AUD 6 - Accounting and Review Service Engagements, Interim Reviews, and Professional Responsibilities

Question 1

what standards are the following committees responsible for:

1. Auditing Standards Board
2. Accounting and Review Services Committee
3. General Accounting Office

Answer 1

1. Auditing Standards Board - auditing standards under GAAS
2. Accounting and Review Services Committee - standards concerning an accountant’s association with un audited financial statements of a non-issuer
3. General Accounting Office - responsible for audit standards under the federal “Single Audit Act”

Question 2

What is a preparation engagement?

Answer 2

it is when an accountant is engaged to prepare the financial statements in accordance with a specified framework.

It is the lowest level of service and SSARs will apply

no assurance id provided so independence NOT required

can only complete for private/non-public issuers

Question 3

Does a CPA need to be independent to prepare a tax return?

Answer 3

no, the CPA does not.

Question 4

Does the AICPA require that the lead partner rotation?

Answer 4

no, the AICPA does not require this. SOX/PCAOB/SEC requires lead partner rotation every 5 years.

As such, non issuers do not need to rotate their lead partner but ISSUERS need to rotate every 5 years

Question 5

How often does the PCAOB inspect a registered public accounting firm?

Answer 5

if under 100 clients then PCAOB conducts an inspection every 3 years. If over 100 clients then PCAOB conducts an annual inspection

Question 6

Does the PCAOB have the authority to prosecute criminal violations and impose civil monetary penalties?

Answer 6

the PCAOB only has the right to improve civil monetary penalties.

Question 7

An auditor of an issuer can provide the following tax services?

Answer 7

1. tax compliance
2. tax planning
3. tax advice

Question 8

What is the difference between a compilations report and a preparation report?

Answer 8

compilations require a report while preparation engagements do not

compilations require an auditor to disclose lack of independence when preparation engagements do not.

the type of procedures performed with compilations and preparations are substantially the same

Question 9

can an auditor issue an adverse opinion on a compilations?

Answer 9

no they cannot issue any opinion on a compilations, they can either disclose or withdraw

Question 10

Key points to the Standard Compilations Report

Answer 10

1. there is no title to the report
2. “performed in accordance to SSARS”
3. “we did not audit or review”
4. “we do not express an opinion nor provide any form of assurance”

Question 11

Key points to the Standard Preparation Report

Answer 11

no report is issued with a preparation.

Question 12

When the prior period has been audited, the accountant issues in the current period either a compilations or review report, the accountant needs to include an additional paragraph that includes?

Answer 12

1. the prior period statements were audited
2. the date of the previous report
3. the opinion expressed and if other than unmodified, the reasons for the modification, AND
4. that NO auditing procedures have been performed since the previous report date

Question 13

CPA was asked to issue a review report on only the balance sheet of a nonissuer. CPA will not report on statement of income, retained earnings, and cash flows. The CPA may issue the report as long as?

Answer 13

the scope of the inquiry and analytical procedures has not been restricted

Question 14

Do you use the words “presented fairly” in a review report?

Answer 14

No, those words are only used in audits; a review only provides limited assurance that the accountant is not aware of any material modifications that need to be made to the accompanying financials.

Question 15

Each page of a non issuers financial statements reviewed by an accountant should include?

Answer 15

a note stating “see independent accountant’s review report”

Question 16

Ratio vs Trend Analysis

Answer 16

Ratio analysis is more likely used on balance sheet accounts while a trend analysis is more likely used on income statement accounts

Question 17

What are the AICPA’s Code of Professional Conduct general standards?

Answer 17

1. professional competence
2. due professional care
3. planning and supervision
4. sufficient relevant data

Question 18

How many CPAs is the PCAOB made up of?

Answer 18

2 CPAs, and 3 Non CPAs

Question 19

What are the SEC rotation rules for partners?

Answer 19

lead and concurring review partner required to rotate after 5 yrs; other partners required to rotate after 7 years

Question 20

Adams is the executive partner of Adams & Co., CPAs. One of its smaller clients is a large nonprofit charitable organization. The organization has asked Adams to be on its board of directors, which consists of a large number of the community’s leaders. Membership on the board is honorary. Adams & Co. would be considered to be independent

Answer 20

As long as Adams does not perform or give advice on management functions of the organization.

Question 21

What SSARSs engagements require a mgmt rep letter?

Answer 21

Preparation - No
Compilation - No
Review - Yes

Question 22

Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?

A. Reviewing interim financial information for issuers.
B. Preparing a tax return for a partnership.
C. Processing financial data for clients of other accounting firms.
D. Preparing an individual’s personal financial statement to be used to obtain a mortgage.

Answer 22

D. Preparing an individual’s personal financial statement to be used to obtain a mortgage.

AR-C 70 describes the accountant’s responsibilities for preparation services. A preparation of financial statements includes preparation of personal financial statements for presentation with a financial plan.

Question 23

Does a review of a public entity’s financial information require an evaluation of internal control?

Answer 23

yes

Question 24

PCAOB board consist of how many CPAs?

Answer 24

exactly two

Question 25

what does due professional care in performing an audit require?

Answer 25

requires a member to plan and supervise adequately any professional activity for which he or she is responsible for

Question 26

A CPA serving as a bank director should not be concerned with

A. The CPA’s independence with respect to a client’s receiving a large loan from the bank.
B. Disclosure of confidential client information to the bank.
C. The compatibility of serving as a bank director and the possibility of soliciting clients.
D. A possible conflict of interest between the bank and the CPA’s clients.

Answer 26

C. The compatibility of serving as a bank director and the possibility of soliciting clients

The Code of Professional Conduct does not prohibit solicitation of clients. Solicitation is permitted if it is not false, misleading, or deceptive.

Question 27

In which of the following situations would a covered member’s independence be considered to be impaired?

1. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution.
2. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust.
3. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a finance lease, and the rental income is material to the CPA.

Answer 27

2 and 3; independence is impaired bc 3 is a finance lease (would be okay if operating lease)

When a member leases property to or from a client, independence is not impaired if (1) the lease meets the criteria of an operating lease, (2) the terms and conditions of the agreement compare with those of similar leases, and (3) all amounts are paid in accordance with the lease.

Question 28

With respect to records in a CPA’s possession, the Code of Professional Conduct provides that

A. An auditor may retain client-provided records if fees due with respect to a completed engagement have not been paid.

B. Extensive analyses of inventory prepared by the client at the auditor’s request are working papers that belong to the auditor and need not be furnished to the client upon request.

C. The auditor who has provided records to a client must comply with any subsequent requests to again provide such information.

D. Worksheets in lieu of a general ledger belong to the auditor and need not be furnished to the client upon request.

Answer 28

B. Extensive analyses of inventory prepared by the client at the auditor’s request are working papers that belong to the auditor and need not be furnished to the client upon request.

A member’s working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.

Question 29

Green Company, an issuer, uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green’s auditor to issue a report with a(n)

A. Explanatory paragraph as to consistency.
B. Qualified opinion.
C. Unqualified opinion.
D. Opinion modified as to consistency.

Answer 29

C. Unqualified opinion.

The objective of the evaluation of consistency for the periods presented is to communicate in the report when the comparability of financial statements between periods has been materially affected by a change in accounting principles or by adjustments to correct a material misstatement in previous statements. Thus, the use of two different cost flow assumptions does not, by itself, affect the comparability of the entity’s financial statements between periods if no accounting changes have occurred.

Question 30

An other-matter paragraph is included in the auditor’s report of a nonissuer except when
A. A predecessor auditor’s report is not reissued.
B. The opinion on the prior-period statements has changed.
C. The client has materially restated the prior year’s comparative financial statements.
D. The auditor draws the user’s attention to a relevant unique feature of the audit.

Answer 30

C. The client has materially restated the prior year’s comparative financial statements.

An other-matter paragraph draws attention to a matter not required to be presented or disclosed in the financial statements that is relevant to users’ understanding of the auditor’s audit, responsibilities, or report. A correction of a material misstatement in previously issued financial statements requires the auditor to include an emphasis-of-matter paragraph. This matter is appropriately presented or disclosed in the financial statements and is fundamental to users’ understanding.

Question 31

Company Y has asked Practitioner X to review its financial projection for the next few years. X should

A. Accept the review engagement if X is independent.
B. Accept the engagement if a lack of independence is disclosed.
C. Inform Y that prospective financial statements may be examined but not reviewed.
D. Inform Y that only financial forecasts may be reviewed.

Answer 31

C. Inform Y that prospective financial statements may be examined but not reviewed.

A practitioner may accept an engagement to examine or apply agreed-upon procedures to, but not review, prospective financial statements.

Question 32

Under attestation standards, what type of engagements are allowed for pro forma financial information?

Answer 32

compilations, review, and examinations

Question 33

When the Supplementary Information SI and the audited statements are presented together, the auditor reports on the SI in

Answer 33

(1) a separate report or (2) a separate section subsequent to the opinion section.

Question 34

Eagle Company’s financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is
A. Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph.
B. Unmodified but not mention the departure in the auditor’s report.
C. Unmodified and describe the departure in an other-matter paragraph.
D. Qualified and describe the departure in a separate paragraph.
Answer (D) is incorrect.
An adverse or qualified opinion is not expressed when the statements are fairly presented.

Answer 34

C. Unmodified and describe the departure in an other-matter paragraph.

A material departure from GAAP prohibits expression of an opinion that financial statements are in conformity with GAAP. However, an exception is permitted when the auditor can demonstrate that because of unusual circumstances the statements would otherwise have been misleading. Given these circumstances, and if no other basis for modifying the opinion exists, the auditor may express an unmodified opinion, provided that (s)he describes in an other-matter paragraph

Question 35

Does the AICPA and PCAOB require an emphasis of matter paragraph?

Answer 35

only the AICPA requires an EOM paragraph. PCAOB permits an EOM but it is never required.

Question 36

When the auditor concurs with a change in accounting principle that materially affects the comparability of the comparative financial statements, the auditor should the auditor concurring explicitly with the change?

Answer 36

no the auditor should not concur with change in audit report. should only have additional paragraph

Question 37

14) Management’s discussion and analysis (MD&A) must be in accordance with the rules and regulations adopted by the
A. PCAOB.
B. AICPA.
C. SEC.
D. FASB.

Answer 37

C. SEC.

MD&A must be in accordance with the rules and regulations adopted by the SEC, a federal governmental regulator.

Question 38

An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP
A. Is required to be included both in the notes to the financial statements and the auditor’s report.
B. Need not be quantified and included in either the notes to the financial statements or the auditor’s report.
C. Is required to be included only in the notes to the financial statements.
D. Is required to be included only in the auditor’s report.

Answer 38

B. Need not be quantified and included in either the notes to the financial statements or the auditor’s report.

The tax basis is a special purpose framework used to file tax returns. Moreover, the statements should be appropriately titled in accordance with the framework used. Also, the statements should include a summary of significant accounting policies and describe how the special purpose framework varies from GAAP. However, the dollar amount of the effects of the difference is not required to be included in the notes to the financial statements or the auditor’s report.

Question 39

Which of the following would not be included in an accountant’s report based upon a review of the financial statements of a nonissuer?
A. A statement describing the primary procedures performed.
B. A statement that management is responsible for the financial statements.
C. A statement that the review was in accordance with GAAS.
D. A statement describing the results of the review.

Answer 39

C. A statement that the review was in accordance with GAAS.

The report should include a statement that the review is substantially less in scope than an audit. GAAS apply to audits, not reviews. A review is in accordance with SSARSs issued by the AICPA. It consists primarily of inquiries of entity personnel (including requests to management for written representations) and analytical procedures applied to financial data (AR-C 90).