CH 5 Accounting and Review Services Engagements Flashcards
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
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.
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.
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.
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. 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.
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
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.
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
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).
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.
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.”
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.
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
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.
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.
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. 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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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).
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.
