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LOC Guide > Sample LOC Findings
Sample Modifying LOC Findings: Engagement Reviews
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Reports not modified for OCBOA
Finding - In one of the compilation engagements submitted for review, we noted that the accountant's report was not modified to disclose the presentation of the accompanying financial statements on a comprehensive basis of accounting other than generally accepted accounting principles. Specifically, the financial statements were prepared on the [cash basis] [modified cash basis] [income tax basis] of accounting and omitted substantially all disclosures, but did not describe the basis of accounting in an attached footnote or in a note on the face of the financial statements. In these circumstances, Statements on Standards for Accounting and Review Services require disclosure of the basis of accounting in the accountant's report.
Recommendation - We recommend that the firm review the financial statements that it compiles and identify those prepared using a comprehensive basis of accounting other than generally accepted accounting principles. A memorandum should then be prepared highlighting the changes to be made in the current year and placed in the files of the client for whom the accountant's report must be revised. The revised report should describe the basis of accounting and state that it is a comprehensive basis of accounting other than generally accepted accounting principles. Alternatively, the firm's client may prefer to add a separate footnote to financial statements or include a note on the face of the statements.
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Specific omitted material disclosures
Finding - In the engagements that we reviewed, disclosures of related-party transactions and lease obligations as required by generally accepted accounting principles were not included in the financial statements, and the omission was not disclosed in the accountants' reports.
Recommendation - We recommend that the firm review the professional standards governing disclosures of related-party transactions and lease obligations and disseminate information regarding the disclosure requirements to all staff involved in reviewing or compiling financial statements. In addition, we recommend that the firm establish appropriate policies to ensure that the necessary related-party transaction and lease obligations are disclosed in financial statements reported on by the firm. For example, a step might be added to compilation and review work programs requiring that special attention be given to these areas.
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Lack of independence not disclosed
Finding - On one of the engagements that we reviewed, we noted that the firm's compilation report did not disclose the firm's lack of independence with respect to the financial statements as required by the AICPA Statements on Standards for Accounting and Review Services.
Recommendation - We recommend that the firm review the situations that can impair independence and determine if there are any other engagements where the firm's independence may be impaired. In addition, the firm should consider adding a step, during the final engagement review process, where independence in considered. The firm should also review independence requirements with other members of the firm.
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Cumulative effect of omitted disclosures is material and not disclosed in the report
Finding - During our review of the reports and financial statements issued by the firm, we noted instances where disclosures required by generally accepted accounting principles were either omitted or incomplete. The cumulative effect of the omitted or incomplete disclosures was significant to an understanding of the financial statements, but the accountant's report did not disclose the departure. Specifically, deficiencies were noted in the areas of:
[Material intercompany transactions] [Revenue recognition accounting policies] [Related party transactions] [Material debt obligations]
In one instance, the firm discussed the departures with its client and decided to recall its report and restate the accompanying financial statements.
Recommendation - We recommend that the firm establish a means of considering the cumulative significance of disclosure requirements in addition to the significance of individual disclosures. One way to accomplish this might be to acquire additional continuing professional education in accounting and reporting, use of a reporting and disclosure checklist on accounting engagements, or a "cold" review of reports and financial statements prior to issuance.
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Inappropriate OCBOA balances used in the financial statements
Finding - Our review identified an instance where compiled financial statements included balances that were inappropriate for the other comprehensive basis of accounting used and the accountant's report did not disclose the departure. Specifically, the financial statements included . . .
Recommendation - We recommend that the firm review the financial statements prepared during the last year and identify those that were prepared under an other comprehensive basis of accounting and determine that the accounts included are consistent with the basis of accounting used. The firm should then consider whether it is preferable to remove any inconsistent accounts from the financial statements or modify the accountant reports to disclose a departure from the basis of accounting.
offlocq06
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Omission of the statement of cash flows is not disclosed in the report
Finding - On one of the compilation engagements selected for review, the financial statements did not include a statement of cash flows as required by generally accepted accounting principles and the accountant's report did not disclose the departure. A statement of cash flows is required when financial statements intend to present both results of operations and financial position.
Recommendation - We recommend that the firm review its other compilation engagements and identify those prepared under generally accepted accounting principles. For those engagements, the firm should verify that either 1) a statement of cash flows is included for each period for which results of operations are presented when the financial statements present both results of operations and financial position or 2) modify the accountant's report to disclose the omission of the statement of cash flows.
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Required financial statement formats for specialized industries are not followed
Finding - The financial statements for one of the engagement reviewed did not conform to the presentation format required by generally accepted accounting principles for the specialized industry applicable to the engagement and the accountant's report did not disclosure the departure. Specifically the financial statements . . .
Recommendation - We recommend that the firm review the financial statement presentation requirements for the specialized industry applicable to the engagement. One source of information about financial statements presentation is the related industry accounting and auditing guide. In addition, the firm should identify it other engagements in this industry and place a memorandum in the client's file as a reminder to review the financial statement format during the next engagement.
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Failure of report to disclose omission of substantially all disclosures
Finding - The reports on compiled financial statements for the engagements selected for review did not indicate that the financial statements omitted substantially all disclosures required by [generally accepted accounting standards] [cash basis of accounting] [income tax basis of accounting]. In addition, selected disclosures presented did not include the caption "Selected Information - Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Omitted."
Recommendation - We recommend that the firm review its compilation engagements that are prepared with substantially all disclosures omitted and determine that the accountant's report includes a reference to the omission of substantially all disclosures.
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