18.1 Flashcards
In the course of an engagement to compile unaudited financial statements, the client requests that the accountant perform normal accounts receivable audit confirmation procedures. (S)he agrees and performs such procedures. The confirmation procedures
Are part of an accounting service and are not performed for the purpose of conducting an audit in accordance with GAAS.
Accountants may perform other accounting services either in connection with a preparation, compilation, or review of unaudited financial statements of a nonissuer or separately.
When financial statements of a nonissuer compiled by a CPA do not include normal disclosures because the statements are intended for internal use only, the CPA should
Issue a compilation report on the financial statements and include in the report that the statements are not designed for those who are not informed about such matters.
The accountant may compile financial statements that omit substantially all the disclosures required by an applicable reporting framework if the omission is not, to his or her knowledge, done to mislead those who might reasonably be expected to use the statements. When reporting on statements that omit substantially all disclosures, the accountant should include in the compilation report a paragraph stating that (1) management has elected to omit substantially all the disclosures, (2) the omitted disclosures might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters.
Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?
Communicating any material weaknesses discovered during the consideration of internal control.
A review does not involve obtaining an understanding of internal control or performing many other procedures ordinarily performed in an audit. Thus, the communication of material weaknesses is required in an audit, not a review.
Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker’s attention that indicated substantial doubt as to Hall’s ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall’s financial statements. Which of the following statements best describes Baker’s reporting responsibility concerning this matter?
Baker is not required to modify the accountant’s review report.
AR-C 90 states that, normally, neither an uncertainty about an entity’s ability to continue as a going concern nor an inconsistency in the application of accounting principles should cause the accountant to modify the report, provided the financial statements appropriately disclose such matters. Nothing in this statement, however, is intended to preclude an accountant from including an emphasis-of-matter paragraph in the report describing a matter regarding the financial statements. Nevertheless, if management’s conclusions about a going-concern issue are unreasonable, or if disclosure is inadequate, the accountant must follow the guidance for departures from the applicable reporting framework.
Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?
Obtain a management representation letter.
The procedures performed during a review of financial statements in accordance with SSARSs include making inquiries, applying analytical procedures, and obtaining management representations.
Which of the following accounting services is not a preparation service under the Statements on Standards for Accounting and Review Services?
I. Preparing a working trial balance
II. Preparing standard monthly journal entries
Both I & II.
Standard monthly journal entries and a working trial balance do not meet the definition of a financial statement. Thus, their preparation is not a service under SSARSs.
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate
The type of opinion expressed previously.
The separate paragraph is added to the current period’s review report when the prior-period report is not reissued. The separate paragraph should indicate (1) that the prior-period statements were audited, (2) the date of the previous report, (3) the type of opinion expressed, (4) the substantive reasons if the opinion was not unmodified, and (5) that no audit procedures were performed after the date of the previous report.
An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, changes in shareholders’ equity, and cash flows. The accountant may issue the requested review report only if
The scope of the accountant’s inquiry and analytical procedures has not been restricted.
The accountant may accept an engagement to issue a review report on one financial statement of a nonissuer, e.g., the balance sheet, if the scope of his or her procedures has not been limited (AR-C 90).
An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARSs). Do the SSARSs require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the accountant?
printed on the accountant’s letterhead:
Manually signed by the accountant:
No
No
The compilation report need not be printed on the accountant’s letterhead or manually signed by the accountant. However, the report must be signed by the accounting firm or the accountant as appropriate. Thus, the signature may be manual, printed, or digital.
An accountant began an audit of the financial statements of a nonissuer and was asked to change the engagement to a review because of a restriction on the scope of the audit. If the change is reasonably justified, the accountant’s review report should refer to the
Auditing procedures that may have been performed:
reason for change:
No
No
The accountant may conclude, based upon his or her professional judgment, that changing the engagement is reasonably justified. If (s)he then complies with the standards applicable to the changed engagement, (s)he should issue an appropriate review report. The report should not refer to (1) the original engagement, (2) any auditing procedures that may have been performed, or (3) scope limitations that resulted in the changed engagement (AR-C 90).
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?
Observing the safeguards over access to and use of assets and records.
A review does not require obtaining an understanding of internal control or assessing risks, testing accounting records, or performing other procedures ordinarily performed in an audit (AR-C 90).
Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?
Preparing an individual’s personal financial statement to be used to obtain a mortgage.
AR-C 70 describes the accountant’s responsibilities for preparation services. A preparation of financial statements includes preparation of personal financial statements for presentation with a financial plan.
After an auditor had been engaged to perform the first audit for a nonissuer, the client requested to change the engagement to a review. In which of the following situations would there be a reasonable basis to comply with the client’s request?
The client’s bank required an audit before committing to a loan, but the client subsequently acquired alternative financing.
An auditor engaged to perform an audit may be requested to change the engagement to a review. The request may result from (1) a change in circumstances affecting the need for an audit, (2) a misunderstanding as to the nature of one of the services, or (3) a scope restriction. Either (1) a change in circumstances or (2) a misunderstanding about a service ordinarily is a reasonable basis for a change. But, before agreeing to the change, the auditor should consider the reason for the request and the additional effort and cost to complete the audit. A scope restriction should be given special consideration. When the client has no need for an audit, the auditor should agree to the request because it has no negative implications, and the cost to complete the audit would be substantial. The subsequent report should not refer to the original engagement, any auditing procedures performed, or scope limitations that resulted in the changed engagement (AR-C 90).
SSARSs are primarily useful for the preparation, compilation, and review of financial statements for
private companies.
SSARSs describe the standards for preparation, compilation, and review of financial statements for nonissuers (private companies).
An accountant performed a review engagement of the financial statements of a nonissuer oil and gas refinery. Which of the following would be included in the accountant’s documentation?
A memo on a discussion with the CFO regarding a suspected kiting scheme.
A memo of a discussion with the CFO about a potentially significant fraud revealed during review procedures should be included in the documentation.
