Chapter 6

Question 1

An auditor provides positive assurance in all of the following reports except:

Answer 1

A report on compliance with contractual or regulatory requirements related to audited financial statements is correct. Compliance engagements can be very sneaky because the CPA could perform an examination engagement, which expresses positive assurance, but only if it is not performed in conjunction with an audit.
If the compliance report is performed in conjunction with an audit, then a “review engagement” must be performed, and the CPA would express negative or limited assurance. Since a review must be performed, this is the only engagement that would not express positive assurance, which is why it is the correct answer.

Question 2

In an attestation review engagement, the objectives of the practitioner are to:

Answer 2

Obtain limited assurance about whether any material modifications should be made to the subject matter in order for it be in accordance with the criteria is correct. This is the most important thing to remember for a “review engagement”. Review engagements provide limited assurance. Just remember that attestation standards for reviews are only applicable to issuers. If the client is a nonissuer, then SSARS is applicable for a review engagement.

Question 3

When considering the three elements of attestation risk, the risk that a material misstatement that could occur on the subject matter will not be prevented, detected and corrected best describes which of the following?

Answer 3

Control risk is correct. Control risk is the risk that a material misstatement that could occur in the subject matter will not be prevented, detected and corrected. The CPA should assess what controls the company has in place as that will determine the extent of procedures that the CPA needs to perform in the engagement.

Question 4

Jaydon and Madison, senior auditors for a CPA firm located in Malibu, are providing limited assurance for the engagement they are assigned to. Limited assurance would be provided for which of the following attestation engagements?

Answer 4

Reviews is correct. As illustrated in the visual below, a review is a type of attestation engagement for “issuers” or public company’s where the CPA provides limited assurance. It is important to remember that the CPA does not need to be independent.

Question 5

Which of the following prospective financial statements is allowed for general use?

Answer 5

Financial forecast is correct. As illustrated in the visual below, financial forecasts, which is one of the two types of prospective financial statements, is the only option that is allowed for general use. Financial projections, the other type of prospective financial statements, is only allowed for restricted use.

Question 6

Which of the following prospective financial statements is based on an accountants knowledge and belief on what an entity’s expected financial results of operations will be?

Answer 6

Financial forecast is correct. An accountant would use historical operations and known facts to predict the forecast. The accountant would not use any hypothetical “what-if” scenarios in a financial forecast.

Question 7

Pratik, an accountant located in Ireland, can perform which of the following for prospective financial statements?

Answer 7

Agreed-upon procedures is correct. Accountants can perform either an examination or agreed-upon procedures on prospective financial statements. The only option listed in the question is agreed-upon procedures. Both of these options are types of attestation engagements and would be subject to SSAE standards.

Question 8

Which of the following best identifies the overall objective of an examination engagement?

Answer 8

To obtain reasonable assurance about whether the subject matter is free of material misstatements is correct. The key thing to remember is that while an examination is an attestation engagement, it is very similar to an audit. An examination is the only type of attestation engagement where the CPA would express positive assurance (i.e. “the financial statements a fairly presented). The visual below is helpful for understanding how an audit compares to an examination:

Question 9

Which set of accounting standards are applicable for Kim, a senior accountant, that is performing a review for an issuer?

Answer 9

I only is correct. A “review engagement” is the only type of engagement that can be performed under SSAE and SSAR. The key differentiator between the two is the type of client. If the client is a public company or issuer, then the CPA would follow SSAE. If the client is a private company or nonissuer, then the CPA would follow SSARS. ABSOLUTELY CRITICAL TO REMEMBER THE DISCTINCTION BETWEEN THE TWO!

Question 10

Prospective financial information presented in the format of historical financial statements that omits either gross profit or net income is deemed to be:

Answer 10

Partial presentation is correct. Under the minimum presentation guidelines, prospective financial statements may be presented in many different forms but might be limited to certain minimum items. A presentation is “partial” if it omits one or more of the following:
sales or revenue
gross profit or cost of sales
unusual or infrequently occurring items
provisions for income taxes
discontinued operations
income from continuing operations
net income
basic and diluted earnings-per-share and:
significant changes in financial position.

Question 11

A review typically consists of inquiries and analytical procedures. An attestation review may not rely heavily on analytical procedures because the subject matter may be:

Answer 11

Less quantitative is correct. The key part of the question to focus on is analytical procedures. This is when we use the numbers in the financial statements to understand relationships and assess whether the financial presentation makes sense. Since analytical procedures requires heavy focus on numbers, then we should think about “quantitative procedures” The definition for “quantitative” is relating to measuring or measured by the quantity of something rather than its quality. So if an attestation review does not rely heavily on analytical procedures, then there is less reliance on the quantitative aspect of the subject matter.

Question 12

Does a Type 1 Service Audit Report include the auditor’s opinion?

Answer 12

Yes, the auditor includes an opinion on management of the service organization’s written assertion of having fairly and accurately described the organization’s system and controls is correct. In a Type 1 Report, management of the service organization offers both a description of the service organization’s system, as well as a written assertion that their description is accurate in describing the organization’s systems and controls, and the auditor provides an opinion on this assertion. Remember, in a type I report, the service auditor does not assess the “operating effectiveness” of the controls.

Question 13

Which of the following is NOT something a service auditor needs to assess?

Answer 13

The description of the service organization’s system matched the user needs during the specified period is correct. This is the only thing that the service auditor should not care about. The service auditor should not care if the system met the users need. This is similar to if we were auditing a restaurant. Would we care if the customers liked the food? No, we would only care if the internal controls for the restaurant were operating effectively.

Question 14

Which of the following procedures should a user auditor include in the audit plan to create the most efficient audit when an audit client uses a service organization for several processes?

Answer 14

Review the service auditor’s report on controls placed in operation is correct. To understand why this is the correct answer, you need to understand that the user auditor is not the auditor preparing the service report. The user auditor is auditing the company that uses the service organization. In the position of the user auditor, all you can do is obtain the service auditor’s report. There will never be an opportunity for the user auditor to directly communicate or review the internal controls of the service organization. The visual below illustrates how the user auditor fits into the process.

Question 15

A “Type 2” service auditors report will include:

Answer 15

I only is correct. See below for description on each option:
Managements description of service auditors organization’s system is correct. A Type 2 report is a report on the design, implementation, and operating effectiveness of a service organization’s controls. Some examples of a Type 2 report include managements description of the service organization’s system, a written assertion by management of the service organization, and the auditor’s opinion of managements assertion and a description of the service auditor’s tests of controls and their respective results.

Question 16

A Type 2 Service Audit assesses three aspects of a service organization’s controls. Which is an aspect included in a type 2 report that is not included in a type I report?

Answer 16

Operating effectiveness is correct. This is the differentiating aspect between a type 1 report and type 2 report. Both reports include an assessment on the design and implementation, but only a type 2 report assesses the operating effectiveness.

Question 17

Sasha, a practitioner, has examined her client’s compliance with debt covenants associated with a bank loan and is ready to issue a report. Which of the following standards apply to Sasha’s report?

Answer 17

Compliance attestation standards is correct. Since Sasha is assessing whether her client is compliant with their debt covenants with a 3rd party bank, this is a compliance engagement. Compliance engagements are considered attestation engagements and would be subject to SSAE. Compliance engagements can be financial or non-financial. A few examples include:

Question 18

When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that:

Answer 18

Describes the limitations on the usefulness of the projection is correct. The report on compiled projected financial statements should include a separate paragraph that describes the limitations on the usefulness of the presented statements. Since the report was compiled by an accountant or an accounting firm, users need to understand that no assurance is being provided.

Question 19

An accountant must change its standard review report for which of the following matters when reviewing the financial statements of a nonissuer?
I. Inability to assess the risk of material misstatement due to fraud
II. Discovery of significant deficiencies in the design of the entity’s internal control

Answer 19

Neither I nor II is correct. Neither of the mentioned circumstances will require the modification to a review report. Review engagements will merely require limited assurance, and thus, only limited procedures will be performed (analytical procedures and inquiries). Assessment of risk and testing internal controls will be performed when conducting an engagement that requires positive assurance (e.g. audits or examinations) and would not be necessary when conducting a review).

Question 20

Which of the following procedures should an accountant perform when performing a compilation engagement under Statements on Standards for Accounting and Review Services (SSARS)?
I. Obtain a letter supporting management representations in the financial statements.
II. Analytical procedures on material financial statement figures.

Answer 20

Neither I nor II is correct. An accountant will only be required to read the financial statements and consider whether such financial statements appear to be free from obvious material errors prior to issuing the compilation report under SSARS. The accountant will NOT be required to either:

Question 21

Big Bear Accounting firm is preparing the financial statements of Mammoth Inc. in the current year. What would most likely be included in Big Bear’s documentation for this particular client?

Answer 21

Any significant findings or issues is correct. Big Bear should certainly include any significant findings or issues identified during the preparation engagement. This is true of really any engagement that an accountant performs. It’s important to remember that the preparation report does not need to have an accountant’s report, so the significant findings or issues won’t be included in the financial statements. The other two items that should be included in the accountants documentation include the engagement letter and a copy of the financial statements that were prepared.

Question 22

Each of the following is normally performed while conducting a review of interim financial information, except:

Answer 22

Obtaining litigation updates from external legal counsel is correct. We are looking for the procedure we would not perform in a review engagement. In a review engagement, we perform limited procedures, and obtaining litigation updates would be a type of substantive procedure we would perform for an audit but not a review.

Question 23

When an accountant is engaged to prepare financial statements, each of the following requirements applies, except:

Answer 23

The accountant should verify the completeness of information provided by management for the financial statements is correct. This is the correct answer because it is not a requirement. In a preparation engagement, no assurance is provided, and this option explains an audit procedure that would be performed to gather audit evidence.

Question 24

If an accountant compiles financial statements for an entity and a member of the engagement team has a direct financial interest in the entity, then the accountant should:

Answer 24

Indicate the accountant’s lack of independence in a final paragraph of the compilation report is correct. Although the accountant is not required to be independent for a compilation engagement, any independence issues should be included in the final paragraph of the compilation report.

Question 25

When conducting a review engagement of a nonissuer, each of the following is considered an analytical procedure, except a comparison of the current-year’s financial information to:

Answer 25

Supporting documentation is correct. A review engagement for a nonissuer would be subject to SSARS. For a review engagement, the accountant would perform limited procedures, which consists of inquiry and analytical procedures. When performing analytical procedures, the accountant would not compare financial information to support documentation.

Question 26

Which of the following best describes the purpose of the risk-based approach of the Single Audit Act? Which of the following procedures is an accountant required to perform before issuing a compilation report under Statements on Standards for Accounting and Review Services (SSARS)?

Answer 26

Read the financial statements and consider whether such financial statements appear to be free from obvious material errors is correct. In a compilation engagement, the CPA isn’t performing any procedures other than “compiling” the financial statements. However, the CPA should at least read through the compiled financial statements to make sure there are no obvious material errors. The CPA should basically check their work and see if the financial statements make sense!

Question 27

Which of the following best describes the purpose of the risk-based approach of the Single Audit Act?

Answer 27

Which of the following best describes the purpose of the risk-based approach of the Single Audit Act?

Question 28

A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?

Answer 28

Both I and II is correct. When auditing the financial statements of a municipality that received federal financial assistance and is being audited under the Single Audit Act, the auditor would conduct their engagement while considering both Generally Accepted Auditing Standards (GAAS) and Generally Accepted Government Auditing Standards (GAGAS). The Single Audit Act will always consider both GAAS and GAGAS, therefore, this is the best answer choice.