AUD 6.07 - Letters for Underwriters

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  1. What is the role of the underwriter?
    To issue bonds on behalf of a company
  2. True / False: The auditor of the company FS is obligated to provide a comfort letter.
    • False
    • But, it’s good practice to keep a client
  3. What is the purpose of a comfort letter and to whom is it provided?
    • To provide negative assurance on unaudited interim FS for an underwriter’s due-diligence defense
    • Provided ONLY to
    • ** named underwriter
    • ** selling shareholder
    • ** sales agent
    • ** broker-dealer
    • ** financial intermediary
    • ** buyer/seller
  4. What requirements must be provided by the underwriter prior to issuing a comfort letter
    The underwriter must provide the auditor with an attorney’s opinion or representation letter confirming that the underwriter has a due diligence defense.
  5. True / False: The comfort letter is provided to the entity and may be provided to anyone who requests it.
    • False
    • The comfort letter is provided only to the underwriter
    • The letter clearly states a restricted use “solely for the information of the addresses and to assist the underwriters in conducting and documenting their investigation of the affairs of the company in connection with the [bond] offering.”
  6. What scope of services should be documented in the engagement letter to provide a comfort letter.
    • The auditor will perform a specific set of described procedures, per the underwriter’s direction.
    • The auditor will not provide any assurance that the procedures are sufficient
  7. True / False: The auditor must have knowledge of the entity’s internal control not only for the annual audit, but also for the interim period, in order to provide a comfort letter
    True
  8. Which date should be used on the comfort letter? Is the report date the same as the cutoff date? If they differ, what statement must be included?
    The cut-off date and report date may differ. If so, a statement that no procedures were performed between the cutoff date and the date of the report must be included.
  9. True / False: The auditor must be independent to provide a comfort letter.
    True
  10. What components are included in a comfort letter.
    • Date of report
    • Addressee: only to the requesting party, or the requesting party and entity
    • Introductory Paragraph: identifies the FS and the securities offering
    • Auditor’s Report: reference to the report of the audited FS
    • Representations: refer to the requesting party’s representations
    • Independence: statement of auditor’s independence (positive assurance)
    • SEC Compliance (special option, only if auditedFS): If requested, the auditor is to provide positive assurance as to whether the interim FS comply as to form, in all material respects, with the applicable accounting requirements of the 1933 Act and the related rules and regulations adopted by the SEC
    • Information Other Than Audited FS: describe the procedures performed and provide negative assurance. This includes if the annual FS were unaudited but reviewed.
    • Restricted Use Paragraph: only for the underwriter’s use
  11. What are the criteria for providing negative assurance?
    • The information must be derived either directly, by analysis, or by computation from the accounting records subject to internal control over financial reporting
    • The information is capable of evaluation against reasonable criteria that have been established by the SEC
  12. A company will take the audited FS, and add or remove items that the company believes are one-time or special events that materially affected the FS, but skew the performance of the company. The company then issues the modified FS. What are these types of FS called?
    Pro Forma
  13. Are pro forma statements GAAP?
    No – these are non-GAAP
  14. Can an auditor provide negative assurance on pro forma financial information? If so, what conditions must be met?
    • Yes, provided the auditor
    • ** has an appropriate level of knowledge of the accting and financial reporting practices of the entity
    • ** has performed an audit of the annual FS OR has reviewed the interim financial information
  15. What 3 levels of service may be performed by an auditor regarding financial forecasts, and which requires independence.
    • Agreed Upon Procedures
    • Compilation
    • Examination, the only one that requires independence
  16. True / False: Financial forecasts are only limited use
    • False
    • Financial forecasts may be for general or limited use
  17. A requesting party has engaged the auditor to perform agreed upon procedures on a financial forecast as an addition to the comfort letter. What is the auditor’s responsibility?
    • Obtain an understanding of the entity’s internal control over financial reporting for both the annual and interim periods
    • Perform procedures required by the attestation standards for reporting on the compilation of a forecast
    • Issue a report on the procedures and results
    • Do not provide negative assurance
    • Attach the report to the comfort letter
  18. A requesting party has engaged the auditor to perform a compilation on a financial forecast as an addition to the comfort letter. What is the auditor’s responsibility?
    • Obtain an understanding of the entity’s internal control over financial reporting for both the annual and interim periods
    • Perform procedures required by the attestation standards for reporting on the compilation of a forecast
    • Issue a compilation report
    • Do not provide negative assurance
    • Attach the report to the comfort letter
  19. A requesting party has engaged the auditor to perform an examination on a financial forecast as an addition to the comfort letter. What is the auditor’s responsibility?
    • Obtain an understanding of the entity’s internal control over financial reporting for both the annual and interim periods
    • Perform procedures required by the attestation standards for reporting on the examination of a forecast
    • Provide negative assurance that includes the following: “based on our review, we are not aware of any material modifications regarding the assumptions used in the accompanying financial forecast for it to be in accordance with AICPA standards for the presentation of financial forecasts. We (the auditors) have no responsibility to update this information, nor are we vouching for the achievability of these forecasts.”
    • Attach the report to the comfort letter
  20. What is the time limitation wherein an auditor can provide negative assurance regarding subsequent changes on the previously performed audit or review.
    135 days (approx 4.5 months)
  21. What 3 items should the auditor NOT provide comment or assurance?
    • Market risk sensitive instruments
    • Qualitative disclosures
    • Information subject to legal interpretation
  22. REVIEW THE SKILLS PRACTICE FOR THIS MODULE
    It’s really good
  23. True / False: The auditor who is providing a comfort letter should provide negative assurance regarding the conformity with the disclosure requirements of Reg S-K
    • False
    • Absolutely no assurance or comment regarding this item should be provided

Card Set Information

Author:
BethG
ID:
333021
Filename:
AUD 6.07 - Letters for Underwriters
Updated:
2017-07-20 14:26:54
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audit AUD
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Description:
Becker Review 2017
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