18.2 Flashcards
SSARSs may be applied to other historical or prospective financial information if they are
Adapted as necessary in the circumstances.
SSARSs describe responsibilities of the accountant for engagements to (1) prepare, (2) compile, and (3) review financial statements. They are to be adapted as necessary in the circumstances for services on other historical or prospective financial information. But prospective financial information may be prepared or compiled but not reviewed.
Which phrase is included in an engagement letter for a preparation of financial statements?
“We will not express an opinion or a conclusion . . .”
The engagement letter for a preparation service states that the accountants will not gather evidence for the purpose of expressing an opinion or conclusion. Accordingly, an opinion or conclusion will not be expressed, and the accountants will not provide any assurance on the statements.
An accountant is considering an engagement to compile the pro forma financial information (PFFI) of a nonissuer. The accountant may accept the engagement if
The underlying transaction or event was a change in capitalization.
PFFI shows the significant effects on historical information that might have resulted if an underlying transaction or event had occurred earlier. The following are examples of such transactions or events:
- Business combination
- Change in capitalization (e.g., an initial public offering of equity securities)
- Disposition of a significant portion of a business
- Change in the form of a business
- Proposed sale of securities and the application of the proceeds
In a preparation engagement, the financial statements should include a statement such as
“No assurance provided”.
A notation on each page (including notes) of financial statements prepared by an accountant should state, “No assurance is provided.” The statement is intended to avoid misunderstanding of the accountant’s involvement.
Hart, CPA, is engaged to review the Year 2 financial statements of Kell Co., a nonissuer. Previously, Hart audited Kell’s Year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include a separate paragraph in the Year 2 review report. Comparative financial statements are being presented for Year 2 and Year 1 and the Year 1, report is not reissued. This separate paragraph should indicate the
Substantive reasons for the prior year’s qualified opinion.
The accountant should include an other-matter paragraph. It should state (1) that the financial statements of the prior period were audited previously, (2) the date of the previous report, (3) the type of opinion expressed previously, (4) the substantive reasons if the opinion was other than unmodified, and (5) that no auditing procedures were performed after the date of the previous report.
How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer’s financial statements?
The financial statements have not been audited:
The accountant has compiled the financial statements:
Explicitly
Explicitly
The standard report for the compilation of a nonissuer’s financial statements should state that the financial statements have not been audited or reviewed. The report also should state that a compilation has been performed in accordance with the SSARSs issued by the AICPA.
During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should
Disclose the departure from GAAP in a separate paragraph of the accountant’s report.
When a departure from GAAP precludes an unmodified review report, and modification of the standard report is sufficient to disclose the departure, the accountant should add an additional paragraph to the report disclosing the departure, including its effects on the financial statements if they have been determined by management or are known as the result of the accountant’s procedures. The paragraph should have a heading such as “Known Departure From Accounting Principles Generally Accepted in the United States of America.”
A practitioner is deciding whether to compile pro forma financial information for a client. The practitioner should perform the engagement only if (s)he
Documents the terms of the engagement in writing.
The practitioner should draft an engagement agreement in writing and obtain the client’s acceptance of that agreement.
Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?
Inquire management about related party transactions.
A review consists primarily of making inquiries of management, applying analytical procedures, and obtaining a management representation letter.
In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?
Inability to assess the RMM due to fraud:
Discovery of significant deficiencies in the design internal control:
No
No
A review does not involve obtaining an understanding of internal control or assessing the RMMs. It also does not involve testing accounting records or performing other procedures ordinarily performed in an audit. Because a review consists of making inquiries, applying analytical procedures, and obtaining management representations, the review report need not be modified for the matters specified in the question.
While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client’s request is reasonable, the CPA’s review report should
I. Refer to the scope limitation that caused the change
II. Describe the auditing procedures that have already been applied
Neither I nor II.
An accountant may be asked to change the engagement from an audit to a review. The request may result from (1) a change in circumstances affecting the entity’s requirements; (2) a misunderstanding as to the nature of one of the services; or (3) a scope restriction, whether imposed by the client or circumstances. Before an accountant engaged to perform a higher level of service agrees to such a request, (s)he should consider (1) the reason for the client’s request, particularly the implications of a scope restriction, whether imposed by the client or by circumstances; (2) the additional effort required to complete the original engagement; and (3) the estimated additional cost to complete the original engagement. The report on the changed engagement should not mention (1) the original engagement, (2) any auditing or review procedures performed, or (3) the scope limitations that led to the changed engagement.
To compile financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should
Obtain an understanding of the entity’s significant accounting policies.
To perform a compilation, the accountant should obtain an understanding of (1) the applicable financial reporting framework and (2) the significant accounting policies adopted by management.
An accountant may accept an engagement to compile pro forma financial information (PFFI) of a nonissuer only if the
Report on the complete financial statement is included with the PFFI.
The accountant may compile PFFI only if it is contained in a document that includes the complete financial statements on which it is based. These statements must have been compiled, reviewed, or audited, and the report must be included in the document. A complete financial statement is defined as the statement or statements (including any notes) subject to compilation, review, or audit.
An accountant agreed to perform a compilation of a company’s financial statements under Statements of Standards for Accounting and Review Services (SSARSs). During fieldwork, the accountant decided to perform some analytical procedures. Which of the following would the accountant do related to the compilation engagement?
Issue a compilation report even though review procedures were performed on the engagement.
When providing a compilation service, the accountant should read the statements after obtaining an understanding of the framework and significant accounting policies. The accountant then considers whether the statements appear to be appropriate in form and free from obvious material misstatements. The accountant is not required to make inquiries or perform other procedures to verify, corroborate, or review information supplied by the entity. However, the accountant may have performed such other procedures. A review requires performing procedures (e.g., analytical procedures, inquiries, and requests for written representations) that permit expression of limited assurance. A compilation expresses no assurance. Performing some analytical procedures does not suffice to meet the requirements for a review.
When an accountant attaches a compilation report to a nonissuer’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are
Not designed for those who are uninformed about the omitted disclosures.
When disclosures are omitted, a paragraph is added to the compilation report stating that (1) management has elected to omit substantially all disclosures required by GAAP and (2), if the omissions were included, they might influence the users’ conclusions.
