When considering accepting an engagement of the audit of special-purpose financial
statements, the auditor should do the following:
• Obtain an understanding of the purpose for which the financial statements are
being prepared, intended users, and steps taken by management to ensure that the
framework is acceptable under the circumstances.
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In the report on special-purpose financial statements, the auditor will:
• Adequately describe the applicable financial reporting framework.
• Evaluate whether the financial statements have the appropriate title.
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As noted by AU-C 805 (paragraph .A2), “The following are examples of single financial
statements, each of which would include related notes:
• Balance sheet
• Statement of income or statement of operations
• Statement of retained earnings
• Statement of cash flows
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a. The report title does not have the word independent in it. It is required by the
auditing standards to be included so as to clearly differentiate the auditor’s report from
other reports that may be in the same document, such as a report from management.
b. Introductory paragraph:
i. The financial statements should not be titled as balance sheets and statements of
income. This implies GAAP basis statements. Rather, they should be titled
c. Scope paragraph:
i. “free of material errors.” should read “free of material misstatements.”
d. Explanatory paragraph
i. The auditor should indicate the cash basis is a comprehensive basis of
accounting other than GAAP to meet the first standard of reporting.
e. Opinion paragraph:
i. “Financial position” should be replaced with “assets and liabilities arising from
cash transactions” and “results of operations” should be replace with “revenues
f. Signature
i. The report should be signed in the name of the firm, not an individual. This
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Board of Directors
XYZ Company, Inc.
We have examined the financial statements of XYZ Company, Inc., for the year ended
June 30, 2015, and have issued our report thereon dated August 15, 2015. Our
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examination was made in accordance with generally accepted auditing standards and,
accordingly, included such tests of the accounting records and such other auditing
procedures as we considered necessary in the circumstances.
In the course of our examination, we examined the provision for federal and state income
taxes for the year ended June 30, 2015, and the related accruals and deferred income
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“An agreed-upon procedures engagement is one in which a practitioner is engaged by a
client to issue a report of findings based on specific procedures performed on subject
matter” (AT 201, paragraph .03). In this type of engagement, the independent practitioner
is engaged to assist in evaluating subject matter or an assertion. Agreed-upon procedures
vary widely, so the nature, timing, and extent of agreed-upon procedures will also vary.
Examples of appropriate procedures include the following (AT 201, paragraph .17):
• “Execution of a sampling application after agreeing on relevant parameters
• Inspection of specified documents evidencing certain types of transactions or
Examples of inappropriate agreed-upon procedures include the following (AT 201,
paragraph .18):
• “Mere reading of the work performed by others solely to describe their findings
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Prospective financial statements are “either financial forecasts or financial projections
including the summaries of significant assumptions and accounting policies” (AT 301,
paragraph .08a). A financial forecast includes “prospective financial statements that
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A compilation of prospective financial statements involves:
• Assembling prospective financial statements based on the responsible party’s
assumptions; assembling involves the manual or computer processing of
mathematical or clerical functions to achieve the presentation of prospective
financial statements.
The following are standards that the practitioner should comply with when compiling
prospective financial statements (AT 301, paragraph .15):
a. “The compilation should be performed by a person or persons having adequate
technical training and proficiency to compile prospective financial statements.
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An examination differs from a compilation in that the practitioner is not the individual
responsible for preparing the financial statements. Rather, the practitioner’s role in this
setting is to evaluate and report upon those financial statements.
An examination of prospective financial statements involves:
a. “Evaluating the preparation of the prospective financial statements.
d. Issuing an examination report” (AT 301, paragraph .29).
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Historical financial information describes actual results of financial information. In
contrast, pro forma financial information shows “what the significant effects on historical
financial information might have been had a consummated or proposed transaction (or
event) occurred at an earlier date” (AT 401, paragraph .04).
The presentation of pro forma financial information should adhere to the following
guidelines:
• It should describe the transaction or event that is reflected in the pro forma
financial information.
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The following procedures are appropriate for examining or reviewing pro forma financial
information:
• Obtain an understanding of the underlying transaction or event.
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• Discuss management’s assumptions regarding the effects of the transaction or
event.
• Evaluate whether pro forma adjustments are completely recorded.
• Obtain sufficient appropriate evidence to support any pro forma adjustments. The
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Forensic accounting involves detailed investigation of situations where fraud has already
been identified or where fraud is highly suspected. Exhibit 17.19 contains a summary of
differences between forensic accounting and auditing.
Exhibit 17.19
Differences Between Forensic Accounting and Auditing
Area
Forensic Accounting
Auditing
Focus
Getting the perpetrator to confess
Known frauds or areas where fraud is
Fairness of financial statements
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Approach
Interviews
Reconstruction of damages
100% examination of targeted files
Sampling, analytical review,
tests of controls, substantive
procedures, based on materiality
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Non-financial reporting is the “practice of measuring, disclosing and being accountable to
internal and external stakeholders for organisational performance towards the goal of
sustainable development.” Corporate social responsibility reporting is the “continuing
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Factors that have driven the demand for sustainability reporting include investor interest,
Exhibit 17.20
Standards for Sustainability Reporting and Assurance
sustainability planning and performance. This framework allows for a great
Global Reporting
Initiative
Global Reporting Initiative (GRI) Sustainability Reporting Guidelines
(https://www.globalreporting.org/reporting/G3andG3-1/g3-
guidelines/Pages/default.aspx). This framework and guidance assist
companies in determining how and what to report in terms of their
recommended.
providers.
AccountAbility’s AA1000 series are principles-based standards to help
organizations become more accountable, responsible and sustainable. They
address issues affecting governance, business models and organizational
than audits or reviews of historical financial information.
IAASB and AICPA general standards for providing assurance and
attestation services can be adapted to the context of sustainability reporting,
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It is not unethical for a company to provide a sustainability report, but to provide no
assurance on the reliability of the information contained therein. Rather, this is simply a
Application Activities
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The web sites of these organizations are constantly changing, as are the associated agenda
items. So, the instructor should review the status of sustainability initiatives at the time of
the assignment.
a. The activities are similar in that all the organizations except the PCAOB address
sustainability in some fashion. The AICPA and the IAASB address the issue from an
assurance perspective, while the IFAC addresses the issue from a preparer perspective.
b. The implication of the PCAOB’s decision to not address sustainability is that it is
simply allowing other organizations to tackle the issue without unnecessary
c. The implications of differences in sustainability reporting internationally are
primarily concentrated on preparer difficulty (in deciding what to report and how to
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The answers to these questions will depend entirely on the companies chosen. To
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The information to answer these questions was obtained from www.sasb.org in July
2014. As the SASB evolves, it is likely that the responses to these questions may change.
a. SASB’s mission is to develop and disseminate sustainability accounting standards
that help publicly-listed corporations disclose material factors in compliance with SEC
requirements. Through these standards, along with associated education and outreach,
b. The U.S. financial accounting system, which requires transparent disclosure of
material issues to investors, plays a fundamental role in making our markets the most
efficient, liquid, and resilient in the world. However, the construct for standardized
financial reporting to investors was developed in a time when a company’s ability to
c. Standards have been issued for the following sectors: Health Care, Financials,
Technology & Communications, and Non-renewable Resources. Draft Standards exist for
the following sectors: Transportation and Services.
d. The Board of Directors includes a list of very influential individuals, including
Michael Bloomberg, Bob Eccles (Harvard Professor), Mary Shapiro, and Elisse Walter.
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Academic Research Case
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a. There has been rapid growth in sustainability reporting over the last decade.
These reports can provide increased transparency and accountability. However, some
argue that since this reporting is voluntary it is nothing more than an attempt for good
public relations and allows corporations to engage in impression management. The
b. The authors indicate that their analysis of 77 sustainability reports issued by U.S.
corporations in 2006 suggests that that there is a favorable selectivity bias when
companies determine which items to present in graphical format. More specifically, the
authors find that the overwhelming majority of graphs portray items exhibiting favorable
c. The results of this paper can help inform the discussions on whether sustainability
reporting should be voluntary or mandated and whether standards related to sustainability