Other Types of Reports Flashcards

1
Q

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction.
The accountant’s report should include a statement that

A

Any difference in the facts, circumstances, or assumptions presented may change the report.
An accountant’s report on the application of accounting principles to a specific transaction should include: 1) a statement that the engagement was conducted in accordance with applicable AICPA standards, 2) a description of the transaction and the accounting principles to be applied, 3) a statement indicating that responsibility for proper accounting treatment rests with the preparers of the financial statements, and 4) a statement that any difference in the facts, circumstances, or assumptions may change the report. (AU 625)

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2
Q

When reporting on financial statements prepared on the same basis of accounting as that used for income tax purposes, the auditor should include in the report a paragraph that

A

States that the income tax basis of accounting is a basis of accounting other than generally accepted accounting principles.
The report should include a paragraph stating that the income tax basis of accounting is a basis of accounting other than GAAP. The paragraph would also state the basis of presentation and refer to a note to the financial statements describing the basis.

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3
Q

When an entity’s auditor issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive

A

Negative assurance on capsule information.

In a typical comfort letter, the auditor will provide negative assurance on capsule information.

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4
Q

Comfort letters ordinarily are

A

Comfort letters are requested by and addressed to underwriters and other parties. They provide the underwriter with “reasonable grounds to believe there are no material omissions or misstatements in financial statements related to a 1933 Act securities offering.” They are addressed to the underwriter (or other requesting parties) and signed by the auditor.

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5
Q

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)?

A

An auditor should report on the scope of the auditor’s testing of compliance with laws and regulations.
Financial statement audits in accordance with Government Auditing Standards require the following reports:
an audit report;
a report on internal control;
a report on compliance with laws, regulations, and the provisions of contracts or grant agreements.

The compliance report would identify the scope of the auditor’s testing of compliance with laws and regulations.

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6
Q

In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is

A

Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.
The auditor is generally required to report directly to an external party such as a federal inspector general when the auditee fails to make required reports of fraud or illegal acts to such parties. The auditor must first report fraud or illegal acts to the auditee’s governing body. The auditee, in turn, must report these acts to appropriate parties. If the auditee fails to do so, the auditor must report directly to these external parties.

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7
Q

In an audit in accordance with Government Auditing Standards an auditor is required to report on the auditor’s tests of the entity’s compliance with applicable laws and regulations.
This requirement is satisfied by designing the audit to provide

A

Reasonable assurance of detecting misstatements that are material to the financial statements.
When auditing under Government Auditing Standards, the auditor is required to report on the auditor’s tests of the entity’s compliance with applicable laws and regulations. Designing the audit to provide reasonable assurance of detecting misstatements that are material to the financial statements will satisfy that requirement.
Such a design would encompass the detection of misstatements arising from noncompliance with provisions of contracts or grant agreements that have a direct and material effect on the determination of financial statement amounts.

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8
Q

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when

A

The Statements on Standards for Accounting and Review Services are not applicable when: 1) preparing a working trial balance; 2) assisting in adjusting the books of account; 3) consulting on accounting, tax, and similar matters; 4) preparing tax returns ; 5) providing bookkeeping or data processing services, and 6) processing financial data for clients of other accounting firms.

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9
Q

The clarified SSARSs applicable to preparation engagements (AR-C 70) do not apply to the following engagements, except for

A

Preparing financial statements to be presented alongside a personal financial plan.
AR-C 70 does, in fact, apply to engagements to prepare financial statements to be presented ;alongside a personal financial plan. However, AR-C 70 does not apply to an engagement to prepare financial statements as part of a written personal financial plan prepared by the accountant. The key word here is “alongside” a personal financial plan.

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10
Q

An accountant has been engaged to compile the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS).
Do the SSARSs require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the accountant?

A

The SSARSs do not require that the compilation report be printed on the accountant’s letterhead or that the report be manually signed by the accountant. The compilation report requires the signature of the accountant (or firm), but that signature may be printed or manually signed. The compilation report requires the identification of the accountant’s city and state, which may be accomplished by presenting the report on the accountant’s letterhead; otherwise, that information may be provided in the signature block.

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11
Q

If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is

A

Not independent and, therefore, may issue a compilation report, but may not issue a review report.
The accountant may issue a compilation report even though not independent, since no assurance is conveyed. In that case, the compilation report should state that the accountant was not independent. However, the accountant would be prohibited from issuing a review report when not independent, since a review report results in a type of assurance known as negative assurance.

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12
Q

Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA.
Blue may accept this engagement but should

A

Consult with the continuing CPA to obtain information relative to the transaction.
An accountant is allowed to accept an engagement to provide an opinion on the application of accounting principles to a specific transaction. The accountant, however, must consult with the continuing CPA to obtain all of the available facts pertinent to the transaction.

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13
Q

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements.
Under these circumstances, the report on the selected data should

A

Refer to the report issued on the audited financial statements.
In an engagement to report on selected financial data included in a client-prepared document containing audited financial statements, the report on such data should refer to the audit report on the financial statements.

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14
Q

Payroll Data Co. (PDC) processes payroll transactions for a retailer.
Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls placed in operation as of a specific date. These controls are relevant to the retailer’s internal control, so Cook’s report may be useful in providing the retailer’s independent auditor with information necessary to plan a financial statement audit.

Cook’s report should

A

Contain a disclaimer of opinion on the operating effectiveness of PDC’s controls.
A report on controls placed in operation should include a disclaimer on operating effectiveness as this type of engagement does not include any tests of controls. It is not intended to provide a user auditor with a basis for reducing control risk below maximum.

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15
Q

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor’s report

A

Material instances of fraud and illegal acts that were discovered.
In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, the auditor’s report should include only material instances of fraud and illegal acts discovered. A separate report identifying any instances of noncompliance found and any resulting questioned costs may also be required by federal audit regulations.

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16
Q

The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits.
Which of the following is a supplemental reporting standard for government financial audits?

A

A written report on the auditor’s understanding of the entity’s internal control structure and assessment of control risk should be prepared.
GAO reporting standards require a written report on the auditor’s understanding of the entity’s internal control (which, in turn, is used to assess control risk).

17
Q

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards?

A

An auditor should report on the scope of the auditor’s testing of internal controls.
Financial statement audits conducted in accordance with Government Auditing Standards include a report on the scope of the auditor’s testing of internal controls.

18
Q

The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the

A

Accounting and Review Services Committee.
The standards that address unaudited financial statements are the Statements on Standards for Accounting and Review Services.
These standards are issued by the AICPA’s Accounting and Review Services Committee.

19
Q

The clarified SSARSs deal with each of the following engagements involving nonissuers, except for

A

Performing agreed-upon procedures on financial statement items.
Agreed-upon procedures agreements are addressed by the Statements on Standards for Attestation Engagements, not SSARSs.

20
Q

The clarified SSARSs applicable to preparing financial statements (AR-C 70) apply to each of the following, except for

A

Preparing financial statements in connection with business valuation services.
AR-C 70 specifically does not apply to financial statements prepared in connection with business valuation services.

21
Q

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP).
Green asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years’ financial statements in comparative form. What is Clark’s responsibility concerning the proposed engagement?

A

Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures.
A CPA may not report on comparative financial statements when financial statements that both omit substantially all disclosures and include necessary disclosures are included. Financial statements that omit substantially all disclosures are not comparable to financial statements that include such disclosures.

22
Q

When an accountant is engaged to compile a nonpublic entity’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are

A

Not designed for those who are uninformed about the omitted disclosures.
Compilation of financial statements omitting substantially all disclosures required by GAAP would result in the issuance of a compilation report with a separate paragraph commenting on the omitted disclosures and indicating indicating that the financial statements are not designed for those who are uninformed about the omitted disclosures. The accountant must also believe that there is no intent to mislead those who might reasonably be expected to use such financial statements.

23
Q

When engaged to compile the financial statements of a nonpublic entity, 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.
This answer might be obtained by the “process of elimination” by determining that this is the “least bad answer” on the menu. In a compilation engagement, the accountant has a responsibility to obtain an understanding of the financial reporting framework and significant accounting policies associated with the entity’s financial statements. As a “precondition” for accepting the compilation engagement, the accountant is required to verify management’s understanding of a variety of management responsibilities (and document that with an engagement letter). The interaction that the accountant has with management and other accounting personnel makes it reasonably likely that the accountant will gain an understanding of the qualifications of personnel associated with the financial reporting process.

24
Q

Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?

A

Obtaining a representation letter from the chief executive officer.
In a review engagement, the accountant performs a limited set of procedures consisting of inquiries of management and analytical review. The accountant is also required to obtain a representation letter from management, which is typically signed by the CEO and CFO.

25
Q

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.
If the accountant concludes that it is appropriate to change the engagement from an audit to a review, the review report should not refer to the original (audit) engagement.

26
Q

Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that a review

A

Consists principally of inquiries of the entity’s management and analytical procedures applied to financial data.
A review report should include the statement that a review consists primarily of inquiries of management and analytical procedures applied to financial data.

27
Q

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 Statements on Standards for Accounting and Review Services?

A

Perform a reasonableness test of the balance by computing days’ sales in receivables.
The basis for conclusions in a review engagement consists primarily of inquiries and analytical procedures. An analytical procedure such as this might be performed.

28
Q

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate

A

The type of opinion expressed previously.
In these circumstances, AICPA standards require the accountant to add a separate paragraph to the review report stating (1) that the prior period’s financial statements were audited; (2) the date of the previous report; (3) the type of opinion expressed; (4) the reasons for any modification of the report; and (5) that no auditing procedures were performed after the date of the previous report.