Preparation, Compilation, Review, and Attestation II

Question 1

What is a situation that would be considered a “Partial Presentation?”

Answer 1

WHEN Prospective financial information is presented in a format of historical financial statements that omit either gross profit or net income

Question 2

What item(s) WHEN missing would create a “Partial Presentation” situation?

Answer 2

(1) sales or gross revenues
(2) gross profit or cost of sales
(3) unusual or infrequently occurring items
(4) provision for income taxes
(5) discontinued operations or extraordinary items
(6) income from continuing operations
(7) net income
(8) basic and diluted earnings per share; and
(9) significant changes in financial position

Question 3

What item(s) should be included in prospective financial statements issued in an attestation engagement?

Answer 3

All significant assumptions used to prepare the financial statements

NOTE: A CPA should NOT accept an engagement to compile, examine, or apply agreed-upon procedures to prospective financial statements if;

• the significant assumptions are not disclosed

Question 4

What is a statement that should be included in a preparation engagement of financial statements?

Answer 4

“No assurance is provided”

This should be on each page (including notes) of financial statements prepared by the CPA

Question 5

WHEN would accepting an engagement to compile a financial projection for an issuer be inappropriate?

Answer 5

WHEN the projection were intended for use by all shareholders of record as of the report date

Why? - Because Financial projections are not appropriate for general use

E.g. Persons the responsible party is not negotiating directly

Question 6

What should be the first step in reviewing the financial statements of a nonissuer?

Answer 6

Obtaining a general understanding of the entity’s organization; and

• its operating characteristics, and its products or services

Question 7

What is the difference between Prospective Financial Statements and Financial Projections?

Answer 7

Financial Projections - appropriate for limited use

Financial Forecasts - appropriate for general use

Note: Any type of prospective financial statements would normally be appropriate for limited use

E.g. a submission to a regulatory body or in negotiations for a bank loan

Question 8

What type of prospective financial statements engagement may a CPA NOT accept?

Answer 8

An engagement to perform a review

AT 301 does NOT provide for a review of prospective financial statements

Alternatively the CPA can perform a Compilation, Preparation, or apply agreed-upon procedures to prospective financial statements

Question 9

What is a similarity amongst the Preparation, Compilation, and Review services?

Answer 9

All three services allow the financial statements to be released to outside users

Question 10

What should NOT be included in a CPA’s report WHEN managements asks him to change their engagement from an audit to a review because of a restriction on the scope of the audit?

And the change is justified?

Answer 10

The report should NOT include any mention of;

• The Original Engagement that was agreed to; or
• Any Scope Limitations that caused the engagement change

Question 11

What services would NOT be considered preparation service under the Statements on Standards for Accounting and Review Services?

Answer 11

(1) Preparing a working trial balance
(2) Preparing standard monthly journal entries

Why? - Because these documents do NOT meet the criteria of Financial Statements; therefore NO GO on the preparation

Question 12

What is an accountant responsible for selecting in a SSARSs engagement?

Answer 12

The Procedures to be Applied in the Engagement

Note: IT’s Managements job to;

• Select the financial reporting framework

Question 13

What procedure should a CPA perform during an engagement to compile prospective financial statements?

Answer 13

He should make inquiries about the accounting principles used in the preparation of the prospective financial statements

E.g. He needs to determine the accounting principles to be used

Question 14

What documentation would be included in an accountant’s documentation of a compilation of a client’s financial statements?

Answer 14

(1) A memo to the CFO about a potentially significant fraud
(2) Inquiries (i.e. discussions) of management involving presentation of financial statement items
(3) An engagement letter

Question 15

What is the rule on predecessor auditor communication before accepting an audit or a review engagement?

Answer 15

(1) The accountant is required to communicate with the predecessor accountant before accepting an audit engagement
(2) The accountant may decide to communicate with the predecessor accountant before accepting a review engagement

Question 16

What is the purpose of a compliance EXAMINATION engagement?

Answer 16

To express an opinion on whether an entity is in compliance (or on whether the responsible party’s assertion about such compliance is fairly stated);

• in all material respects, based on the specified criteria

Question 17

What is a Preparation Engagement?

Answer 17

An engagement that does NOT require the accountant to determine whether he is independent of the entity

E.g. the accountant does NOT need to

• verify the accuracy or completeness of management’s information
• obtain evidence to express an opinion or a conclusion; or
• report on the financial statements

Question 18

What is another name for a Preparation and compilation service?

Answer 18

They are also referred to as “write-up services”

Question 19

What is a universal expectation in a SSARs engagement regardless of the service (e.g. Preparation, Compilation, Review) provided?

Answer 19

Unrestricted access to all information needed

E.g. The CPA should have access to all information that he needs and that management will get him everything he needs

Question 20

What action would a CPA most likely take if;

1. they are engaged to review a client’s financial statements; but
2. determine that the entity maintained its accounts on a special purpose framework other than generally accepted accounting principles (GAAP)?

Answer 20

The CPA would modify the review report to reflect the fact that the financial statements were presented on a special purpose framework

NOTE: A review report states that;

• the accountant is not aware of any material modifications that should be made to the statements for them to be in accordance with the applicable reporting framework, e.g., GAAP

Question 21

What should be included in the CPA’s established understanding with the entity regarding the services to be performed in a review engagement?

Answer 21

1. Provision that the engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations
2. Description of the report the accountant expects to issue
3. Description of the nature and limitations of the services to be performed