18.3 Flashcards
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
A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?
Compilations.
A CPA who is a director of the client is not independent. Thus, (s)he must not perform any service for the client that requires independence. A compilation does not require independence, but the report should be modified to disclose the lack of independence.
A client has requested that an accountant prepare an income statement for the most recent 6-month period and present it comparatively with the prior year’s annual income statement. The accountant may accept the engagement if
Management instead requests comparison of the statement with a statement for the previous 6-month period.
An accountant may (1) prepare, (2) compile, or (3) review a complete set of financial statements or a single statement (for example, a balance sheet). The statements may be for an annual or other period, depending on management’s needs. However, presenting statements other than for an annual period comparatively with statements for an annual period usually is inappropriate.
A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA’s review report should include a
Statement that a review is substantially less in scope than an audit.
If the accountant concludes that the change is reasonable and complies with the standards for a review, (s)he should issue a review report. The review report states, “A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.”
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when
Compiling financial statements generated through the use of computer software:
Reproducing client-prepared financial statements, without modification, for the client:
Yes
No
A compilation is a service that assists management to present financial information in the form of financial statements without undertaking to provide any assurance. When the accountant is engaged to compile the statements, they should be accompanied by a written report. Thus, producing financial statements generated through the use of computer software is a compilation. Reproducing client-prepared financial statements, without modification, for the client is not.
Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?
Inquiry regarding the client’s principles and practices and the method of applying them.
Review procedures consist of inquiries and analytical procedures. The accountant should understand the accounting principles and practices used by the client to (1) measure, (2) recognize, (3) record, and (4) disclose all significant accounts and disclosures in the statements (AR-C 90).
An accountant compiles the financial statements of a nonissuer and issues the compilation report. Although not specifically stated in this report, it is implied that
Substantially all disclosures required by GAAP are included in the financial statements.
An accountant may compile financial statements that omit substantially all disclosures required by an applicable reporting framework if the omission is not, to his or her knowledge, made to mislead users of the statements. When reporting on such statements, the accountant should include in the compilation report a paragraph with the following statements: (1) Management has elected to omit substantially all disclosures; (2) if the omitted disclosures were included, they might influence the user’s conclusions; and (3) the statements are not designed for those who are not informed about such matters. Accordingly, the compilation report implies that substantially all disclosures required by GAAP are included in the financial statements because it does not mention disclosures.
During a review of the financial statements of a nonissuer, the accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentation, the accountant should
Disclose this departure from generally accepted accounting principles in a separate paragraph of the report.
If the statements are not revised, the accountant should consider whether modification of the report is adequate to disclose the departure. If modification is appropriate, the departure should be disclosed in a separate paragraph of the report, including disclosure of the effects of the departure if they have been determined by management or are known as a result of the accountant’s procedures. The accountant need not make this determination if management has not, provided that (s)he states in the report that the effects have not been determined. If modification of the standard report is inadequate to indicate the deficiencies, the accountant should withdraw from the engagement (AR-C 90).
In a review engagement, the accountant should establish an understanding with the entity regarding the services to be performed. The understanding should include all of the following except a
Provision that any errors, fraud, or noncompliance with laws and regulations that come to the accountant’s attention need not be reported to the entity.
The engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations. However, the accountant agrees to inform the appropriate level of management of (1) any material errors and (2) evidence or information coming to the accountant’s attention that fraud or noncompliance may have occurred. But the accountant need not report clearly inconsequential noncompliance (AR-C 90).
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.
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.
Which of the following would not be included in an accountant’s documentation of a compilation of a client’s financial statements?
A review of the segregation of duties in the cash disbursement process.
The accountant should prepare documentation (working papers) in connection with each compilation engagement to provide a clear understanding of the work performed. A compilation does not involve obtaining an understanding of internal control or assessing fraud risk. Thus, the documentation does not include a review of the segregation of duties in the cash disbursement process.
Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?
Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.
In a compilation, the accountant should read the compiled financial statements and consider whether the statements appear to be in appropriate form and free from obvious material errors. Examples are arithmetic or clerical mistakes or mistakes in the application of accounting principles (AR-C 80).
In accordance with SSARSs, which of the following is an accurate comparison of a preparation service with a compilation service?
Both services allow the financial statements to be released to outside users.
SSARSs allows release of financial statements for a preparation, compilation, or review service.
Which of the following procedures is an accountant required to perform before issuing a compilation report under Statements on Standards for Accounting and Review Services (SSARSs)?
Read the financial statements and consider whether such financial statements appear to be free from obvious material errors.
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.
