7.05 - COMPILATION ENGAGEMENTS Flashcards
7.05 - COMPILATION ENGAGEMENTS
An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take?
Accept the engagement and obtain whatever knowledge of the industry, if any, that the accountant determines to be adequate.
Request that management engage an independent industry expert to consult with the accountant.
Decline the engagement.
Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge
about the industry.
Accept the engagement and obtain whatever knowledge of the industry, if any, that the accountant determines to be adequate.
EXPLANATION:
Knowledge of a client’s industry is required for a review or an audit.
An accountant may accept a compilation engagement without such knowledge, however, as long as the accountant has a means of obtaining it on a timely basis.
The accountant will then apply judgment in determining what level of knowledge, if any, is necessary to perform the compilation
engagement in a competent manner.
7.05 - COMPILATION ENGAGEMENTS
Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March
31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years’
financial statements in comparative form. What is Clark’s responsibility concerning the proposed engagement?.
Clark may report on the comparative financial statements provided Clark updates the report on the 20X1
statements that do not include the GAAP disclosures.
Clark may report on the comparative financial statements provided an explanatory paragraph is added
to Clark’s report on the comparative financial statements.
Clark may report on the comparative financial statements provided the 20X1 statements do not contain any obvious material misstatements.
Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures.
Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures.
EXPLANATION:
A CPA cannot report on comparative financial statements if in fact they are not comparable.
Since the 20X1 financial statements exclude disclosures and the 20X2 statements include disclosures, these statements are not comparable and the CPA may not report on them.
7.05 - COMPILATION ENGAGEMENTS
When an independent CPA assists in compiling the financial statements of a publicly held entity, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond…
Determining whether management has elected to omit substantially all required disclosures.
Reading the financial statements for obvious material misstatements.
Ascertaining whether the financial statements are in conformity with generally accepted accounting
principles.
Documenting that the internal control structure is not being relied on.
Reading the financial statements for obvious material misstatements.
EXPLANATION:
In a compilation, the CPA performs no audit procedures, but has only the responsibility to read the statements for obvious errors or misstatements.
7.05 - COMPILATION ENGAGEMENTS
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to…
Verify that the reissued report will notbe used to obtain credit from a nancial
institution.
Review the successor accountant’s working papers for matters affecting
the prior year.
Make inquiries about actions taken at meetings of the board of directors during the current year.
Compare the prior year’s financial
statements with those of the current year.
Compare the prior year’s financial
statements with those of the current year.
EXPLANATION:
When reissuing a compilation or review report, a predecessor will consider if the report is still appropriate and will
read the current period’s financial statements and related report, compare the prior period’s financial statements with those previously issued and the current statements, and obtain a letter of assurance from the successor indicating whether or not the successor is aware of matters that would affect the financial statements.
The predecessor is not required to make inquiries about actions taken at board meetings.
Unless there is a reason to restrict the report, a reissued report may be used to obtain credit.
The predecessor would not review the successor’s papers, although the successor would provide information to the predecessor about matters affecting the prior year
