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By Kathy J. Ecklund

Accountants are often called upon to provide assurances to third parties about financial information that does not meet the definition of a financial statement. In those cases reference must be made to the professional standards under the category of specified element, account, or item.

A specified element, account, or item is accounting information that is part of, but significantly less than, a financial statement. Specified elements may be obtained directly from the financial statements (or notes), and they may represent any element or combination of elements derived from the financial statements. They may be individual financial statement line items or summations of individual line items. They may also be general ledger accounts that comprise all or part of a line item in the financial statements. The following are examples of specified elements, accounts, or items:

* A schedule of accounts receivable that reflects a company's accounts receivable balance at a certain date.

* A schedule of balances in each of a company's cash accounts at a certain date.

* A summary of the amounts included in property and equipment at a certain date.

* The total revenue line from an income statement.

* The subordinated debt and equity at a certain date.

The following paragraphs discuss the five basic services that can be provided related to specified elements, accounts, or items.

Audit of the Specified Element. In an audit of a specified element, the auditor expresses an opinion on whether the specified element is fairly presented, in all material respects, in conformity with the appropriate basis of accounting. Audits of specified elements are governed by SAS No. 62, Special Reports. Audit engagements must also be performed in accordance with GAAS. The auditor should apply the same general, fieldwork, and reporting standards that would apply in a financial statement audit. That includes such matters as planning the engagement, obtaining an understanding of internal control (as it relates to the specified element), and evaluating passed adjustments. An audit of a specified element, typically consists of tests of details and analytical procedures particularly relevant to the specified element.

Review of the Specified Element. In a review engagement, the accountant provides negative assurance about whether the presentation of the specified element is fairly stated in all material respects based on certain criteria. When engaged to review a specified element, the accountant should not follow SSARS literature because it does not apply to engagements to review specified elements. Instead, the standards contained in SSAE No. 1, Attestation Standards, apply.

Performing limited procedures engagements and providing negative assurance may increase the risk of litigation. Thus, it may be preferable to structure engagements as either audits, compilations, or agreed-upon procedures engagements. However, if a review engagement is accepted, the accountant should make certain the client understands the
type of report being provided and
the limited nature of responsibility assumed.

Compilation of Specified Element. Interpretation 8 of SSARS 1 makes it clear that SSARS do not apply to separate engagements to compile specified elements. However, compiling and issuing reports on specified elements is not prohibited. The accountant's report should omit the reference to "Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants" (which is required for SSARS engagements), because standards do not apply.

Agreed-Upon Procedures Applied to the Specified Element. An agreed-upon procedures engagement is one in which an accountant is engaged to perform specific procedures and report findings. In the past, engagements to report on applying agreed-upon procedures to specified elements have been conducted in accordance with SAS 35. However, in September 1995, the AICPA's Auditing Standards Board issued SAS No. 75, Engagements to Apply Agreed-Upon Procedures to Specified Elements, Accounts, or Items of a Financial Statement. SAS No. 75 supersedes SAS No. 35 and contains expanded performance and reporting guidance for agreed-upon procedures engagements.

Under SAS No. 75, the accountant should report the results of procedures in the form of procedures and findings and not provide any type of assurance on the specified element--neither positive nor negative.

Report on the Specified Element as Supplementary Information. Elements of a financial statement may also be presented as supplementary information accompanying the basic financial statements. In those situations, the accountant's services regarding the supplementary information are generally an extension of the services applied to
the basic financial statements. Those services might include an audit, review, or compilation.

Selecting Type of Service

Many times, services will be performed at the request of a user whose needs dictate the format of service. For example, a lessor might request a schedule of sales in conjunction with a lease agreement. The lessor (or the lease agreement) might specify that the schedule of sales should be audited, and the client will have no choice but to provide an audited schedule. In other situations, however, the client will decide the type of service to be provided.

While the type of service to be performed should be decided by the client, it is often necessary for the CPA to
be involved in the decision. The type of service to be provided depends on
the needs of the client and how much assurance is needed. Does the client want an opinion on the specified element, or will he or she be comfortable with a report in the form of procedures and findings? Generally, the CPA can advise the client on the type of engagement that will best meet the client's needs and that can be provided at the lowest cost. *

Kathy J. Ecklund, CPA, is with Practitioners Publishing Company. This article was adapted from material previously published in The PPC Accounting and Auditing Update.

Douglas R. Carmichael, PhD, CPA Baruch College

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