Accounting Services, Compilations and Reviews: Effective Risk Management

This course covers the whole spectrum of practice management issues: engagement acceptance, professional standards, independence rules, engagement and representation letters, performance standards, reporting, engagement administration, quality control, and peer review.

Highlights include: how to communicate engagement scope with clients; coverage of SSARS and TPAs; peer review deficiencies; firm vs. client responsibilities; supervision of client employees; prevention of engagement creep; engagement withdraw; and numerous illustrative examples, flowcharts, observations and engagement suggestions.

• Identify practices to efficiently manage compilation, review, and accounting services in conformity with current professional standards and best business practices
• Identify the risks inherent in bookkeeping, payroll, and other accounting services
• Identify the risk management practices available

Value Aid! AICPA Peer Review Checklists

Prerequisite: Experience in accounting services, compilations and reviews

Chapter 1 - Introduction

Learning Objectives

After studying this chapter, you should be able to

• Realize that efficient workpaper documentation is one of the keys to successfully performing small private business accounting and review engagements.
• Understand that professional standards, e.g., generally accepted accounting and review services standards, attestation standards, and quality control standards can be implemented and documented efficiently without sacrificing effectiveness.
• Describe why working papers are necessary and what professional standards say about the purposes of working papers.
• Describe the factors affecting the content, quantity, and type of working papers for small private business engagements.

Introduction

Practical guidance for developing and enhancing the accountant's ability to exercise professional judgment when designing appropriate, sufficient, and competent documentation for compilation, review, and attestation engagements of small business clients is the focus of this course. In addition, the concept of efficiently documenting the work performed, the appropriate response to engagement risks, and the conclusions reached in support of the accountant's report will also be heavily emphasized.

Although the form, content, and type of working papers is a matter of professional judgment, the changes in quality control standards (including Peer Review Program requirements), the increased oversight activities by regulators, and the ever-present litigation environment all combine to make effective and efficient documentation (including the rationale for modifying the generic forms, checklists, and practice aids provided by various vendors) more important than ever. The purpose of this seminar is to provide practicing professional accountants with practical guidance, suggestions, and considerations that will improve your ability, proficiency, and skills in the critical process of documenting procedures performed and conclusions reached when performing small private business engagements. The form and content of the participant manual and the efforts of the discussion leader will be focused on practical ways to comply with professional standards concerning documentation, which provide only general guidance.

Course Objectives

The emphasis in each of the chapters will be identifying ways to effectively and efficiently comply with AICPA professional standards concerning workpaper documentation. Practical applications (including ways to modify generic practice aids available from a variety of vendors) will be the centerpiece of the participant manual and classroom presentation. The unique characteristics of compilation, review, and attest engagements will be considered and suggested approaches to the documentation of the key issues in those engagements will be presented.

Specifically, attention will focus on how to document the processes related to

• Identifying and reaching appropriate conclusions as to engagement risk, business risk, and client risk associated with compilation and review engagements, and then designing appropriate responses to such risks.
• Planning the nature, extent, and timing of procedures to be performed.
• Analyzing the results of the work performed and forming appropriate conclusions.
• Supervising all aspects of the engagement to insure compliance with professional standards, including quality control.

Documentation Traps

• Too much
• Too little
• Wrong kind
• Forms-driven vs. risk-driven
• Ineffective/inefficient
• Not tailoring practice aids

Case Study - "Who Wants to See and Copy Our Work Papers?"

Introduction

Ben Cooper, a partner of the CPA firm of Cooper, Price, Anderson & Co. (CPA&Co), gazed out his office window. He tried to remember if he knew an attorney who would give him free advice. Unfortunately, he couldn't think of one offhand. Just then, Heather Hansen, a senior at the firm, walked in. "I have the indexes to the workpapers. Do you want to go over them now, or should I just leave them for you?" she asked. Ben grimaced. "Just leave them, I guess." Ben had been the partner on the Radio Systems, Inc. (Radio) engagement. Radio recently changed accountants. That didn't bother Ben too much. The client had not paid the bill anyway; so it was not a tragic loss. What bothered him now was that he was going to have to spend time on Radio's affairs, even though it apparently was no longer a client.

Background

CPA&Co. has provided accounting services for Radio for seven years. The firm compiled financial statements quarterly and reviewed the annual financial statements. In addition, it prepared the corporate tax return. Radio was a provider of frequency space for two-way radio, cellular, and paging companies on its network of towers and transmitters, which covered the metropolitan area in which Radio was located. Radio was owned by Madison and Carolyn Carson who were husband and wife. The Company was healthy, although it experienced seasonality in its business operations.

Each month, Radio mails its bank statements directly to CPA&Co., which reconciled them in conjunction with the quarterly compilations. Other accounting services performed during the compilation included posting property and equipment changes, calculating depreciation, proposing adjustment of journal entries, and drafting financial statements. The relationship seemed mutually satisfactory until earlier this year. The firm compiled the 1st and 2nd quarterly financial statements, and was preparing to compile the 3rd quarter when they were abruptly terminated.

In retrospect, Ben concluded that he should have suspected problems when Radio was slow in paying for the review engagement at the beginning of the year. Although the report had been delivered the first week of February, payment was not received until the 1st quarter's compilation was underway in late April. Generally, Radio was very satisfied with the professional services and paid its bills promptly. During the 1st quarterly compilation, however, the staff person working on the engagement reported that the records were not in as good shape as they usually were. It was also noted that the Carsons were not as accessible as they normally were. There were rumors that they were not getting along. By the time CPA&Co. began work on the 2nd quarterly compilation, it had not received payment for the 1st quarter's financial statement. It was also rumored that the Carsons had split up and were headed for divorce. When CPA&Co. completed the 2nd quarter engagement, it still had not been paid for the 1st quarter work. Ben delivered the financial statements and had a long talk with Madison Carson. Ben stressed that the firm would be unable to begin work on the 3rd quarter if the outstanding bills were not paid. Madison's reaction caught Ben by surprise. While Ben had expected an apologetic tone and a story about Madison's marital difficulties, Madison actually became very critical of CPA&Co's work. He said he thought the firm was unresponsive and that tax planning had been less than adequate. He said that he thought a CPA firm should be able to do a better job of minimizing Radio's income tax liability. Madison ended the conversation annoyed about being asked to pay the outstanding fees and by saying that he would have to evaluate the continuation of the relationship.

The Beginning of the End

In mid-August the first and second quarter fees were still unpaid. Ben was seriously concerned about whether they would ever get paid, and considered the ramifications of reminding Madison of his previous ultimatum. Ben was adamant that he wanted to get paid, but he was aware that the Carsons were now embroiled in an acrimonious divorce proceeding and that their conflict had adversely affected Radio's financial results. On the day after Labor Day, Ben got a call from Hal Westover, a partner with the firm of Westover, Hasler & Co., P.C. Hal informed Ben that his firm had just been engaged to provide compilation and review services for Radio. Hal informed Ben that he would have some questions to ask later on and that he would need copies of CPA&Co.'s workpapers. This conversation was not substantive, merely serving as a communication to let Ben know that there would be further contact.

The Requests to See and/or Copy Workpapers

Two weeks later, Ben received a letter from Hal Westover containing the formal request to review and copy CPA&Co.'s workpapers. Miffed, he put the letter aside and did not respond. Hal called a few days later and asked, "When can we meet. We need to begin the 3rd quarter engagement." Ben replied that he had no intention of sending copies of his files to Hal's firm. Hal got very upset and said that Ben was professionally obligated under SSARS to provide this information and he expected Ben to comply. Ben countered that he believed Hal had misread SSARS and he would not consider expending any time or money until CPA&Co. was paid for the work already completed. Hal concluded with a veiled threat to report Ben to the state board of accountancy and the Ethics Division of the AICPA unless the written request was complied with.

Ben called Radio and asked to speak to Madison. The receptionist seemed surprised to hear from Ben. She told him that Madison was not in and took a message. Madison did not call back. About a week later, Ben got another phone call regarding workpapers on Radio.

Carolyn Carson's lawyer had engaged another CPA to assist in the divorce proceedings. That accountant was now calling about the previous year-end's annual reviewed financial statements. He was trying to estimate a value for Radio and needed additional information. In addition, he

732822