Discuss nature and objectives of various services provided by a practicing accountant
Services provided by the professional accountants can be categorized into:
(1) Assurance engagements
(2) Other engagements
1. Assurance engagements
The objective of assurance engagement is for practicing accountant to evaluate a subject matter that is the responsibility of another party against identifiable suitable criteria and to express an opinion tha: provides the users with a level of assurance about the subject matter Assurance engagements are intended to enhance the creditability information about a subject matter by evaluating whether the subje matter conforms in all material with suitable criteria, thereby improving the likelihood that the information will meet the needs of an intend user. Thus the user has greater degree of confidence in the creditability of the subject matter.
Assurance engagement include following range of services
The objective of an audit of financial statements is to enable the audition to express an opinion whether the financial statements give a true and fair view in accordance with IAS.
The auditor’s opinion enhances the creditability of financial statement by providing a high, but not absolute, level of assurance. Absolute assurance is not attainable due to inherent limitations of an audit the need for judgment, use of testing, inherent limitations of any system of internal controls and the fact that most audit evidence is persuasive rather than conclusive .
Elements of assurance engagements are:
(a) Three-party relationship involving
(i) a professional accountant
(ii) a responsible party;
(ii) an intended user
Responsible party is the person or persons responsible for the subject matter, e.g .., management
Intended users are often the addressee of the profession accountast’s report
Sometimes a responsible party and intended user may both be within the same organization, for example, the management of a company may seek assurance about the accounts receivable of the company.
Subject matter e.g., financial statements, prospectivefinancial information, performance indicators, internal controls, compliance with regulations, corporate governance, a component of organization, non financial information
Suitable criteria. Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an assurance engagement. It is the basis against which the subject matter has been evaluated to form an opinion.
Without this frame of reference any conclusion is open to individual interpretation and misunderstanding. Examples of suitable criteria are International Accounting tandards in the preparation of financial statements; generally cepted criteria for a particular industry when reporting on the ay the organization is managed; stated internal control criteria hen reporting on internal control, applicable law or contract hen reporting on compliance oflaw.
Engagement process. Engagement process involves the professional accountant and those who engage the professional accountant agreeing to the terms of engagement.
(e) Opinion ofthe professional accountant
The opinion provides a level of assurance as to whether the subject matter conforms in all material respects with the identifiable suitable criteria.
A review is performing inquiry and analytical procedures that provides the professional accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with International Accounting Standards.
1. Have physical inventories been counted? If not, how have inventories been determined? The professional accountant should make of management inquiries regarding the accounting polices and practices in use, the procedures used for recording the transactions, and the procedures for accumulating financial statement information. Additional inquiries should cover actions taken at shareholders’ meeting, meetings of board of directors, changes in accounting policies and subsequent evens. Examples of inquires that my be made regarding inventories during a review of financial statements are:
2. Have book balances been adjusted to agree with physical inventories?
3. If physical inventories were taken at a date other than the balance sheet date, what procedures were used to record changes in inventories between the date of the physical inventory and the balance sheet date?
4. Were goods held for third parties excluded from physical inventories?
5. Have inventories been valued at lower of cost and NRV?
6. Does inventory cost include material and conversion costs?
7. Is adequate allowance made for slow moving and obsolete inventories?
8. Have proper cutoffs of purchases, goods in transit, and returned goods been made?
9. Are any inventories pledged?
include comparison of current financial results with prior year’s and budgeted results, comparison with other companies in the same industry, comparison of financial with non financial data and evaluation of the relationships of the elements of financial statements that would be expected to conform to predictable pattern.
There are no requirements for the professional accountant to assess control risk or to gather any evidence to corroborate the inquiries and analytical procedures unless he becomes aware that the information may be incorrect, incomplete or otherwise unsatisfactory. However the professional accountant should obtain representation letter that is similar but less extensive that representation letter obtained in an audit. Each page of financial statements should include a reference as “see auditor’s reviews report”
2. Other engagements
• Agreed upon procedures
• Compilation of financial information
• Preparation of tax returns with no opinion expressed and tax consulting
• Management consulting
• Other advisory services
Agreed upon procedures
Base of agreed upon procedures, the party engaging the professional ountant or the intended user determines the procedures to be formed and the professional accountant provides report of factual gs as a result of performing those procedures. Although those dures, Although the user of the report may derive some assurance the report factual findings, the engagement is not intended to .de, nor does the professional accountant express, a conclusion that provides a level of assurance. Instead, the user evaluates the procedures and findings and draw his own conclusions.
An example of report on factual findings is as follows
Report of Independent Accountants
To the Trustee of Honest Enterprises:
At your request, we have performed the procedures set out below with respect to the claims of creditors of Honest Limited as of December 31, 20×8 set forth in the accompanying schedules. These procedures were performed solely to assist you in evaluating the reasonableness of those claims, and our report is not to be used for any other purpose. The procedures we performed are summarized as follows:
a. We compared the total of the list of balance of accounts payable at December 31, 20×8, prepared by the company,’ to the balance in the company’s control account.
b. We ‘Compared the claims received from creditors to the list of balance of accounts payable.
c. We examined documentation submitted by the creditors in support of their claims and compared it to documentation in the company’s files, including invoices, receiving reports, and other evidence of receipt of goods or services.
Because the above procedures do not constitute an audit conducted in accordance with generally accepted auditing standard, we do not express an opinion on the accounts payable balance .as of December 31, 20×8. In connection with the procedures referred to above, except as set forth in Exhibit A, no matter came to our attention that caused us to believe that the accounts payable might require adjustment. Had we performed additional procedures or had we conducted an audit of the financial statements in accordance with generally accepted auditing standards, other matters might have come to our attention that would have been reported to you. This report relates only to the accounts and items specified above and does not relate to any financial statements of Honest Enterprises, taken as a whole.
Compilation of financial statements
A compilation is presenting in the form of financial statements formation that is the representation of management (owners) without dertaking to express any assurance on the statements. ny small enterprises are unable to employ qualified chartered ountants and need outside assistance in preparing both historical and spective financial statements. Professional accountants provide a ful service by rendering such assistance.
Compilation engagement ordinarily involves reducing detailed data to a geable and understandable form without the requirement to test the ions underlying that information. The procedures employed are not gned and do not enable the auditor to express any assurance the financial information . However use of compiled financial information derive some benefit as a result of the professional untant’s involvement because the service has been performed with sional competence and due care.
Three significant matters to be taken up in such a assignment are: The client should take full responsibility for the accounting records and financial statements. Separate staff should be assigned for audit and for providing assistance in compilation of financial statements. such assignment should not be accepted for a limited liability ompany.
What are matters are to be convered in terms of audit engagement agreed upon procedures
Terms of engagement of agreed upon procedures include:
• procedures performed will not constitute an audit or reviews, accordengly no opinion will basis expressed.
• Purpose of engagements
• Identification of the component to which the procedures will be applied
• Nature, timing and extent of procedures to be applied
• Anticipated form of the report
• Limitation on distribution of the report
What procedures are performed as regards agreed upon procedures engagement?
Procedures for agreed upon engagement are:
• Analytical procedures
• Other clerical accuracy check
• Obtaining confirmations.
Enumerate matter to be included in an engagement letter for compilation
Terms of engagement of compilation engagement include:
• Procedures performed will not constitute an audit or reviews accordingly no opinion will basis expressed.
• The compilation cannot be relied upon to disclose errors or frauds.
• Fact that management is responsible for the accuracy completeness of information.
• The applicable framework.
• Intended use.
• Anticipated form of the report.
• The accountant is not required to make inquiries of management to assess the reliability and completeness of information, assess internal controls or verify any explanations.
If the accountant becomes aware that information supplied by management is incorrect incomplete or unsatisfactory what action should he take?
If the accountant becomes aware that information supplied by management is incorrect incomplete or unsatisfactory he should consider performing further procedures and request management to provide additional information. If management refuses to provide additional information, the accountant should withdraw from the engagement.
Enumerate basic elements of compilation report
Compilation report will include following matters:
• Identification of financial statements noting that it is based on information provided by the management.
• Management responsibility.
• A statement that neither an audit nor a review has been carried out and accordingly no assurance is expressed.
ou are employed as audit manager in Saleem and Company, Chartered Acountants, who have been appointed by Indigo Private Limited to prepare certain financial information. The management has informed that the information would be submitted to prospective private investors in a foreign country and the fact that the information has been prepared by your firm shall also be disclosed therein.
While preparing the financial information you identified that current
maturity of a long term loan amounting to Rs. 100 million has been shown as a long term liability, in the books of account. The management disagrees with your observations and believes that the amount should be disclosed as a long term liability. To support their point of view they have informed you that their negotiations with the lenders are at the advanced stages and the agreement for restructuring will be signed soon after the date on which the information is due for submission.
Draft a suitable report to address the above situation.
COMPILATION REPORT TO BOARD OF DIRECTORS
On the basis of information provided by the management we have compiled, in accordance with the International Standard of Related services applicable to compilation engagements, the balance sheet 0- Indigo (Private) Limited at December 31,2008 and statement of income and cash flows for the year then ended in accordance with the approve accounting standards as applicable in Pakistan.
Management is responsible for these financial statements. We have not audited or reviewed these financial statements and accordingly express assurance thereon.
We draw attention to note X to the financial statements. The management has disclosed the current maturity of loan amounting .
Rs. 10 million as long term liability.
What is the objective of due diligence work. Give some examples of the task involved in due diligence
The objective of due diligence is to provide all relevant facts about a proposed take over so that “surprises” are not revealed after the decision to take over. The task assists the purchaser to arrive at the conclusion whether the purchase consideration is not excessive.
Some of the tasks involved in due diligence are:
• Considering that all liabilities have been accounted for, including. contingent liabilities.
• Considering that all assets have been accounted for, in including internally generated intangibles (for example, brand names, customer database).
• Detailed study of debt covenants.
• Knowledge of all significant aspects of the business.
• Benefits of take over.
• Potential disadvantages of take over.
• Study of prior years’ financial statements.
• Study of forecast financial statements.