A6: Accounting and Review Service Engagements

Question 1

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, Year 1. 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, Year 2, and to include all GAAP disclosures for the Year 2 statements only, but otherwise present both years’ financial statements in comparative form. What is Clark’s responsibility concerning the proposed engagement?

A. Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark’s report on the comparative financial statements.
B. Clark may report on the comparative financial statements provided the Year 1 statements do not contain any obvious material misstatements.
C. Clark may report on the comparative financial statements provided Clark updates the report on the Year 1 statements that do not include the GAAP disclosures.
D. Clark may not report on the comparative financial statements because the Year 1 statements are not comparable to the Year 2 statements that include the GAAP disclosures.

Answer 1

Choice “D” is correct. Compiled financial statements that omit substantially all the disclosures required by GAAP are not comparable to financial statements that do
include required GAAP disclosures. Accordingly, the Year 1 statements are not comparable to the Year 2 statements and Clark cannot report on them.

Choice “A” is incorrect. Compiled financial statements that omit substantially all of the
disclosures required by GAAP are not comparable to financial statements that include
such disclosures. Accordingly, Clark may not report on the comparative financial
statements, even if an explanatory paragraph is added.
Choice “B” is incorrect. The lack of material misstatements does not alter the fact that
the statements are not comparable and therefore Clark may not report on them.
Choice “C” is incorrect. Updating the auditor’s report does not change the fact that the
financial statements for the two periods are not comparable.

Question 2

MCQ-12572
The spouse of a covered member of an accounting firm is in a permitted employment situation at an attest client and participates in the client’s employee stock ownership
plan. According to the AICPA Code of Professional Conduct, which of the following actions is required of the spouse when beneficial financial interests are distributed?

A. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained.
B. The spouse must hold the shares for a minimum of 30 days after the right to dispose is obtained.
C. The spouse must serve as a trustee for the share-based compensation arrangement to receive put options as part of the compensation arrangement.
D. The spouse must not exercise any put option to require the employer to repurchase the beneficial financial interests until after 30 days from receipt.

Answer 2

Choice “A” is correct. According to the AICPA Code of Professional Conduct, when the spouse of a covered member is in a permitted employment situation at an attest client
and participates in the client’s employee stock ownership plan (ESOP), the spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to
dispose is obtained.

Note: SEC Rules regarding ESOP are more restrictive and require the immediate family member to dispose the received publicly traded shares as soon as possible.

Choice “B” is incorrect. When the financial interests are distributed or when the immediate family member has a right to dispose of the financial interests, the spouse
must dispose the shares no later than 30 days after the right to dispose is obtained.
Choice “C” is incorrect. If the spouse is a trustee for the share-based compensation,
then independence is impaired.
Choice “D” is incorrect. The spouse should exercise the put option as soon as permitted.

Question 3

MCQ-14886
An accountant has a work program that consists entirely of the following steps:
1. Obtain knowledge of the accounting principles and practices of the client’s
industry.
2. Obtain knowledge of the client.
3. Make inquiries of the client’s management about accounting procedures, the
consistent application of generally accepted accounting principles (GAAP) in the
preparation of the financial statements, and actions taken at meetings of
stockholders and the board of directors.
4. Perform analytical procedures.
5. Obtain a letter of representation from management.
Which of the following types of engagements is the CPA performing?

A. Review
B. Audit
C. Compilation
D. Attestation

Answer 3

Choice “A” is correct. All the steps included in the work program of the CPA are required when performing a review engagement. A review engagement is based on inquiry and
analytical procedures performed by the auditor.

Choice “B” is incorrect. An audit engagement would include all the steps in the work
program but must also include audit procedures such as confirmation with external
parties and vouching transactions from the financial statements back to supporting
documentation.
Choice “C” is incorrect. A compilation engagement does not require inquiries of client’s
management, analytical procedures, or obtaining a management representation
letter.
Choice “D” is incorrect. In an attestation engagement, the auditor and management
must agree up the subject matter of the engagement and in most cases, a written
assertion is generally obtained from management.