CPAExcl 7-Other Reports

Question 1

Under what circumstances would a reporting accountant, who is engaged to provide a written report or provide oral advice on a specific transaction, not be expected to consult with the continuing accountant?

Answer 1

When (1) the reporting accountant is engaged to provide recurring accounting and reporting advice and does not believe that a second opinion is being requested, (2) has full access to management, and (3) believes that the relevant information has been obtained.

Question 2

What is meant by the term reporting accountant?

Answer 2

An accountant, other than a continuing accountant, who prepares a written report or provides oral advice on the application of the requirements of an applicable financial reporting framework to a specific transaction or on the type of report that may be issued on a specific entity’s financial statements.

Question 3

What is meant by the term advisory accountant?

Answer 3

A reporting accountant who is also engaged to provide accounting advice to a specific entity on a recurring basis is commonly referred to as an advisory accountant.

Question 4

When is the AICPA pronouncement, “Reports on Application of Requirements of an Applicable Financial Reporting Framework” applicable?

Answer 4

When providing a written report or verbal advice on:

1. The application of accounting principles to specific transactions; or
2. The type of opinion that might be issued on specific financial statements.

Question 5

Identify the five paragraphs normally associated with a reporting accountant’s report when engaged to report on the application of the requirements of an applicable financial reporting framework to a specific transaction.

Answer 5

1. Identify the nature of the engagement and subject matter involved;
2. Describe the specific transaction(s) involved;
3. Describe the appropriate accounting principles involved;
4. Provide concluding comments and reference continuing accountant; and
5. Restrict the distribution of the report to the specified users.

Question 6

What is meant by the term specific transaction?

Answer 6

A completed or proposed transaction or group of related transaction or a financial reporting issue involving facts and circumstances of a specific entity.

Question 7

Identify the procedures an auditor should perform when engaged to report on the application of accounting principles to a specific transaction.

Answer 7

1. Obtain an understanding of the form and substance of the transaction involved;
2. Consult with the “continuing accountant” (which requires the client’s permission); and
3. Review applicable accounting requirements and consult with others, as necessary.

Question 8

What is meant by the term hypothetical transaction?

Answer 8

A transaction or financial reporting issue that does not involve facts or circumstances of a specific entity.

Question 9

When should the auditor’s report on an entity’s financial statements prepared in accordance with a special purpose framework include a description of the “purpose for which the financial statements are prepared”?

Answer 9

Such a description would be required when the financial statements have been prepared on (1) the contractual basis; or (2) the regulatory basis (whether intended for general use or not).

Question 10

Identify the 5 sections of the auditor’s report normally associated with an entity’s financial statements prepared in accordance with a special purpose framework.

Answer 10

1. Identify the nature of the engagement and financial statements involved;
2. Management’s responsibility;
3. Auditor’s responsibility;
4. Express the opinion (reference footnote that describes basis of presentation); and
5. “Basis of accounting” – reference footnote describing basis of presentation.

Question 11

Which special purpose frameworks require a paragraph in the auditor’s report to restrict the distribution of the report to specified users?

Answer 11

The contractual basis and regulatory basis (not intended for general distribution) require such a restriction. The cash basis, tax basis, and regulatory basis intended for general use do not require such restricted distribution.

Question 12

When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what 3 matters should the auditor consider?

Answer 12

1. The purpose for which the financial statements are prepared;
2. The intended users of the financial statements; and
3. The steps taken by management to determine that the framework is acceptable in the circumstances.

Question 13

What is meant by the term special purpose framework?

Answer 13

A financial reporting framework other than GAAP that is one of the following bases of accounting:

1. Cash basis;
2. Tax basis;
3. Regulatory basis;
4. Contractual basis; or
5. Other basis that uses a “definite set of logical, reasonable criteria.”

Question 14

Which special purpose frameworks require an emphasis of matter paragraph (labeled “Basis of Accounting”) in the auditor’s report pointing out the special purpose framework to readers?

Answer 14

The cash basis, tax basis, contractual basis, and regulatory basis (only if restricted). Such a paragraph is not required if prepared on a regulatory basis intended for general use.

Question 15

What is the impact on the auditor’s report when reporting on an incomplete presentation that is otherwise presented in accordance with GAAP?

Answer 15

The auditor should include an emphasis-of-matter paragraph that (1) states the purpose for which the presentation is prepared (and refers to a note in the financial statements that describes the basis of presentation) and (2) indicates that the presentation is not intended to be a complete presentation.

Question 16

What are the reporting requirements when the auditor has been engaged to audit a specific element of a financial statement in connection with an audit of the complete set of financial statements?

Answer 16

The auditor should (1) issue a separate report and express a separate opinion for each engagement; and (2) indicate in the report on a specific element of a financial statement the date and nature of the auditor’s report on the complete set of financial statements. (These separate reports may be published in the same document, if sufficiently differentiated.)

Question 17

What is required when the auditor is engaged to report on a specific element that is based on (or derived from) the entity’s net income?

Answer 17

The auditor should obtain sufficient appropriate audit evidence to enable the auditor to express an opinion about both financial position and results of operations. (Effectively, this means that the auditor must audit the complete set of financial statements, too.)

Question 18

If a modified opinion on the set of financial statements is material and pervasive to the specific element, what is the effect on the separate report on the specific element?

Answer 18

The auditor should either (1) express an adverse opinion on the specific element when the modification involves a misstatement; or (2) disclaim an opinion on the specific element when the modification involves a scope limitation.

Question 19

When deciding whether to accept an engagement to report on financial statements prepared in accordance with a special purpose framework, what 3 matters should the auditor consider?

Answer 19

1. The purpose for which the single financial statement or specific element is prepared;
2. The intended users; and
3. The steps taken by management to determine that the financial reporting framework is acceptable and that disclosure is adequate.

Question 20

How is the auditor’s report on compliance affected when there are instances of noncompliance, but the entity has obtained a waiver for such noncompliance?

Answer 20

The auditor’s report on compliance may include a statement that a waiver has been obtained, but all instances of noncompliance should be described in the report, including those for which a waiver has been obtained.

Question 21

Identify the 3 requirements before the auditor can provide negative assurance about an entity’s compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit.

Answer 21

The auditor did not identify any instances of noncompliance;
The auditor expressed an unmodified or qualified opinion on the financial statements; and
The covenants or regulatory requirements involved were subject to audit procedures.

Question 22

Is an auditor permitted to comment on an entity’s compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit, if the auditor expressed an adverse opinion or disclaimer of opinion on the financial statements?

Answer 22

If the auditor expressed an adverse opinion or disclaimer of opinion on the financial statements, the auditor is permitted to issue a report on compliance only when instances of noncompliance were identified.

Question 23

Identify the 3 paragraphs normally associated with a report on compliance with specified aspects of a contractual agreement or regulatory requirements in connection with a financial statement audit (when no instances of noncompliance were identified).

Answer 23

1. Refer to the audit of the financial statements and identify the date of the auditor’s report;
2. Provide negative assurance about relevant compliance; and
3. Restrict the distribution to appropriate specified parties, including management and those charged with governance.

Question 24

Why is the user auditor obligated to obtain an understanding of the services provided to a user entity by a service organization, including its internal controls?

Answer 24

The services of the service organization may be relevant to the audit of a user entity when those services (and the controls over those services) affect the user entity’s information system related to financial reporting and safeguarding of assets.

Question 25

What is meant by the term user entity?

Answer 25

An entity that uses a service organization and whose financial statements are being audited.

Question 26

According to AICPA professional standards, what are the user auditor’s objectives when the user entity uses the services of a service organization?

Answer 26

The user auditor’s objectives are (1) to obtain an understanding of the nature and significance of the services provided and their effect on the user entity’s internal control relevant to the audit sufficient to assess the risks of material misstatement; and (2) to design and perform audit procedures that are responsive to those risks.

Question 27

When might the user auditor’s report appropriately refer to the service auditor’s report?

Answer 27

The user auditor may refer to the service auditor in the user auditor’s report containing a modified opinion, if that reference would be helpful to understanding the user auditor’s modification. (There should be no reference to the service auditor in the user auditor’s report containing an unmodified opinion.)

Question 28

What is meant by the term complementary user entity controls?

Answer 28

Controls that management of the service organization assumes, in the design of its service, will be implemented by user entities, and which, if necessary to achieve the control objectives stated in management’s description of the service organization’s system, are identified as such in that description.

Question 29

When the user auditor has relied on the report of a service auditor to support the user auditor’s understanding of the services provided by a service organization, including internal controls, what matters should the user auditor evaluate regarding the service auditor’s report?

Answer 29

The user auditor should (1) evaluate whether the report provides sufficient appropriate evidence for understanding the user entity’s relevant internal controls; and (2) determine whether any complementary user entity controls identified by the service organization are relevant in assessing the risks of material misstatement.

Question 30

What is meant by the term service organization?

Answer 30

An organization or segment of an organization that provides services to user entities that are relevant to those user entities’ internal control over financial reporting.

Question 31

What is meant by the term user auditor?

Answer 31

An auditor who audits and reports on the financial statements of a user entity.

Question 32

When the user auditor has relied on the report of a service auditor to support the user auditor’s understanding of the services provided by a service organization, including internal controls, what matters should the user auditor evaluate regarding the service auditor?

Answer 32

The user auditor should be satisfied about (1) the service auditor’s professional competence and independence; and (2) the standards that the service auditor followed in issuing the report.

Question 33

What is meant by the term service auditor?

Answer 33

A practitioner who reports on controls at a service organization.

Question 34

What is meant by the term type 2 report for a service auditor?

Answer 34

This refers to a report on management’s description of a service organization’s system and the suitability of the design and operating effectiveness of internal controls at the service organization – whether the policies and procedures are suitably designed and working effectively to provide reasonable assurance of achieving the stated control objectives.

Question 35

What two types of reports on internal controls at the service organization may the service auditor be engaged to issue?

Answer 35

1. Report on management’s description of a service organization’s system and the suitability of the design of controls (type 1 report).
2. Report on management’s description of a service organization’s system and the suitability of the design and operating effectiveness of controls (type 2 report).

Question 36

What 2 specific matters does the auditor express an opinion on when issuing a type 1 report?

Answer 36

(1) That the description fairly presents the system that was designed and implemented as of the specific date; and (2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively as of the specific date.

Question 37

To whom should the distribution of the service auditor’s type 1 and type 2 reports be restricted?

Answer 37

The service organization, user entities, and the user entities independent auditors.

Question 38

What 3 specific matters does the auditor express an opinion on when issuing a type 2 report?

Answer 38

(1) That the description fairly presents the system that was designed and implemented as of the specific date; (2) that the controls related to the stated control objectives were suitably designed to provide reasonable assurance that the control objectives would be achieved if the controls operated effectively as of the specific date; and (3) that the controls tested operated effectively throughout the period.

Question 39

What is meant by the term type 1 report for a service auditor?

Answer 39

This refers to a report on management’s description of a service organization’s system and the suitability of the design of internal controls at the service organization – whether the control policies and procedures are suitably designed and placed in operation.

Question 40

How does an independent accountant’s “letter for underwriters and certain other requesting parties” (comfort letter) assist an underwriter or others?

Answer 40

1. Such a letter from an independent accountant may help underwriters or others having a statutory due diligence defense under Section 11 of the 1933 Securities Act establish a “reasonable investigation” - that is, meet their “due diligence” requirements.
2. (Note: Comfort letters are not required by, and are not filed with, the SEC.)

Question 41

The auditor expresses positive assurance (an opinion) on what specific matter(s) in a “letter for underwriters and certain other requesting parties”?

Answer 41

An opinion is only expressed on whether the audited financial statements and schedules, included in the registration statement, comply as to form with SEC requirements.

Question 42

What are the meeting requirements of an auditor as it pertains to underwriters and certain other requesting parties?

Answer 42

The independent accountant should meet with the underwriters and other parties requesting the “comfort letter” to establish their specific needs and to give them a draft of the comfort letter in advance to avoid any misunderstandings as to the letter’s content.

Question 43

To whom should a comfort letter be addressed?

Answer 43

The comfort letter should be addressed to the client, named underwriters, broker-dealer, or the financial intermediary related to the securities involved.

Question 44

When is a comfort letter usually dated?

Answer 44

A comfort letter is usually dated on or shortly before the effective date of the registration statement.

Question 45

When must a state or local governmental entity be audited according to the Single Audit Act of 1984, as amended?

Answer 45

When a state or local governmental entity spends federal assistance aggregating at least $750,000 in a fiscal year.

Question 46

Describe the auditor’s responsibility regarding communications of “significant deficiencies” under Government Auditing Standards.

Answer 46

The auditor should obtain a response from officials of the entity as to their views about those findings and include a copy of any written response in the auditor’s report.

Question 47

List the three main differences in Government Auditing Standards relative to the AICPA’s Statements on Auditing Standards.

Answer 47

1. Government Auditing Standards require a written report on internal control;
2. Government Auditing Standards require a written report on compliance with applicable laws and regulations; and
3. Government Auditing Standards require the auditor to report any known instances of illegal acts that could result in criminal prosecution.

Question 48

What are the requirements of the Single Audit Act?

Answer 48

It requires a single coordinated audit of the aggregate federal financial assistance provided to the state and local governmental entity with emphasis on defined “major” assistance programs), including:

1. An audit of the entity’s financial statements
2. Additional reporting on compliance with applicable laws and regulations;
3. Additional reporting on internal control.

Question 49

When do the general and specific requirements of the Government Auditing Standards apply?

Answer 49

1. General requirements - apply to all federal financial programs; and
2. Specific requirements - apply by statutory (legislative) requirement to a particular program.

Question 50

Who is the issuer of Government Auditing Standards, also known as Generally Accepted Government Auditing Standards?

Answer 50

The U.S. Government Accountability Office (GAO) under the authority of the U.S. Comptroller General, through the GAO’s “Yellow Book.”

Question 51

What types of reports can an auditor issue when the focus of the report is on compliance?

Answer 51

The auditor may issue:

1. A separate report on compliance only;
2. A combined report on compliance and on internal control over compliance; or
3. A separate report on internal control over compliance

Question 52

What are the objectives of the “compliance audit”?

Answer 52

1. To express an opinion on whether the entity complied with applicable compliance requirements, at the level specified in the governmental audit requirements; and
2. To identify audit/reporting requirements in the governmental audit requirement that are supplementary to GAAS and GAGAS and to evaluate those requirements.

Question 53

List the documentation requirements of an auditor for a compliance audit.

Answer 53

The auditor should document:

1. The risk assessment procedures performed;
2. The responses to the assessed risks of material noncompliance;
3. The basis for materiality levels; and
4. The compliance with applicable “supplementary audit requirements.”

Question 54

List the procedures that an auditor should undertake regarding risk assessments as it relates to the performing a compliance audit.

Answer 54

The auditor should: Perform risk assessment procedures to obtain an understanding of applicable compliance requirements and internal controls over compliance;
Assess risks of material noncompliance for each applicable compliance requirement and consider whether any are “pervasive” to compliance; and
Perform further audit procedures in response to assessed risks and develop an overall response to any risks that are “pervasive” to the entity’s compliance.

Question 55

Describe the auditor’s responsibility for communicating various matters relating to a compliance audit.

Answer 55

The auditor should communicate the following matters with those charged with governance:

1. The auditor’s responsibilities under GAAS;
2. The auditor’s responsibilities under GAGAS and the governmental audit requirements;
3. An overview of the planned scope and timing of the compliance audit; and
4. Any significant findings.

Question 56

Define “governmental audit requirement.”

Answer 56

A governmental requirement established by law, regulation, rule, or provision of contracts or grant agreements requiring that an entity undergo an audit of its compliance with applicable compliance requirements related to one or more government programs.

Question 57

Under what two circumstances would the Applicability of Statement on Auditing Standard No. 117, “Compliance Audits,” apply?

Answer 57

When an auditor is engaged to perform a “compliance audit” in accordance with Generally Accepted Auditing Standards (GAAS); Government Auditing Standards, also called “Generally Accepted Government Auditing Standards” (GAGAS); and when there is a governmental audit requirement requiring an expression of opinion on compliance with applicable compliance requirements.

Question 58

What AICPA standards are applicable to reviews and compilations for nonissuers?

Answer 58

Statements on Standards for Accounting and Review Services (SSARSs) are issued by the AICPA’s “Accounting and Review Services Committee” (ARSC).

Question 59

What is the purpose of a “review” as prescribed under in Statements on Standards for Accounting and Review Services?

Answer 59

The purpose of a “review” is to obtain limited assurance, sometimes called negative assurance, that there are no material modifications that should be made to the financial statements.

Question 60

When can an auditor depart from a “presumptively mandatory requirements”?

Answer 60

In rare circumstances, the accountant may depart from a “presumptively mandatory requirement.” The auditor must document the justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the objectives of the presumptively mandatory requirement (requirement indicated by the word “should”).

Question 61

What is the purpose of a compilation as defined in the Statements on Standards for Accounting and Review Services?

Answer 61

A “compilation” assists management in presenting financial information in the form of financial statements without providing any assurance on that information.

Question 62

Define “explanatory material” as outlined in AICPA Professional Standards.

Answer 62

Explanatory material is intended to be descriptive and does not impose a professional requirement;
Explanatory material is identified by the terms “may,” “might,” or “could.”

Question 63

List two categories of “requirements” under the AICPA’s “Framework for Compilation and Review Engagements.”

Answer 63

Unconditional requirements; and

Presumptively mandatory requirements.

Question 64

Describe the documentation requirements for compilation engagement.

Answer 64

The accountant should document the work performed in accordance with Statements on Standards for Accounting and Review Services (SSARS) including the engagement letter; any findings or issues that are considered “significant;” and any communications, whether oral or written, to the appropriate level of management about fraud or illegal acts.

Question 65

What are the auditor’s performance requirements for a compilation engagement?

Answer 65

The accountant should understand the industry and the entity itself, including accounting principles and practices used; read the entity’s financial statements to see if they are appropriate in form and free of obvious material errors.
Other compilation procedures - the accountant is not required to verify the information supplied by the entity, but should obtain additional or revised information when the accountant believes the financial statements are materially misstated.

Question 66

What is the accountant’s responsibility to establish an understanding for an engagement to compile a nonissuer’s financial statements?

Answer 66

The accountant should establish an understanding about the engagement’s objectives, management’s responsibilities, the accountant’s responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.

Question 67

What is the effect on a compilation report if the accountant is not independent?

Answer 67

A compilation does not require independence, since no assurance is provided - but the compilation report must point out that fact when independence is lacking. The auditor may choose to add a single sentence to the end of the compilation report without any further explanation as to the reason(s) for the impairment of independence; or may instead choose to disclose the reason(s) for the impairment of independence.

Question 68

What is the objective of a “review” engagement under the Statements on Standards for Accounting and Review Services?

Answer 68

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.

Question 69

What is the accountant’s responsibility to establish an understanding for an engagement to review a nonissuer’s financial statements?

Answer 69

The accountant should establish an understanding about the engagement’s objectives, management’s responsibilities, the accountant’s responsibilities, and the limitations of the engagement, among other matters with management and document that in writing with an engagement letter.

Question 70

What is the effect on the successor accountant’s compilation or review report when the predecessor accountant’s compilation or review report is not presented on the prior year’s financial statements?

Answer 70

The successor accountant’s report should include an explanatory paragraph that identifies the nature and date of the predecessor’s report and states that the current accountant takes no responsibility for the prior year’s financial statements.

Question 71

What are the accountant’s performance requirements regarding an engagement to compile pro forma financial information?

Answer 71

The accountant should read the compiled pro forma financial information, including the summary of significant assumptions, and consider whether that information appears to be free of obvious material errors.

Note: To compile the pro forma financial information, the accountant must have compiled, reviewed, or audited the historical financial statements on which the pro forma information is based.

Question 72

Under the Statements on Standards for Accounting and Review Services, what is the successor-predecessor communications requirement?

Answer 72

The successor is not required to communicate with the predecessor, but may choose to do so after obtaining the permission of management to initiate such a communication.

Question 73

What is the responsibility of the accountant when the accountant helps develop personal financial statements related to an individual’s personal financial plans?

Answer 73

1. If the financial statements will not be used for any other purpose, a “compilation” report is not required;
2. The accountant should prepare a report stating that the purpose of the financial statements is intended solely to help develop the financial plan, and note that the financial statements have not been audited, reviewed, or compiled.

Question 74

When an accountant submits unaudited financial statements to the client that are not expected to be used by a third party, what actions must the accountant take?

Answer 74

The accountant must either:

1. Issue a compilation report; or
2. Document an understanding with the client by an engagement letter and a management representation letter in which, among other things, management states that the financial statements are for internal use only and are not to be used by third parties.

Question 75

What are the accountant’s performance requirements regarding an engagement to compile specified elements of the financial statements?

Answer 75

The accountant should read the compiled elements, accounts, or items and consider whether that information appears to be free of obvious material errors.

Question 76

What is the accountant’s responsibility to establish an understanding for an engagement to compile an entity’s pro forma financial information?

Answer 76

The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties’ respective responsibilities, and the nature of the report to be issued. It is preferable, but not technically required, to get that understanding in writing.

Question 77

What is the accountant’s responsibility to establish an understanding for an engagement to compile specified elements of an entity’s financial statements?

Answer 77

The accountant should establish an understanding about the services to be performed, the nature and limitations of those services, the parties’ respective responsibilities, and the nature of the report to be issued. It is preferable, but not technically required, to get that understanding in writing.

Question 78

What is the purpose of a “pro forma” financial statement?

Answer 78

The purpose is to show the significant effects on historical financial information associated with a transaction (actual or proposed) had the transaction occurred at an earlier date.

Question 79

What is the accountant’s responsibility when compiled financial information is presented in a prescribed form that differs from Generally Accepted Accounting Principles (GAAP)?

Answer 79

The accountant should add an explanatory paragraph to the compilation report to indicate that the prescribed form differs from GAAP.