Category Archives for "Accounting and Auditing"

SSAE 18: The Clarified Attestation Standards

By Charles Hall | Auditing

SSAE 18 is effective on May 1, 2017, and changes the Attestation Standards.

Do you issue any attestation reports such as agreed upon procedures? If yes, then be aware of the recent changes from the Auditing Standards Board (ASB). The ASB has clarified the Attestation Standards. The ASB did the same with the audit standards a few years ago; that change resulted in the AU-C (clarity) designations for audit standards.

The re-write of the Attestation Standards culminated in the April 2016 issuance of SSAE 18.

SSAE 18 supersedes all Attestation Standards other than:

• AT section 701, Management’s Discussion and Analysis (MD&A). AT section 701 will not be clarified because practitioners rarely perform attestation engagements to report on MD&A; it will be retained in the attestation standards in its current form. AT section 701 has been renumbered as AT-C section 395.

Also be aware that AT section 501 An Examination of an Entity’s Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements was moved to the auditing standards as Statement on Auditing Standards (SAS) No. 130, as An Audit of Internal Control Over Financial Reporting That is Integrated With An Audit of Financial Statements.

Just as the ASB did with the audit clarity standards, a “-C” is added to the clarified Attestation Standards. So the clarified attestation standards are identified as AT-C. The clarified standards are written using ASB’s clarity conventions, including:

• Objectives for each chapter
• Definitions in each chapter
• Separating requirements from application and explanatory material
• Using various formatting techniques such as bulleted lists to enhance readability
• When applicable, including additional considerations for governmental entities or smaller less complex entities

Attestation Levels of Service

The clarified standards provide for the following types of attestation services:

Service	AT-C Section	Report Type
Examination	205	Opinion
Review	210	Conclusion
Agreed Upon Procedures	215	Findings

Sample report excerpts follow:

Examination Report on Subject Matter; Unmodified Opinion

In our opinion, the schedule of investment returns of ABC Company for the year ended December 31, 2020, is presented in accordance with the ABC criteria set forth in Note 1 in all material respects.

Review Report on Subject Matter; Unmodified Conclusion

Based on our review, we are not aware of any material modifications that should be made to the accompanying schedule of investment returns of ABC Company for the year ended December 31, 2020, in order for it to be in accordance with XYZ criteria set forth in Note 1.

Agreed-Upon Procedures Report

We obtained the accounts receivable subsidiary ledger as of June 30, 2017, from Topaz, Inc. We compared all customer account balances in the aged trial balance (exhibit B) as of June 30, 2017, to the balances shown in the accounts receivable subsidiary ledger.

We found no exceptions as a result of the procedure.

New SSAE 18 Requirements

In addition to clarifying (restructuring) the attestation standards, SSAE 18 also:

• Separates the review engagement procedures and reporting requirements from those of examination engagements (and highlights the similarities of reviews performed under the SSAEs and those performed under Statements on Standards for Accounting and Review Services [SSARS])
• Requires the practitioner to request a written representation letter in all attestation engagements (the pre-clarity standards only required representation letters for certain engagements)
• Changes the existing requirements related to scope limitations, indicating that based on the practitioner’s assessment of the effect of the scope limitation, the practitioner should express a qualified opinion, disclaim an opinion, or withdraw from the engagement
• Eliminated compilations of prospective financial information from the attestation standards (the Accounting and Review Services Committee issued SSARS 23 to cover this service)

SSAE 18 Effective Date

The guidance in SSAE No. 18 is effective for practitioners’ reports dated on or after May 1, 2017.

For a full copy of SSAE No. 18, click here.

See may article regarding SSAE 19, Agreed Upon Procedures Engagements. 

Tick and Tie Financial Statements

By Charles Hall | Accounting and Auditing

What are the steps to tick and tie financial statements?

You may be wondering what “tick and tie” means. It refers the action an accountant performs when he agrees one financial statement number to another.  For example, the accountant can compare total assets with total liabilities and equity–they should be the same. If they are not, something is wrong. This is the purpose of ticking and tieing numbers: to ensure that the financial statements are correct. Accountants also compare financial statement numbers with note disclosures or to supplementary information. Again, many such numbers should agree.

Financial statements come in a wide variety of presentation formats depending on the industry and the requirements of the financial reporting framework (e.g., generally accepted accounting principles). Below I provide common numbers that accountants tick and tie (agree), assuming the financial statements include:

1. Balance sheet
2. Income statement
3. Statement of changes in equity
4. Cash flow statement

The Accounting Equation

Keep in mind the accounting equation: Total Assets = Total Liabilities + Total Equity.  All three (total assets, total liabilities, total equity) appear on the balance sheet.

Also, remember that net income–which appears on the income statement–is the result of subtracting expenses from revenues. In equation form, the formula is Net Income = Revenues – Expenses.

Tic and Tie Examples

Here are the numbers that should agree:

• Total assets equals total liabilities and equity (the balance sheet includes each of these)
• Net income on the income statement should agree with net income on the statement of changes in equity
• Net income on the income statement should agree with the first line on the cash flow statement (assuming the indirect method is used to prepare the cash flow statement)
• The last line of the cash flow statement is cash; this period-end cash balance should agree with the cash balance on the balance sheet
• The last line(s) of the statement of changes in equity (the period-end equity balance) should agree with the equity balance(s) on the balance sheet
• A statement of changes in equity can include multiple columns for each category of equity (e.g., retained earnings, common stock, paid-in capital); each of the ending equity balances should agree with the equity shown on the balance sheet
• Any payments made to the owners (e.g., distributions) appear on the statement of changes in equity and should agree with the same amount on the cash flow statement (in the financing section of the cash flow statement)
• If the cash flow statement is comparative (e.g., two-year presentation), the ending cash for the prior year should agree with the beginning cash balance in the current year
• If the financial statements contain notes, some disclosure numbers will agree with financial statement balances (e.g., the receivables note disclosure will usually include total receivables; this figure should agree with the receivable line on the balance sheet)
• The plant, property, and equipment note will typically include total depreciation expense for the year; this depreciation expense number should agree with the cash flow statement depreciation line (assuming the cash flow statement is shown using the indirect method)
• Supplementary information (e.g., a detail of other expenses) should agree with the other expense line on the income statement 

Closing Thoughts

The above list of tick-and-tie numbers is not comprehensive. There are too many variations in financial statement presentations to provide a full universal list. But, hopefully, this helps.

AICPA Code of Conduct

By Charles Hall | Auditing , Preparation, Compilation & Review

In this post, I provide information about accessing the AICPA Code of Conduct and the Plain English Guide to Independence.

Are you a CPA looking for answers to independence or other ethical questions? Below, you’ll see two handy AICPA resources:

• AICPA Code of Professional Conduct
• Plain English Guide to Independence

AICPA Code of Professional Conduct

The AICPA provides online access to the Code of Conduct. You can also download a PDF copy here (this PDF covers all standards issued through August 31, 2016).

Online access is free, and users are able to save searches and bookmark content.

The Code is organized into three parts:

1. Public practice
2. Members in Business
3. All other members (including those who are in between jobs or retired)

The Code includes a threats and safeguards framework. CPAs should identify threats and then consider safeguards to mitigate those threats. The CPAs can proceed with the engagement if threats–after considering safeguards–are at an acceptance level.

Plain English Guide to Independence

As the Quality Control partner for our firm, I receive quite a few questions about ethical issues (mainly about independence). Nine out of ten times I find the answers to those questions in the AICPA’s Plain English Guide to Independence. I download this guide and keep it handy. When I need to research an issue, I open the document and perform word searches. If you aren’t already using this resource, I highly recommend it. 

See my article CPA’s Ethics: Four Questions for Better Decisions.

Omitting the MD&A in Governments

By Charles Hall | Auditing , Local Governments

Omitting the MD&A in governments is not common, but it does occur.

According to AU-C 730, the auditor’s report on the financial statements should include an other-matter paragraph that refers to the required supplementary information (RSI). In governmental financial statements, the management, discussion, and analysis (MD&A) is considered RSI. Though the MD&A is “required” supplementary information, governments can–strangely enough–exclude it from the financial statements.

Omitting the MD&A – Effect on an Audit Opinion

If the required supplementary information is omitted, the auditor should include an other-matter paragraph in the opinion such as the following:

Management has omitted the management, discussion, and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

Notice the omission of the MD&A does not affect the opinion rendered (in other words, it does not result in a modified report).

RSI Audit Standard

AU-C 730 is the audit standard for required supplementary information. Click here for an overview of the supplementary information audit standards. The former supplementary information standards were SASs 118, 119 and 120; those standards are now–under the Clarity Standards–AU-C sections 720, 725, and 730.

Omitting the MD&A – Effect on a Compilation Report

The MD&A is sometimes omitted in financial statements subject to a compilation report. 

In compilation reports, the relevant language when omitting the MD&A is as follows:

Management has omitted the management, discussion and analysis that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board which considers it to be an essential part of financial reporting and for placing the basic financial statements in an appropriate operational, economic, or historical context. 

Do Loan Guarantees Create Liabilities?

By Charles Hall | Accounting

Can a loan guarantees create liabilities that go on the balance sheet of the guarantor?

Yes.

Recording Loan Guarantees

FASB 5 (now ASC 450) has been with us for some time. It states that a company should record a contingent liability if two things occur:

1. The liability is subject to estimation (you can calculate it)
2. It is probable that the liability will be paid

ASC 450 addresses these contingent liabilities.

FIN 45 (now ASC 460) was issued in the early 2000s to clarify that some loan guarantees create liabilities–even when there is no loan default. ASC 460 deals with noncontingent liabilities. And it’s the noncontingent piece that confuses everyone (including me). So let’s first take a look at noncontingent liabilities.

Noncontingent Liability

ABC Co. guarantees a $2,000,000 loan of XYZ Co. (an unrelated entity); in exchange, XYZ agrees to pay a fee of $50,000.

Should ABC Co. record a liability for the guarantee? Yes.

What’s the entry?

                                                         Dr.                 Cr.

Accounts Receivable                $50,000

Guarantee Liability                                           $50,000

The standard allows the guarantor to use the guarantee fee as a practical expedient to valuing the loan guarantee.

What if there is no guarantee fee? For instance, let’s say ABC Co. guarantees a loan for Sidewalk Safety Nonprofit, Inc. This guarantee is provided to the nonprofit free of charge. How would ABC Co. record this guarantee?

First ABC Co. would need to determine the value of the guarantee. If Sidewalk Safety’s interest rate is 8% without the guarantee, but now it’s 4%, then you can compute the differential using present value calculations. Let’s say the result is $40,000, what is the entry?

                                                                       Dr.                Cr.

Guarantee Expense (Contribution)      $40,000

Guarantee Liability                                                       $40,000

Guarantee of Related Party Debt

What if the loan guarantee is for an entity owned by the same parties? If the guarantee is on the debt of a related entity under common control, ASC 460-10-25-1 exempts the guarantor from the requirement to record the guarantee liability.

Next, we’ll see how to relieve the guarantee liability.

Guarantee Liability – In Subsequent Periods

After inception, the fair value liability (for both examples above) is taken to income as the guarantor is released from risk; the liability is to be adjusted to fair value at the period end.

ASC 460 does not provide detailed guidance as to how the guarantor’s initial liability should be measured after its initial recognition. Depending on the nature of the guarantee, the guarantor’s release from risk is recognized with an increase to earnings using one of three methods:

1. Systematic and rational
2. Deferring until expiration or settlement of the guarantee
3. Remeasurement at fair value (for guarantees accounted for as derivatives)

You now know how to account for the noncontingent liability, but what if the guaranteed party defaults on the loan. Now the guarantor needs to record the loan as a liability.

Contingent Liability

For example, what if Sidewalk Safety defaults on the loan? Then ABC Co. needs to book a liability for the remaining debt. Sidewalk Safety’s default triggers ASC 450.

This is the contingent piece of the equation (for which no amount is typically recorded at the inception of the guarantee). Upon Sidewalk Safety’s default, the debt amount is subject to estimation and payment is probable. ABC Co. is on the hook for the remaining debt.