CH 5 Accounting and Review Services Engagements Flashcards

1
Q

Ordinarily, communications that fraud or noncompliance with laws and regulations may have occurred to parties other than the client’s senior management (or the client’s board of directors) is which of the following?

I. Not part of the accountant’s responsibility
II. Would be precluded by the accountant’s ethical or legal obligations of confidentiality
A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

A

C.
Both I and II

The disclosure of any evidence or information that comes to the accountant’s attention during the performance of compilation or review procedures that fraud or noncompliance with laws and regulations may have occurred to parties other than the client’s senior management (or those charged with governance, if applicable) ordinarily is not part of the accountant’s responsibility and, ordinarily, would be precluded by the accountant’s ethical and legal obligations of confidentiality.

Under certain circumstances, the accountant may have a duty to disclose this information to parties outside the entity, for example, in order to comply with legal and regulatory requirements, to a successor accountant, or in response to a subpoena.

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2
Q

Which of the following statements is correct regarding both a compilation and a review engagement of a nonissuer’s financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

A.
The CPA should assess fraud risk.

B.
The CPA must obtain an understanding of the client’s internal control.

C.
The CPA must establish an understanding with the client regarding the services to be performed and document it in an engagement letter.

D.
The reports contain a statement that the engagement is substantially less in scope than an audit.

A

C. The CPA must establish an understanding with the client regarding the services to be performed and document it in an engagement letter.

The accountant should establish an understanding with the entity regarding the services to be performed for both compilation and review engagements, and should document the understanding through a written communication with management.

Assessing fraud risk and obtaining an understanding of a client’s internal control are audit procedures.

The phrase “substantially less in scope than an audit” is found in a review report.

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3
Q

A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client’s management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except:

A.
issue an accountant’s review report with a separate paragraph discussing the change in engagement scope.

B.
consider the additional audit effort and cost required to complete the audit.

C.
evaluate the possibility that financial statement information affected by the limitation on work to be performed may be incorrect or incomplete.

D.
consider the reason given for the client’s request and assess whether the request is reasonable.

A

A. issue an accountant’s review report with a separate paragraph discussing the change in engagement scope.

When an accountant determines that a change in the scope of an engagement from an audit to a review is appropriate, the accountant would issue a review report and would not refer to the original engagement, any procedures performed as part of the engagement, or any scope limitation.

The accountant should consider the additional audit effort and cost required to complete the audit, evaluate the possibility that financial statement information affected by the limitation on work to be performed may be incorrect or incomplete, and consider the reason given for the client’s request and assess whether the request is reasonable.

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4
Q

Which of the following would be used on a review engagement?

A.
Examination of board minutes

B.
Confirmation of cash and accounts receivable

C.
Comparison of current-year to prior-year account balances

D.
Recalculation of depreciation expense

A

C. Comparison of current-year to prior-year account balances

A review, while still an attest engagement, offers only limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. As a review does not offer the same level of assurance that an audit does, the requirements and procedures are different.

The review would involve a comparison of current-year to prior-year account balances (an analytical procedure), asking about actions taken at board of directors’ meetings (though not necessarily examining the board minutes), as well as obtaining an understanding of the client’s business and utilizing inquiry and other analytical procedures.

A review would not involve obtaining an understanding of internal control, assessing fraud risks, or testing accounting records (confirming cash and accounts receivable balances). The accountant would not need to recalculate depreciation expense. These procedures are performed in an audit.

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5
Q

If properly disclosed in the financial statements, which of the following would ordinarily cause an accountant to modify his or her standard compilation or review report?

I. Uncertainty about the entity’s ability to continue as a going concern
II. Inconsistency in the application of accounting principles

A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

A

D.
Neither I nor II

If adequately disclosed in the financial statements, an uncertainty about an entity’s ability to continue as a going concern or other accounting matters (other than those involving a change in accounting principles) may be, at the accountant’s discretion, emphasized in the accountant’s report (but will not require a modification to the standard compilation or review report).

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6
Q

Each page of a nonissuer’s financial statements reviewed by an accountant should include the following reference:

A.
See accompanying accountant’s footnotes.

B.
Reviewed, no material modifications required.

C.
See independent accountant’s review report.

D.
Reviewed, no accountant’s assurance expressed.

A

C.
See independent accountant’s review report.

Statements on Standards for Accounting and Review Services (SSARS) require that each page of the financial statements be marked, “See independent accountant’s review report.”

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7
Q

An auditor’s engagement letter most likely would include a statement that:

A.
lists potential significant deficiencies discovered during the prior year’s audit.

B.
explains the analytical procedures that the auditor expects to apply.

C.
describes the auditor’s responsibility to evaluate going concern issues.

D.
limits the auditor’s responsibility to detect errors and fraud.

A

D.
limits the auditor’s responsibility to detect errors and fraud.

The auditor is required to establish a written understanding with the client regarding the services to be performed. This written understanding is accomplished through the engagement letter.

The engagement letter includes the objectives of the engagement, management’s responsibilities, the auditor’s responsibilities, and the limitations of the engagement. The engagement letter would state, “An audit is not designed to detect error or fraud that is immaterial to the financial statements.”

The engagement letter does not address significant deficiencies discovered during the prior year’s audit; significant deficiencies are addressed in a different communication with those charged with governance. The auditor does not explain the specific audit procedures he or she expects to apply in any communication with the client. These procedures are part of the audit plan and the auditor’s working papers. Under generally accepted auditing standards, the auditor does have a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. However, this responsibility is not stated in the engagement letter

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8
Q

When engaged to compile the financial statements of a nonissuer, an accountant is required to possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of the:

A.
stated qualifications of the entity’s accounting personnel.

B.
design of the entity’s internal controls placed in operation.

C.
risk factors relating to misstatements arising from noncompliance with laws and regulations.

D.
internal control awareness of the entity’s senior management.

A

A.
stated qualifications of the entity’s accounting personnel.

Part of gaining an understanding of an entity’s accounting practices is obtaining an adequate understanding of the qualifications of the accounting personnel. While engaged to compile the financial statements of an entity, the accountant may perform additional procedures he or she determines to be necessary; however, the accountant should be careful that others do not interpret the additional procedures as being part of an audit. Even a general understanding of the design of the entity’s internal controls, the level of internal control awareness of senior management, or the risk factors relating to misstatements arising from noncompliance with laws and regulations are outside compilation standards.

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9
Q

Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

A.
Perform a reasonableness test of the balance by computing days’ sales in receivables

B.
Vouch a sample of subsequent cash receipts from customers

C.
Confirm individually significant receivable balances with customers

D.
Review subsequent bank statements for evidence of cash deposits

A

A. Perform a reasonableness test of the balance by computing days’ sales in receivables

When evaluating the accounts receivable balance under a review engagement, the accountant would perform analytical procedures such as computing the current period’s days’ sales in receivables ratio. Once computed, this ratio could be compared to the client’s prior period’s ratio and/or an industry average ratio to determine if the reported accounts receivable balance (and its relationship to sales) is reasonable.

Vouching a sample of subsequent cash receipts from customers, confirming individually significant receivable balances with customers, and reviewing subsequent bank statements for evidence of cash deposits are audit tests and confirmations that are not required in a review engagement.

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10
Q

When an auditor submits a document that contains information in addition to audited financial statements to a client or to others, his responsibility:

A.
is limited to the audited financial statements.

B.
includes applying audit procedures to the additional information.

C.
includes reporting on all the information included in the document.

D.
precludes referring to the additional information in the opinion.

A

C.
includes reporting on all the information included in the document.

When an auditor submits a document that contains information in addition to audited financial statements to a client or to others, his responsibility is not limited to the audited financial statements, but rather includes reporting on all the information included in the document. AU-C 725.A5 states, “Although an auditor has no obligation to apply auditing procedures to supplementary information presented outside the basic financial statements, the auditor may choose to modify or redirect certain of the procedures to be applied in the audit of the basic financial statements so that the auditor may express an opinion on the supplementary information….” If such audit procedures are applied, the auditor may refer to the additional information in the opinion. If audit procedures are not applied, the auditor may disclaim an opinion on the additional information. But, in either case, the auditor should refer to the additional information in the report.

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11
Q

When financial statements that an accountant has compiled in accordance with Statements on Standards for Accounting and Review Services omit substantially all disclosures required by generally accepted accounting principles, the accountant’s report should include:

A.
management’s justification for its decision to elect to omit substantially all the disclosures.

B.
no modification of the standard compilation report because compilations do not require disclosures that are required for audited financial statements.

C.
information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements.

D.
a separate paragraph in the compilation report stating that the financial statements are misleading due to the lack of disclosures by management.

A

C.
information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements.

An accountant can compile financial statements that omit substantially all disclosures, as long as the omission is clearly indicated in the report and is not undertaken with the intention of misleading those who might reasonably be expected to use such financial statements. The accountant should modify the standard compilation report to include a separate paragraph that states all of the following items:

Management has elected to omit substantially all the disclosures required by the applicable financial reporting framework.
If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the entity’s financial position, results of operations, and cash flows.
The financial statements are not designed for those who are not informed about such matters.
The report does not include either management’s justification for its decision or a separate paragraph stating that the financial statements are misleading due to the lack of disclosures by management.

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12
Q

The procedure, “The accountant should modify the accountant’s report if there is a change in accounting principles that is adequately disclosed,” is:

A.
not required for a compilation or a review.

B.
required for a review only.

C.
required for both a compilation and review.

D.
not required for a compilation but required for a review.

A

C. required for both a compilation and review.

A change in accounting principle is a change from one accounting principle in accordance with the applicable financial reporting framework to another accounting principle in accordance with the applicable financial reporting framework when (1) two or more accounting principles apply or (2) the accounting principle formerly used is no longer in accordance with the applicable financial reporting framework. A change in the method of applying an accounting principle also is considered a change in accounting principle.

Changes in accounting principle having a material effect on the financial statements for an audit they require the addition of an emphasis-of-matter paragraph in the independent auditor’s report, the same is required for a compilation or a review.

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13
Q

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant’s review report be modified?

A.
The accountant should issue the review report without mentioning the change in engagement.

B.
The accountant should include in the review report a disclaimer of an audit opinion.

C.
The accountant should include in the review report the circumstances that resulted in the change in engagement.

D.
The accountant should include in the review report a reference to the original engagement but not the reason for the change.

A

A.
The accountant should issue the review report without mentioning the change in engagement.

An accountant who has been engaged to audit financial statements of a nonissuer in accordance with generally accepted auditing standards (GAAS) may, before the completion of the audit, be requested to change the engagement to a review or compilation engagement. A change in the circumstances that affects the entity’s requirement for an audit, or a misunderstanding concerning the nature of an audit, review, or compilation, would normally be considered a reasonable basis for requesting a change in the engagement.

The accountant should use professional judgment in deciding whether or not to change the engagement. No reference should be made in the report to the original engagement, any audit procedures that have been performed, or any scope limitations that resulted in the change in engagement.

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14
Q

When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?

A.
Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year-end

B.
Inquire of the entity’s outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity

C.
Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation

D.
Consider the results of audit procedures performed with respect to the current year’s financial statements

A

D. Consider the results of audit procedures performed with respect to the current year’s financial statements

When performing a review of interim financial information, the accountant is required to become knowledgeable about the entity’s business and its internal control in order to focus the inquiries and analytical procedures. The procedures to obtain this knowledge include the following:

Reading documentation of the preceding year’s audit and of reviews of prior interim period(s) of the current year and corresponding interim period(s) of the prior year to the extent necessary, based on the accountant’s judgment, to enable the accountant to identify matters that may affect the current-period interim financial information
Reading the most recent annual and comparable prior interim period financial information
Considering the results of any audit procedures performed with respect to the current year’s financial statements
Inquiring of management about changes in the entity’s business activities
Inquiring of management about the identity of, and nature of transactions with, related parties
Inquiring of management about whether significant changes in internal control have occurred subsequent to the preceding annual audit or prior review of interim financial information
The review does not contemplate obtaining corroborating evidence for responses to inquiries concerning litigation, claims, and assessments. The accountant is also not required to perform testing on transactions. Analytical procedures would involve comparing interim financial information with comparable information for the immediately preceding interim period (not the previous audited fiscal year-end).

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15
Q

Which of the following statements is true with regard to review services performed under the Statements on Standards for Accounting and Review Services?

A.
To perform a review, an accountant need not be independent but should disclose that fact.

B.
In a review, an accountant will express limited assurance as to the applicable financial reporting framework on the financial statements.

C.
An accountant must have extensive knowledge of the client’s business, industry, and the economy to perform a review.

D.
In a review, an accountant gives no assurance as to the applicable financial reporting framework on the financial statements.

A

B.
In a review, an accountant will express limited assurance as to the applicable financial reporting framework on the financial statements.

The performance of a review engagement requires that the accountant perform procedures designed to accumulate review evidence that will provide a reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. Thus, the accountant does provide some level of assurance.

The accountant is precluded from performing a review engagement if the accountant’s independence is impaired for any reason.

The accountant need not possess an extensive knowledge of the client’s business, industry, and the economy to perform a review. Instead, he or she needs only to obtain knowledge of the client and possess an understanding of the industry in which the client operates, including the accounting principles and practices generally used in the industry, sufficient to assist the accountant with determining the specific nature, timing, and extent of review procedures to be performed.

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16
Q

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

A.
obtain an updated management representation letter from the entity’s management.

B.
compare the prior year’s financial statements with those of the current year.

C.
review the successor accountant’s working papers for matters affecting the prior year.

D.
make inquiries of the entity’s lawyers concerning continuing litigation

A

B.
compare the prior year’s financial statements with those of the current year.

Before reissuing a compilation report, the predecessor accountant should:
read the financial statements of the current period and the successor’s report,
compare the prior year’s financial statements with those of the current period, and
obtain a letter from the successor accountant that indicates whether he is aware of any matter that might have a material effect on the financial statements, including disclosures, reported on by the predecessor.
It is not necessary to obtain any representations from management or corroborations from the client’s attorney. It is also not necessary to view the successor accountant’s working papers. Remember that this is a compilation engagement, not a review or an audit. The letter from the successor accountant will suffice to determine if any matters affect the prior year’s financial statements.

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17
Q

The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

A.
Performing tests of details of major account balances

B.
Performing inquiries and analytical procedures

C.
Obtaining an understanding of internal control to assess control risk

D.
Having previous experience in the client’s industry

A

B.
Performing inquiries and analytical procedures

The requirements of a review completed in accordance with SSARS include the requirement that inquiries be made to the appropriate individuals and analytical procedures be performed.

The inability to perform detail testing on major account balances would not prevent a review to be performed in accordance with SSARS. Detail testing is an auditing procedure, not a procedure performed during a review engagement.

Tests of internal control are performed in audit engagements and are not required for a review under SSARS.

While an accountant should obtain sufficient knowledge regarding the company’s industry and business during the review engagement, he or she is not required to have previous experience in the client’s industry.

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18
Q

Which of the following is a false statement regarding subsequent discovery of facts existing at the date of the accountant’s compilation or review report?

A.
Unless new information comes to his or her attention, the accountant has no obligation to perform other compilation or review procedures with respect to the financial statements.

B.
If the accountant becomes aware of information that relates to financial statements previously reported on by him or her, he or she should discuss the matter with the client and request cooperation in whatever investigation may be necessary.

C.
If the engagement was a compilation, the accountant must modify his or her report for a lack of independence.

D.
If the engagement was a review, the accountant should perform the additional procedures deemed necessary to achieve limited assurance that there are no material modifications that should be made to the financial statements to be in conformity with the applicable financial reporting framework.

A

C.
If the engagement was a compilation, the accountant must modify his or her report for a lack of independence.

The existence of subsequent events does not impair independence, so no modification regarding independence is necessary for a compilation report. The standards for a compilation require that the accountant obtain additional or revised information. The standards for a review require that the accountant should perform additional procedures deemed necessary to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. If the accountant determines that action should be taken to prevent further use of the accountant’s report or the financial statements (because persons using the financial statements would attach importance to the information that is not included), the accountant should advise the client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements. Appropriate disclosure depends on the circumstances.

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19
Q

When an accountant is engaged to report on subject matter or presentation based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions, he or she should do which of the following?

A.
Restrict the report because it may be misunderstood by those who are not adequately informed of the basis, assumptions, or purpose of the presentation

B.
Issue a standard compilation or review report on the entity’s financial statements and an agreed-upon procedures report on the subject matter or contractual or regulatory presentation

C.
Issue a standard compilation or review report on the entity’s financial statements and disclaim an opinion on the subject matter or contractual or regulatory presentation

D.
Modify the standard compilation or review report for use of a comprehensive basis of accounting other than generally accepted accounting principles

A

A.
Restrict the report because it may be misunderstood by those who are not adequately informed of the basis, assumptions, or purpose of the presentation

If a report is issued on subject matter or presentations based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions, the basis, assumptions, or purpose of the presentation are developed for, and directed only to, the parties to the agreement or regulatory agency responsible for the provisions. As such, the accountant will restrict the use of the report.

Aside from the inclusion of an additional restricted use paragraph, a standard compilation and review report may be issued in connection with this type of engagement.

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20
Q

Paige, CPA, is engaged to submit unaudited financial statements to a client that are not expected to be used by third parties. In documenting her understanding with the client, all of the following descriptions or statements should be included in her engagement letter except:

A.
a description of the objective of a compilation.

B.
a description of the report.

C.
no opinion or any form of assurance on the financial statements will be provided.

D.
acknowledgment of management’s representation and agreement that the financial statements are not to be used by third parties.

A

B. a description of the report.

The engagement letter will include, among other items:

  • The objective of a compilation is to assist management in presenting financial information in the form of financial statements.
  • No opinion or any form of assurance on the financial statements will be provided.
  • Acknowledgment of management’s representation and agreement that the financial statements are not to be used by third parties.

The documentation of the understanding should also address the following additional matters if applicable:

  • Material departures from the applicable reporting framework may exist, and the effects of those departures, if any, on the financial statements may not be disclosed.
  • Substantially all disclosures (and statement of cash flows, if applicable) required by the applicable financial reporting framework may be omitted.
  • Reference to supplementary information
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21
Q

When the basic financial statements are accompanied by information presented for supplementary analysis purposes in a compilation or review engagement, the accountant should do which of the following?

A.
Disclaim an opinion on the supplemental information

B.
Include a representation in the management representation letter regarding the fair presentation of the supplemental information

C.
Clearly indicate the degree of responsibility, if any, he or she is taking with respect to the supplemental information

D.
Withdraw from the engagement

A

C.
Clearly indicate the degree of responsibility, if any, he or she is taking with respect to the supplemental information.

When the basic financial statements are accompanied by information presented for supplementary analysis purposes, the accountant should clearly indicate the degree of responsibility, if any, he or she is taking with respect to such information.

An accountant does not obtain a management representation letter on a compilation engagement nor is he or she required to disclaim an opinion or withdraw from the engagement when supplemental information accompanies the basic financial statements.

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22
Q

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?

A.
Review report with a qualification

B.
Review report with a disclaimer

C.
Review report and footnote exceptions

D.
None of the answer choices are correct.

A

D.
None of the answer choices are correct.

A management representation letter is required for the issuance of a review report. Without this letter from management, the scope of the review is restricted, and the review cannot be completed. In this circumstance, the accountant would be precluded from issuing a review report on the financial statements and would ordinarily be precluded from issuing a compilation report on the financial statements.

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23
Q

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 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 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.

B.
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.

C.
Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark’s report on the comparative financial statements.

D.
Clark may report on the comparative financial statements provided the Year 1 statements do not contain any obvious material misstatements.

A

A.
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.

Compiled financial statements that omit substantially all of the disclosures required by an applicable financial reporting framework are not comparable to financial statements that include such disclosures. Accordingly, the accountant should not issue a report on comparative financial statements when statements for one or more, but not all, of the periods presented omit substantially all of the disclosures required by an applicable financial reporting framework.

24
Q

Which of the following statements is correct regarding a review engagement of a nonpublic company’s financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

A.
An accountant must establish an understanding with the client after an engagement letter.

B.
An accountant must obtain an understanding of the client’s internal control when performing a review.

C.
A review provides an accountant with a basis for expressing limited assurance on the financial statements.

D.
A review report contains an accountant’s opinion of the financial statements taken as a whole.

A

C. A review provides an accountant with a basis for expressing limited assurance on the financial statements.

A review is substantially less in scope than an audit. It involves applying inquiry and analytical procedures to obtain a basis for providing limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with generally accepted accounting principles.

Unlike an audit, a review does not involve obtaining an understanding of internal control, assessing control risk, assessing fraud risks, testing of accounting records, obtaining corroborating evidence (such as confirmations), or expressing an opinion on the financial statements taken as a whole.

25
Q

SSARS guidance for compilations of unaudited financial statements establishes standards and procedures for which of the following engagements?

A.
Assisting in adjusting the books of account for a partnership

B.
Compiling an individual’s personal financial statements which will be used solely to assist the client and the client’s advisors to develop the clients’ personal financial goals

C.
Processing financial data for clients of other accounting firms

D.
Compiling an individual’s personal financial statements to be used to obtain a mortgage

A

D.
Compiling an individual’s personal financial statements to be used to obtain a mortgage

The objective of a compilation is to assist management in presenting financial information in the form of financial statements (AR-C 80.04). Compiling an individual’s personal financial statements to be used to obtain a mortgage would be considered a compilation engagement under the Statements on Standards for Accounting and Review Services (SSARS).

Assisting in adjusting the books of account for a partnership and processing financial data for clients of other accounting firms are examples of services not meeting the definition for compilation engagements under SSARS.

26
Q

Which of the following is not a consideration in accepting or continuing a compilation or review engagement?

A.
The firm has sufficient personnel with the necessary capabilities and competencies.

B.
Specialists are available, if needed.

C.
The firm is able to complete the engagement within the reporting deadline.

D.
The firm is able to complete the engagement within the firm’s time budget.

A

D.
The firm is able to complete the engagement within the firm’s time budget.

Matters to consider in accepting or continuing the client engagement include whether:

  • firm personnel have experience with relevant industries or subject matters or the ability to effectively gain the necessary knowledge;
  • firm personnel have experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies;
  • the firm has sufficient personnel with the necessary competence and capabilities;
  • specialists are available, if needed;
  • individuals meeting the criteria and eligibility requirements to perform an engagement quality control review are available, where applicable; and the firm is able to complete the engagement within the reporting deadline.
27
Q

When a client undertakes to disclose newly discovered facts and their impact on the financial statements to persons known to be currently using or likely to use the financial statements, which of the following methods should be used?

A.
If the effect on the accountant’s report or the financial statements can be readily determined, disclosure should consist of issuing revised financial statements and, where applicable, the accountant’s report. The reasons for the revision should be described in a note to the financial statements and, when applicable, be referred to in the accountant’s report.

B.
If the effect on the accountant’s report or the financial statements cannot be immediately determined, persons known to be using or likely to use the financial statements should be notified that they should not be used. If the financial statements will be revised, these persons should be notified that revised financial statements and, where applicable, the accountant’s report will be issued as soon as practicable.

C.
When issuance of the financial statement for the subsequent period is imminent, disclosure can be made in those subsequent period statements.

D.
All of the answer choices could be used, given the particular circumstances.

A

D.
All of the answer choices could be used, given the particular circumstances.

When the accountant has concluded that action should be taken to prevent further use of the accountant’s report or the financial statements, the accountant should advise his or her client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements to persons who are known to be currently using or who are likely to use the financial statements. When the client undertakes to make appropriate disclosure, the method used and the disclosure made will depend on the circumstances…

If the effect of the subsequently discovered information on the accountant’s report or the financial statements can promptly be determined, disclosure should consist of issuing, as soon as practicable, revised financial statements and, when applicable, the accountant’s report. The reasons for the revision usually should be described in a note to the financial statements and, when applicable, referred to in the accountant’s report.
When issuance of financial statements for a subsequent period is imminent, so that disclosure is not delayed, appropriate disclosure of the revision can be made in such statements instead of reissuing the earlier statements.
When the effect on the financial statements of the subsequently discovered information cannot be promptly determined, the issuance of revised financial statements would necessarily be delayed. In this circumstance, when it appears that the information will require a revision of the statements, appropriate disclosure would consist of notification…that the financial statements should not be used; that revised financial statements will be issued; and, when applicable, that the accountant’s report will be issued as soon as practicable.

28
Q

The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether:

A.
material modifications should be made to conform with the applicable financial reporting framework.

B.
a reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.

C.
condensed financial statements or pro forma financial information should be included in a registration statement.

D.
the financial statements are presented fairly in accordance with the applicable financial reporting framework.

A

A.
material modifications should be made to conform with the applicable financial reporting framework.

The objective of a review of interim financial information of an issuer is to provide the CPA with a basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.

29
Q

The procedure, “The accountant should request written representation from members of management who have appropriate responsibilities for the financial statements..,” is:

A.
required for a review only.

B.
required for both a compilation and review.

C.
not required for a review but required for a compilation.

D.
not required for either a compilation or a review.

A

A.
required for a review only.

The accountant is only required to obtain a management representation letter when performing a review of the financial statements of a nonissuer. This procedure is not required for a compilation, due to the fact that the accountant does not express any assurance in a compilation.

30
Q

When an accountant is engaged to compile a nonissuer’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are:

A.
not designed for those who are not informed about such matters.

B.
prepared in conformity with a comprehensive basis of accounting other than GAAP.

C.
not compiled in accordance with Statements on Standards for Accounting and Review Services.

D.
special-purpose financial statements that are not comparable to those of prior periods.

A

A.
not designed for those who are not informed about such matters.

Compiled financial statements that omit substantially all disclosures required by GAAP are not designed for those who are uninformed about the omitted disclosures. The fact that financial statements omit substantially all disclosures does not mean the statements are prepared in conformity with a comprehensive basis of accounting other than GAAP.

The Statements on Standards for Accounting and Review Services (SSARS) do allow compilation of financial statements that omit substantially all disclosures required by GAAP (or applicable financial reporting framework) as long as the report contains the caution about the limited use of the statements. Special-purpose financial statements are those prepared for contractual or regulatory purposes, not statements that omit substantially all disclosures.

31
Q

An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct?

A.
The accountant should refuse the compilation engagement.

B.
A report need not be issued for a compilation of a nonissuer.

C.
The accountant should include the disclaimer “I am an owner of the entity” in the report.

D.
The accountant should include a final paragraph in the accountant’s compilation report.

A

D.
The accountant should include a final paragraph in the accountant’s compilation report.

According to AR-C 80.22, independence is impaired if, during the engagement, the accountant has a direct financial interest in the client. Ownership is a form of direct financial interest.

If the accountant is not independent, the accountant should include a final paragraph in the accountant’s compilation report referencing the nonindependence of the accountant.

32
Q

Which of the following circumstances would ordinarily preclude a CPA from issuing a review or a compilation report on the financial statements of a nonissuer client that had originally engaged the CPA to perform an audit?

I. The CPA has been prohibited by the client from corresponding with the entity’s legal counsel.
II. The entity refuses to provide the CPA with a signed representation letter.
A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

A

C.
Both I and II

When a client refuses to allow correspondence with legal counsel (a required procedure for an audit) or to provide a representation letter (a required procedure for both an audit and a review), the accountant cannot ignore that there may be reasons behind the client’s refusal to cooperate. SSARSs ordinarily preclude the accountant from downgrading the engagement under these circumstances.

33
Q

The accountant should agree the limitations of the engagement are:

A.
required for a review only.

B.
required for both a compilation and review.

C.
not required for a review but required for a compilation.

D.
not required for either a compilation or a review.

A

B.
required for both a compilation and review.

While performing an engagement to either compile or review the financial statements of a nonissuer, the accountant would be required to establish an understanding with the entity regarding the limitations of the services to be performed. This understanding must be documented through a written communication with management (an engagement letter).

34
Q

When an independent CPA assists in preparing the financial statements of an issuer, but has not audited or reviewed them, the CPA should issue a disclaimer of opinion. In such situations, the CPA has no responsibility to apply any procedures beyond:

A.
documenting that internal control is not being relied on.

B.
reading the financial statements for obvious material misstatements.

C.
ascertaining whether the financial statements are in conformity with GAAP.

D.
determining whether management has elected to omit substantially all required disclosures.

A

B.
reading the financial statements for obvious material misstatements.

When an independent CPA assists in the preparation of financial statements of a publicly held entity, but has not audited or reviewed the financial statements, he complies with the “Principles Underlying an Audit Conducted in Accordance with Generally Accepted Auditing Standards” by disclaiming an opinion. However, he does have a responsibility of reading the financial statements for obvious material misstatements. The fact that the internal control is not being relied on would be documented in an audit where control risk is assessed at the maximum. Audit procedures would be required to ascertain whether the financial statements are in conformity with GAAP. In a compilation engagement, the CPA would report that management has elected to omit substantially all required disclosures.

35
Q

A CPA should not submit unaudited financial statements of a nonissuer to a client or a third party unless, as a minimum, the CPA complies with the provisions applicable to:

A.
compilation engagements.

B.
review engagements.

C.
statements on auditing standards.

D.
attestation standards.

A

A.
compilation engagements.

The accountant is required to comply with the provisions of AR-C 80 whenever the accountant is engaged to report on compiled financial statements or submits financial statements to a client or to third parties.

36
Q

Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

A.
The report should not be issued if the accountant is not independent from the entity.

B.
The report should include a statement indicating that the information is the representation of the accountant.

C.
The report should include a description of other procedures performed during the compilation.

D.
The date on the report should be the date of completion of the procedures required by AR-C 80.17.

A

D.
The date on the report should be the date of completion of the procedures required by AR-C 80.17.

The basic elements of the compilation report are as follows:
- A statement that the compilation has been performed in accordance with SSARS issued by the AICPA
- A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management
- A statement that the financial statements have not been audited or reviewed and that the accountant does not express an opinion on them
- A signature of the accounting firm or accountant
The date of the compilation report (dated as of the date of completion of the procedures required by AR-C 80.17)

The report does not include a description of the procedures performed during the compilation, and the accountant is permitted to perform the compilation even if she is not independent. In this circumstance, the report would state that the accountant is not independent.

37
Q

The Statements on Standards for Accounting and Review Services (SSARS) consider which of the following to be a submission of financial statements when the accountant has:

A.
typed client-prepared financial statements, without modification, as an accommodation to the client.

B.
provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements.

C.
proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.

D.
generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

A

D.
generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

The accountant is required to comply with the provisions of AR-C 80 whenever he or she is engaged to report on compiled financial statements or submits financial statements to a client or to third parties. Submission is defined as a “submission of financial statements” as “presenting to management financial statements that an accountant has prepared.”

Generating, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP would meet the definition of submission under the Statements on Standards for Accounting and Review Services (SSARS).

Typing client-prepared financial statements, without modification, as an accommodation to the client; providing a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements; and proposing correcting journal entries to be recorded by the client that change client-prepared financial statements would be examples of services not meeting the definition of submission under SSARS.

38
Q

If an accountant becomes aware that unaudited financial statements not expected to be used by a third party were in fact distributed to third parties by the client, the accountant should do all of the following except:

A.
discuss the situation with the client and determine the appropriate course of action.

B.
issue a compilation report as soon as practicable.

C.
notify known third parties that the financial statements are not intended for third-party use if the client does not comply with the aforementioned request within a reasonable period of time.

D.
consult an attorney.

A

B.
issue a compilation report as soon as practicable.

If the accountant becomes aware that the financial statements have been distributed to third parties, the accountant should discuss the situation with the client and determine the appropriate course of action, including considering requesting that the client have the statements returned. If the accountant requests that the financial statements be returned and the client does not comply with this request within a reasonable period of time, the accountant should notify known third parties that the financial statements are not intended for third party use, preferably in consultation with his or her attorney. The accountant is not required to issue a compilation report in this situation.

39
Q

Which of the following statements would least likely appear in an auditor’s engagement letter?

A.
Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.

B.
During the course of our audit, we may observe opportunities for economy in, or improved controls over, your operations.

C.
Management is responsible for the entity’s financial statements.

D.
After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

A

D.
After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Of the statements listed, the least likely to appear in an auditor’s engagement letter is a statement assuring the client that the auditor, after performing preliminary analytical procedures, will discuss other procedures considered necessary to complete the engagement. Among others, what the engagement letter should contain are statements regarding:

  • the basis of the auditor’s fee,
  • the objective of the engagement and additional work to be performed such as management advisory services, and the fact that management is responsible for the entity’s financial statements.
40
Q

Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer?

A.
Analytical review of payroll tax expense

B.
Testing of internal controls over cash receipts

C.
Testing the aging of accounts payable

D.
Confirmation of notes receivable

A

A.
Analytical review of payroll tax expense

A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. A review does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents (for example, cancelled checks or bank images); or other procedures ordinarily performed in an audit.

Testing internal controls over cash receipts, testing the aging of accounts payable, and confirmation of notes receivable are all procedures more commonly found in an audit of financial statements.

41
Q

Which of the following is not a quality control policy or procedure related to the review of work performed by other engagement team members?

A.
The work has been performed in accordance with professional standards and regulatory or legal requirements.

B.
Appropriate consultations have taken place and the resulting conclusions have been documented and implemented.

C.
The nature, timing, and extent of work performed is appropriate and without need for revision.

D.
Summarization of findings from the firm’s annual inspection

A

D.
Summarization of findings from the firm’s annual inspection

A review may include consideration of whether, for example:
- the work has been performed in accordance with professional standards and applicable regulatory and legal requirements,
- significant findings and issues have been raised for further consideration,
- appropriate consultations have taken place and the resulting conclusions have been documented and implemented,
- the nature, timing, and extent of work performed is appropriate and without need for revision,
the work performed supports the conclusions reached and is appropriately documented,
- the evidence obtained is sufficient and appropriate to support the report, and
- the objectives of the engagement procedures have been achieved.

Summarization of findings from the firm’s annual inspection is a monitoring activity, not engagement performance.

42
Q

In which of the following circumstances does an accountant not have a duty to disclose that fraud or noncompliance with laws and regulations may have occurred to parties outside of the entity?

A.
To comply with certain legal and regulatory requirements

B.
To a successor accountant in connection with his or her acceptance of an engagement to compile or review the financial statements of a nonissuer

C.
To a predecessor accountant so that he or she might notify any users who might still be relying on his or her report

D.
In response to a subpoena

A

C.
To a predecessor accountant so that he or she might notify any users who might still be relying on his or her report

AR-C 90.A89 states that “A duty to disclose…may exist in the following circumstances: (a) to comply with certain legal and regulatory requirements, (b) to a successor accountant management has given permission for communication between the predecessor accountant and the successor accountant, and (c) in response to a subpoena.” There is no duty to communicate such matters to the predecessor accountant.

43
Q

Which of the following statements is incorrect regarding notification of third parties if the client refuses to disclose newly discovered facts and their impact on the financial statements?

A.
The accountant’s disclosure need not detail the specific information regarding the client’s refusal.

B.
The accountant’s disclosure should indicate that information has come to his or her attention which the client has not cooperated in attempting to substantiate and that, if the information is true, the accountant believes the compilation or review report must no longer be used or associated with the financial statements.

C.
The accountant’s disclosure should include a brief description of the client’s conduct or motive with regard to its refusal to notify third parties.

D.
Disclosure should not be made unless the accountant believes the financial statements are likely to be misleading.

A

C.
The accountant’s disclosure should include a brief description of the client’s conduct or motive with regard to its refusal to notify third parties.

If the client has not cooperated, the accountant’s disclosure need not detail the specific information but can merely indicate that the client has not cooperated with the accountant’s attempt to substantiate information that has come to the accountant’s attention and that, if the information is true, the accountant believes that the compilation or review report must no longer be used or associated with the financial statements. No such disclosure should be made unless the accountant believes that the financial statements are likely to be misleading and that the accountant’s review report should not be used.

44
Q

When an accountant submits unaudited financial statements to his or her client that are not expected to be used by third parties, he or she should do which of the following?

A.
Always issue a compilation report

B.
Follow AICPA guidelines for consulting engagements rather than SSARS

C.
Withdraw from the engagement

D.
Only issue a compilation report if engaged to perform a compilation engagement

A

D.
Only issue a compilation report if engaged to perform a compilation engagement

For nonissuers, a compilation report does not need to be issued unless the accountant has been specifically engaged to perform a compilation engagement. This is true whether prepared financial statements are intended to be used by management or third parties.

45
Q

An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that:

A.
the accountant has not audited or reviewed the financial statements.

B.
substantially all disclosures required by GAAP are included in the financial statements.

C.
the financial statements should not be used to obtain credit.

D.
the compilation is limited to presenting information that is the representation of management.

A

B.
substantially all disclosures required by GAAP are included in the financial statements.

A standard compilation report implies that substantially all disclosures required by GAAP (or applicable financial reporting framework) are included in the financial statements.

The standard compilation report explicitly states that the accountant has not reviewed or audited the financial statements. The financial statements may be used to obtain credit if a standard compilation report is issued.

The standard compilation report’s limitation to presenting information that is the representation of management is explicitly addressed by stating, “Management is responsible for the preparation and fair presentation of the financial statements…”

46
Q

Which of the following statements should be included in an accountant’s standard report based on the compilation of a nonissuer’s financial statements?

A.
A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.

B.
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

C.
A compilation is not designed to detect material modifications that should be made to the financial statements.

D.
A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards.

A

B.
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

The standard compilation report states, in part:

Our Responsibilities:
The objective of our engagement is to

a. prepare financial statements in accordance with accounting principles generally accepted in the United States of America based on information provided by you and
b. apply accounting and financial reporting expertise to assist you in the presentation of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. A review report also states that:

the accountant is not aware of any material modifications that should be made to the financial statements and
a review is substantially less in scope than an audit in accordance with generally accepted auditing standards.
These statements are not applicable to a compilation and are not included in the compilation report. While it is true that a compilation is not designed to detect material modifications that should be made to the financial statements, this statement is not included in the compilation report. The accountant should, however, consider whether the compiled financial statements are appropriate in form and free from material error.

47
Q

An independent accountant’s report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

A.
accountant’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

B.
accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

C.
accountant’s review was performed in accordance with standards established by the Securities and Exchange Commission.

D.
accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP.

A

A. accountant’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

In an independent accountant’s review report on interim financial information included in a registration statement, a prospectus should include a statement clarifying that the accountant’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933. (AU-C 925.A6 states, “If the registration statement includes the auditor’s review report on interim financial information, then the requirements…assist the auditor in determining that the issuer discloses the fact that an interim review report is not a report on, or a part of, the registration statement prepared or certified by the auditor, within the meaning of Section 7 and Section 11 of the Securities Act of 1933, and that the auditor’s liability under Section 11 does not extend to the auditor’s review report.”)

This statement describes the limited purpose of the accountant’s review and the restricted degree of reliance that should be placed on the review report. An accountant does assume responsibility to update the report for subsequent events and circumstances, up to the effective date of the registration statement. The accountant’s review is performed in accordance with the PCAOB Auditing Standards for a public entity and the AICPA Statements on Auditing Standards for a nonissuer. Obtaining corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP is an audit procedure and is not required in a review engagement.

48
Q

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:

I. reproducing client-prepared financial statements, without modification, as an accommodation to a client.
II. preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.

A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

A

D.
Neither I nor II

An accountant must comply with the provisions of Statements on Standards for Accounting and Review Services (SSARS) whenever he or she submits financial statements to a client or to third parties. Submission is defined as presenting to management financial statements that an accountant has prepared. Reproducing client-prepared financial statements does not meet the definition of preparation. Preparing monthly journal entries also does not constitute the preparation of financial statements.

49
Q

West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer. Lake’s financial statements are prepared in conformity with the cash basis of accounting. If Lake’s financial statements do not disclose the basis of accounting used, which of the following statements best describes West’s reporting responsibility concerning this matter?

A.
West should disclose the basis of accounting used in the notes to Lake’s financial statements.

B.
West should disclose the basis of accounting used in West’s compilation report.

C.
West should quantify the effects of the differences between GAAP and the cash basis and disclose them in West’s compilation report.

D.
West should quantify the effects of the differences between GAAP and the cash basis and disclose them in the notes to Lake’s financial statements.

A

B. West should disclose the basis of accounting used in West’s compilation report.

Financial statements prepared in accordance with an other comprehensive basis of accounting (OCBOA) are not considered appropriate in form unless the financial statements include:

A description of the OCBOA, including a summary of significant accounting policies and a description of the primary differences from generally accepted accounting principles (GAAP). The effects of the differences need not be quantified.
Informative disclosures similar to those required by GAAP if the financial statements contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP.
Thus, the differences need not be quantified.

An entity may request the accountant to compile financial statements that omit substantially all the disclosures required by an applicable financial reporting framework, including disclosures that might appear in the body of the financial statements. The accountant may compile such financial statements, provided that the omission of substantially all disclosures is not, to his or her knowledge, undertaken with the intention of misleading those who might reasonably be expected to use such financial statements. When reporting on financial statements that omit substantially all disclosures, the accountant should include, after the paragraph describing the accountant’s responsibility, a paragraph in the compilation report that includes the following elements:

A statement that management has elected to omit substantially all the disclosures (and the statement of cash flows, if applicable) required by the applicable financial reporting framework (or ordinarily included in the financial statements if the financial statements are prepared in accordance with an OCBOA)
A statement that if the omitted disclosures (and statement of cash flows, if applicable) were included in the financial statements, they might influence the user’s conclusions about the company’s financial position, results of operations, and cash flows (or equivalent for presentations other than accounting principles generally accepted in the United States of America)
A statement that, accordingly, the financial statements are not designed for those who are not informed about such matters
An entity may request the accountant to compile financial statements that omit substantially all the disclosures required by an applicable financial reporting framework, including disclosures that might appear in the body of the financial statements. The accountant may compile such financial statements, provided that the omission of substantially all disclosures is not, to his or her knowledge, undertaken with the intention of misleading those who might reasonably be expected to use such financial statements. When reporting on financial statements that omit substantially all disclosures, the accountant should include, after the paragraph describing the accountant’s responsibility, a paragraph in the compilation report that includes the following elements:

A statement that management has elected to omit substantially all the disclosures (and the statement of cash flows, if applicable) required by the applicable financial reporting framework (or ordinarily included in the financial statements if the financial statements are prepared in accordance with an OCBOA)
A statement that if the omitted disclosures (and statement of cash flows, if applicable) were included in the financial statements, they might influence the user’s conclusions about the company’s financial position, results of operations, and cash flows (or equivalent for presentations other than accounting principles generally accepted in the United States of America)
A statement that, accordingly, the financial statements are not designed for those who are not informed about such matters
Since the financial statements and accompanying footnotes are the responsibility of Lake’s management and Lake’s management has elected to omit substantially all disclosures, the basis of accounting should be disclosed in West’s compilation report.

50
Q

The procedure, “The accountant should communicate illegal employee acts is:

A.
required for a review only.

B.
required for both a compilation and a review.

C.
not required for a review but required for a compilation.

D.
not required for either a compilation or a review.

A

D.
not required for either a compilation or a review.

As a result of the limited procedures performed in a compilation and a review, evidence or information may come to the accountant’s attention that noncompliance with laws and regulations may have occurred. In this case, the matter should be brought to the attention of the appropriate level of management. The accountant is not required to report matters regarding illegal acts [noncompliance] that are clearly inconsequential.

51
Q

North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to review and generate North’s interim financial statements on King’s microcomputer when King prepared North’s quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

A.
Statements on Standards for Accounting and Review Services.

B.
Statements on Standards for Unaudited Financial Services.

C.
Statements on Standards for Consulting Services.

D.
Statements on Standards for Attestation Engagements.

A

A.
Statements on Standards for Accounting and Review Services.

The Statements on Standards for Accounting and Review Services (SSARS) is used by accountants to conduct a review engagement responsibly. SSARS requires accountants to perform procedures that will obtain limited assurance that material modifications have been made.

52
Q

Which of the following is a false statement regarding communications to management and others that fraud or noncompliance with laws and regulations may have occurred?

A.
The accountant need not report matters that are clearly inconsequential.

B.
When matters regarding fraud or noncompliance involve senior management, the accountant should report the matter to an individual or group at a higher level with the entity, such as a manager (owner) or the board of directors.

C.
The communication must be in writing.

D.
When matters regarding fraud or noncompliance involve the owner of the business, the accountant should consider resigning from the engagement.

A

C.
The communication must be in writing.

The communication regarding fraud or noncompliance with laws and regulations may be oral or written. If the communication is oral, the accountant should document it.

53
Q

Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web’s financial statements do not disclose the basis of accounting used, Miller should:

A.
disclose the basis of accounting in the accountant’s compilation report.

B.
clearly label each page “Distribution Restricted—Material Modifications Required.”

C.
issue a special report describing the effect of the incomplete presentation.

D.
withdraw from the engagement and provide no further services to Web.

A

A.
disclose the basis of accounting in the accountant’s compilation report.

When financial statements are prepared in conformity with a special-purpose framework, such as the income tax basis of accounting, and the basis of accounting is not disclosed, the CPA should disclose the basis of accounting in the accountant’s compilation report. Labeling each page, issuing a special report, or withdrawing from the engagement is not necessary.

54
Q

When the basic financial statements are accompanied by information presented for supplementary analysis purposes in a review engagement, the accountant’s review report should state that the review has been made for the purpose of expressing a conclusion that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and which of the following?

I. The other data accompanying the financial statements are presented only for purposes of additional analysis and have been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and the accountant did not become aware of any material modifications that should be made to such data.
II. The other data accompanying the financial statements are presented only for purposes of additional analysis and have not been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, but were compiled from information that is the representation of management, without audit or review, and the accountant does not express an opinion or provide any assurance on such data.

A.
I only

B.
II only

C.
Either I or II

D.
Neither I nor II

A

C.
Either I or II

The accountant’s review report should state the other data was subjected to the inquiry and analytical procedures applied in the review of the basic financial statements and provide the same negative assurance as the basic financial statements or state that the other data has not been subjected to those procedures but has been compiled from information that is the representation of management and the accountant does not express an opinion or provide any assurance on the data.

55
Q

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review:

A.
provides only limited assurance that the financial statements are fairly presented.

B.
includes examining, on a test basis, information that is the representation of management.

C.
includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

D.
does not contemplate obtaining corroborating audit evidence or applying certain other procedures ordinarily performed during an audit.

A

C.
includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

The following form of standard report is used for a review:

A review engagement includes primarily applying analytical procedures to your financial data and making inquiries of company management. A review engagement is substantially less in scope than an audit engagement, the objective of which is the expression of an opinion regarding the financial statements as a whole. A review engagement does not contemplate obtaining an understanding of the entity’s internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit engagement. Accordingly, we will not express an opinion regarding the financial statements.

56
Q

Which of the following is correct if an accountant is engaged to submit unaudited financial statements that are reasonably expected to be used by a third party?

A.
A compilation report must be issued.

B.
The financial statements may not be prepared on a comprehensive basis of accounting other than generally accepted accounting principles.

C.
The financial statements may not omit substantially all disclosures.

D.
Each page of the financial statements should have a restriction such as “Restricted for Management’s Use Only.”

A

A.
A compilation report must be issued.

The only time a compilation report is not required is when the financial statements are not expected to be used by a third party.

There is no prohibition that an entity’s financial statements cannot be prepared on a comprehensive basis of accounting other than generally accepted accounting principles (OCBOA) or omit substantially all disclosures when used by a third party. The restriction is added to each page of the financial statements when there is a reasonable expectation the financial statement will not be used by a third party.

57
Q

Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer’s financial statements?

A.
The accountant is independent with respect to the entity.

B.
The financial statements have not been audited.

C.
A compilation consists principally of inquiries and analytical procedures.

D.
The accountant does not express any assurance on the financial statements.

A

A.
The accountant is independent with respect to the entity.

An implicit representation is one that is implied rather than stated; an explicit representation is one that is fully and clearly expressed.

If the accountant is not independent with respect to a client when issuing a compilation report, the accountant should specifically disclose the lack of independence in a final paragraph in the compilation report. Otherwise, the report contains the implicit representation that the accountant is independent.

A review consists of inquiries and analytical procedures, not a compilation.

The other two representations are made explicitly in the report:

The financial statements have not been audited.
The accountant does not express any assurance on the financial statements.