18.4

Question 1

An accountant may complete an engagement to prepare financial statements under SSARSs even if

Answer 1

The accountant is not independent.

The accountant need not (1) be independent or (2) determine whether (s)he is independent to prepare financial statements under SSARSs.

Question 2

If an accountant is performing a review engagement for a nonissuer and considers it necessary to communicate a matter that is not presented in the financial statements, then the accountant should include this information in which of the following paragraphs in the review report?

Answer 2

The other-matter paragraph.

An other-matter paragraph is included in the report (1) if required by SSARSs or (2) at the accountant’s discretion. It refers to a matter other than those presented or disclosed in the statements that, in the accountant’s judgment, is relevant to (1) users’ understanding of the review, (2) the accountant’s responsibilities, or (3) the report.

Question 3

If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is

Answer 3

Not independent and, therefore, may issue a compilation report, but may not issue a review report.

If a member of the AICPA has an immaterial direct financial interest in the client, (s)he is not independent. When the accountant issues a report on a compilation for an entity from which (s)he is not independent, the accountant’s report should be modified. The accountant should indicate his or her lack of independence in a final paragraph of the report and is permitted but not required to disclose the reasons (AR-C 80). An accountant must not perform a review if his or her independence is impaired for any reason (AR-C 90).

Question 4

In a preparation engagement, the accountant’s name ordinarily is

Answer 4

Not disclosed in the financial statements.

The guidance on preparation services does not require an accountant’s name to be identified or associated with the financial statements. However, it also does not prohibit the identification of the accountant if a disclaimer is attached.

Question 5

An accountant may prepare financial statements that exclude substantially all disclosures unless

Answer 5

The purpose is to mislead others.

Disclosures may be excluded unless the purpose is to mislead users. But the accountant still must disclose the omission in the financial statements.

Question 6

An accountant agrees to the client’s request to change an engagement from a review to a compilation of financial statements. The compilation report should include

Answer 6

No reference to the original engagement.

The report on the changed engagement should not refer to the original engagement, any review procedures performed, or the scope limitations that led to the changed engagement.

Question 7

A CPA who is not independent may issue a

Answer 7

A compilation report.

An accountant who lacks independence may issue a compilation report if (s)he discloses that (s)he is not independent (AR-C 80).

Question 8

An accountant’s compilation report should be dated as of the date of

Answer 8

Completion of the compilation.

When an accountant has performed a compilation for a nonissuer, the date of the report should be the date of the completion of the compilation (AR-C 80).

Question 9

A nonissuer has asked an accountant to compile its financial statements that omit substantially all disclosures required by generally accepted accounting principles (GAAP). The accountant may comply with the entity’s request provided that the

Answer 9

Omission is not employed in order to mislead the users of the financial statements and is properly disclosed in the accountant’s report.

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 such statements. When reporting on statements that omit substantially all disclosures, the accountant should include a paragraph stating that (1) management has elected to omit substantially all disclosures, (2) the omitted disclosures (and statement of cash flows, if applicable) might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters.

Question 10

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant’s review report be modified?

Answer 10

The accountant should issue the review report without mentioning the change in engagement.

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. For example, if the entity 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 (1) the original engagement, (2) any auditing procedures performed, or (3) scope limitations that resulted in the changed engagement. Accordingly, the change in engagement is not mentioned.

Question 11

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by U.S. GAAP. Ford may comply with General’s request provided the omission is clearly indicated in Ford’s report and the

Answer 11

Omission is not undertaken with the intention of misleading the users of General’s financial statements.

An entity may request the accountant to compile financial statements that omit substantially all the disclosures required by an applicable financial reporting framework. The accountant may compile such statements if the omission is not, to his or her knowledge, intended to mislead those who might reasonably be expected to use the statements.

Question 12

During an audit of a nonissuer, the CPA is asked by the client to change the audit to a review. The CPA

Answer 12

May grant the request if the audit is no longer needed by the client.

An accountant may be asked to change the engagement from an audit to a review. If the accountant (1) concludes that the change is reasonably justified and (2) complies with the standards applicable to a review, the accountant may issue the appropriate review report. The report on the changed engagement should not mention (1) the original engagement, (2) any auditing procedures performed, or (3) scope limitations that led to the changed engagement (AR-C 90).

Question 13

Which service is a preparation service under SSARSs?

Answer 13

Preparation of pro forma financial information.

SSARSs apply to the preparation for a nonissuer of other historical or prospective financial information, such as pro forma financial information.

Question 14

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should

Answer 14

Disclose the departure from GAAP in a separate paragraph of the report.

If the accountant concludes that a modified report is adequate to disclose a departure from the applicable reporting framework, the report should contain a separate paragraph disclosing the departure. The paragraph should have the heading, “Known Departure From Accounting Principles Generally Accepted in the United States of America (or other applicable framework).” It should include the effects on the financial statements if they have been determined by management or are known as the result of the accountant’s procedures (AR-C 90).

Question 15

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?

Answer 15

Compare the financial statements with budgets or forecasts.

Review procedures include inquiries of management, analytical procedures, and obtaining a representation letter. Comparing the financial statements with budgets or forecasts is an analytical procedure.

Question 16

The client has requested the accountant to change engagements from an audit to a review because the client will not allow the accountant to communicate with client’s legal counsel as required by GAAS. Under these circumstances, the accountant ordinarily

Answer 16

Should not accept the review engagement.

The accountant should consider that the information affected by the restriction may be incorrect, incomplete, or otherwise unsatisfactory. An accountant who has been engaged to audit the financial statements ordinarily should not accept a review engagement when not allowed to consult with the client’s legal counsel.

Question 17

Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by U.S. GAAP. Winters may compile such financial statements provided the

Answer 17

Omission is not undertaken to mislead the users of the financial statements and is disclosed in the accountant’s report.

The accountant may not accept the engagement unless (1) (s)he modifies the standard compilation report to indicate that substantially all disclosures required by the applicable reporting framework have been omitted and (2) the omission is not, to the accountant’s knowledge, made to mislead users of the statements.

Question 18

Before accepting an engagement to compile or review the financial statements of a nonissuer, which of the following specific inquiries should a successor accountant consider making to the predecessor accountant?

Answer 18

How would you describe the integrity of the owner?

Statements on Standards for Accounting and Review Services (SSARSs) apply to engagements to prepare, compile, or review statements of a nonissuer. An accountant should not accept an engagement in accordance with SSARSs if (s)he has (1) reason to believe that ethical requirements will not be satisfied or (2) cause to doubt management’s integrity such that engagement performance is likely to be affected.

Question 19

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a review of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the

Additional Audit Effort Necessary to Complete the Audit:
Reason Given for Tech’s request:

Answer 19

Yes
Yes

Before an accountant who was engaged to perform an audit in accordance with GAAS agrees to change the engagement to a review, at least the following should be considered: (1) the reason given for the client’s request, particularly the implications of a restriction on the scope of the audit, whether imposed by the client or by circumstances; (2) the additional audit effort required to complete the audit; and (3) the estimated additional cost to complete the audit.

Question 20

Which item is not included in the accountant’s documentation of a preparation engagement?

Answer 20

A statement about whether the statements were fairly presented.

Documentation in connection with each preparation engagement should provide a clear understanding of the work performed and, at a minimum, include (1) the engagement letter and (2) a copy of the financial statements that the accountant prepared. Also, significant consultations or significant professional judgments made during the engagement may be documented. However, a preparation engagement does not involve gathering evidence about the fairness of the financial statements.