioner’s attention that would lead the accountant to believe that the financial statements were not prepared in accordance with accounting standards. The reason for including such a statement in a review report is to provide financial statement users with some level of assurance that the financial statements are fairly stated. The level of assurance is less than that for an audit of historical financial statements, but more than the zero-level assurance for a compilation. 20-4 Based upon the fact that the client is planning to go public in the near future, it is advisable that an audit be performed (all public companies are required to have an audit). Further, it would advisable that the client adopt IFRS as its accounting framework (public companies follow IFRS). 20-5 NPO’s (nonprofit organizations) have different objectives from profit-oriented organizations. The primary emphasis is on providing the required services at reasonable cost, rather than earning profits. With a review, the accountant assesses the reasonability of the financial statements, and risks of inaccurate information focus around the following areas:  completeness of revenues  valuation of donated assets or services  existence of donated assets  compliance with regulations Accordingly, the accountant should ask about policies and procedures in these areas. 20-6 The purpose of Section 9200, “Compilation Engagements,” is to provide guidance with respect to services provided by a public accountant to clients who require assistance in compiling financial statements but who do not require that the public accountant provide any assurance with respect to the financial statements. The statements need not comply with an acceptable financial reporting framework. Perhaps the most common example is financial statements compiled to be included with a tax return. 20-7 There are two performance standards for compilation engagements (Quoted from: CPA Canada Assurance Handbook 9200.18): 1. The services should be performed by a person or persons having adequate technical training and proficiency in accounting, and with due care. 2. The work should be adequately planned and properly executed and, if assistants are employed, they should be properly supervised.

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The difference between compilations and audit and review engagements is that there is no assurance provided in the compilation engagement and the work is limited to compiling information – the practitioner collects l and compilation engagements is that the general standard for reviews requires proficiency in conducting reviews. 20-8 Section 9200.08 of the CPA Canada Assurance Handbook states “In a compilation engagement, the financial statements need not necessarily be in accordance with [GAAP or an acceptable financial reporting framework]” but that the limitations of the statements should be clear to users, they should be aware that the compiled financial statements are not appropriate for general purpose use. The financial statements should not be false or misleading. The accountant compiles the financial statements to assist the client. The exceptions to acceptable accounting principles are permitted because the compiled financial statements are not prepared for general-purpose use. They are prepared for use by management or for inclusion in tax returns or as stated in the engagement letter. The information that may be excluded would be:  segmented information  statement of significant accounting policies  non-relevant notes to the financial statements  statement of cash flows 20-9 Users may request these reports because the level of assurance provided by an audit or a review is not necessary or is too costly. Although the practitioner does not provide an opinion or conclusion, the user is able to obtain assurance from the audit procedures performed. 20-10 To avoid confusion over the purpose of the engagement, the standards recommend that the report distribution be limited to the relevant users and the preparer of the information. 20-11 In response to a request to provide assurance on information contained in New Dominion’s Corporate Sustainability Report, the accountant would conduct the engagement in accordance with CSAE 3000. The practitioner would most likely be engaged to conduct an attestation engagement whereby the practitioner would issue an opinion (or conclusion) on the presentation of management’s assertions about compliance with specific sustainability criteria. Depending upon the type of information included in the report, the practitioner will need to determine whether to conduct a limited or a high assurance engagement. Distribution of the accountant’s report would be unrestricted. 20-12 Attest engagements are engagements where the auditor expresses a conclusion on a written assertion about a subject prepared by a party accountable for the assertion, such as management; the assertion measures the subject matter using appropriate criteria. A direct reporting engagement is an engagement where the auditor directly expresses a conclusion on his or her evaluation of subject matter using certain criteria; management does not report in a direct reporting engagement. An example of a Direct Reporting Engagement would be the communication by the Auditor General to Parliament, describing the results of audits undertaken by her office.

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Chapter 20: Other Assurance and Nonassurance Services

20-13 Criteria are the benchmark or standard against which the subject matter of the assurance engagement is measured. Public accountants are increasingly being asked to provide audit-like or assurance services for different purposes. The existing standards relate primarily to the audit of historical financial statements, whereas the new services often deal with other types of information. Therefore, the guidance provided to accountants became difficult to formulate and communicate effectively. 20-14 The three parties and their roles are: 1. the practitioner, whose responsibility it is to conduct the assurance engagement and to issue a written communication expressing a conclusion concerning a subject matter for which the accountable party is responsible 2. the user(s), who would be any stakeholder who will use the information on which the assurance is provided 3. the person who is accountable for the subject matter (usually management). Section 9100 may be utilized when an audit is not required, but a contract or agreement requires that certain figures be audited. For example, such a report may be appropriate when a trust indenture requires that certain funds be set aside. Multiple Choice Questions 20-15

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