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Engagement Review
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LOR Samples
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Updated 2/13/2005

       REPORTING MATTERS

e01
Back to Engagement Performance Index

Symptom: Inappropriate financial statement titles used in the report
Design: Lack of policy to determine adequacy of reports

Comment - The firm has not established quality control policies and procedures for engagement review as it relates to the form and content of reports accompanying financial statements. As a result, on several engagements, we noted instances where an audit report did not contain the title "Independent Auditor's Report" and other instances where titles used in the report were not consistent with those used in the financial statements. None of the deficiencies were of such significance as to cause the reports to be materially misleading.

Recommendation - The firm should develop policies and procedures for engagement review as it relates to the form and content of reports accompanying financial statements. One method of accomplishing this objective, although not required by professional standards, is through the use of a financial reporting checklist.

e02
Back to Engagement Performance Index

Symptom: Report covering financial statements prepared on a basis required by a regulatory agency does not conform to professional standards.
System Cause: Engagement review procedures not appropriately comprehensive.

Comment - The firm's policies and procedures require the engagement partner to review the accountant's or auditor's reports and accompanying financial statements before they are issued. However, the firm does not use other quality control materials as an aid in reviewing reports and financial statements, nor does it require a pre-issuance review of financial statements by a partner not associated with the engagement. During our review, we noted instances where the accountant's reports did not report on supplementary data included in the financial statements. In addition, an auditor's report covering financial statements prepared on a basis prescribed by a regulatory agency did not include the appropriate wording required by professional standards. None of the reporting deficiencies were misleading.

Recommendation - The firm should reemphasize to its owners the importance of thoroughly reviewing auditor reports and accompanying financial statements before issuance. In addition, the firm should obtain or develop a comprehensive reporting checklist. The firm should then amend its quality control policies and procedures to require its use on all engagements, and require the engagement partner to review the checklist prior to issuance of the accountants' or auditors' reports

e03
Back to Engagement Performance Index

Symptom: Inappropriate financial statement titles used in the report.
System Cause: Did not follow policy to use reporting checklist.

Comment - Although the firm's quality control policies and procedures require the completion of a financial reporting checklist, one was not prepared for several engagements. As a result, on several engagements, we noted instances where an audit report did not contain the title "Independent Auditor's Report" and other instances where titles used in the report were not consistent with those used in the financial statements. None of the deficiencies were of such significance as to cause the reports to be materially misleading.

Recommendation - The firm should emphasize to its personnel the importance of complying with its policy of preparing a financial reporting checklist. The completion of the checklist should be monitored as part of the final review of an engagement.

e04
Back to Engagement Performance Index

Symptom: Report wording departures.
System Cause: Unfamiliarity with the reporting checklist questions.

Comment - The firm's quality control policies and procedures require the completion of a financial reporting checklist. Although one was prepared, in several engagements, we noted inappropriate answers on the checklists. As a result, on several reports, we noted instances where titles used in the report were not consistent with those used in the financial statements. None of the deficiencies were of such significance as to cause the reports to be materially misleading.

Recommendation - The owners of the firm should carefully review the proper use of its reporting checklist as part of the final engagement review. In addition, a training session should e held to review the questions on the reporting checklist and to establish procedures for resolving issues when questions arise.

e05
Back to Engagement Performance Index

Symptom: Supplementary information not reported on.
System Cause: Issue not identified during the engagement review process.

Comment - The firm's policies and procedures require the completion of a financial reporting checklist that includes consideration of reporting on supplemental information accompanying the basic financial statements. Although a checklist was prepared, in several engagements, supplemental information was not identified as such and the accountant's report did not report the level of responsibility taken for that information. The deficiencies were not of such significance as to cause the reports to be misleading.

Recommendation - The owners of the firm should carefully review the proper use of its reporting checklist as part of the final engagement review. In addition, a training session should e held to review the questions on the reporting checklist and to establish procedures for resolving issues when questions arise.

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e20
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Symptom: Omitted disclosures in the financial statements
System Cause: Lack of a policy or procedure to determine disclosure completeness

Comment - The firm has not established quality control policies and procedures for engagement review as it relates to determining the completeness of financial statement disclosures. As a result, on several engagements, we noted several instances where financial statements did not include all disclosures required by generally accepted accounting principles. None of the missing disclosures were of such significance to make the financial statements misleading.

Recommendation - The firm should develop policies and procedures for engagement review as it relates to assessing the adequacy of financial statement disclosures. One method of accomplishing this objective, although not required by professional standards, is through the use of a financial statement reporting and disclosure checklist.

e21
Back to Engagement Performance Index

Symptom: Omitted disclosures in the financial statements
System Cause: Engagement review procedures not appropriately comprehensive

Comment - The firm's policies and procedures require the engagement partner to review the firm's reports and the accompanying financial statements before they are issued. Although not required by professional standards, the firm does not use disclosure checklists as an aid in the review of financial statements. On several engagements reviewed, the financial statements did not include all the disclosures required by generally accepted accounting principles, particularly in the areas of related party transactions and leases. None of the missing disclosures were of such significance to make the financial statements misleading.

Recommendation - The firm should revise its quality control policies and procedures for ensuring that clients' financial statements include all relevant disclosures, such as by obtaining or developing comprehensive reporting and disclosure checklists. The firm should then amend its quality control policies and procedures to require that these checklists be completed by a member of the engagement team, reviewed by the engagement partner, and retained with the engagement working papers.

e22
Back to Engagement Performance Index

Symptom: Omitted disclosures in the financial statements
System Cause: Did not follow policy to use disclosure checklist

Comment - Although the firm's quality control policies and procedures require the completion of a financial statement disclosure checklist for its full disclosure engagements, one was not prepared for several engagements. As a result, in several engagements, we noted the omission of several disclosures required by generally accepted accounting principles. None of the missing disclosures were of such significance to cause the financial statements to be misleading.

Recommendation - The firm should emphasize to its personnel the importance of complying with its policy of preparing a financial statement disclosure checklist for its full disclosure engagements.

e23
Back to Engagement Performance Index

Symptom: Omitted disclosures in the financial statements
System Cause: Unfamiliarity with disclosure checklist questions

Comment - The firm's quality control policies and procedures require the completion of a financial statement disclosure checklist for its full disclosure engagements. However, on several engagements reviewed, we noted inappropriate answers on the checklists. As a result, several financial statements did not disclose all the disclosures required by generally accepted accounting principles. This was caused by staff unfamiliarity with using the checklists and resolving questions about disclosures. None of the missing disclosures were of such significance to cause the financial statements to be misleading.

Recommendation - The owners of the firm should carefully review the proper use of its financial statement reporting and disclosure checklist as part of the final financial statement review. In addition, a training session should be held to review the questions on the checklist and establish procedures for resolving issues when questions about disclosures arise.

e24
Back to Engagement Performance Index

Symptom: Inappropriate answers noted on some disclosure checklist questions
System Cause: Disclosure materiality not consistently considered for some financial statement elements

Comment - The firm's quality control policies and procedures require that a financial statement disclosure checklist be completed for its full disclosure engagements. The firm complied with this policy, however, it has not established a consistent approach to evaluating the applicability and materiality of financial statement disclosures. As a result, for several engagements reviewed, some disclosure checklist questions, related to existing financial statements elements, were answered "not applicable." Based on workpaper documentation, it was not apparent if these disclosure matters were considered and if so, whether the conclusion was reached that the disclosure elements were not material. Based on our discussions with firm personnel, we concluded that the checklist questions related to disclosure elements that were not material to the financial statements.

Recommendation - The firm should carefully review, with its staff, the proper use of its financial statement disclosure checklist. In particular, checklist preparers should be reminded to distinguish between disclosure matters that do not apply and those that could apply, but are not material. Although, not required by professional standards, it may be helpful to distinguishing notation on the face of the disclosure checklist or in the engagement workpapers. This documentation may also facilitate the review by the firm owner during the final review stage of the engagement. Finally, checklist preparers should be reminded to consult with an appropriate source when questions arise about the applicability of a disclosure checklist question.

e25
Back to Engagement Performance Index

Symptom: Several disclosure, reporting and presentation deficiencies were noted
System Cause: Firm used a condensed rather than a comprehensive disclosure and reporting checklist

Comment - The firm's quality control policies and procedures require the completion of a comprehensive financial reporting and disclosure checklist. However, we noted several instances where a condensed checklist was used for compilation and review engagements. The condensed checklist did not include references to some recent professional standards and we noted some inappropriate answers to a few checklist questions. As a result, in one engagement, financial statement titles for compiled financial statements prepared on an other comprehensive basis of accounting were not modified to reflect the basis of accounting used, although the accompanying accountant's did appropriately disclose the basis of accounting. In another engagement, we noted that the accountants' report did not include a reference the change in equity presented in the financial statements. None of the matters noted caused the reports or the financial statement to be misleading.

Recommendation - The firm should emphasize to its personnel the importance of complying with its policy of using current, comprehensive financial reporting and disclosure checklists. In addition, the firm should review the proper procedures for answering questions on the checklists. Although we noted no deficiencies related to this, the firm may also want to establish guidance for considering and documenting the resolution to checklist questions when applicability or materiality issues arise.

e26
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Symptom: Financial statement format and disclosure departures from GAAP
System Cause: No procedure for monitoring the contents of the firm's library

Comment - The firm's quality control system does not provide a means of ensuring that its library contains all relevant technical manuals, such as a periodic review of library contents. Our review disclosed that the firm's reference library contained outdated editions of professional standards and lacked industry accounting and auditing guides for some of the industries in which the firm's clients operate. As a result we noted a few instances where financial statement formats and disclosures departed from professional standards. However, none of these instances caused these financial statements to be misleading.

Recommendation - The firm should acquire current editions of professional standards as well as audit and accounting guides for industries in which the firm practices. In addition, the firm should revise its quality control policies and procedures to ensure that the library is comprehensive and up-to-date and that it includes all industry and accounting guides for the industries in which the firm operates.

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e40
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Symptom: Specialized industry audit procedures not performed
System Cause: Lack of the use of tailored audit programs

Comment - The firm requires that a standard audit program be used on all audit engagements, but does not require this audit program be tailored to cover the requirements of specialized industries, when necessary. Our review of engagements disclosed that, while the audit program had not been tailored to reflect special industry requirements, the procedures performed were appropriate and sufficient in the circumstances.

Recommendation - The firm's planning policies and procedures should be expanded to include a review and, when necessary, tailoring of the audit program before the start of field work. The firm should consider obtaining or developing audit programs that are reflective of the specialized industries in which its clients operate.

e41
Back to Engagement Performance Index

Symptom: Management representation letters not tailored for specialized engagements
System Cause: The firm did not comply with its requirement to tailor representation letters

Comment - The firm's quality control policies require that the firm's professional reference material be consulted when performing engagements in specialized industries. These practice aids include guidance and examples for tailoring client management representation letters for circumstances unique to specialized audits. However, during our review, we noted that this policy was not complied with. As a result, the representation letters for the firm's audits did not include some elements required by professional standards. Specifically, the firm's representations about compliance and internal control contemplated by Government Auditing Standards were not included. In addition, when an attorney was not consulted about possible litigation matters, the management representation letters did not include this representation. We were able to determine that the other substantive tests performed by the firm compensated for the omitted written representations.

Recommendation - We recommend that the firm review its reference sources related to its current audits in specialized industries and identify those characteristics that may require the firm to obtain unique representations. In addition, the firm should add a step to its standard audit procedures to determine that management representation letters have been appropriately tailored for the engagement. This procedure should be reviewed for completion during the engagement review stage of the audit.

e42
Back to Engagement Performance Index

Symptom: Lack of consultation when it would have been appropriate to consult
System Cause: Consultation situations not identified

Comment - Our review disclosed that the firm's consultation policies and procedures do not identify situations where, because of the nature or complexity of the subject matter, consultation ordinarily is needed. As a result, we noted a few instances where consultation was lacking when it would have been appropriate. These instances did not, however, result in the issuance of an inappropriate report.

Recommendation - The firm should revise its quality control policies and procedures to specify the situations where, because of their nature or complexity, consultation is required. Such situations might include the following: 1) the application of newly issued technical pronouncements, 2) the application of a regulatory agency's filing requirements, 3) industries with special accounting, auditing or reporting considerations, 4) emerging practice problems, and 5) cases where there is a choice among alternative generally accepted accounting principles.

e43
Back to Engagement Performance Index

Symptom: Misapplication of a generally accepted accounting principle
System Cause: Did not follow policy to seek proper consultation

Comment - The firm's quality control policies and procedures state that when experience is not available within the firm to resolve a practice question or problem, the engagement partner should consult with outside sources such as the AICPA or another practitioner. Our review disclosed an instance where the firm did not have the experience required and did not consult an external source as required. In this instance, a partner designated as a specialist in another industry was consulted, but the advice rendered resulted in the misapplication of a generally accepted accounting principle. Since the amount involved did not make the financial statements misleading, the firm did not have to recall its report; the client has agreed, however, to adjust the financial statements in the next period in which they are prepared.

Recommendation - We recommend that the firm reemphasize the importance of consulting the appropriate authorities. Designated specialists should also be reminded that they should not exceed their authority in consultative situations by providing advice in areas outside their expertise.

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e60
Back to Engagement Performance Index

Symptom: Inadequate audit planning documentation
System Cause: No specific procedure for documenting audit planning

Comment - The firm's quality control policies and procedures require that all audits be properly planned. However, the firm does not provide specific procedures for documenting its engagement planning, including the assessment of audit risk, judgments about materiality, performance of preliminary analytical review procedures, and consideration of the internal control structure. During the review of engagements, we noted several instances where we could not determine if the firm had considered assessment of audit risk or judgments about materiality. In addition the firm did not document its understanding of the internal control structure or assessment of control risk. Through discussions with firm personnel, we were able to satisfy ourselves that the firm has a good understanding of the client's internal control structure and that adequate planning procedures had been performed.

Recommendation - The firm should revise its policies and procedures to specify the nature and extent of audit planning documentation. Documentation guidelines should include the areas of audit risk, materiality, preliminary analytical review, and internal control structure and control risk. Documentation might be in the form of a planning checklist, planning memorandum, standardized workpapers, or a combination of these.

e61
Back to Engagement Performance Index

Symptom: Lack of documentation of internal control risk assessment
System Cause: Policies do not require documentation of control risk

Comment - The firm's quality control policies and procedures do not require documentation of its understanding of an entity's internal control structure on engagements for which it has assessed control risk at the maximum level. As a result, on several engagements reviewed there was no documentation of the firm's understanding of the internal control structure of the client. However, we were satisfied that the firm had a good understanding of the client's internal control and that the audit was properly planned.

Recommendation - The firm should revise its policies and procedures to require the documentation of its understanding of internal control structure on all audits as required by professional standards. Such documentation may be in the form of a memorandum in the workpapers.

e62
Back to Engagement Performance Index

Symptom: Lack of audit planning documentation
System Cause: Did not follow audit program documentation requirements

Comment - The firm's audit programs outline steps for performing and documenting audit planning procedures for preliminary judgments about materiality levels, planned assessed level of control risk, analytical review procedures and conditions that may require extension or modification of tests. However, our review disclosed several instances where the firm's planning working papers did not include documentation for these areas. Through discussion with engagement personnel, we were able to satisfy ourselves that the engagement planning was adequate.

Recommendation - The firm should remind all professionals of the matters to be considered when planning an audit engagement and of its documentation requirements. In addition, the firm should consider obtaining or developing a planning checklist or index to assist staff when planning an audit engagement and documenting the results thereof. The firm also should consider conducting a refresher training session to highlight the documentation matters noted during the review. Finally, the firm's owners and managers should monitor the adequacy of audit planning documentation.

e63
Back to Engagement Performance Index

Symptom: Lack of documentation of communication of reportable conditions
System Cause: Did not follow policy to document communication of reportable conditions

Comment - The firm's policies and procedures require communication of reportable conditions noted during an audit to client management in accordance with professional standards. During our review, however, we noted instances where the communication of reportable conditions in internal accounting controls was not documented. Although the firm has represented that the reportable conditions were communicated orally to its client, there was no memorandum or notation in the working papers as required by professional standards.

Recommendation - The firm should reemphasize the importance of adhering to professional standards regarding documentation of communication of reportable conditions.

e64
Back to Engagement Performance Index

Symptom: Lack of sampling documentation
System Cause: Workpaper policies do not require documentation of sampling

Comment - The firm's policies and procedures do not require documentation of sample selections and evaluation of the results of sampling applications. During our review of engagements, we noted several instances where the firm performed non-statistical sampling, but did not document its considerations. Through discussions with firm personnel, we were able to satisfy ourselves that adequate procedures had been performed.

Recommendation - The firm should revise its policies and procedures to require documentation of sample selections and evaluation of sampling results for statistical and non-statistical sampling. This may be accomplished by obtaining or developing a standardized form that conforms to the guidance included in professional standards.

e65
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Symptom: Lack of documentation of workpaper review
System Cause: Lack of policy specifying the nature and extent of review

Comment - The firm's quality control policies and procedures do not specify the workpapers that should be reviewed by the firm owner or require any documentation of that review. While reviewing engagements, we were unable to determine from the working papers the extent of the workpaper review. This did not result in the issuance of an inappropriate report.

Recommendation - The firm should revise its quality control policies and procedures to specify the extent and nature of the firm owner's review of the workpapers and require documentation of the extent of his/her review. Such documentation can be in the form of initialing the workpapers, file covers, or an engagement review checklist.

e66
Back to Engagement Performance Index

Symptom: Lack of documentation of some compilation and review procedures
System Cause: No review procedure for ensuring that all procedures are performed

Comment - The firm does not provide its professional staff with a means of ensuring that all necessary procedures are performed on review and compilation engagements. As a result, the firm's review and compilation working papers did not include documentation of all the procedures required by firm policy or professional standards. However, we were able to satisfy ourselves that, in each case, sufficient procedures had been performed.

Recommendation - Although not required by professional standards, the firm should consider obtaining or developing work programs for use on review and compilation engagements.

e67
Back to Engagement Performance Index

Symptom: Material audit documentation deficiencies
System Cause: Policies do not address the form and content of workpaper documentation

Comment - The firm's quality control policies and procedure do not address the form and content of workpaper documentation. As a result, for all of the engagements reviewed, we noted significant documentation deficiencies. Although the firm used an audit program, it was outdated and not comprehensive, and the firm does not have appropriate procedures for documentation of work completed. The work papers did not comply with professional standards since they did not contain sufficient documentation of evidence obtained, procedures applied or tests performed for many key areas. Evidence that the work was adequately planned and supervised was missing. Areas of inadequate documentation include . . .

Through discussion with the firm we were able to satisfy ourselves that in each case sufficient procedures had been performed and appropriate conclusions reached. However, since the documentation deficiencies were so pervasive, we were unable to review any related documentation to support the firms position. The firm has indicated that because of the pervasive nature of the deficiencies, it intends to complete the documentation of its audit procedures.

Recommendation - The firm should amend its policies and procedures to require the completion of a current, comprehensive audit program tailored for the particular circumstances of the engagement. In addition the firm should require that all audit procedures be documented as appropriate. As part of the engagement review process the engagement partner should review the adequacy of the workpaper documentation.

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