Chapter 2

Question 1

Can an audit of a single financial statement be done?

Answer 1

Yes. An audit of a single financial statement is permitted under U.S. GAAS. It can be performed as a separate audit or in conjunction with an audit of the complete set of financial statements. (They merely involve special considerations in the application of U.S. GAAS).

Question 2

What is an auditor NOT supposed to do when they are auditing financials that are in conformity with a basis of accounting outside of GAAP?

Answer 2

When financial statements are prepared in conformity with a comprehensive basis of accounting other than GAAP, the auditor would NOT include a statement saying that the basis of accounting is not a comprehensive basis of accounting

Question 3

What is a piecemeal opinion?

Answer 3

Opinions on parts of the financial statements, when those parts constitute a major portion of the financial statement s. They are not appropriate if the auditor has disclaimed an opinion or issued an adverse opinion, because they may overshadow the auditors opinion on the financial statements taken as a whole.

Question 4

When is an auditors report designated a report on compliance?

Answer 4

When it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements. (Report on compliance in connection with audited financial statements provides only negative assurance on compliance).

Question 5

What is a special purpose framework?

Answer 5

A special purpose framework is a financial basis of accounting other than GAAP that includes cash basis, tax basis, regulatory basis, and contractual basis.

Question 6

When is positive assurance provided?

Answer 6

It is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special purpose financial presentations to comply with contractual agreements or regulatory provisions. (Negative assurance is provided in reports on compliance with aspects of contractual agreements or regulatory requirements related to AUDITED financial statements)

Question 7

When auditing a single financial statement, how is an auditor supposed to determine materiality?

Answer 7

They are required to determine materiality for the single financial statement they are auditing, and not for the financial statements as a whole

Question 8

When are modifications made to the standard review report?

Answer 8

Only when there is a departure from GAAP.

Question 9

Are compiled financial statements required to be accompanied by a compilation report?

Answer 9

YES, even if the financial statements are not expected to be used by a third party. SSARS requires it

Question 10

When is an accountant required to comply with SSARS?

Answer 10

When they are engaged to prepare, compile, or review the financial statements. (Not re-prepare or do monthly accounting work).

Question 11

Does SSARS apply when an accountant prepares personal financial statements for the inclusion in written personal financial plans?

Answer 11

NO.

Question 12

When making inquiries in a review, what are the inquiries typically concerning?

Answer 12

They are concerning the entities procedures for recording and summarizing transactions

Question 13

Can an auditor report on the comparative financial statements if they were complied and one year omitted substantially all disclosures and the other one did not?

Answer 13

Compiled financial statements that omit substantially all disclosures required by GAAP are not comparable to financial statements that do not include required GAAP disclosures.

Question 14

When the prior period financial statements were audited, what should the auditor include in their paragraph for this year’s review?

Answer 14

• That prior period statements were audited
• The date of the previous report(s)
• The opinions expressed, and, if other than unmodified, the reason for the modification
• That no auditing procedures have been performed since the previous report date

Question 15

Under what standards is a review of interim financial information of a publicly traded company conducted?

Answer 15

A review of interim financial information of a publicly traded company is conducted in accordance with PCAOB standards (NOT SSARS, that applies to reviews of the financial statements of nonissuers)

Question 16

What is the objective of a review of interim financial information?

Answer 16

To provide the accountant, through inquiries and analytical procedures, with a basis for reporting whether material modifications should be made to such information to conform with generally accepted accounting principles

Question 17

If a report on a review of interim financial information is presented in a registration statement, what should be included in the prospectus?

Answer 17

A statement that the report is not a “report” or “part” of the registration statement.

Question 18

When is positive assurance provided in a comfort letter?

Answer 18

When the auditor expresses an OPINION as to whether the audited financial statements comply in form with the accounting requirements of the SEC

Question 19

What is a comfort letter?

Answer 19

A comfort letter is a letter containing negative assurance from the CPA to the underwriter or certain other requesting parties just before the registration of the client’s securities (Signed by an independent auditor)

Question 20

Who is a comfort letter addressed to and signed by?

Answer 20

It is addressed to the client’s underwriter of securities and is signed by the companies independent auditor

Question 21

When is a CPA required to comply with SSAE?

Answer 21

When engaged to review MD&A prepared pursuant to rules and regulations adopted by the SEC (among other things)

Question 22

What is a WebTrust engagement?

Answer 22

An attestation engagement designed to measure transaction integrity, information protection, and disclosure of business practices

Question 23

What should an accountants report on a review of pro forma financial information include?

Answer 23

A reference to the financial statements from which the historical information is derived and a statement as to whether the financial statements were audited or reviewed

Question 24

When an accountant examines a financial forecast that fails to disclose significant assumptions used to prepare the forecast, what type of opinion should the accountant issue?

Answer 24

The accountant should issue an ADVERSE opinion

Question 25

What are partial presentations?

Answer 25

Presentations of prospective financial information, which is usually not appropriate because they omit one ore more of these essential elements

• Sales or gross revenue
• gross profit or cost of sales
• unusual or infrequently occurring items
• provision for income taxes
• discontinued ops, or extraordinary items
• income from continuing operations
• net income
• earnings per share
• significant change in financial position

Question 26

Are prospective financial statements appropriate for general or limited use?

Answer 26

Any type of prospective financial statements (Forecast or projection) would normally be appropriate for restricted use (forecast can be appropriate for general use)

Question 27

What is an attest engagement?

Answer 27

One in which a CPA is engaged to issue an examination, a review, or agreed upon procedures report on subject matter, or on an assertion about a subject matter, that is the responsibility of another party.

Question 28

What does it say on each page of a nonissuer’s financial statements reviewed by an accountant?

Answer 28

See Independent Accountant’s Review Report

Question 29

In an attest engagement, when is the report not required to be restricted?

Answer 29

When reporting on an assertion about the subject matter instead of reporting directly on the subject matter