AUD Becker A6 - Accounting and Review Service Engagements, Interim Reviews, and Ethics and Professional Responsibilities Flashcards
Which of the following most likely would be included in an accountant’s documentation of a
preparation of a client’s financial statements?
A. The results of analytical procedures
B. Engagement letter
C. Management representation letter
D. Accounts receivable confirmations
Choice “2” is correct. An engagement letter should be included in the documentation of a preparation.
Choice “1” is incorrect. A preparation engagement does not require the practitioner to perform analytical procedures. Therefore, it is unlikely that this would be included in the documentation.
Choice “3” is incorrect. A preparation engagement does not require the practitioner to obtain a management representation letter.
Choice “4” is incorrect. A preparation engagement does not require confirmation of accounts receivable. Confirmation of accounts receivable is documentation likely to be included in an audit engagement.
During a review of financial statements, an accountant decides to emphasize a matter in
the review report. Which of the following is an example of a matter that the accountant
would most likely want to emphasize?
A. The entity has had significant transactions with related parties.
B. The IRS has notified the entity that it intends to audit income tax returns for prior
years.
C. Other entities in the same industry have recently changed from LIFO to FIFO.
D. The entity has had significant tax expenses as a result of a new tax law.
Choice “1” is correct. An example of a matter an accountant would want to emphasize is that the entity has significant transactions with related parties.
Choice “2” is incorrect. An accountant generally does not discuss upcoming IRS audits for an entity in a review report.
Choice “3” is incorrect. The review report should focus on the accountant’s client and would not mention other entities’ accounting principles.
Choice “4” is incorrect. An accountant is unlikely to emphasize in the review report that the entity had significant tax expenses as a result of a new tax law.
According to the ethical standards of the profession, which of the following acts generally is
prohibited?
A. Retaining client records after the client has demanded their return.
B. Issuing a modified report explaining the CPA’s failure to follow a governmental
regulatory agency’s standards when conducting an attest service for a client.
C. Revealing client tax returns to a prospective purchaser of the CPA’s practice.
D. Accepting a contingent fee for representing a client in connection with obtaining a
private letter ruling from the Internal Revenue Service.
Choice “1” is correct. According to the Discreditable Acts Rule, members may not commit any act that discredits the profession. Failure to return records to a client after the client makes a demand is specifically listed as an act that would discredit the profession.
Choice “2” is incorrect. Unusual circumstances may justify a departure from generally accepted accounting principles if compliance would cause the report to be misleading (e.g., new legislation or new forms of business transactions). The departure must be described and explained.
Choice “3” is incorrect. Although an accountant may not reveal confidential client information to others without the client’s permission, the rule does not prohibit a review of the accountant’s practice in connection with a sale of the accountant’s practice. The accountant is required to take appropriate precautions in such cases. A written confidentiality agreement would be an example of such a precaution.
Choice “4” is incorrect because a contingent fee is permitted when representing a client in a request for a ruling by IRS. The determination of the result would be determined by the IRS, not the accountant.
Which of the following areas of professional responsibility should be observed by a CPA not in public practice? Objectivity Independence A. Yes No B. Yes Yes C. No Yes D. No No
Choice “1” is correct. A CPA must always be objective; however, a CPA need not be independent, except when engaged in public practice.
Choices “2”, “3”, and “4” are incorrect, per the above.
Under which of the following circumstances would an accountant most likely conclude that it
is necessary to withdraw from an engagement to review a nonissuer’s financial statements?
A. The entity declines to provide the accountant with a signed representation letter.
B. The entity prepares its financial statements on the income tax basis of accounting.
C. The entity requests the accountant to report only on the balance sheet and not on the
other financial statements.
D. The entity does not have reasonable justification for making a change in accounting
principle.
Choice “1” is correct. The accountant is required to obtain a representation letter from management. When the client does not provide such a letter, the review is incomplete and the accountant may not issue the review report.
Choice “2” is incorrect. The income tax basis is a special purpose framework. It is acceptable for an auditor to review special purpose financial statements, and there would be no need to withdraw.
Choice “3” is incorrect. A review engagement may involve reporting on only one financial statement as long as the scope of the engagement is not limited. There would be no need to withdraw in this circumstance.
Choice “4” is incorrect. Lack of a reasonable justification for a change in accounting principle is a departure from GAAP, generally resulting in a modified report. It would not require the accountant to withdraw from the engagement.
When preparing a nonissuer’s financial statements, an accountant would be least likely to:
A. Advise management on alternative accounting policies that are significant to the
financial statements.
B. Assist management in making judgments for impairment expense.
C. Omit substantially all of the disclosures required by generally accepted accounting
principles.
D. Perform control testing around the cash disbursement process.
Choice “4” is correct. A preparation engagement does not require the accountant to perform control testing. A preparation engagement involves the accountant preparing financial statements using the records, documents, explanations, and other information provided by management. An accountant does not need to test controls or perform substantive procedures.
Choice “1” is incorrect. In the preparation of financial statements, the accountant may provide assistance to management with significant judgments, such as advising management on alternative accounting policies that are significant to the financial statements.
Choice “2” is incorrect. In the preparation of financial statements, the accountant may provide assistance to management with significant judgments, such as assisting management in making judgments for impairment expense.
Choice “3” is incorrect. If requested by management, the accountant preparing the financial statements might omit substantially all of the disclosures required by GAAP.
According to the SEC, an auditor is not independent of its issuer audit client in which of the
following situations?
A. The auditor’s grandparent was in an accounting role at the audit client and ended
employment before the period under audit began.
B. The auditor has an investment in an entity that has the ability to exercise significant
influence over the audit client.
C. The auditor has an automobile loan at standard terms from the audit client that is
collateralized by the automobile.
D. The auditor’s cousin has an insurance policy obtained from the issuer before it
became an audit client.
Choice “2” is correct. An investment in an entity that has the ability to exercise significant influence over the audit client would be considered a violation of the Independence Rule.
Choice “1” is incorrect. A covered member’s spouse and dependents are also generally subject to the Independence Rule; however this does not extend to grandparents.
Choice “3” is incorrect. Independence is not impaired in a financial institution client by a fully collateralized car loan with a financial institution client.
Choice “4” is incorrect. A covered member’s spouse and dependents are also generally subject to the Independence Rule; however this does not extend to cousins.
Preparation engagements should be performed in accordance with:
A. Statements on Standards for Accounting and Review Services
B. Statements on Auditing Standards
C. Statements on Standards for Attestation Engagements
D. Statements on Standards for Preparation and Compilation Services
Choice “1” is correct. Preparation engagements should be performed in accordance with Statements on Standards for Accounting and Review Services.
Choice “2” is incorrect. Audit engagements for nonissuers should be performed in accordance with Statements on Auditing Standards.
Choice “3” is incorrect. Attestation engagements should be performed in accordance with Statements on Standards for Attestation Engagements.
Choice “4” is incorrect. The AICPA does not have standards entitled, Statements on Standards for Preparation and Compilation Services.
The standard that an auditor should put forth an honest effort in the performance of
professional services in accordance with relevant technical and professional standards is
included in the Generally Accepted Government Auditing Standard ethics principle of:
A. Serving the public interest.
B. Objectivity.
C. Integrity.
D. Professional behavior.
Choice “4” is correct. Professional behavior includes an auditor’s honest effort in the performance of professional services in accordance with the relevant technical and professional standards.
Choice “1” is incorrect. The public interest is defined as the collective well-being of the community of people and entities served by the auditor. Auditor services should be designed to meet those needs.
Choice “2” is incorrect. Objectivity includes independence of mind and appearance when providing audits, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest.
Choice “3” is incorrect. Integrity includes auditors conducting their work with an attitude that is objective, fact-based, nonpartisan, and non-ideological with regard to the audited entities and users of the auditor’s reports.
According to the profession's ethical standards, which of the following events may justify a departure from U.S. GAAP. I. New legislation II. Evolution of a new form of business transaction A. Yes Yes B. No No C. Yes No D. No Yes
Choice “1” is correct. Yes - Yes. The Accounting Principles Rule of the Code of Professional Conduct of the AICPA states that if the financial statements or data contain a GAAP departure, the departure may be justified if the CPA can demonstrate that due to unusual circumstances, such as new legislation or the evolution of a new form of business transaction, the financial statements would otherwise be misleading.
Under these circumstances, the auditor’s report should describe the departure, its approximate effects, if practicable, and the reasons why compliance with the generally accepted principle would result in a misleading statement.
Choices “4”, “3”, and “2” are incorrect, per the above explanation.
An accountant performing a nonissuer’s review engagement is considering the
appropriateness of a client’s balance for accrued wages. The accountant should perform
each of the following procedures, except:
A. Making inquiries of the payroll accountant regarding completeness of the account
balance.
B. Obtaining representations from management regarding the year-end balance.
C. Comparing the current-year balance to the prior-year balance.
D. Testing the process used by management to determine the balance.
Choice “4” is correct. Review engagements do not require testing of processes used by management.
Choice “1” is incorrect. Inquiry procedures, such as making inquiries of the payroll accountant regarding completeness of the account balance, are performed in a review engagement.
Choice “2” is incorrect. A review includes obtaining representations from management regarding the year-end balance.
Choice “3” is incorrect. Analytical procedures, such as comparing the current-year balance to the prior-year balance, are performed in a review engagement.
The Public Company Accounting Oversight Board was established by which of the
following?
A. The Financial Accounting Standards Board.
B. The Sarbanes-Oxley Act of 2002.
C. The International Accounting Standards Board.
D. The American Institute of Certified Public Accountants.
Choice “2” is correct. The Public Company Accounting Oversight Board was established by the Sarbanes-Oxley Act of 2002.
Choices “1”, “4”, and “3” are incorrect per the explanation above.
According to the U.S. Department of Labor, an auditor of an employee benefit plan would
be considered independent if:
A. An actuary associated with the auditor’s firm renders services to the plan.
B. The auditor is committed to acquire a material indirect financial interest in the plan
sponsor.
C. The auditor’s firm maintains financial records for the plan.
D. A member of the auditor’s firm is an investment advisor to the plan.
Choice “1” is correct. According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if an actuary associated with the auditor’s firm renders services to the plan.
Choice “2” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if the auditor is committed to acquire a material indirect financial interest in the plan sponsor.
Choice “3” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if the auditor’s firm maintains financial records for the plan.
Choice “4” is incorrect. An auditor of an employee benefit plan independence would be considered impaired if a member of the auditor’s firm is an investment advisor to the plan.
Financial statements of a nonissuer that have been reviewed by an accountant should be
accompanied by a report stating that:
A. Management is responsible for the preparation and fair presentation of the financial
statements.
B. The scope of the inquiry and analytical procedures performed by the accountant has
not been restricted.
C. A review is greater in scope than a compilation, the objective of which is to present
financial statements that are free of material misstatements.
D. A review includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
Choice “1” is correct. Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that management is responsible for the preparation and fair presentation of the financial statements.
Choice “2” is incorrect. The report does not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted.
Choice “3” is incorrect. The report does not state that a review is greater in scope than a compilation. In addition, presenting financial statements that are free of material misstatements is not the objective of a compilation.
Choice “4” is incorrect. An audit (and not a review) includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
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.
Choice “3” 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 “1” 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 “2” is incorrect. A CPA auditor cannot work for the client in a key position during the audit year.
Choice “4” is incorrect. Fully collateralized loans made within the normal course of business, such as by a financial institution, do not impair independence.
