A-2 2013

Question 1

Name the elements of a CPA firm’s system of quallity control for its auditing, attest, and acounting and review services. (HELP ME!)

Answer 1

Human resources; Engagement/client acceptance and continuance; Leadership responsibilities; Performance of the engagement; Monitoring; Ethical requirements.

Question 2

What are the objectives of an auditor when implementing qualify control procedures at the engagement level?

Answer 2

The objectives of the auditor are to provide reasonable assurance: That the auditr complies with professional standards and any legal or regulatory requirements; That the report issued by the auditor is appropriate for the engagement.

Question 3

Explain the relationship between qualifity control standards and GAAS standards.

Answer 3

Quality control standards pertain to the conduct of all professional activities of an entity’s practice as a whole. GAAS standards related to the conduct of each individual audit engagement.

Question 4

Which four areas do auditors address in special consideration engagements?

Answer 4

Speicial consideration engagements included: Audits of financial statements prepared in accordance with a special purpose framework; Auditrs of single financial statements and specific elements, accounts, or items of a financial statement; Reporting on compliance with aspects of contractual or regulatory requirements associated with audited financials; enagements to report on summary financial statements.

Question 5

Give examples of special purpose frameworks.

Answer 5

Cash basis, Tax basis, Regulatory basis, Contractual basis.

Question 6

What type of information should an auditor gather prior to auditing a single financial statement or a specific element of a financial statement?

Answer 6

The auditor should obtain an understanding of the: Purpose for preparing the single financial statement or specific element of a financial statement; Intended users; and, Steps taken by management to ensure that the applicable financial reporting framework is acceptable under the circumstances.

Question 7

What are some of the limitations surrounding an auditor’s report on a single financial statement, or a specified element, account, or item of a financial statement?

Answer 7

If the item is based on stockholder’s equity, the auditor should perform procedures necessary to expenses an opinion about financial position. If the item is based on net income, the auditor should perform procedures necessary to express an opinion about financial position and results of operations. If an adverse opinion or disclaimer of opinion was issued, the auditor may not report on items that constitute a major portion of the financial statements. (The auditor may report on nonmajor items, but such reports should not accompany the report on the financial statements.)

Question 8

Under US auditing standards, when may an auditor issue a special report on a client’s compliance with contractual agreements or regulatory requirements?

Answer 8

Under US auditing standards, the auditor: Must have audited the client’s financial statements and expressed an unmodified or qualified opinion (i.e., no adverse opinion or disclaimer); and, May only give negative assurance on the compliance.

Question 9

What type of opinion can an auditor issue on summary financial statemetns and when is that opinion appropriate?

Answer 9

The auditor may iss either an unmodified opinion or an adverse opinion on the summary financail statements, but cannot issue a qualified opinion due to the summarized nature of the financials. An unmodified opinion is appropriate when the auditor concludes that the summary financial statements are consistent, in all material respects, with the corresponding audited financial statements. An adverse opinion is appropriate when the summary financial statements are not consistent, in all material respects, with the audited financial statements, and management does make the necessary changes.

Question 10

Name the five elements of compilation and review engagements.

Answer 10

A three-party relationship (management, the accountant, and the intended users); Financial reporting framework; Financial statements or financial information; Sufficient, appropriate evidence (review only); Written communication or report.

Question 11

Compilation and review standards require that an accountant establsih an understanding with the client as to the services to be performed. What should be included in this understanding?

Answer 11

An engagement letter is presumptively mandatory and should include: A description of the specific compilation or review services to be performed; The objectives of the engagement; Management’s responsibilities and the accountant’s responsibilities; An explanation of hte limitations of the service, including a statement that: the engagement cannot be relied upon to disclose errors, fraud, or illegal acts; and the entity will be informed of any information indicating that fraud or an illegal act may have occurred; A description of other accounting services, if any, to be performed.

Question 12

Identify the performance requirements that are necessary when egaged in a compilation.

Answer 12

When performing a compilation, the accountant must: Process knowledge of the accounting principles and practices of the client’s industry; Have a general understanding of the client’s business; Read the compiled financial statements to determine if appropriate in form and free from obvious material errors; Follow up with management when aware of fraud or illegal acts, going concern issues, or subsequent events. The accountant should consider the impact of the follow-up on the financail statements, evaluate management conclusions, and consider the effect on the compilation report.

Question 13

How does the expected use of compiled fiancial statements affect reporting requirements?

Answer 13

When financial statements are expected to be used by third parties, a compilation report is required; When financial statements are not expected to be used by third parties, a written communication (either a compilation report or an engagement letter) is required.

Question 14

What should be included in an accountant’s report on a compilation of a nonissuer’s financial statements?

Answer 14

Title (“Accountant’s Compilation Report” or “Accountant’s Independent Compilation Report”), addressee, signgature, and date. Introductory Paragraph: The entity, financial statements, and dates; The financial statements have been compiled; The accountant has not audited or reviewed and does not express an opinion. Management Responsibility Paragraph: Management is responsible for hte financial statemetns and internal controls. Accountant’s Responsibility Paragraph: Conducting the engagement in accordance with SSARS; Assisting management in presenting financial statements without providing assurance.

Question 15

What are the reporting requirements with respect to compiled financial statements when: Substantially all disclosures are omitted? Only limited disclosures are included? The auditor lacks independence?

Answer 15

Statement that omit substantially all disclosures: The accountant can only report if the omission is not intended to mislead expected users; The reprot must clearly indicate the omission; The compilation report should be modified by a fourth paragraph disclosing the omissions. Statement that includeonly limited disclosures: Notes should be labled “Selected Information–Substantially All Disclosures Required by GAAP are Not Included.” Statement when the accountant lacks independece: The last paragraph of the report should disclose the lack of independence; THe auditor is permitted, but not required, to disclose the reason(s) for the independence impairment.

Question 16

What are the performance requirements applicable to a review engagement? (U LIAR CPA)

Answer 16

The performance requirements applicable to a review are: U–Understanding with client must be established; L–Learn and/or obtain sufficient knowledge of the entity’s business; I–Inquiries should be addressed to the appropriate individuals; A–Analytical procedures should be performed; R–Review–other procedures should be performanced; C–CLient representation letter should be obtained from management; P–Profesional judgement should be used to evaluate results; A–Accountant should communicate results. Remember the mnemonic “U LIAR CPA”.

Question 17

What should be included in an accountant’s report on a review of a nonissuer’s financial statements?

Answer 17

Title (“Independent Accountant’s Reivew Report”), addressee, signature, and date; Introductory Paragraph: The entity, financial statements and dates; The financial statements have been reviewed; A review includes inquiry and analytical procedures; A review is less in scope than an audit and the accountant does not express an opinion. Management Responsibility Paragraph: Management is responsible for the financial statements and internal controls. Accountant’s Responsibility Paragraph: Conducting the engagement in accordance with SSARS; Perform procedures to obtain limited assurance; Procedres provide a reasonable basis for report. Engagement Results Paragraph: The accountant is not aware of any material modifications that should be made in the financial statements (other than any indicated in the report).

Question 18

If during the course of an engagement the client requests a change in the engagement (i.e., audit to review), what are some acceptable and unacceptable reasons for the change?

Answer 18

Acceptable reasons for change: Change in client requirements; Misunderstanding as to the nature of servcies being performed; Scope limitation but accountant determines change reasonable. Unacceptable reasons for change: Current engagement would uncover errors or fraud; Client is attempting to create misleading or deceptive financial statements; Scope limitation (client refusing to provide a signed representation letter or not allowing correspondence with client legal counsel).

Question 19

If an accountant has reviewed the prior period statements but compiled the current period statements, what are his or her reporting options?

Answer 19

The accountant has provided a lower level of service: review to compilation. Reporting options include: Issuing a compilation report on the current period statements with a paragrapyh added to describe the responsibility assumed for the prior period statements; or Reissuing (not updating) the report on the prior period. Th reissed report may be combined with or presented separately from the compilation report on the current period. Either the added paragraph (from the first option above) or the reissued report (in the second option) should include the origtinal date andstate that no review procedures have been performed since that date.

Question 20

If an accountant has audited prior period statements, but comipled or reviewed current period statements, what are his her reporting options?

Answer 20

When the level of servcie decreases from an audit to a review or compilation, the accountant should either reissue the prior report or include an additional paragraph in the current period report. Such an additional paragraph should indicate: that prior period statements were audited; the date of the previous report(s); the opinions expressed, and if other than unqualified, the reasons for the modification; and, that no auditing procedures have been performed since the previous report date.

Question 21

What procedures should be performed in a review of the interim financial information of a publicly held company? (U LIAR CPA)

Answer 21

Auditing standards require the accountant to perform the following: U–Understanding with client must be established; L–Learn and/or obtain sufficient knowledge of the entity’s business; I–Inquiries should be addressed to the appropriate individuals; A–Analytical procedures should be perfromed; R–Review–other procedures should be performed; C–Client representation letter should be obtained from management; P–Professional judgement should be used to evaluate results; A–Auditor should communicate results. Remember the mnemonic: “U LIAR CPA”

Question 22

What should be included in an auditor’s report on the review of interim financial statements of a publicly held entity?

Answer 22

Title (includes the word “Independent”), addressee, signature, location, date. Introductory Paragraph: The entity, financail statemetns, and dates; the interim financial statemetns have been reviewed. Management’s Responsibilitiy Paragraph: Fair presentation of the interim financial information and internal controls are the responsibility of management. Auditor’s Responsibility Paragraph: Conduct the interim financial review in accordance with US GAAS; THe reivew consists principally of analytical procedures and inquiry; A review of interim financial statements is less in scope than an audit, which expresses an opinion on the financial statemetns as a whole, whereas an interim financial review expresses no such opinion. Concluding Section Paragraph (with appropriate heading): A statement about whether the auditor is aware of any material modifications that should be made for the interim financial information to be in accordance with the applicable financial reporting framework.

Question 23

What type of information should an auditor promptly communicate to management during a review of interim finanial information and what action should the auditor take if management fails to appropriately respond?

Answer 23

The auditor should promptly communicate to management if: Material modifications need to be made to interim financial information to be in accordance with the applicable financial reporting framework; The issuer filed quarterly report (10-Q or 10-QSB) prior to the review being completed; The nonissuer issued interim financial information prior to the completion of the review (when the review is required). When management does not appropriately respond, the auditor should: Inform those responsible for corporate governance, and, if they fail to adequately respond, consider resigning or consulting legal counsel.

Question 24

What is a comfort letter and what types of assurance are provided within it?

Answer 24

A comfort letter is a letter from the CPA to underwriters. It provides: Positive assurance regarding the CPA’s independence and whether the financial statements comply as to form in all material respects with the applicable requirements of the SEC Act; Negative assurance regarding unaudited financial statements, capsule financial information, changes in certain financial statement items, and compliance of certain nonfinancial statement information with SEC requirements; A list of procedures and findings (no assurance) regarding pro forma financial information, forecasts, and other financial information.

Question 25

A comfort letter should not comment or provide assurance on what type of information?

Answer 25

The comfort letter (auditor) should not include comments or assurances on: Market risk sensitive instruments; Qualitative disclosures.

Question 26

Define an attestation engagement.

Answer 26

An attestation engagement is one in which a practitioner (CPA) is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on a subject matter, or on an assertion about the subject matter, that is the responsibility of another party (usually management).

Question 27

List six major attestation services.

Answer 27

Reports on: Agreed-upon procedures; Financial forecasts and projections; Pro forma financial statemetns; Internal control over financial reporting; Compliance with statutory, regulatory, or contractual requirements; Management’s Discussion and Analysis (MD&A).

Question 28

What are the five general attestation standards? (TIPPY)

Answer 28

Training; Independence; Performance (due professional care); Professional knowledge of subject matter; Your belief that the assertion is capable of evaluation against criteria that are suitable and available to users.

Question 29

What are the two fieldwork attestation standards?

Answer 29

Planning and supervision; Appropriate, sufficient evidence.

Question 30

What are the four reporting attestation standards?

Answer 30

Identify the Subject matter or the assertion being reported on and the character of the engagement; Disclose Significant reservations about the engagement; Express conclusions and the subject matter or the assertion in relation to the established or stated criteria; Restrict use of the report to specified parties when: the criteria are appropriate for or available to only a limited number of parties; reporting on subject matter and a written assertion has not been provided; reporting on an agreed-upon procedures engagement.

Question 31

How are attestation standards different from GAAS?

Answer 31

Attestation standards are broader in scope than GAAS. Attestation standards have a different conceptual focus: No reference is made to GAAP or to financial statements. Attestation standards provide a level of assurance below that provided by a GAAS audit. Attestation standards provide for services tailored to the needs of the user, who may directly participate in specifying either the nature and scope of the engagement or the criteria against which the assertions are measured.

Question 32

What levels of assurance may be provided by attestation engagements?

Answer 32

Examination: A positive opinion, high level of assurance, generally based on a variety of procedures, including search, verification, inquiry, and analysis. Review (“negative assurance”): Moderate level of assurance, generally based on inquiry and analytical procedures. Agreed-Upon Procedures: No assurance, but procedures and findings are listed.

Question 33

Identify the seven conditions that must exist in order to perform an agreed-upon procedures attestation engagement. (I AM SURE)

Answer 33

Indendence of the practitioner; Agreement of the parties; Measurability and consistency of subject matter; Sufficiency of the procedures; Use of report restricted to specified parties; Responsibility of subject matter is with client; Egagements to perform agreed-upon procedures on prospective financial statements must include a summary of significant assumptions.

Question 34

List some of the key elements in a report on an engagement to apply agreed-upon procedures. Part 1 of 2

Answer 34

A title, signature, and date. Identification of the specified parties, the subject matter, the character of the engagement, and the responsible party. A statement that the subject matter is the responsibility of the responsible party. A statement that the procedures performed were those agreed to by the specified parties. A statement that the specified parties (and not the accountant) are responsible for the sufficiency of the procedures.

Question 35

List some of the key elements in a report on an engagement to apply agreed-upon procedures. Part 2 of 2

Answer 35

A statement that the engagement was conducted in accordance with AICPA attestation standards. A list of procedures performed and related findings. A statement that the practicioner did not conduct an examination, a disclaimer of opinion, and a statement that if additional procedures had been performed, other matters might have been reported. A statement of restrictions on the use of the report. Where applicable, reservations or restrictions concerning procedures or findings.

Question 36

Wht is the difference between a financial forecast and a financial projection?

Answer 36

A financial forecast reflects, to the best of the responsible party’s knowledge, the expected financial results of a future period based on expected conditions and expected courses of action. A forecast is appropriate for general or limited use. A financial projection is based on hypothetical assumptions and reflects a “what if” scenario. A projection is appropriate for limited use only.

Question 37

In what three ways might the CPA be associated with prospective financial statements?

Answer 37

The practitioner may: Compile prosective financial statements; Apply agreed-upon procedures to prospective financial statements; Examine prospective financial statements. Not that a review of prospective financial statemetns is not allowed.

Question 38

What should be included in the accountant’s report on a compilation of prospective financial statements?

Answer 38

Included in the accountant’s report: Identification of prospective financial statements; A statement that the practitioner has compiled prosepctive financial statements in accordance with AICPA attestation standards; A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on statements; A caveat that the prospective results may not be achieved; A statement that the practitioner assumes no no responsiblity to update the report for events and circumstances occurring after the date of the report; The signature of the practitioner’s firm and the date of the report.

Question 39

How does an examination of prospective financial statements differ from the application of agreed-upon procedures?

Answer 39

An examination: Is broader and more substantial in scope and responsibility than an agreed-upon procedures engagement; Includes the expression of an opinion as to whether the statements are presented in conformity with AICPA guidelines and whether the underlying assumptions provide a reasonable basis for the statements.

Question 40

What type of engagement can an accountant perform on pro forma financial statements and what procedures are necessary for a pro forma financial statements engagement?

Answer 40

The accountant can conduct either an examination or review of pro forma financial statements. The accountant should perform the following procedures in a pro forma financial statemetns engagement: Obtain an understanding of the future or hypothetical event and evaluate the pro forma adjustments and assumptions pertaining to the adjustments; Obtain written representations from management; Make reference to the financial statements from which the historical information was derived, and indicate whether the financial statements were audited or reviewed.