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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 coverage of SSARS and TPAs; peer review deficiencies; fraud and independence issues; quality control, and engagement administration. Those who have practice management responsibilities for compilations, reviews and other accounting services will benefit from this course.
Objectives:
Identify practices to efficiently manage compilation, review and other accounting services in conformity with all applicable current professional standards and best business practices
Prerequisite: Experience both with compilation, review and accounting services and with engagement management and administration733481
Chapter 2 - Engagement Planning and Administration
Learning Objectives
• Understand the general considerations of accepting a compilation or review engagement.
• Recognize the importance of establishing an understanding with the client.
• Be aware of the guidance for changing the type of engagement.
• Understand the requirements for communications with predecessor accountants.
• Be aware of recurring deficiencies in compilation and review engagements.
Introduction
Some of the procedures that you should perform as part of accepting an engagement are broad in nature. They apply to the structure that should be in place within the accounting firm to evaluate each prospective compilation and review engagement, and they should take into account relevant portions of the Code of Professional Conduct and the firm's quality control system. This chapter discusses those client acceptance procedures, as well as other planning and administration issues that are unique to compilation and review engagements.
Client Acceptance and Retention
Standards that apply to compilation and review engagements emphasize the need for you to evaluate the prospective client carefully before accepting the engagement. Rule 201 of the Code of Professional Conduct specifically states that you should "undertake only those professional services that the member or the member's firm can reasonably expect to be completed with professional competence." This standard does not necessarily preclude you from accepting a compilation or review engagement that the firm is not fully qualified to execute at the time of acceptance. On the contrary, AR section 100 states that you could accept an engagement in an industry that you have no experience in as long as you obtain the necessary expertise before the engagement is completed.
Furthermore, the Statements on Quality Control Standards (SQCSs) require that quality control policies and procedures be in place to help you decide whether to accept a client or continue an association with an existing client. The purpose of the quality control requirement is to minimize the probability of your associating with a client whose management lacks integrity. See Chapter 6 for a complete discussion of the SQCSs.
SSARSs do not identify specific factors you should consider in determining whether to accept a compilation and review engagement; however, you should take the following steps:
• Evaluate prospective clients
• Identify intended users of the compiled or reviewed financial statements
• Assess the firm's capabilities
• Consider the firm's independence
Observation: The presentation of client acceptance procedures in this section is quite extensive, and may be more elaborate than is necessary for all engagements. Depending on the risk assessment and the size of the client, you may need only meet with the client, look over the client's records, and obtain a copy of the current financial statements and tax returns.
Evaluate Prospective Clients
After the initial contact by a prospective client but before the terms of the engagement are negotiated, you should evaluate the prospective client. This screening process should help you determine whether the prospective client fits with the type of practice that you are developing. Although various factors are relevant to the screening process, the following are the more basic steps that should be taken:
• Interview the prospective client.
• Read the prospective client's financial statements.
• Develop a preliminary understanding of the form of the prospective client's accounting records.
• Perform a preliminary evaluation of staff competencies.
• Communicate with the prospective client's predecessor CPA.
• Contact third parties familiar with the prospective client.
Interview the Prospective Client
After the prospective client initially contacts you, arrangements should be made for the two parties to meet. The meeting gives you the opportunity to speak directly with key management personnel or owners and to get a feeling for the skill level of personnel and the types of personalities in the client's company. Other areas that should be explored during the interview are
• Why the prospective client wants financial statements compiled or reviewed.
• What limitations, if any, the prospective client may impose on the engagement.
• A brief history of the prospective client, including identification of the principals involved and the management team.
• A summary of turnover of key personnel, including financial staff.
• Identification and description of pending or threatened litigation.
• How accounting policies are established and what recent changes have been made to accounting principles.
• Any conflict of interest between the accounting firm and the prospective client.
Read the Prospective Client's Financial Statements
The initial meeting with the prospective client affords you an opportunity to read prior financial statements. The financial statements can provide some idea of the sophistication of the prospective client's financial personnel. If the financial statements appear to be incomplete or erroneous (for example, you might see that routine adjustments such as provisions for depreciation expense and bad debt expense have not been made or that financial statement notes are incomplete), you and the prospective client should discuss what other accounting services must be performed before a compilation or review engagement can commence.
Develop a Preliminary Understanding of the Prospective Client's Accounting Records
Although compilation and review engagements do not require you to understand and evaluate the client's internal control, you should develop some understanding of the prospective client's accounting records. Ordinarily, this understanding would include identification of the types of journals and ledgers used, the manner in which data are processed (manually or electronically), the use of outside data processing services, and the training and level of education of the client's accounting personnel. A basic understanding of the prospective client's accounting records should alert you to whether additional accounting services are needed before a compilation or review engagement can be performed. In some instances, the accounting records may be so poorly designed and maintained that you will decide that a compilation or review engagement cannot be performed or that the potential for encountering problems is so great that it would be better not to accept the engagement.
Communicate with the Prospective Client's Predecessor CPA
SSARS standards provide the following definitions:
• Successor accountant – An accountant who has been invited to make a proposal for an engagement to compile or review financial statements and is considering accepting the engagement or an accountant who has accepted such an engagement.
• Predecessor accountant – An accountant who (a) has reported on the most recent compiled or reviewed financial statements or was engaged to perform but did not complete a compilation or review of the financial statements, and (b) has resigned, declined to stand for reappointment, or been notified that his or her services have been, or may be, terminated.
The successor accountant may (but is not required to) communicate with the predecessor accountant (with the prospective client's permission) to determine whether a compilation or review engagement should be accepted. AR section 400 notes that the inquiries "should be specific and reasonable regarding matters that will assist the successor accountant in determining whether to accept the engagement" and may include areas of inquiry such as the following:
• Management (owner's) integrity
• Disagreements concerning accounting principles, the performance of engagement procedures, or "similarly significant matters"
• Management cooperation with requests for additional or revised information
• Fraud or illegal acts
• The reason for the change of accountants
Generally the predecessor accountant should respond promptly and fully with inquiries posed by the successor accountant except in the case of unusual circumstances such as litigation. When the response is limited, the predecessor accountant should inform the successor accountant of this.
The successor accountant may also request, with the client's permission, a review of the predecessor accountant's working papers. AR section 400 notes that the predecessor accountant should determine which working papers should be made available to and copied by the successor accountant. AR section 400 notes that the predecessor accountant may decide to request a written communication from the successor accountant before allowing access to working papers.
Observation: If the successor accountant discovers during the engagement that the financial statements compiled or reviewed by the predecessor accountant might have to be revised, the successor accountant should request that the client inform the predecessor accountant of this possibility. AR section 400 states that if the client refuses to inform the predecessor accountant of the matter or is not satisfied with the predecessor accountant's response to the notification, the successor accountant should consider the impact (including withdrawal from the engagement or consultation with legal counsel) of such developments on the current engagement.
Observation: Interpretation No. 1 of AR section 400 states that the standards established by AR section 400 apply only when the successor CPA is contemplating the acceptance of a compilation or review engagement. If the CPA has not been engaged to report on an entity's financial statements but has been requested to provide written advice (1) on the application of accounting principles to specific transactions, (2) on the type of report that may be rendered on a client's financial statements, or (3) to intermediaries about the application of accounting principles not involving facts or circumstances of a particular principal, the standards established by AU section 625, Reports on the Application of Accounting Principles, should be observed. It should be noted that AU section 625 applies to oral advice as well.
Contact Third Parties Familiar with the Prospective Client
You should also consider contacting other parties familiar with the prospective client, including other accountants (including the predecessor CPA), bankers, the prospective client's attorney, and other business associates. In making such contacts, you must be careful not to breach any confidential relationships between the prospective client and other parties. It is a good idea for you to get the prospective client's permission before beginning any discussions with third parties.
Identify Intended Users of the Compiled or Reviewed Financial Statements
As part of client acceptance, you should determine the purpose of the compilation or review report. In general, the compilation and review report may be intended for use by management, governmental regulatory authorities, or such external parties as banks and other creditors. Although the specific compilation or review procedures do not depend on the users of the compiled or reviewed financial statements, you should assess the risk associated with each engagement – whether the final users of the statements are internal or external parties.
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