Practice Issues- Personal Financial Statements, Pro …

1 Course #5415G/QAS5415G Course Material Practice Issues- Personal Financial Statements, Pro Forma Financial Information, and More Practice Issues Personal Financial Statements, Pro Forma Financial Information, and More 1 Practice ISSUES Personal Financial STATEMENTS, PRO FORMA Financial INFORMATION, AND MORE (COURSE #5415G/QAS5415G) Table of Contents Page A. Personal Financial Statements and Prescribed Forms B. Assurance Services An Engagement Expansion Opportunity C. Financial Statements Submitted in Litigation Support Engagements Involving Bankruptcy and Reorganization D. Campaign Reports E. Financial Statements Submitted Electronically F. Reporting on Budgets Review Questions and Suggested Solutions G.

2 Peer Review Changes H. Peer Reviews: Recurring Deficiencies Noted in Compilation and Review Engagements I. GAAP Hierarchy: Compilation and Review Review Questions and Suggested Solutions J. Simplifying the Reporting Process K. Using the Internet An Accountant s Research Tool L. Consulting on Complex Technical and Ethical Questions M. Changes to Engagement Letters N.

3 Liability to Accountants Who Perform Bank Reconciliations Review Questions and Suggested Solutions O. Changes in Independence Rules That Affect Compilation and Review Engagements Revision of Interpretation 101-3 Performance of Nonattest Services P. International Compilation and Review Standards Q. Responsibility to Third Parties: The Privity Standard R. Public Perception of Accountants in Jury Trials S. Ethics Interpretations T. Determining Whether Financial Statements Have Been Prepared By the Accountant Review Questions and Suggested Solutions Glossary Index 2 7 9 10 11 12 17 21 27 35 39 46 58 60 60 87 89 94 154 155 158 162 165 167 175 176 Practice Issues Personal Financial Statements, Pro Forma Financial Information, and More 2 Practice Issues Objectives: Discuss how the rules for Personal Financial statements are applied.

4 Recognize the rules for supplementary information. Identify the changes in peer review and deficiencies found in peer review engagements. Explain how to tighten up engagement letters. A. Personal Financial Statements and Prescribed Forms CPAs are frequently asked to compile or review the Personal Financial statements of individuals or families applying for credit; perform income tax, retirement, gift, or estate planning; or provide public disclosure about their Financial affairs (for example, individuals seeking public office). 1. Authority for Personal Financial Statements: SOP 82-1, Accounting and Financial Reporting for Personal Financial Statements, establishes accounting standards for GAAP-basis Personal Financial statements. The statement: a) Requires that assets be stated at their estimated current values, and liabilities at their estimated current amounts.

5 The current value is the amount at which the item could be exchanged between a buyer and seller, each of whom is well informed and willing, and neither of whom is compelled to buy or sell. The costs of disposal of assets, if material, should be deducted in computing current values. b) Required Financial statements: Statement of Net Worth Required Statement of Changes in Net Worth Optional c) A hypothetical income tax must be presented in the liability section computed as follows: Estimated FMV of net assets xx Tax basis of net assets xx Hypothetical gain xx x Tax rate(s) xx% = Estimated income tax on difference between the fair value and tax basis of net assets xx [Presented as a liability on the statement of net worth] Practice Issues Personal Financial Statements, Pro Forma Financial Information, and More 3 What does the compilation or review report for Personal Financial statements look like?

6 The report is essentially the same as the traditional compilation or review report. However, if substantially all disclosures are omitted, the report must disclose that the assets are presented at their estimated current values and liabilities at their estimated amount. Generally this additional disclosure is placed in the first or last paragraph of the report. Sample Report Substantially All Disclosures Are Omitted Fred and Mary Jones 20 Main Street Winchester, MA 01890 We have compiled the accompanying statement of Financial condition of Fred and Mary Jones as of December 31, 20XX, and the related statement of changes in net worth for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

7 These Financial statements are intended to present the assets of Fred and Mary Jones at their estimated current values and their liabilities at estimated amounts. A compilation is limited to presenting, in the form of Financial statements, information that is the representation of the individuals whose Financial statements are presented. We have not audited or reviewed the accompanying Financial statements and, accordingly, do not express an opinion or any other form of assurance on them. The individuals whose Financial statements are presented have elected to omit substantially all disclosures required by generally accepted accounting principles. If the omitted disclosures were included in the Financial statements, they might influence the user's conclusions about the individuals' assets, liabilities, and net worth.

8 Accordingly, these Financial statements are not designed for those who are not informed about such matters. James J. Fox & Company, CPA 2. OCBOA Personal Financial Statements: A client may present Personal Financial statements using an OCBOA (other comprehensive basis of accounting, such as cash, income tax basis, etc.) provided the Financial statements or the report discloses the basis of accounting and how it differs from GAAP. If this is the case, OCBOA titles must be used such as Statement of Assets and Liabilities Income Tax Basis. 3. Personal Financial Statements Issued as Part of a Personal Financial Plan: A CPA may be asked to include a Personal Financial statement as part of a Personal Financial plan. Must the statement be compiled or reviewed along with the related report being attached?

9 Practice Issues Personal Financial Statements, Pro Forma Financial Information, and More 4 SSARS No. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans, may also apply to Personal Financial statement engagements. SSARS No. 6 provides an exemption from SSARS No. 1 ( , no compilation or review report is required nor the related procedures) for Personal Financial statements included in written Personal Financial plans if the following conditions are met: a) The CPA establishes an understanding with the client preferably in writing, that the Financial statements: Will be used solely to assist the client and the client's advisers in developing the client's Personal Financial goals and objectives. Will not be used to obtain credit or for any purpose other than developing these goals and objectives.

10 B) Nothing comes to the CPA's attention during the engagement that would cause the CPA to believe that the Financial statements will be used to obtain credit or for any purposes other than developing the client's Financial goals and objectives. Example of Report Issued in a Written Personal Financial Plan: SSARS No. 6: The accompanying Statement of Financial Condition of Susan and Joseph Miller, as of December 31, 20X1, was prepared solely to help you develop your Personal Financial plan. Accordingly, it may be incomplete or contain other departures from generally accepted accounting principles and should not be used to obtain credit or for any purposes other than developing your Financial plan. We have not audited, reviewed, or compiled the statement. Each of the Personal Financial statements should include a reference to the accountant's report such as: See Accountant's Report 4.