Other Types of Reports

Question 1

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

Answer 1

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 2

What is meant by the term advisory accountant?

Answer 2

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 3

What is meant by the term reporting accountant?

Answer 3

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 4

What is meant by the term hypothetical transaction?

Answer 4

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

Question 5

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 5

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 6

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 6

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 7

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

Answer 7

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 8

What is meant by the term specific transaction?

Answer 8

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

Question 9

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 9

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 10

Which special purpose frameworks require an other-matter paragraph in the auditor’s report to restrict the distribution of the report to specified users?

Answer 10

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 11

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

Answer 11

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

Question 12

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 12

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 13

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 13

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 14

What is meant by the term special purpose framework?

Answer 14

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, or 4. Contractual basis.

Question 15

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 15

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 16

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 16

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 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

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

Answer 19

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 20

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 20

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 21

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 21

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 22

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 22

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 23

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 23

1. The auditor did not identify any instances of noncompliance; 2. The auditor expressed an unmodified or qualified opinion on the financial statements; and 3. The covenants or regulatory requirements involved were subject to audit procedures.

Question 24

What is meant by the term complementary user entity controls?

Answer 24

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 25

What is meant by the term service auditor?

Answer 25

A practitioner who reports on controls at a service organization.

Question 26

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

Answer 26

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 27

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 27

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 28

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

Answer 28

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 29

What is meant by the term user auditor?

Answer 29

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

Question 30

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 30

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 31

What is meant by the term user entity?

Answer 31

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

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 organization?

Answer 33

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 34

What is meant by the term type 1 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 of internal controls at the service organization – whether the control policies and procedures are suitably designed and placed in operation.

Question 35

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

Answer 35

(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 36

What is meant by the term user auditor?

Answer 36

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

Question 37

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

Answer 37

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 38

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

Answer 38

(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 39

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

Answer 39

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

Question 40

What is meant by the term service auditor?

Answer 40

A practitioner who reports on controls at a service organization.

Question 41

What is meant by the term user entity?

Answer 41

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

Question 42

What is meant by the term service organization?

Answer 42

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 43

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

Answer 43

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 44

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

Answer 44

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 45

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

Answer 45

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. (Note: Comfort letters are not required by, and are not filed with, the SEC.)

Question 46

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

Answer 46

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 47

To whom should a comfort letter be addressed?

Answer 47

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

Question 48

To what matters should the independent accountant provide a comfort letter (positive assurance)?

Answer 48

The independent accountant should give positive assurance (an opinion) only as to whether the audited financial statements comply with the form and content required by the SEC.

Question 49

When is a comfort letter usually dated?

Answer 49

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

Question 50

Describe the Single Act of 1984.

Answer 50

An Act requiring state and local governmental entities receiving federal assistance aggregating at least $500,000 in a fiscal year to be audited according to the Single Audit Act.

Question 51

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

Answer 51

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 52

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

Answer 52

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

Question 53

What are the requirements of the Single Audit Act?

Answer 53

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

Question 54

To whom does the general and specific requirements of the Government Auditing Standards apply?

Answer 54

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

Question 55

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

Answer 55

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

Question 56

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

Answer 56

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 57

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

Answer 57

The auditor should communicate the following matters with those charged with governance: The auditor’s responsibilities under GAAS; The auditor’s responsibilities under GAGAS and the governmental audit requirements; An overview of the planned scope and timing of the compliance audit; and Any significant findings.

Question 58

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

Answer 58

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 59

What are the objectives of the “compliance audit”?

Answer 59

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

Question 60

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

Answer 60

The auditor should document: The risk assessment procedures performed; The responses to the assessed risks of material noncompliance; The basis for materiality levels; and The compliance with applicable “supplementary audit requirements.”

Question 61

Define “governmental audit requirement.”

Answer 61

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 62

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

Answer 62

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 63

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

Answer 63

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

Question 64

What standards cover reviews and compilations for nonissuers?

Answer 64

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

Question 65

Define “explanatory material” as outlined in the Statements on Auditing Standards.

Answer 65

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 66

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

Answer 66

Unconditional requirements; and Presumptively mandatory requirements.

Question 67

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

Answer 67

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 68

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

Answer 68

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 69

Describe the documentation requirements for compilation engagement.

Answer 69

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 70

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

Answer 70

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 71

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

Answer 71

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 72

What is the accountant’s responsibility regarding the establishment of understanding with the client regarding a compilation engagement?

Answer 72

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 73

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

Answer 73

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 74

What is the accountant’s responsibility for establishing an understanding regarding review engagements?

Answer 74

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 75

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

Answer 75

If the financial statements will not be used for any other purpose, a “compilation” report is not required; 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 76

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 76

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 77

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

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 accountant’s responsibility when a compilation report prescribed form differs from Generally Accepted Accounting Principles (GAAP)?

Answer 78

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

Question 79

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

Answer 79

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 80

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

Answer 80

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 81

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

Answer 81

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 82

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

Answer 82

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

Question 83

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

Answer 83

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 84

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 84

The accountant must either: Issue a compilation report; or 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.