AUDIT 6

Question 1

Name the five elements of preparation, compilation, and review engagements.

Answer 1

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

Question 2

According to SSARS, who must sign the engagement letter?

Answer 2

1. The accountant or accountant’s firm AND management or those charged with governance

Question 3

Financial statements prepared in accordance with a special purpose framework are not considered appropriate in form unless the financial statements include which two elements?

Answer 3

1. A description of the special purpose framework, including a summary of significant accounting policies and a description of the material differences from GAAP

AND

2. Disclosures similar to those required by GAAP if the financial statements contain items that are similar tot those included in FS prepared in accordance with GAAP.

Question 4

If the accountant is issuing a compilation or review report on FS and the FS are intended for use only outside the US, the accountant should use either of what two reports?

Answer 4

1. Report in accordance with SSARS that includes a statement that refers to the note of the FS that describes the basis of presentation, including identification of the country of origin of the principles.
2. Report in accordance with another set of compilation or review standards.

Question 5

Identify the performance requirements that are necessary when engaged to perform a preparation engagement.

Answer 5

1. Obtain an engagement letter.
2. Possess knowledge of and understanding of the entity’s financial reporting framework.
3. Prepare the FS.
4. Include a statement on each page of the FS that “no assurance is provided” or issue a disclaimer.

Question 6

What are the reporting requirements with respect to compiled FS when:

1. Substantially all disclosures are omitted?
2. Only limited disclosures are included?
3. The auditor lacks independnce?

Answer 6

1. Can only report if the omission is not to mislead the users, report must clearly indicate the omission, include an additional paragraph disclosing the omissions
2. Notes should be labeled “selected information- substially all disclosures required by GAAP are not included”
3. The last paragraph of the report should disclose the lack of independence. The auditor is permitted but not required to state why they are truly not independent.

Question 7

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

Answer 7

1. Obtain an engagement letter
2. Possess knowledge of the accounting principles
3. Have a general idea of the business
4. Read the compiled FS
5. Follow up with management about issues
6. Issue report

Question 8

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

Answer 8

Includes the following in one paragraph

1. Management responsibility

“Not required to perform any procedures to verify the accuracy or completeness of the information”

Question 9

What are the performance requirements applicable to a review engagement?

Answer 9

U-Understanding with client is established
L-Learn about the business
I-INquiries
A-Analytical procedures
R-Review
C-Client rep letter
P-Professional judgement is used
A-Accountant should communicate results

Question 10

What SSARS engagement require determination of independence?

Answer 10

1. Compilation: Although independence is not required, it should be evaluated. Lack of it needs to be disclosed.

2 Review: Auditor must be independent

Note: Preparation is non-attest so it doesn’t require evaluation of independence.

Question 11

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

Answer 11

It is a letter to underwriters from the CPA.

It provides:

1. Positive assurance regarding the CPA’s independence and whether the FS comply as to form in all material respects with the applicable SEC requirements.
2. Negative assurance regarding unaudited FS, capsule information, changs in certain FS items, and compliance of certain non FS information with SEC requirements .

Question 12

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

Answer 12

1. Market risk sensitive instruments

2. Qualitative disclosures

Question 13

What are the 6 principles of the AICPA Code of Professional Conduct?

Answer 13

1. Responsibility
2. Public Interest
3. Integrity
4. Objectivity and Independence
5. Due Care
6. Scope and nature of services

Question 14

Under the AICPA Code of Professional Conduct, independence is impaired when:

Answer 14

1. Member has direct financial interest
2. Material indirect interest
3. Member or member’s family member has a loan to or from client
4. Member accepts more than a token gift
5. Member is an employee of or makes management decisions
6. Client is overdue more than one year of payment fees
7. Actual or threatened litigation between the member and cleint

Question 15

When are contingent fees prohibited?

Answer 15

1. Audits of FS, Reviews, Examinations of prospective financial information, preparing an original or amended tax return or claim for a tax refund

Question 16

When are contingent fees permitted?

Answer 16

1. For compilations expected to be used by 3rd parties only if the member

Fees by courts are not considered contingent

Question 17

Explain the conceptual framework approach utilized by the AICPA Code of Professional Conduct?

Answer 17

It requires entities to:

1. Identify threats to compliance with fundamental principles
2. Evaluate the significance of the threat
3. Apply safeguards to eliminate threats or reduce threats to an acceptable level, whenever possible.

Question 18

Identify threats to compliance with fundamental principles included within the AICPA Code of Professional Conduct.

Answer 18

Threats include:

1. Adverse interest threat
2. Advocacy threat
3. Familiarity threat
4. Management participation threat
5. Self-Interest Threat
6. Self-Review threat
7. Undue influence threat

Question 19

What is an adverse interest threat?

Answer 19

It is the treat that a member will not act with objectivity because the member’s interests are opposed to the client or employing organization interests.

For example, a member experiences an adverse interest threat if he or she is commencing litigation against their client/employing organization.

Question 20

Define and provide an example of advocacy threat.

Answer 20

It is a threat that a member will promote the client’s or employing organization’s interest to the point that this or her objectivity or independence is compromised.

For example, a member experiences advocacy threat when he or she endorses a client’s services or products.

Question 21

Define and provide an example of familiarity threat.

Answer 21

This is a threat due to a long or close relationship with the client or employing organization, a member will become too accepting of the product or service and/or too sympathetic to the client’s or employing organization’s interests.

For example, a close friend could be employed by the client.

Question 22

Define and provide an example of management participation threat.

Answer 22

The threat that a member will take on the role of client management or otherwise assume management responsibilities.

For example, a member experiences management participation threat if he or she serves as an officer or a director of an attest client.

This threat exists for members engaged in attest engagements.

Question 23

Define self interest threat.

Answer 23

The threat that a member could benefit financially or otherwise from an interest in, or relationship with, a client or employing organization or persons associated with the client or emplying organization.

For example, a member is eligible for a profit or other performance related bonus at the employing organization and the value of that bonus is directly affected by the member’s decisions.

Question 24

Self review threat

Answer 24

The threat that a member will not appropriately evaluate:

1. The results of a previous judgement made or
2. a service performed of supervised by the member or
3. An individual in the member’s firm or employing organization and
4. That the member will rely on that service in forming a judegement as part of another service

For example, a member in public practice would experience self review threat when performing bookkeeping services for a client.

Question 25

Undue influence threat

Answer 25

The threat that a member will subordinate his or her judgement to an individual associated with a client or employing organization or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.

For example, a member would incur this threat if he ir she is pressured to become associated with misleading information.

Question 26

What is an “issuer” and what group establishes standards

Answer 26

Issuer is an entity subject to the rules of the SEC

PCAOB establishes standards.

Question 27

Title I of the SOX 2002 requires that registered firms must adhere to what auditing standards?

Answer 27

1. Audit workpapers must be maintained for 7 years
2. A concurring or second partner review is required for each audit report
3. The audit report must describe the scope of the testing of the issuer’s internal controls

Question 28

Under SOX 2002, what services may not be provided to an audit client?

Answer 28

Prohibitted services include:

Bookkeeping, financial info systems design, vaulation/appraisal, actuarial services, management functions, internal audit outsourcing, investment related, legal services, expert services unrelated to the audit

Question 29

Under SOX TItle II and SEC regulation S-x, what services must be preapproved by the audit committee?

Answer 29

All auditing services and permitted non-attest services (including tax) must be preapproved.