2. Other Reports Flashcards
In the standard report on summary financial statements that are derived from a public entity’s audited financial statements, a CPA should indicate that the:
a. Summary financial statements are prepared in conformity with another comprehensive basis of accounting.
b. CPA has audited and expressed an opinion on the complete financial statements.
c. Summary financial statements are not fairly presented in all material respects.
d. CPA expresses limited assurance that the financial statements conform with GAAP.
Choice “b” is correct. The auditor’s report on summary financial statements derived from audited statements should indicate (1) that the CPA audited and expressed an opinion on the complete financial statements, (2) the date of the auditor’s report on the complete financial statements, (3) the type of opinion expressed, and (4) whether, in the auditor’s opinion, the information set forth in the summary financial statements is consistent, in all material respects, with the audited financial statements from which it was derived.
The performance requirements applicable to a review are:
U LIAR CPA
Understanding with client should be established
Learn and/or obtain sufficient knowledge of entity’s business
Inquiries should be addressed to appropriate individuals
Analytical procedures should be performed
Review – other procedures should be performed
Client representation letter should be obtained from management
Professional judgement should be used to evaluate results
Accountant (CPA) should communicate results
An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with requirements of SSARS when both of the following conditions exist:
- The accountant establishes an understanding with the client that the financial statements will be used solely to assist the client in developing a financial plan and will not be used to obtain credit,
and - Nothing comes to the accountant’s attention during the engagement indicating that the financial statements will be used to obtain credit.
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
a. Regression analysis.
b. Trend analysis.
c. Ratio analysis.
d. Risk analysis.
Choice “c” is correct. Ratio analysis is often used to examine relationships between balance sheet accounts.
Choice “b” is incorrect. Trend analysis would be more appropriate for examining income statement accounts.
Choice “a” is incorrect. Regression analysis would not likely be used since twenty to thirty past observations are generally required to reliably
make estimates.
Choice “d” is incorrect. Risk analysis would not be used to evaluate relationships between balance sheet accounts.
The accountant’s Report in a Compilation engagement should include the following:
CAR - Complied, Not Reviewed or Audited
MR - Management Responsibility Paragraph
ARSOM - Accountant’s Responsibility, SSARS, Objective of a compilation is to assist Management.
What is the level of service: Review?
= Limited assurance
A CPA may express limited (negative) assurance on F/S that have not been audited.
What is the level of service: Compilation?
= No assurance
In a compilation engagement, the objective is to present in the form of financial statements information that is the representation of management without undertaking to express any assurance on the f/s. The CPA does not perform any audit or review procedures. Although a compilation is not an assurance engagement, it is an attest engagement.
What is SSARS?
The Accounting and Review Services Committee was established by the AICPA to establish standards for privately-held (non-issuer) companies not seeking audited statements. Statements on Standards for Accounting and Review Services (SSARS) are issued by this Committee, and they are applicable to unaudited financial statements or unaudited financial information of a nonpublic entity. SSARS are covered later in the course.
Pass Key
Complied F/S’s that omit GAAP Disclosures are acceptable if the: (3)
- F/S’s are otherwise in conformity with GAAP
- Reason for omission was not to deceive the user.
- Compilation report warns the user of missing disclosures.
What is the first step in reviewing the financial statements of a nonissuer?
d. Obtaining a general understanding of the entity’s organization, its operating characteristics, and its products or services:
a. The objectives of the engagement
b. Management’s Responsibilities
c. The accountant’s Responsibilities
d. The limitations of engagement
What is submission?
SSARS Applicability
Submission is defined as as presenting F/S to a client or third party that the accountant has prepared, either manually or through the use of computer software.
Which of the following statements would normally be included in a representation letter for a review of interim financial information?
Management’s representation should include:
1) Management’s responsibility for the preparation and fair presentation of the F/S and their belief that they are fairly stated. [DATED completion of review procedures performed]
2) Management’s acknowledgement of its responsibility for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the F/S.
3) Management’s full and truthful responses to all inquiries.
4) Representations about the completeness of information.
5) Information concerning subsequent events
6) Acknowledgement of management’s responsibility to prevent/detect fraud.
7) Knowledge of any material fraud or suspected fraud.
8) Additional representations related to matters specific to the entity’s business and industry.
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. That the CPA did not update the assessment of control risk.
b. The reasons for the change from an audit to a review.
c. The type of opinion expressed previously.
d. That the audit report should no longer be relied on.
Choice “c” is correct. When the prior period has been audited, the accountant should issue the current period compilation or review report,
and any additional paragraph should indicate:
-That prior period statements were audited;
-The date of the previous report(s);
-The opinions expressed, and, if other than unmodified, the reasons for the modification; and
-That no auditing procedures have been performed since the
previous report date.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:
[OLD CPA should:]
a. Read the statement and the report of the current period; b. Compare the prior period statements with those issued previously and currently; and c. Obtain a letter from the successor accountants stating that they are NOT aware of any relevant information that might have a material effect on the prior period statements.
An auditor may report on summary financial statements that are derived from complete financial statements if the:
a. Summary financial statements are presented in comparative form with the prior year’s summary financial statements.
b. Auditor describes the additional procedures performed on the summary financial statements.
c. Auditor indicates whether the information in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.
d. Summary financial statements are distributed to stockholders along with the complete financial statements.
Choice “c” is correct. An auditor may report on summary financial statements that are derived from financial statements that he or she has audited, indicating (1) that he or she has audited and expressed an opinion on the complete financial statements, (2) the date of the auditor’s report, (3) the type of opinion expressed, and (4) that the information contained in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.
