7.07 - REVIEW ENGAGEMENTS Flashcards
7.07 - REVIEW ENGAGEMENTS
Which of the following would be used on a review engagement?
Comparison of current-year to prior-year account balances.
Recalculation of depreciation expense.
Examination of board minutes.
Confirmation of cash and accounts receivable.
Comparison of current-year to prior-year account balances.
EXPLANATION:
A review consists of performing analytical procedures, which may include comparing current year to prior year balances, and making inquiries.
Examining board minutes, confirming cash and accounts receivable, and recalculating depreciation expense are all audit procedures that would not ordinarily be performed in a review.
7.07 - REVIEW ENGAGEMENTS
Statements on Standards for Accounting and Review Services (SSARS) would govern the conduct of which of the following?
I. Beck, CPA, prepares financial
statements as a necessary step prior to Beck’s engagement to compile the financial statements.
II. Preparation of financial
statements that will not be compiled, reviewed or audited.
III. Gumpert, CPA, prepares financial
statements that will be compiled by Martinez, CPA.
II and III only
I, II, and III
II only
I and II only
II and III only
II - Prep F/S that will NOT be compiled
III - Prep F/S that will be compiled by another CPA
EXPLANATION:
Lecture 7.02 of the 2017 AUD textbook:
if financial statements are prepared as a necessary first step prior to an actual engagement to compile, review, or audit the statements, then the preparation of the statements is a non-attest engagement, actually a form of bookkeeping engagement, and is not subject to SSARS. That’s why answer (I) cannot be part of the correct answer.
Answer (II) is part of the correct answer because a separate engagement to prepare financial statements only, with no follow-on engagement to compile, review, or audit the statements by the accountant preparing the financial statements, is a standalone engagement, still a non-attest engagement, that is subject to SSARS. See further down on the same page in the textbook.
7.07 - REVIEW ENGAGEMENTS
Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that…
The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.
A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.
A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
Management is responsible for the preparation and fair presentation of the financial statements.
Management is responsible for the preparation and fair presentation of the financial statements.
EXPLANATION:
The second paragraph of a review report indicates that management is responsible for the preparation and fair presentation of the financial statements and for internal control.
A scope limitation may preclude completing a review or may result in a modification, but a lack of a limitation is not indicated in the report.
An audit, not a review, includes examining evidence supporting the financial statements.
Although a review is greater in scope than a compilation, the objective of a compilation is to assist management in presenting financial information in the form of financial statements, not specifically to present financial statements that are free of material misstatements.
7.07 - REVIEW ENGAGEMENTS
Which of the following statements is true with regard to review services performed under Statements on Standards for Accounting and Review Services?
To perform a review, an accountant need not be independent but should disclose that fact.
In a review, an accountant gives no assurance as to generally accepted accounting principles on the financial
statements.
An accountant must have extensive knowledge of the client’s business, industry, and the economy to perform a review.
In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements.
In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements.
EXPLANATION:
An accountant provides limited assurance in a review engagement indicating that the accountant is not aware of any modifications that are required to be made in order for the financial statements to be in accordance with GAAP without expressing an opinion as to whether or not they are in accordance, which would be providing reasonable, rather than limited, assurance.
7.07 - REVIEW ENGAGEMENTS
Under which of the following circumstances would an accountant most likely conclude that it is necessary to
withdraw from an engagement to review a nonpublic entity’s financial statements?
The entity does not have reasonable justification for making a change in accounting principle.
The entity prepares its financial
statements on the income tax basis of accounting.
The entity declines to provide the accountant with a signed representation letter.
The entity requests the accountant to report only on the balance sheet, and not on the other financial statements.
The entity declines to provide the accountant with a signed representation letter.
EXPLANATION:
The accountant may not issue a review report without having received a signed letter of representation from the client.
An unjustified change in accounting principle will result in a modified report but will not require the accountant to withdraw.
A review can be performed on financial statements prepared under a wide variety of applicable financial reporting frameworks, including the tax basis.
An accountant may also accept an engagement to report on a single financial statement, such as a balance sheet only.
7.07 - REVIEW ENGAGEMENTS
If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial
direct financial interest, the accountant is
Not independent and, therefore, may not issue a review report.
Not independent and, therefore, may not be associated with the financial statements.
Independent because the financial
interest is immaterial and, therefore, may issue a review report.
Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion.
Not independent and, therefore, may not issue a review report.
An accountant with any direct financial interest in a client, regardless of materiality, is not independent of that client.
The accountant may not perform a review or an audit of its financial statements and is precluded from issuing either a review
report or an audit opinion.
The accountant may, however, be associated with the financial statements by performing a compilation provided the lack of independence is disclosed.
7.07 - REVIEW ENGAGEMENTS
Which of the following procedures should an accountant perform during an engagement to review the nancial
statements of a nonissuer (nonpublic entity)?
Obtaining a client representation letter from members of management.
Sending bank confirmation letters to the entity’s financial institutions.
Examining cash disbursements in the subsequent period for unrecorded liabilities.
Communicating significant deficiencies
discovered during the assessment of the risk of material misstatement.
Obtaining a client representation letter from members of management.
EXPLANATION:
When performing a review, the accountant is required to have or obtain an understanding of the client and its business, perform inquiries and analytical procedures, and obtain a letter of representation from the client.
The accountant is not required
to obtain an understanding of internal control and would therefore not be responsible for communicating significant
deficiencies.
Substantive tests, including sending bank confirmation letters and examining cash disbursements are performed in an audit but not in a review.
7.07 - REVIEW ENGAGEMENTS
When performing an engagement to review a nonpublic entity’s financial
statements, an accountant most likely
would…
Limit the distribution of the accountant’s report.
Ask about actions taken at board of directors’ meetings.
Confirm a sample of significant accounts receivable balances.
Obtain an understanding of the internal control structure.
Ask about actions taken at board of directors’ meetings.
EXPLANATION:
In a review, an accountant performs inquiry and analytical procedures. Therefore, he or she would most likely inquire about actions taken by the board.
Confirming is a substantive test used in an audit. In addition, the accountant is required to assess controls in an audit.
Review reports may be restricted but are ordinarily general use reports.
7.07 - REVIEW ENGAGEMENTS
Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that a review…
Does not contemplate obtaining corroborating evidential matter or applying certain other procedures
ordinarily performed during an audit.
Includes examining, on a test basis, information that is the representation of management.
Provides little to no assurance that the financial statements are fairly presented.
Requires the performance of procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.
Requires the performance of procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.
EXPLANATION:
Reviewed financial statements should be accompanied by a report stating that a review was performed in accordance
with Statements on Standards for Accounting and Review Services issued by the AICPA, which standards require the performance of procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.
Reviews do provide some assurance, so it would be inappropriate to suggest that no assurance, as in ‘little to no’, is provided.
A statement on examining on a test basis is included in a PCAOB audit report, not a review report.
Although a review does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit, it is not necessary to indicate this in a review report. It is sufficient to indicate that a review is substantially less in scope than an audit, and that, accordingly, no opinion is expressed.
7.07 - REVIEW ENGAGEMENTS
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(SSARS)?
Inquiry concerning the effectiveness
of the client’s system of internal control.
Inquiry of the client’s professional advisors, including bankers, insurance agents, and consultants.
Inquiry to identify transactions between related parties and management.
Inquiry regarding the client’s principles and practices and the method of applying them.
Inquiry regarding the client’s principles and practices and the method of applying them.
EXPLANATION:
In a review engagement, the accountant’s first responsibility is to have or obtain knowledge of the client and its industry, which may include making inquiries as to the client’s principles and practices.
The accountant obtains an understanding of internal control in an audit, not in a review engagement.
The accountant will inquire about related party transactions during the course of the review but it will not be done first.
Inquiries are made of the client’s professional advisors and others in an initial engagement to determine if the accountant should accept the engagement but not as part of the
engagement.
7.07 - REVIEW ENGAGEMENTS
Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with Statements on Standards for Accounting and Review Services?
Perform a reasonableness test of the balance by computing days’ sales in receivables.
Confirm individually significant receivable balances with customers.
Vouch a sample of subsequent cash receipts from customers.
Review subsequent bank statements for evidence of cash deposits.
Perform a reasonableness test of the balance by computing days’ sales in receivables.
EXPLANATION:
A review consists of making inquiries and performing analytical procedures, one of which might be to compare the number of days’ sales in accounts receivable and compare the result to the accountant’s perception of what it should be to determine if it seems reasonable and, if not, to make additional inquiries to explain any discrepancies.
A sample of subsequent cash receipts would be vouched in an audit not in a review. The same is true of confirming balances with customers and reviewing subsequent bank statements to obtain evidence of cash deposits, which are also performed in an audit but not in a review.
