902

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902
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2011-10-31 09:55:12
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Pre engagement Activities
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Pre-Engagement Activities
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  1. 902 Pre-engagement and Planning Activities

    902.1
    The pre-engagement and planning activities discussed in this section
    are appropriate for both compilation and review engagements. They
    include the following specific procedures:
    a. Evaluating engagement acceptance and continuance.

    b. Evaluating the level of service to be performed.

    c. Establishing engagement terms and completing an engagement letter.

    d. Gaining knowledge of the client and its industry.
  2. Evaluating Engagement Acceptance and Continuance

    902.2
    SQCS No. 8 requires CPA firms to establish policies and procedures for
    the acceptance and continuance of client relationships and specific
    engagements. According to SQCS No. 8 (QC 10.27-.30),
    the policies and procedures should be designed to provide the firm with
    reasonable assurance that it will undertake or continue relationships
    and engagements only when the firm:
    a. Is competent to perform the engagement and has the capabilities, including time and resources, to do so;

    b. Can comply with legal and relevant ethical requirements; and

    c. Has considered the integrity of the client and does not have information indicating the client lacks integrity.
  3. 902.3
    Management's Integrity and Reputation.
    Quality control standards require CPA firms to establish policies and
    procedures to consider the client's integrity. SSARS compilations and
    reviews are typically performed for small entities
    • One of the characteristics of a
    • small entity is concentration of operational control in one or a few
    • individuals. In addition, CIRAs often delegate sufficient financial and
    • operational duties to outside managing agents. This means that a primary
    • consideration in client acceptance and continuance for a compilation or
    • review engagement is the general honesty and good faith of management,
    • including the managing agent. However, the client includes various
    • individuals such as the key management, related parties, and those
    • charged with governance. Consequently, the authors believe that the
    • integrity of any individuals who have more than just a passing
    • involvement with the entity should be considered. Knowledge about the
    • integrity of the client's management may be obtained from previous
    • experience with the client, former accountants, or other professionals
    • within the community
  4. 902.4 Communication with Predecessor Accountant.
    One way to obtain the information needed to evaluate a prospective new
    client is to confer with the entity's previous accountant. Unlike the
    auditing literature,
    • SSARS No. 4 does not require a
    • successor accountant to communicate with a predecessor, but provides
    • guidance that should be followed whenever a successor decides to
    • initiate such communication. However, the authors believe that
    • accountants should generally attempt this communication. The AICPA Code of Professional Conduct
    • requires the successor to obtain the client's permission before
    • contacting the predecessor. SSARS No. 4 defines predecessor accountant
    • and successor accountant, provides guidance regarding the acceptance of
    • an engagement, suggests inquiries the successor might decide to ask the
    • predecessor, and includes example language for a letter from a
    • predecessor to a successor when granting access to the work papers.
    • Appendix 2P of PPC's Guide to Compilation and Review Engagements is based on the example letter from SSARS No. 4.
  5. 902.5 A successor accountant may wish to obtain
    • copies of specific prior-year
    • workpapers from the predecessor. The successor accountant should review
    • the year-end adjusting entries to determine what workpapers the
    • predecessor may have prepared that may not be in the entity's possession
    • and ask for copies of those workpapers.
  6. 902.6 Evaluating Firm Competence, Capabilities, and Resources
    The next component considered when deciding whether to accept or
    continue an engagement requires policies and procedures that guide the
    firm to determine whether it has personnel who possess the competence
    and capabilities, along with scheduling availability to provide the
    desired services. SQCS No. 8 (QC 10.A11) offers the following matters to consider:
    • Do firm members have, or are they able to acquire, the requisite industry or subject matter knowledge?

    • Do firm members have, or are they able to acquire, the requisite experience with regulatory or reporting requirements?

    • Are there sufficient competent and capable firm personnel available to staff the engagement?

    • If specialists are needed, are they available?

    • For applicable engagements, are there individuals qualified to perform an engagement quality control review?

    • Can the firm meet the reporting deadline required by the engagement?
  7. 902.7 Compliance with Legal and Ethical Requirements. Another component when deciding whether to accept or continue
    • an engagement requires the firm to
    • develop policies and procedures to determine whether the firm can comply
    • with the requisite legal and ethical requirements of the engagement.
  8. 902.8 As discussed in section 101, CIRAs operate under a broad umbrella of federal regulations, including federal laws that are designed to
    • ensure fair housing practices, provide mortgage loans to individuals
    • purchasing units in CIRAs, and subsidize aspects of the operations of
    • certain CIRAs such as HUD-assisted projects. In addition, all 50 states
    • have enacted statutes to regulate the operations of condominiums and
    • condominium associations as well as, in some cases, HOA communities and
    • cooperatives. CIRAs also may be subject to regulations that are designed
    • to protect the personal and financial information of unit owners.
  9. 902.9 Section 100 of the AICPA's Code of Professional Conduct requires that members in public practice be
    • independent in fact and
    • appearance, as well as maintain integrity and objectivity when
    • performing professional services. Subject to mitigating factors, in
    • cases where it appears that a firm's independence, integrity, or
    • objectivity is likely to be impaired, the firm should decline to accept
    • an engagement. Section 214 of PPC's Guide to Compilation and Review Engagements
    • provides a more detailed discussion of independence issues related to
    • compilation and review engagements, including a discussion of the
    • effects of accounting/write-up services on independence. Section 601 of this Guide also discusses independence requirements in more detail.
  10. 902.10 Continuing Clients.
    For continuing clients, consider whether there are any significant
    changes in the following matters that would cause the firm to
    discontinue serving the client:
    • • Nature of the business.
    • • Management, including management agents.
    • • Financial condition.
    • • Conditions, events, or operating results that are relevant to the going-concern assumption.
    • • Loan covenant compliance.
    • • Litigation status.
    • • Control environment or activities.
    • • Fraud risks.
    • • Management attitude toward, or pressures on, the accountants.
    • • Scope of the engagement
    • .•Other internal or external conditions, including whether the CIRA is
    • controlled by the developer or whether control was turned over from the
    • developer to the unit owners.
    • • Changes in independence.
  11. 902.11 Engagement Acceptance Form. The “Engagement Acceptance Form” at HOA-CR-1
    is designed to help a firm make and document the acceptance or
    continuance decision. A CPA should complete this form when evaluating a
    potential new compilation or review client.
    • The practitioner may also use this form to evaluate the desirability of
    • continuing service to an existing client, particularly when a situation
    • arises that would have caused the firm to reject the engagement
    • initially. If issues involving the acceptance or continuance of a client
    • relationship or a specific engagement are identified and the firm
    • decides to accept or continue the client relationship or the specific
    • engagement, SQCS No. 8 requires that the firm document how the issues
    • were resolved. CPAs that will also perform an audit engagement for their
    • compilation or review client (for example, monthly compilations and an
    • annual audit) may choose to use the audit practice aid “Engagement
    • Acceptance and Continuance Form” at HOA-CX-1.1 for the compilation or review engagement as well as the audit engagement.
  12. Evaluating the Level of Service to Be Performed

    902.12
    The level of service a CPA will perform on a set of financial
    statements will depend on several factors, the more important of which
    are the following:
    • • The level of service required by state statutes on the CIRA's governing documents
    • .• The needs of the users of the financial statements.
    • • The cost of the engagement relative to other alternatives.
    • • The practitioner's independence.
  13. 902.13 Level of Service Required.
    The level of service that accountants will be engaged to provide on
    the CIRA's financial statements generally is specified by the state
    statutes that govern the CIRA or its governing documents
    • Often, an audit is required, but a
    • review is equally as common for some CIRAs, especially smaller CIRAs.
    • (Usually size is based on gross revenues from assessments.) Some state
    • laws also permit compilations in certain circumstances. When audited or
    • reviewed financial statements are required, those statements generally
    • satisfy the needs of other financial statement users.
  14. 902.14 Needs of Users of the Financial Statements.
    Most unaudited financial statements of CIRAs are prepared for one of
    four groups of users: management, governing board members and the unit
    owners to whom they are responsible, regulators, and banks or other
    creditors. The appropriate level of assurance for each user will, of
    course, vary with the circumstances. However, absent a requirement for
    audited or reviewed financial statements, the following generalizations
    can be made:
    • a. Compiled statements will usually be sufficient for management use, especially for interim periods.
    • b.
    • Governing board members who are not active in management and unit
    • owners probably prefer reviewed statements at least annually.
    • c. Regulators' requirements will vary with the state and the size of the CIRA.
    • d. Banks and other creditors usually want as much assurance as they can get.
  15. 902.15 Needs of Management..
    When the financial statements are intended for management use,
    helping the client determine the best level of service is a matter of
    proper communication.
    • The client tells the CPA what he
    • thinks he wants; the CPA explains the differences in procedures,
    • communications, and costs; the client asks the CPA for his view; the
    • client selects the level of service. As previously mentioned, a
    • compilation engagement usually is sufficient for use by management. Even
    • in that case, however, clients can select among a number of alternative
    • levels of service as well as types of presentations. For instance, they
    • may be able to select a compilation engagement with or without a
    • report. In addition, they might be able to choose between full
    • disclosure GAAP financial statements or financial statements that omit
    • substantially all disclosures. Therefore, the authors recommend that
    • accountants carefully discuss each of these alternatives with the client
    • before recommending a specific level of service.
  16. 902.16 Needs of External Users..
    When banks or other external users are involved, what is best for the
    client often becomes secondary to what is best for the external user
    • In many cases, the CPA will be
    • able to save his client unnecessary fees by properly explaining the
    • differences between compiled, reviewed, and audited financial statements
    • to the third party user. When recommending a level of service,
    • accountants also should keep in mind that they may be able to tailor the
    • engagement to meet the third party users' needs. For instance, a banker
    • whose loan is collateralized by a cooperative's receivables from
    • tenants may request an audit because he wants receivables confirmed.
    • However, if explained properly, the banker might accept reviewed
    • financial statements or an agreed-upon procedures report [performed in
    • accordance with SSAE No. 10, Attestation Standards: Revision and Recodification (AT 201, Agreed Upon Procedures Engagements)]
    • on tenant receivables. Another option would be to issue a compilation
    • report on tenant receivables [performed in accordance with SSARS No. 13 (AR 110), Compilation of Specified Elements, Accounts, or Items of a Financial Statement]. All of these alternatives would undoubtedly save the client money.
  17. 902.17 In other cases, the level
    of service to be performed is specified by an external user, such as
    with regulators. Are accountants responsible for determining the
    required level of service?
    • The answer to this question, in
    • the authors' opinion, is, “Absolutely not.” Management is responsible
    • for determining what level of service is required and engaging the
    • accountants to perform that service. However, if the accountants become
    • aware that the planned level of service does not meet relevant legal,
    • regulatory, or contractual requirements, the authors believe the
    • accountants should inform the client. When the CIRA requests a level of
    • service that does not satisfy legal or regulatory requirements,
    • accountants should inform the board of directors of the CIRA's legal
    • reporting requirements. (See paragraph 902.22.)
    • The authors suggest that this communication be made in writing. If done
    • orally, it should be documented in the engagement workpapers
  18. 902.18 Cost of the Engagement. As previously noted, an audit report is the highest level of assurance on financial statements a CPA can provide
    • It is also, however, the most
    • expensive. A review report provides less assurance than an audit report,
    • but also requires less work by the practitioner, resulting in a lower
    • fee. A compilation report provides no assurance about the fairness of
    • financial statements. Therefore, a compilation costs less than a review
    • or an audit of the financial statements. Given the cost variations, a
    • practitioner should carefully consider the client's needs and expected
    • benefits before suggesting a level of service.
  19. 902.19 Independence.
    A practitioner who is not independent with respect to a client may not
    issue an audit or a review report on its financial statements.
    • The accountant may, however, issue a
    • compilation report (modified for this lack of independence) regardless
    • of any independence conflicts. Practitioners should read Rule 101 of the
    • AICPA Code of Professional Conduct, interpretations of Rule 101, independence rulings, and the Conceptual Framework for AICPA Independence Standards (ET 100.01) for guidance concerning independence. These can be found in AICPA Professional Standards, ET Sections 100, 101, and 191. In addition, section 214 of PPC's Guide to Compilation and Review Engagements contains an extensive discussion of independence issues. Sections 103 and 601 of this Guide discuss independence issues unique to CIRAs.
  20. 902.20 Performance of Nonattest Services..
    A frequent concern about meeting independence requirements is the
    effect of providing accounting assistance to the client, including
    assisting in the preparation of the association's reserve study.
    • An accountant may be asked to
    • provide accounting services to CIRAs who are too small to employ an
    • adequate accounting staff, and concerns may arise that the accountant's
    • independence has been impaired in these circumstances. In addition, for
    • many small CIRAs, the accountant serves as a primary business consultant
    • and may unknowingly be providing services as a part of a compilation or
    • review engagement that impair his or her independence. Interpretation
    • 101-3 (ET 101.05), “Performance of Nonattest Services,” and the Conceptual Framework for AICPA Standards (ET 100) of the Code of Professional Conduct
    • provide independence guidance for accountants that perform nonattest
    • (other) services to their compilation, review, and audit clients. Before
    • performing any accounting, tax, or consulting service for a compilation
    • or review client, the accountant should carefully consider the
    • requirements of the Interpretation, which are discussed in section 103 of this Guide.
  21. 902.21 Unpaid Professional Fees.. Ethics Ruling No. 52 (ET 191.103-.104)
    states that a member's independence is considered to be impaired if,
    when the current year report is issued, billed or unbilled fees or a
    note receivable arising from the fees remain unpaid for professional
    services provided more than one year prior to the date of the member's report.
    (While Ruling No. 52 does not indicate that the unpaid fee must be of a
    certain amount before it impairs independence, the authors believe that
    clearly inconsequential amounts would not impair independence.)
    • Generally, the engagement partner assigned to each client is aware of
    • not only the status of uncollected fees, but also unbilled fees
    • applicable to that client. Accordingly, the authors believe that the
    • engagement partner (or the in-charge accountant under the engagement
    • partner's supervision) should have the primary responsibility for
    • determining if there are unpaid fees that would impair the firm's
    • independence. That partner should ensure that all prior year's fees are
    • collected before the current year's report is issued.
  22. 902.22 Changes in the Level of Service.
    A CIRA will occasionally request accountants to provide a lower level
    of service than that required by its governing documents or state
    statutes. For example, state statutes or the governing documents may
    specify an audit, but the CIRA may request the accountants to perform a
    compilation or a review instead.
    • In those circumstances, accountants
    • should inform the board of directors of the CIRA's legal reporting
    • requirements and the differences between compilations, reviews, and
    • audits. Management's response to such information should be considered
    • by the accountants in deciding whether to accept the engagement. The
    • authors recommend that the communication with the board of directors be
    • made in writing, and that if done orally, it be documented in the
    • workpapers.
  23. 902.23 Practitioners should be
    concerned with step-down engagements when the client requests a lower
    level of service after an engagement has already begun.
    • Although there may be acceptable
    • reasons for the request, the practitioner should consider withdrawing
    • from the engagement if the step-down request involves certain scope
    • restrictions, as discussed in section 204 of PPC's Guide to Compilation and Review Engagements. Practitioners should complete the “Checklist for a Step-down Engagement” at HOA-CR-2 when a client requests a step-down in the level of service
  24. Establishing Engagement Terms and Completing an Engagement Letter

    902.24 SSARS No. 19 (AR 80.02)
    requires that a CPA establish an understanding with the client
    regarding the services to be performed for compilation engagements and
    to document that understanding through a written communication with
    management (i.e., an engagement letter). The understanding with
    management regarding a compilation of financial statements should
    include the following (AR 80.03):
    • • The objective of a compilation is to assist management in
    • presenting financial information in the form of financial statements.•


    • The accountant uses information that is the representation of
    • management without undertaking to obtain or provide any assurance that
    • there are no material modifications that should be made to the financial
    • statements in order for them to be in conformity with the applicable
    • financial reporting framework (i.e., GAAP or an OCBOA).
  25. • Management is responsible for—
    • •• the preparation and fair presentation of the financial
    • statements in accordance with the applicable financial reporting
    • framework.
    • •• designing, implementing, and maintaining
    • internal control relevant to the preparation and fair presentation of
    • the financial statements
    • .•• preventing and detecting fraud.
    • •• identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.
    • •• making all financial records and related information available to the accountant.
  26. • The accountant is responsible for conducting the compilation engagement in accordance with SSARS issued by the AICPA.
    • • A compilation differs significantly from a review or audit of
    • financial statements. A compilation does not contemplate performing
    • inquiry, analytical procedures, or other procedures performed in a
    • review. Additionally, a compilation does not contemplate obtaining an
    • understanding of the entity's internal control; assessing fraud risk;
    • testing accounting records by obtaining sufficient appropriate audit
    • evidence through inspection, observation, confirmation, or the
    • examination of source documents; or other procedures ordinarily
    • performed in an audit. Accordingly, the accountant will not express an
    • opinion or provide any assurance regarding the financial statements.

    • The compilation engagement cannot be relied on to disclose errors, fraud, or illegal acts.

    • The accountant will inform the appropriate level of management of any
    • material errors and of any evidence or information that comes to the
    • accountant's attention during the performance of the compilation
    • procedures that fraud or an illegal act may have occurred (unless the
    • illegal acts are clearly inconsequential).

    • The effect of any independence impairments on the expected form of the accountant's report, if applicable.
  27. 902.25 HOA-CR-3.1
    contains an illustrative engagement letter that can be used to document
    the understanding with the CIRA when the compiled financial statements
    are for third-party use. When the financial statements are intended for
    management-use-only, SSARS No. 19 (AR 80.05) requires additional communications be included in the engagement letter.
    • However, as discussed in paragraph 903.8,
    • the authors believe it would be rare for a CPA to perform a
    • management-use-only compilation engagement for a CIRA. Accordingly,
    • neither those requirements, nor an example of an engagement letter for
    • that service, is provided in this Guide. PPC's Guide to Compilation and Review Engagements discusses the understanding with the entity when the financial statements are for management-use-only (see section 203 of that Guide), and includes illustrative engagement letters for such engagements (see Appendix 2L and Appendix 2M).
  28. 902.26 SSARS No. 19 (AR 90.03)
    requires the accountant to establish an understanding with management
    regarding the services to be performed for review engagements and to
    document that understanding through a written communication with
    management (i.e., an engagement letter). SSARS No. 19 also states that
    the understanding with management regarding a review of financial
    statements should include the following (AR 90.04):
    • • The objective of a review is to obtain limited assurance that
    • there are no material modifications that should be made to the financial
    • statements in order for the statements to be in conformity with the
    • applicable financial reporting framework (i.e., GAAP or an OCBOA).

    • • Management is responsible for—••
    • the preparation and fair presentation of the financial statements in
    • accordance with the applicable financial reporting framework.
    • ••
    • designing, implementing, and maintaining internal control relevant to
    • the preparation and fair presentation of the financial statements
    • .•• preventing and detecting fraud.
    • •• identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.
    • •• making all financial records and related information available to the accountant
    • .•
    • Management will provide the accountant, at the conclusion of the
    • engagement, with a letter that confirms certain representations made
    • during the review.
    • • The accountant is responsible for conducting the review engagement in accordance with SSARS issued by the AICPA.
    • A review includes primarily applying analytical procedures to
    • management's financial data and making inquiries of company management.
    • A review is substantially less in scope than an audit, the objective
    • of which is the expression of an opinion regarding the financial
    • statements as a whole. A review does not contemplate obtaining an
    • understanding of the entity's internal control; assessing fraud risk;
    • testing accounting records by obtaining sufficient appropriate audit
    • evidence through inspection, observation, confirmation, or the
    • examination of source documents; or other procedures ordinarily
    • performed in an audit. Accordingly, the accountant will not express an
    • opinion regarding the financial statements as a whole.

    • The review engagement cannot be relied on to disclose errors, fraud, or illegal acts.

    • The accountant will inform the appropriate level of management of any
    • material errors and of any evidence or information that comes to the
    • accountant's attention during the performance of the compilation
    • procedures that fraud or an illegal act may have occurred (unless the
    • illegal acts are clearly inconsequential).
  29. 902.27 The example engagement letter referred to in paragraph 902.25 is similar to those for commercial businesses.
    • However, there are certain matters that should be emphasized in CIRA
    • engagement letters. A discussion of additional items to consider in CIRA
    • engagement letters is included in section 603. See also the discussion beginning at paragraph 906.20
    • concerning the accountant's responsibility in a compilation or review
    • engagement for required supplementary information on future major
    • repairs and replacements.
  30. Gaining Knowledge of the Client and Its Industry

    902.28
    The SSARS require that an accountant who compiles or reviews financial
    statements have or obtain knowledge of the client's business and its
    industry. The accountant should obtain an understanding of the client's
    business and an understanding of the accounting principles and practices
    used by the client. The understanding of the client's business should
    include a general understanding of—
    • The client's organization.

    • Its operating characteristics.

    • • The nature of its assets, liabilities, revenues, and expenses.That
    • understanding is generally obtained through experience with the client
    • or its industry and inquiry of the client's personnel. The understanding
    • of the accounting principles and practices used by the client should
    • include the accounting principles and practices used in measuring,
    • recognizing, recording, and disclosing all significant accounts and
    • disclosures in the financial statements. The accountant should be alert
    • to changes in accounting principles and practices and differences from
    • norms.
  31. 902.29 Accountants need not be experts in the client's industry, nor
    even have experience in the industry. They must, however, be familiar with its unique principles and practices.
  32. 902.30 Client Information Form. The “Client Information Form” at HOA-CR-4 documents compliance with the SSARS regarding the knowledge required for both compilation and review engagements. Although
    • the level of knowledge required for a review is somewhat more
    • comprehensive than that required for a compilation, the authors have
    • chosen to use one form that meets both requirements. The extra time
    • necessary to complete the additional review engagement information is
    • minimal when compared to the benefit the extra information provides.

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