M6

Question 1

Name the five elements of preparation, compilation and review engagements?

Answer 1

1) A three-party relationship (management, the accountant, and the intended users)
2) Financial reporting framework
3) Financial statements or financial information
4) Sufficient, appropriate evidence (review only)
5) Written communication or report

Question 2

According to Statements on Standards for Accounting and Review Services who must sign the engagement letter

Answer 2

1) The accountant or accountant’s firm and

2) management or those charged with governance

Question 3

What are the requirements for a preparation engagement

Answer 3

1) Obtain an engagement letter
2) Possess knowledge of and understanding of the entity’s financial reporting framework
3) Include a statement on each page of the financial statements that “no assurance is provided” or issue a disclaimer

Question 4

What are reporting requirements with respect to compiled financial statements when:
1) Substantially all disclosures are omitted

Answer 4

1) Substantially all disclosures are omitted
1) The accountant can only report if the omission is not intended to mislead expected users
2) The report must clearly indicate the omission
3) The compilation report should be modified by including an additional paragraph disclosing the omissions

Question 5

What are reporting requirements with respect to compiled financial statements when:
2) Statements that include only limited disclosures

Answer 5

2) Statements that include only limited disclosures

- notes should be labeled “selected information - substantially all disclosures required by GAAP are not included”

Question 6

What are reporting requirements with respect to compiled financial statements when:
3) Statements when the accountant lacks independence

Answer 6

3) Statements when the accountant lacks independence
The last paragraph of the report should disclose the lack of independence. The auditor is permitted, but not required, to disclose the reason(s) for independence impairment

Question 7

what does SSARS govern?

Answer 7

The performance of preparation, compilations and reviews

Question 8

What is the objective of a preparation engagement

Answer 8

1) Prepare financial statements in accordance with specified financial reporting framework
2) An engagement to prepare financial statements is a non-attest service and does not require a determination about whether the accountant is independent of an entity

Question 9

What documentation is required in a preparation engagement?

Answer 9

1) Engagement letter
2) A copy of the financial statements prepared by the accountant
3) any significant findings or issues

Question 10

Identify the performance requirements necessary when engaged in a compilation

Answer 10

When performing a compilation the accountant must:

1) Obtain an engagement letter
2) Possess knowledge of the accounting principles and practices of the client’s industry
3) have a general understanding of the client’s business
4) Read the compiled financial statements to determine if they are appropriate in form and free from obvious material error
5) Follow up with management when aware of fraud or noncompliance with laws and regulations, going concern issues, or subsequent events. The accountant should consider the impact of the follow-up on the financial statements, evaluate management conclusions and consider the effect on the compilation report
6) Issue a compilation report

Question 11

What should be included in an accountants report on a compilation of a non-issuers financial statements

Answer 11

A standard compilation report includes the following in one paragraph:

1) Management is responsible for the financial statements
2) Identify the entity, financial statements, and date covered by financial statements
3) Performed the compilation engagement in accordance with SSARS
4) Did not audit or review the financial statements
5) Not required to perform any procedures to verify the accuracy or completeness of the information
6) do not express an opinion, a conclusion, nor provide any assurance on financial statements
7) Signature
8) City and state (letterhead)
9) Date of the report

Question 12

What are the performance requirements applicable to a review engagement

Answer 12

(U LIAR CPA)
U- Understanding with client must be established
L- Learn and/ or obtain sufficient knowledge of the entity’s business
I- inquiries should be addressed to the appropriate individuals
A- Analytical procedures should be performed
R- Review - other procedures should be performed
C- Client representation letter should be obtained from management
P- Professional judgement should be used to evaluate reports
A- Accountant should communicate results

Question 13

Preparation, compilations, review standards require that an accountant establish an understanding with the client as to the services to be performed. What should be included in the understanding?

Answer 13

An engagement letter is presumptively mandatory and should include:

1) The objectives of the engagement
2) Management’s responsibility and the accountant’s responsibilities
3) Identification of the applicable financial reporting framework
4) An explanation of the limitations of the service, including a statement that the engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations
5) Fore praration: agreement by management that each page of the financial statement will include a statement indicating no assurance or a disclaimer will be issued by the CPA
6) For compilation and review - the expected report to be issued

Question 14

What is a compilation engagement?

Answer 14

In a compilation engagement, the accountant assists management in the presentation of financial statements without expressing any assurance

Question 15

Is independence required for a compilation enagement

Answer 15

Not required but lack of independence must be disclosed in the last paragraph of the compilation report. The auditor is permitted, but not required to disclosure the reason for the independence impairment

Question 16

What is a review engagement

Answer 16

In a review engagement, an accountant uses inquiry and analytical procedures as a basis for expressing limited assurance on the financial statements. Note that a review is a higher level of service than a compilation which expresses no assurance

Question 17

Does the auditor need to be independent in a review engagement?

Answer 17

Yes

Question 18

Which SSARS engagements require determination of independence? What are the effects of independence on reporting?

Answer 18

A compilation and review require determination of independence
1, Compilation - although independence is not required to perform a compilation, independence must be evaluated since it is an attest service. Lack of independence must be disclosed in the compilation report.
2. review - determination of independence is required because it is an attest service. A review report may only be issued when the accountant is independent

Question 19

In a review or compilation engagement - an accountant may become aware of a material departure from the applicable financial reporting framework. If the financial statements are not revised, what options does the accountant have?

Answer 19

• modify the report - if the accountant believes modification of the report is appropriate, a separate paragraph disclosing the departure should be added to the end of the report
  OR
• withdraw form the engagement - if the accountant believes that disclosure in the report would not be adequate to indicate the deficiencies in the FS he or she should withdraw from the engagement

Question 20

If an accountant has reviewed the prior period statements but compiled the current period statements, what are the accountant’s reporting options?

Answer 20

the accountant has provided a lower level of service: Review to compilation.

Reporting options include:
1) Issuing a compilation report on the current period statements with a paragraph added to describe the responsibility assumed for the prior period statements
OR
2) resissueing (not updating) the review report on the prior period
The reissued report may be combined with or presented separately from the compilation report on the current period.

Either the added paragraph (from the first option above) or the reissued report (in the second option) should include the original date and state that no review procedures have been performed since the date.

Question 21

What procedures should be performed in a review of the interim financial information of a publicly held company?

Answer 21

U LIAR CPA
U- understanding with the client must be established
L- Learn and/or obtain sufficient knowledge of the entity’s business, including internal controls.
I- inquiries should be addressed to the appropriate individuals
A- Analytical procedures should be performed
R- Review - other procedures should be performed
C- Client representation letter should be obtained from management
P- Professional judgement should be used to evaluate reports
A- Accountant should communicate results

Question 22

What type of information should an auditor promptly communicate to management during a review of interim financial information and what action should the auditor take if management fails to appropriately respond?

Answer 22

The auditor should promptly communicate to management if:

1) Material modifications need to be made to interim financial information to be in accordance with the applicable financial reporting framework
2) The issuer filed quarterly reports prior to the review being completed
3) The non issuer issued interim financial information prior to the completion of the review (when the review is required).

When management does not appropriately respond, the auditor should:
1) Inform those responsible for corporate governance, and, if they fail to adequately respond, consider resigning or consulting legal counsel.

Question 23

What should be included in an auditor’s report on the review of interim financial statements of a nonissuer?

Answer 23

1. Title
2. Intro paragraph
   - the entity financial statements and dates
   - the interim financial statements have been reviewed
3. Management’s responsibility paragraph
   - fair presentation of the interim financial information and internal controls are the responsibility of management
4. Auditor’s responsibility paragraph
   - conduct the interim financial review in accordance with US GAAS
   - the review consists principally of analytical procedures and inquiry
   - a review of interim financial statements i less in scope than an audit which expresses an opinion on the financial statements as w hole, whereas an interim financial review expresses no such opinion
5. Concluding section -
   - a statement about whether the auditor is aware of any material modifications that should be made for the interim financial information to be in accordance with the applicable financial reporting framework

Question 24

Who provides governance over interim reporting?

Answer 24

SAS - nonissuers

PCAOB- issuers

Question 25

What is a comfort letter and what are the two types of assurance

Answer 25

A comfort letter is a letter from the CPA to an underwriter that provides assurance on unaudited interim financial information

1) Positive assurance
2) Negative assurance

Question 26

What is positive assurance in a comfort letter

Answer 26

regarding the CPAs independence and whether the financial statements comply as to form in all material respects with the applicable sec requirements

Question 27

What is negative assurance in a comfort letter?

Answer 27

regarding unaudited financial statements, capsule financial information, changes in certain financial statement items, and compliance of certain non-financial statement information

Question 28

A comfort letter should not comment or provide assurance on what type of information

Answer 28

Comments/assurance on

i. Market risk sensitive instruments
ii. Qualitative disclosures