A6 - Becker Wrong Answers Flashcards
General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General’s request provided the omission is clearly indicated in Ford’s report and the:
A. Distribution of the financial statements and Ford's report is restricted to internal use only. B. Omitted disclosures would not influence any potential creditor's conclusions about General's financial position. C. Omission is not undertaken with the intention of misleading the users of General's financial statements. D. Reason for omitting the disclosures is acknowledged in the notes to the financial statements.
Choice “C” is correct. The accountant may compile financial statements that omit substantially all disclosures provided that:
- The accountant’s report clearly indicates the omission by including an additional paragraph disclosing such omissions. This paragraph should state that if the disclosures were included, they might influence the user’s conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and
- In the accountant’s professional judgment, the financial statements would not be misleading to users.
Choice “A” is incorrect. Internal use restriction is not required in such circumstances.
Choice “B” is incorrect. This answer discusses only the creditors while the correct answer discusses a broader range of users, in general.
Choice “D” is incorrect. Disclosure of the reason for omission of the disclosures is not a requirement.
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 Clark updates the report on the Year 1 statements that do not include the GAAP disclosures. B. Clark may report on the comparative financial statements provided the Year 1 statements do not contain any obvious material misstatements. C. 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. D. Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark's report on the comparative financial statements.
Choice “C” 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
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Choice “A” is incorrect. Updating the auditor’s report does not change the fact that the financial statements for the two periods are not comparable.
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 “D” 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.
An accountant must be independent to perform ______________________
an audit (financial or internal control), a review, attestation services, or an agreed-upon procedures engagement.
An accountant need not be independent to _ _ _ _ _ _ _ _ _ _ financial statements, but should disclose this lack of independence.
compile
NOTE: a preparation OR a compilation do NOT require independance
Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:
A. Inquire of the client's personnel whether the financial statements omit substantially all disclosures. B. Apply analytical procedures to selected financial data to discover any material misstatements. C. Read the financial statements to consider whether the financial statements are free from obvious material errors. D. Corroborate at least a sample of the assertions management has embodied in the financial statements.
Choice “C” is correct. Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should read the financial statements to consider whether the financial statements are free from obvious material errors.
Choice “A” is incorrect. Inquiry is generally a review procedure; however, it should also be obvious to the accountant if substantially all disclosures are omitted.
Choice “B” is incorrect. Application of analytical procedures is a review procedure, and is not required in a compilation engagement.
Choice “D” is incorrect. Corroboration of a sample of management assertions is an audit procedure, and is not required in a compilation engagement.
Which of the following situations would preclude an accountant from issuing a review report on a company’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?
A. The accountant was engaged to review only the balance sheet. B. Finished-goods inventory does not include any overhead amounts. C. The owner of a company is the accountant's father. D. Land has been recorded at appraisal value instead of historical cost.
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Choice “C” is correct. If the owner of the company is the accountant’s father, the accountant would not be independent. In order to issue a review report, the accountant must be independent.
Choice “A” is incorrect. The accountant can review only the balance sheet.
Choice “B” is incorrect. The accountant can issue a review report that may be modified for the departure from GAAP.
Choice “D” is incorrect. The accountant can issue a review report that may be modified for the departure from GAAP
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:
A. Include a qualified or adverse conclusion on the financial statements in the review report. B. Express positive assurance on the accounting principles that conform with GAAP. C. Issue an adverse or an "except for" qualified opinion, depending on materiality. D. Express negative assurance on the accounting principles that do not conform with GAAP.
Choice “A” is correct. If the accountant concludes that the financial statements contain material misstatements, the review report should be modified to include either a qualified (material but not pervasive issue) or adverse (material and pervasive issue) conclusion.
Choice “B” is incorrect. An accountant would not express positive assurance (i.e., an opinion) on the accounting principles that conform with GAAP in a review engagement.
Choice “C” is incorrect. An accountant would not issue an opinion in a review engagement.
Choice “D” is incorrect. An accountant would not express negative assurance on the accounting principles that do not conform with GAAP in a review engagement.
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a:
A. Management advisory report prepared at the request of a client's audit committee. B. Review report on comparative financial statements for a nonissuer in its second year of operations. C. Report on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act. D. Review report on prospective financial statements that present an entity's expected financial position, given one or more hypothetical assumptions.
Explanation
Choice “B” is correct. Performing inquiry and analytical procedures is the primary basis for an accountant to issue a review report on comparative financial statements for a nonissuer in its second year of operations.
Choice “A” is incorrect. Management advisory services (also known as consulting services) require the accountant to develop findings, conclusions, and recommendations. Generally this would require procedures beyond inquiry and analytical procedures.
Choice “C” is incorrect. Reporting on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act is an attest engagement designed to provide a high level of assurance on an assertion (an “examination”). Inquiry and analytical procedures alone generally would be insufficient to support this level of assurance.
Choice “D” is incorrect. Prospective financial statements that present an entity’s expected financial position (given one or more hypothetical assumptions) may be subject to (1) an examination; (2) a compilation; (3) a preparation, or (4) agreed-upon procedures; but not to a review.
Which of the following procedures would most likely be included in a review engagement of a nonissuer?
A. Assessing the internal control structure. B. Inquiring about related party transactions. C. Preparing a bank transfer schedule. D. Performing cutoff tests on sales and purchases transactions.
Choice “B” is correct. A review engagement is based on inquiry and analytical procedures. Inquiring about related party transactions is a procedure which would most likely be included in a review engagement of a nonpublic entity.
Choice “A” is incorrect. Assessing the internal control structure pertains to an audit engagement.
Choice “C” is incorrect. Preparing a bank transfer schedule pertains to an audit engagement.
Choice “D” is incorrect. Performing cutoff tests on sales and purchases transactions pertains to an audit engagement.
When performing an engagement to review a nonissuer’s financial statements in accordance with Statements on Standards for Accounting and Review Services, an accountant most likely would:
A. Restrict the use of the accountant's report. B. Obtain an understanding of internal control. C. Confirm a sample of significant accounts receivable balances. D. Ask about actions taken at board of directors' meetings.
Choice “D” is correct. As part of the inquiries made during a review engagement, an accountant would ask about actions taken at board of directors’ meetings that affect the financial statements.
Choice “A” is incorrect. The accountant would not normally restrict the use of the review report.
Choice “B” is incorrect. A review engagement performed in accordance with SSARS does not include obtaining an understanding of the client’s internal control.
Choice “C” is incorrect. Certain procedures, such as confirmation of receivables and observation of inventory, are customarily performed in an audit but not in compilation or review engagements.
During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material and pervasive to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:
A. Emphasize that the financial statements are for limited use only. B. Disclose the departure from GAAP in the financial statements. C. Issue an adverse conclusion because of the departure from GAAP. D. Express no assurance of any kind on the entity's financial statements.
Choice “C” is correct. If the accountant becomes aware of material misstatements that are pervasive to the financial statements, the report should be modified to include an adverse conclusion.
Choice “A” is incorrect. There is no need for the auditor to restrict the use of the financial statements.
Choice “B” is incorrect. Failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the review report to include a qualified or adverse conclusion, or withdraw from the engagement.
Choice “D” is incorrect. The accountant should modify the review report to include an adverse conclusion rather than not expressing any kind of assurance on the financial statements.
After the issuance of restricted-use review reports, what is an accountant’s responsibility with regard to controlling the client’s distribution of those reports?
A. An accountant and the client share responsibility for controlling the client's distribution of restricted-use reports. B. An accountant is solely responsible for controlling a client's distribution of restricted-use reports. C. An accountant has no responsibility for controlling a client's distribution of restricted-use reports. D. An accountant is responsible for controlling a client's distribution of restricted-use reports only if this responsibility is expressly stated in the engagement letter.
Choice “C” is correct. An accountant has no responsibility for controlling a client’s distribution of a restricted-use report.
Choice “A” is incorrect. A restricted-use report includes an other-matter paragraph that alerts readers of the restriction on the reports. The accountant has no responsibility for controlling a client’s distribution of a restricted-use report.
Choice “B” is incorrect. An accountant is not responsible for controlling the client’s distribution of restricted-use reports.
Choice “D” is incorrect. An accountant may inform the client that the restricted-use reports are not intended for distribution to nonspecified parties, but the accountant is not responsible for controlling the client’s distribution of the restricted-use reports.
Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?
A. For an audit or a review if agreed upon by both the CPA and the client. B. For a compilation if a third party will use the financial statement and disclosure is not made in the report. C. If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings. D. For an examination of prospective financial statements.
Choice “C” is correct. Fees are not regarded as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies. Further, contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.
Choice “A” is incorrect. Contingent fees are specifically prohibited for audits and reviews of financial statements or examinations of prospective financial information.
Choice “B” is incorrect. Contingent fees are permitted for compilations only if the member includes a statement that the member is not independent.
Choice “D” is incorrect. Contingent fees are specifically prohibited for audits and reviews of financial statements or examinations of prospective financial information.
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence?
A. Providing consultations under a contingency fee arrangement. B. Reviewing a proposed transaction and informing the client of the tax consequences. C. Planning and issuing an opinion in favor of the tax treatment of an aggressive tax position. D. Preparing tax returns for an individual in a financial oversight reporting role during the audit period.
LEARN WRONG ANSWER EXPLANATIONS
Choice “B” is correct. The tax service of reviewing a proposed transaction and informing the client of the tax consequences may be provided jointly with the audit of an issuer’s financial statements without impairing independence.
Choice “A” is incorrect. The PCAOB prohibits registered public accounting firms from receiving a contingent fee from an audit client.
Choice “C” is incorrect. The PCAOB prohibits registered public accounting firms from providing tax services related to aggressive tax transactions to audit clients.
Choice “D” is incorrect. The PCAOB prohibits registered public accounting firms from providing tax services, such as preparing tax returns, to individuals in a financial reporting oversight role.
The Code of Professional Conduct, Independence Rule, does not consider the following circumstances to be a lack of independence:
A. The audited firm is privately held and the auditor provides valuation and appraisal services to an audit client, the results of which are material to the financial statements. B. The CPA firm's sole audit manager served as controller of the firm's audit client from the January, Year 1 through May, Year 5 when the manager began working with the CPA firm. The current audit period for this client is from April 1, Year 5 through March 31, Year 6. C. The auditor's brother-in-law's father is the controller of the client being audited. D. A financial institution client loans the auditor money to buy a boat but does not collateralize the loan.
LEARN WRONG ANSWER EXPLANATIONS
Choice “C” is correct. Independence is impaired by a member, a member’s spouse or dependent (immediate family), or a close relative who holds a key position in the audit client. A brother-in-law and family of the brother-in-law are not considered to be immediate family members or close relatives. According to the Code, a close relative is defined as a parent, sibling, or nondependent child.
Choice “A” is incorrect. Independence is impaired if valuation and appraisal services are performed, the results are material to the financial statements, and the appraisal or valuation is subject to a significant degree of subjectivity.
Choice “B” is incorrect. A CPA auditor cannot work for the client in a key position during the audit year.
Choice “D” is incorrect. Fully collateralized loans made within the normal course of business, such as by a financial institution, do not impair independence.
