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Flashcards in A2-2 Deck (100)
1

Which of the following is true about management representations obtained during an engagement to review the financial statements of a nonissuer?

a.

Written representations from the current management are required for all periods being reported on.

b.

Written representations need not include information concerning subsequent events.

c.

Written representations should be addressed to members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter.

d.

Written representations with respect to prior periods should not be provided by the current management if they were not present during those periods.

Choice "a" is correct. Written representations from the current management are required for all periods being reported on.

Choice "d" is incorrect. Written representations from the current management are required for all periods being reported on, even if the current management was not present during all such periods.

Choice "c" is incorrect. Written representations should be addressed to the accountant. The letter should be signed by members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter.

Choice "b" is incorrect. Written representations should include information concerning subsequent events.

2

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?

~~Inability to assess the risk of material misstatement due to fraud
~~Discovery of significant deficiencies in the design of the entity's internal control
a.

No

Yes

b.

No

No

c.

Yes

Yes

d.

Yes

No

Choice "b" is correct. Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer.

Choices "c", "d", and "a" are incorrect, based on the above explanation.

3

An accountant has compiled the financial statements of a nonissuer but declines to issue a compilation report. This is an example of:

a.

An inappropriate reporting decision, because SSARS require that a report be issued when an accountant has compiled financial statements.

b.

An appropriate reporting decision, if the accountant is not independent with respect to the nonpublic entity.

c.

An appropriate reporting decision, if the compiled financial statements are not expected to be used by a third party.

d.

An appropriate reporting decision, as long as the financial statements are prepared in conformity with GAAP.

Choice "a" is correct. SSARS requires compiled financial statements to be accompanied by a compilation report.

Choice "b" is incorrect. SSARS requires compiled financial statements to be accompanied by a compilation report. Note that an accountant who lacks independence is still permitted to compile financial statements of a nonissuer entity as long as lack of independence is disclosed.

Choice "c" is incorrect. SSARS requires compiled financial statements to be accompanied by a compilation report even if the financial statements are not expected to be used by a third party.

Choice "d" is incorrect. SSARS requires compiled financial statements to be accompanied by a compilation report. Compiled financial statements may be prepared using a framework other than GAAP, such as a special purpose framework or IFRS.

4

An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:

I.

Each page of the financial statements is clearly marked to restrict its use.

II.

A written engagement letter is used to document the understanding with the client.

III.

A written representation letter is obtained from the client's management.

I
II
III
a.

No

No

Yes

b.

Yes

No

Yes

c.

No

No

No

d.

Yes

Yes

No

Choice "c" is correct. SSARS requires compiled financial statements to be accompanied by a compilation report even if the financial statements are not expected to be used by a third party.

Choice "b", "d", and "a" are incorrect, per above explanation.

5

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:

I.

Reproducing client-prepared financial statements without modification, as an accommodation to a client.

II.

Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.

a.

Neither I nor II.

b.

Both I and II.

c.

I only.

d.

II only.

Choice "a" is correct. An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when engaged to prepare, compile, or review the financial statements. An accountant who reproduces client-prepared financial statements has not prepared those statements. Preparation of standard monthly journal entries is a bookkeeping service that also does not involve preparation of financial statements.

Choices "c", "d" and "b" are incorrect, based on the above explanation.

6

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:

a.

Express no assurance of any kind on the entity's financial statements.

b.

Issue an adverse opinion because of the departure from GAAP.

c.

Emphasize that the financial statements are for limited use only.

d.

Disclose the departure from GAAP in a separate paragraph of the accountant's report.

 

Choice "d" is correct. Failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the standard review report or withdraw from the engagement. If modification to the report is sufficient to disclose the departure from GAAP, then the accountant may modify the review report.

Choice "b" is incorrect. An opinion is not issued with a review report. Instead, the report may be modified to disclose the departure from GAAP.

Choice "a" is incorrect. The accountant may still provide limited assurance with respect to the entity's financial statements in the review report, as long as the departures from GAAP are disclosed. An additional paragraph should be added at the end of the review report and should state, "Based on my review, except for the issue noted in the Known Departures From Accounting Principles Generally Accepted in the United States of America paragraph, I am not aware of any material modifications…"

Choice "c" is incorrect. There is no need for the auditor to restrict the use of the financial statements.

7

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

a.

Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

b.

Provides only limited assurance that the financial statements are fairly presented.

c.

Is substantially less in scope than an audit.

d.

Includes examining, on a test basis, information that is the representation of management.

Choice "c" is correct. Financial statements reviewed by an accountant should be accompanied by a report stating that a review is substantially less in scope than an audit. 

Choice "b" is incorrect. The review report provides limited assurance that the accountant is not aware of any material modifications that need to be made to the accompanying financial statements. The terms "presented fairly" are used in the opinion paragraph of the audit report.

Choice "d" is incorrect. Examination of client information is part of an audit engagement, not a review engagement.

Choice "a" is incorrect. While this statement is true, it is not explicitly stated in the accountant's review report.

8

Financial statements of a nonissuer compiled without audit or review by an accountant should be accompanied by a report stating that:

a.

The accountant evaluated the appropriateness of the accounting principles used and the reasonableness of significant accounting estimates made by management.

b.

The accountant has not audited or reviewed the financial statements.

c.

The scope of the accountant's procedures has not been restricted in testing the financial information that is the representation of management.

d.

A compilation includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

Choice "b" is correct. Financial statements compiled by an accountant should be accompanied by a report stating that the financial statements have not been audited or reviewed.

Choice "c" is incorrect. There is no discussion of the scope of the accountant's procedures in a compilation report.

Choice "a" is incorrect. This statement is part of an audit report, not the accountant's compilation report.

Choice "d" is incorrect. It is a review report, not a compilation report, that states that a review includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

9

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

a.

Independent because the financial interest is immaterial and, therefore, may issue a review report.

b.

Not independent and, therefore, may not issue a review report.

c.

Not independent and, therefore, may issue a review report, but may not issue an auditor's opinion.

d.

Not independent and, therefore, may not be associated with the financial statements.

Choice "b" is correct. An accountant with an immaterial direct financial interest in a client is no longer independent with respect to that client. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. If the accountant is not independent, he may issue a compilation report provided he complies with the compilation standards.

Choice "d" is incorrect. An accountant who is not independent may still be associated with the financial statements; for example, by performing a compilation engagement.

Choice "c" is incorrect. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent.

Choice "a" is incorrect. An accountant with any direct financial interest in a client (even an immaterial interest) is no longer independent with respect to that client.

10

Kell engaged March, CPA, to prepare to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement's sole purpose is to assist Kell in developing a personal financial plan. March is:

a.

Required to follow SSARS if the omitted disclosures required by GAAP are material.

b.

Not required to follow SSARS because preparing written personal financial plans are excluded from SSARS requirements.

c.

Required to follow SSARS if the financial statements will be presented in comparative form with those of the prior period.

d.

Not required to follow SSARS if Kell agrees the financial statements will not be disclosed to a non-CPA financial planner.

Choice "b" is correct. SSARS explicitly states that SSARS does not apply when an accountant prepares personal financial statements for inclusion in written personal financial plans. Other situations where SSARS does not apply is when the accountant prepares financial statements:

solely for submission to taxing authorities,

in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or

in conjunction with business valuation services.

 

Choice "c" is incorrect. The presentation of comparative financial statements does not determine whether or not SSARS should be followed.

Choice "a" is incorrect. The omission of disclosures does not determine whether or not SSARS should be followed.

Choice "d" is incorrect. The client is not required to agree that the financial statements will not be disclosed to a non-CPA financial planner.

11

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.

Ratio analysis.

b.

Regression analysis.

c.

Trend analysis.

d.

Risk analysis.

Choice "a" is correct. Ratio analysis is often used to examine relationships between balance sheet accounts. 

Choice "c" is incorrect. Trend analysis would be more appropriate for examining income statement accounts. 

Choice "b" 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.

12

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

a.

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

b.

Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

c.

Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors.

d.

Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.

Choice "a" is correct. In a compilation engagement, the accountant should read the financial statements for obvious material misstatements.

Choice "d" is incorrect. Compiled financial statements may be used to obtain credit. 

Choice "c" is incorrect. As part of a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements. Inquiry is not part of a compilation engagement.

Choice "b" is incorrect. Analytical procedures are part of a review engagement, but not necessary for a compilation engagement.

13

Compiled financial statements should be accompanied by an accountant's report stating that:

a.

A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.

b.

The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.

c.

A compilation includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.

d.

The accountant conducted the compilation in accordance with Statements on Standards for Accounting and Review Services.


Explanation

Choice "d" is correct. Compiled financial statements should be accompanied by a report stating that the compilation was conducted in accordance with SSARS promulgated by the Accounting and Review Services Committee of the AICPA.

Choice "c" is incorrect. An audit, not a compilation, includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.

Choice "a" is incorrect. A review report, not a compilation report, includes the phrase, "is substantially less in scope than an audit."

Choice "b" is incorrect. The accountant expresses no such assurance in a compilation engagement; limited assurance (i.e., "…accountant is not aware of…") is expressed in a review engagement.

14

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the:

a.

Balance sheet is presented in a prescribed form of an industry trade association.

b.

Scope of the inquiry and analytical procedures has not been restricted.

c.

Balance sheet is not to be used to obtain credit or distributed to creditors.

d.

Specialized accounting principles and practices of Dover's industry are disclosed.

Choice "b" is correct. An accountant may issue a review report on one financial statement, such as a balance sheet, and not on other related financial statements, if the scope of the accountant's inquiry and analytical procedures has not been restricted.

Choice "a" is incorrect. The balance sheet need not be presented in a prescribed form of an industry trade association.

Choice "c" is incorrect. There is no limitation on the use of a reviewed financial statement.

Choice "d" is incorrect. Specialized accounting principles should be considered by the accountant when performing the review, but need not be disclosed.

15

Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts and fraud that materially affect Hall's financial statements. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements, Baker should:

a.

Withdraw from the engagement.

b.

Disclaim an opinion.

c.

Issue a qualified opinion.

d.

Issue an adverse opinion.

Choice "a" is correct. If the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements taken as a whole, the accountant should withdraw from the review engagement and provide no further services with respect to those financial statements. Note that the accountant should also request that management consider the effect of the scheme on the financial statements.

Choice "b" is incorrect. Since Baker believes modification of the standard report is not adequate, a disclaimer is inappropriate. Baker should withdraw from the engagement.

Choices "d" and "c" are incorrect. No opinion may be given based on a review engagement.

16

An accountant is most likely required to follow Statements on Standards for Accounting and Review Services (SSARS) when the accountant has:

a.

Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.

b.

Provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements.

c.

Using the information in a general ledger to prepare financial statements outside of an accounting software system.

d.

Typed client-prepared financial statements, without modification, as an accommodation to the client.

Choice "c" is correct. SSARS apply when an accountant prepares, compiles, or reviews financial statements. Using information in the general ledger to prepare financial statements outside an accounting software system is considered a preparation engagement.

Choice "d" is incorrect. Typing or reproducing client-prepared financial statements, without modification, as an accommodation to a client does not constitute preparation of financial statements because the accountant has not prepared those statements.

Choice "b" is incorrect. Providing a client with a financial statement format does not constitute preparation of financial statements and, therefore, this does not fall within the guidelines of SSARS.

Choice "a" is incorrect. Proposing correcting journal entries does not constitute preparation of financial statements. Even entering general ledger transactions or processing payments (general bookeeping) in an accounting system does not constitute a preparation engagement because it is considered merely "assisting " in preparing the financial statements (bookkeeping service.)

17

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer in accordance with Statement on Standards for Accounting and Review Services?

a.

Observing the safeguards over access to and use of assets and records.

b.

Studying the relationships of financial statement elements expected to conform to predictable patterns.

c.

Comparing the financial statements with anticipated results in budgets and forecasts.

d.

Inquiring of management about actions taken at the board of directors' meetings.

Choice "a" is correct. Observing safeguards over access to and use of assets and records is part of the study and evaluation of the client's internal control; such an evaluation is not conducted in a review in accordance with SSARS.

Choice "c" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

Choice "d" is incorrect. As part of a review engagement, the accountant inquires of management about actions taken at the board of directors' meetings.

Choice "b" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

18

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

a.

Sending bank confirmation letters to the entity's financial institutions.

b.

Examining cash disbursements in the subsequent period for unrecorded liabilities.

c.

Obtaining a client representation letter from members of management.

d.

Communicating significant deficiencies discovered during the assessment of control risk.

Choice "c" is correct. An accountant performing a review is required to obtain a client representation letter from the owner, manager, or chief executive officer, and, if appropriate, the chief financial officer.

Choice "d" is incorrect. A review does not require an assessment of control risk.

Choice "a" is incorrect. Confirmation is a substantive audit procedure that is not appropriate for a review engagement.

Choice "b" is incorrect. A search for unrecorded liabilities is an audit procedure that is not appropriate for a review engagement.

19

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the:

~~Scope limitation that caused the changed engagement
~~Original engagement that was agreed to
a.

Yes

No

b.

No

Yes

c.

Yes

Yes

d.

No

No

Choice "d" is correct. If the accountant concludes that there is reasonable justification to change the engagement, the accountant's review report should not include reference to the original engagement, to any auditing procedures that may have been performed, or to the scope limitation that resulted in the changed engagement.

Choices "a", "b", and "c" are incorrect, per above explanation.

20

Which of the following statements should be included in an accountant's standard report based on the compilation of a nonissuer's financial statements?

a.

A compilation is not designed to detect material modifications that should be made to the financial statements.

b.

A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.

c.

The accountant does not express an opinion, a conclusion, nor provide any form of assurance on the financial statements.

d.

A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards.

Choice "c" is correct. The accountant's compilation report should state that the accountant does not express an opinion, a conclusion, nor provide any form of assurance on the financial statements.

Choice "b" is incorrect. A review (not a compilation) consists principally of inquiries of management and analytical procedures applied to financial data.

Choice "a" is incorrect. While a compilation is not designed to detect material misstatements in the financial statements, no mention of this limitation is made in the compilation report.

Choice "d" is incorrect. The review report states that a review is substantially less in scope than an audit.

21

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?

~Compilation

~Review
a.

No

No

b.

Yes

Yes

c.

No

Yes

d.

Yes

No

Choice "b" is correct. Knowledge of the accounting principles and practices of the industry is required in order to perform a compilation or review engagement; however, there is no requirement that such knowledge be obtained prior to accepting such an engagement.

Choices "a", "d", and "c" are incorrect, per the above explanation.

22

Which of the following procedures most likely would not be included in a review engagement of a nonissuer?

a.

Considering whether the financial statements conform with GAAP.

b.

Assessing control risk.

c.

Inquiring about subsequent events.

d.

Obtaining a management representation letter.

Choice "b" is correct. An accountant is not required to assess control risk as part of a review engagement. Assessment of control risk would be appropriate for an audit engagement.

Choice "d" is incorrect. Obtaining a management representation letter is an appropriate review procedure.

Choice "a" is incorrect. Considering whether the financial statements are in accordance with GAAP is an appropriate review procedure.

Choice "c" is incorrect. Inquiring of management regarding subsequent events is an appropriate review procedure.

23

An accountant may compile a nonissuer's financial statements that omit all of the disclosures required by GAAP only if the omission is:

I.

Clearly indicated in the accountant's report.

II.

Not undertaken with the intention of misleading the financial statement users.

a.

Both I and II.

b.

I only.

c.

Neither I or II.

d.

II only.

Choice "a" is correct. An accountant may issue a compilation report for a client's financial statements that omit all required GAAP disclosures, provided the omission is not intended to mislead financial statement users and the omission is clearly indicated in the accountant's report.

Choices "b", "d", and "c" are incorrect, per the above explanation.

24

An accountant's standard report on a review of the financial statements of a nonissuer should state that the accountant:

a.

Does not express an opinion or any form of limited assurance on the financial statements.

b.

Obtained reasonable assurance about whether the financial statements are free of material misstatement.

c.

Is not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with GAAP.

d.

Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

Choice "c" is correct. The accountant's report on a review engagement should state that the accountant is not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with GAAP. 

Choice "a" is incorrect. An accountant expresses limited assurance in a review engagement.

Choice "b" is incorrect. "Reasonable assurance about whether the financial statements are free of material misstatement" is required for audit engagements, but is not necessary for review engagements.

Choice "d" is incorrect. Examining evidence on a test basis is required for an audit engagement; procedures for a review engagement are limited to inquiry and analytical procedures.

25

When performing an engagement to review a nonissuer's financial statements in accordance with Statements on Standards for Accounting and Review Services, an accountant most likely would:

a.

Ask about actions taken at board of directors' meetings.

b.

Confirm a sample of significant accounts receivable balances.

c.

Obtain an understanding of internal control.

d.

Restrict the use of the accountant's report.

Choice "a" is correct. As part of the inquiries made during a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements.

Choice "b" is incorrect. Certain procedures, such as confirmation of receivables and observation of inventory, are customarily performed in an audit but not in compilation or review engagements.

Choice "c" is incorrect. A review engagement performed in accordance with SSARS does not include obtaining an understanding of the client's internal control.

Choice "d" is incorrect. The accountant would not normally restrict the use of the review report.

26

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should:

a.

Express positive assurance on the accounting principles that conform with GAAP.

b.

Express negative assurance on the accounting principles that do not conform with GAAP.

c.

Issue an adverse or an "except for" qualified opinion, depending on materiality.

d.

Disclose the departure from GAAP in a separate paragraph of the report.

Choice "d" is correct. If the accountant concludes that modification of the standard report is appropriate, the departure should be disclosed in a separate paragraph of the report. This paragraph should appear after the Accountant's Conclusion paragraph under the heading "Known Departures from Accounting Principles Generally Accepted in the United States of America."

Choice "b" is incorrect. An accountant would not express negative assurance on the accounting principles that do not conform with GAAP in a review engagement.

Choice "c" is incorrect. An accountant would not issue an opinion in a review engagement.

Choice "a" is incorrect. An accountant would not express positive assurance (i.e., an opinion) on the accounting principles that conform with GAAP in a review engagement.

27

Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer's financial statements?

a.

The financial statements have not been audited.

b.

A compilation consists principally of inquiries and analytical procedures.

c.

The accountant is independent with respect to the entity.

d.

The accountant does not express any assurance on the financial statements.

Choice "c" is correct. If the accountant is not independent, he should specifically disclose the lack of independence. Otherwise, independence is implied.

Choice "a" is incorrect. The report accompanying compiled financial statements explicitly states that the financial statements have not been audited.

Choice "b" is incorrect. Inquiry and analytical procedures are not performed in a compilation engagement.

Choice "d" is incorrect. The report accompanying compiled financial statements explicitly states that the accountant provides no assurance on the financial statements.

28

Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer's financial statements?

a.

Analytical procedures designed to test management's assertions regarding continued existence.

b.

Analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.

c.

Inquiries concerning the entity's procedures for recording and summarizing transactions.

d.

Inquiries of the entity's attorney concerning contingent liabilities.

Choice "c" is correct. When reviewing a nonissuer's financial statements, an accountant ordinarily makes inquiries concerning the entity's procedures for recording and summarizing transactions.

Choices "b", "a", and "d" are incorrect. The following audit procedures generally are not performed in a review engagement:

b.

Tests of the accounting records.

a.

Tests of management's assertions regarding continued existence.

d.

Inquiries of the entity's attorney concerning contingent liabilities.

29

Which of the following procedures is usually performed by the accountant in a review engagement of a nonissuer performed in accordance with Statements on Standards for Accounting and Review Services?

a.

Confirming a significant percentage of receivables by direct communication with debtors.

b.

Comparing the financial statements with statements for comparable prior periods.

c.

Sending a letter of inquiry to the entity's lawyer.

d.

Communicating significant deficiencies discovered during the study of the internal control structure.

Choice "b" is correct. Comparing the financial statements with statements for comparable prior periods (analytical procedures) is a procedure that is usually performed by the accountant in a review engagement of a nonissuer.

Choice "c" is incorrect. Sending a letter of inquiry to the entity's lawyer is a procedure generally performed only in an audit of an entity's financial statements.

Choice "a" is incorrect. Confirming a significant percentage of receivables by direct communication with debtors is a procedure generally performed only in an audit of an entity's financial statements.

Choice "d" is incorrect. The internal control structure is generally not evaluated in a review engagement that is performed in accordance with SSARS.

30

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

a.

Gaining an understanding of the entity's business transactions.

b.

Assisting the entity in adjusting the accounting records.

c.

Obtaining a representation letter from the chief executive officer.

d.

Making a preliminary assessment of control risk.

Choice "c" is correct. Obtaining a representation letter from the CEO is more likely to be performed in a review engagement of a nonissuer (where obtaining the letter is required) than in a compilation engagement.

Choice "a" is incorrect. Gaining an understanding of the entity's business transactions would be performed in both a compilation and a review engagement.

Choice "d" is incorrect. Making a preliminary assessment of control risk would only be performed in an audit, not in a compilation or review.

Choice "b" is incorrect. Assisting the entity in adjusting (compiling) the accounting records is more likely to be performed in a compilation engagement than in a review.

31

Which of the following procedures would most likely be included in a review engagement of a nonissuer?

a.

Preparing a bank transfer schedule.

b.

Inquiring about related party transactions.

c.

Assessing the internal control structure.

d.

Performing cutoff tests on sales and purchases transactions.

Choice "b" is correct. A review engagement is based on inquiry and analytical procedures. Inquiring about related party transactions is a procedure which would most likely be included in a review engagement of a nonpublic entity.

Choice "a" is incorrect. Preparing a bank transfer schedule pertains to an audit engagement.

Choice "c" is incorrect. Assessing the internal control structure pertains to an audit engagement.

Choice "d" is incorrect. Performing cutoff tests on sales and purchases transactions pertains to an audit engagement.

32

Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker's attention that indicated substantial doubt as to Hall's ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall's financial statements. Which of the following statements best describes Baker's reporting responsibility concerning this matter?

a.

Baker should issue an accountant's compilation report instead of a review report.

b.

Baker is not required to modify the accountant's review report.

c.

Baker should express a qualified opinion in the accountant's review report.

d.

Baker is not permitted to modify the accountant's review report.

Choice "b" is correct. Since the principal conditions and events that caused the substantial doubt as to the company's ability to continue as a going concern have been fully disclosed in the notes to Hall's financial statements, Baker is not required to modify the accountant's review report. Baker may, however, choose to emphasize this issue in the report.

Choice "d" is incorrect. The auditor is permitted to modify his review report as he/she feels appropriate in the circumstances.

Choice "a" is incorrect. Baker did not perform a compilation; therefore, a compilation report would not be appropriate.

Choice "c" is incorrect. Since the facts have been fully disclosed in the notes to the financial statements, no modification to the review report is required. Also, an opinion is never expressed based on a review engagement.

33

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.

Financial Accounting Standards Board.

b.

Accounting and Review Services Committee.

c.

General Accounting Office.

d.

Auditing Standards Board.

Choice "b" is correct. The accounting and review services committee is the authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer (i.e., an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities).

Choice "a" is incorrect. The Financial Accounting Standards Board (FASB) is responsible for GAAP standards.

Choice "c" is incorrect. The General Accounting Office (GAO) is responsible for audit standards under the federal "Single Audit Act." 

Choice "d" is incorrect. The Auditing Standards Board (ASB) is responsible for auditing standards under GAAS.

34

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for:

a.

A compilation engagement.

b.

The highest level of service rendered.

c.

A review engagement.

d.

The lowest level of service rendered.

Choice "b" is correct. When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for the highest level of service rendered.

Choices "d", "a", and "c" are incorrect. The report should be appropriate for the highest level of service rendered.

35

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review:

a.

Is substantially less in scope than an audit.

b.

Is substantially more in scope than a compilation.

c.

Provides negative assurance that the internal control structure is functioning as designed.

d.

Provides only limited assurance that the financial statements are fairly presented.

Choice "a" is correct. An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review is substantially less in scope than an audit. (This is why you have to "memorize" the key phrases in the review and compilation reports.)

Choice "c" is incorrect. The review report does not provide assurance related to internal control.

Choice "d" is incorrect. A review does provide limited assurance as to GAAP, but this is not the appropriate wording for the report.

Choice "b" is incorrect. Review report language compares a review with an audit, not with a compilation.

36

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

a.

The entity prepares its financial statements on the income tax basis of accounting.

b.

The entity requests the accountant to report only on the balance sheet, and not on the other financial statements.

c.

The entity does not have reasonable justification for making a change in accounting principle.

d.

The entity declines to provide the accountant with a signed representation letter.


Explanation

Choice "d" is correct. The accountant is required to obtain a representation letter from management. When the client does not provide such a letter, the review is incomplete and the accountant may not issue the review report.

Choice "c" is incorrect. Lack of a reasonable justification for a change in accounting principle is a departure from GAAP, generally resulting in a modified report. It would not require the accountant to withdraw from the engagement.

Choice "a" is incorrect. The income tax basis is a special purpose framework. It is acceptable for an auditor to review special purpose financial statements and there would be no need to withdraw.

Choice "b" is incorrect. A review engagement may involve reporting on only one financial statement as long as the scope of the engagement is not limited. There would be no need to withdraw in this circumstance.

37

Which of the following is not true about documentation requirements related to a review of a nonissuer's financial statements?

a.

Documentation should include the results of analytical procedures.

b.

A management representation letter should be included in the documentation files.

c.

The auditor must document evidence obtained about the operating effectiveness of controls.

d.

Written documentation from a compilation engagement may be used to provide support for the review report.

Choice "c" is correct. The accountant is not required to evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity's financial statements.

Choice "d" is incorrect. Written documentation from other types of engagements may be used to provide support for the review report.

Choice "b" is incorrect. A management representation letter should be obtained in review engagements, and a copy should be included in the documentation files.

Choice "a" is incorrect. Documentation should include the results of analytical procedures (i.e., procedures performed, expectations and how they were developed, results of comparison to recorded amounts, and procedures performed with respect to significant differences).

38

An accountant performing a compilation or review of the financial statements of a nonissuer should:

a.

Never depart from SSARS guidelines.

b.

Not depart from Statements on Auditing Standards.

c.

Be able to justify departures from SSARS.

d.

Exercise professional judgment in applying SSARS, since they are considered recommendations as opposed to standards.

Choice "c" is correct. An accountant should be able to justify departures from SSARS.

Choice "a" is incorrect. An accountant may occasionally depart from SSARS guidelines, but should be prepared to justify such departures.

Choice "d" is incorrect. While it is true that an accountant should exercise professional judgment in applying SSARS, it is not true that SSARS are considered recommendations. SSARS are professional standards, which the accountant should generally follow.

Choice "b" is incorrect. Statements on Auditing Standards do not apply to compilations or reviews of the financial statements of a nonissuer.

39

When performing an engagement to review a nonissuer's financial statements in accordance with Statements on Standards for Accounting and Review Services, an accountant most likely would:

a.

Ask about actions taken at board of directors' meetings.

b.

Confirm a sample of significant accounts receivable balances.

c.

Limit the distribution of the accountant's report.

d.

Obtain an understanding of the entity's internal control.

Choice "a" is correct. A review is based on inquiry and analytical procedures. The accountant should inquire about actions authorized by the stockholders, the board of directors, or other management groups.

Choice "d" is incorrect. The accountant is not required to obtain an understanding of internal control in a review engagement under SSARS. An understanding would be required in an audit or in a review of the interim financial statements for an issuer and nonissuer (when the annual financial statements are audited).

Choice "c" is incorrect. Distribution of a review report is not limited; however, each page of the financial statements should be marked, "See Independent Accountant's Review Report."

Choice "b" is incorrect. Confirmation is an auditing procedure used to corroborate stated account balances. A review is based on inquiry and analytical procedures, and would not include confirmation of balances.

40

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

a.

Completing a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions.

b.

Comparing the financial statements with statements for comparable prior periods and with anticipated results.

c.

Applying analytical procedures designed to identify relationships and individual items that appear to be unusual.

d.

Obtaining a general understanding of the entity's organization, its operating characteristics, and its products or services.

Choice "d" is correct. In reviewing the financial statements of a nonissuer, the accountant's first step would be to obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

Choices "b", "a", and "c" are incorrect. Inquiry and analytical review procedures would be performed after a general understanding of the client is obtained. This understanding will help the accountant more appropriately tailor the inquiry and analytical review procedures to the specific client engagement.

41

Which of the following would be used on a review engagement?

a.

Examination of loan documents.

b.

Confirmation of cash and accounts receivable.

c.

Comparison of current-year to prior-year account balances.

d.

Recalculation of depreciation expense.

Choice "c" is correct. A review consists of inquiries and analytical procedures. Comparison of current year and prior year account balances is an analytical procedure that would often be performed as part of a review.

Choice "a" is incorrect. Examining loan documents is an audit procedure that would not typically be performed in a review.

Choice "b" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not typically be performed in a review.

Choice "d" is incorrect. Recalculation of expenses is an audit procedure that would not typically be performed in a review.

42

Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

a.

An accountant must explain a lack of independence in the review report.

b.

A review provides an accountant with a basis for expressing limited assurance on the financial statements.

c.

An accountant must obtain an understanding of the client's internal control when performing a review.

d.

A review report contains an accountant's opinion of the financial statements taken as a whole.

Choice "b" is correct. A review report is issued when inquiry and analytical procedures provide a reasonable basis for the expression of limited assurance on the financial statements.

Choice "a" is incorrect. An accountant who is not independent cannot issue a review report.

Choice "c" is incorrect. When performing a review under SSARS, the accountant is not required to obtain an understanding of the client's internal control.

Choice "d" is incorrect. A review results in the expression of limited assurance that no material modifications are necessary for the financial statements to be in conformity with generally accepted accounting principles. The limited nature of the work performed during a review does not provide sufficient evidence for an opinion on the financial statements taken as a whole.

43

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?

a.

The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance.

b.

The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness.

c.

In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.

d.

In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.

Choice "c" is correct. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance.

Choice "b" is incorrect. A review does not test for completeness, nor does a compilation test for reasonableness. A review provides limited assurance about the financial statements based on inquiry and analytical review procedures, while a compilation provides no assurance and includes no testing for reasonableness.

Choice "a" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive assurance (such as an audit opinion) is only provided when more extensive procedures have been performed.

Choice "d" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonable assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. A compilation provides no assurance at all.

44

The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:

a.

The accountant did not obtain an understanding of the entity's internal control or assess control risk.

b.

A review is limited to presenting in the form of financial statements information that is the representation of management.

c.

The accountant does not express an opinion or any other form of assurance on the financial statements.

d.

A review includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

Choice "d" is correct. The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that a review includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

Choice "b" is incorrect. A standard review report does not contain the statement that a review is limited to presenting, in the form of financial statements, information that is the representation of management.

Choice "c" is incorrect. A compilation report uses language similar to this, stating that the accountant does not express an opinion, a conclusion, nor any other form of assurance on the financial statements. A review provides negative assurance.

Choice "a" is incorrect. While it is true that a review of the financial statements conducted in accordance with SSARS does not require the accountant to obtain an understanding of the entity's internal control or assess control risk, the report does not explicitly state this.

45

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should:

I.

Refer to the scope limitation that caused the change.

II.

Describe the auditing procedures that have already been applied.

a.

II only.

b.

Neither I nor II.

c.

I only.

d.

Both I and II.

Choice "b" is correct. If the CPA believes the client's request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation.

Choices "c", "a", and "d" are incorrect, based on the above explanation.

46

An accountant agrees to the client's request to change an engagement from a review to a compilation of financial statements. The compilation report should include:

a.

Information about review procedures already performed.

b.

No reference to the original engagement.

c.

Reference to a departure from GAAS.

d.

Scope limitations that may have resulted in the change of engagement.

Choice "b" is correct. If an accountant decides that the change is justified, the report should not make reference to the original engagement.

Choice "c" is incorrect. A change in engagement that occurs for acceptable reasons (for example, a change in client requirements) does not represent a departure from GAAS.

Choice "d" is incorrect. The auditor must consider the implications of a scope restriction in deciding whether a change in engagement is reasonable, but if the accountant decides that the change is justified, the report should not refer to any review procedures performed.

Choice "a" is incorrect. If the accountant decides that the change is justified, the report should not refer to any review procedures already performed.

47

Independence is not required on which of the following types of engagements?

a.

Review.

b.

Compilation.

c.

Agreed-upon procedures.

d.

Audit.

Choice "b" is correct. An accountant need not be independent to compile financial statements, but should disclose this lack of independence.

Choices "d", "a", and "c" are incorrect. An accountant must be independent to perform an audit, a review, or an agreed-upon procedures engagement.

48

Which of the following statements is true regarding analytical procedures in a review engagement?

a.

Analytical procedures are required to be used in the final review stage.

b.

Analytical procedures are not required to be used as a substantive test.

c.

Analytical procedures involve the use of both financial and nonfinancial data.

d.

Analytical procedures do not involve comparisons of recorded amounts to expected amounts.

Choice "c" is correct. Analytical procedures involve comparison of both financial and relevant nonfinancial information.

Choice "b" is incorrect. Inquiry and analytical procedures are the primary means of evaluating financial statement transactions and balances in a review engagement.

Choice "d" is incorrect. Analytical procedures involve comparisons of recorded amounts to expectations developed based on plausible relationships.

Choice "a" is incorrect. Inquiry and analytical procedures are the primary means of evaluating financial statement transactions and balances in a review engagement, but there is no requirement that they also be used as a final review at the end of the engagement. Note that in an audit, there is such a requirement.

49

In reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant is required to modify the standard review report for which of the following matters?

~~Inability to assess the risk of material misstatement due to fraud
~~Discovery of significant deficiencies in the design of the entity's internal control
a.

Yes

Yes

b.

No

Yes

c.

Yes

No

d.

No

No

Choice "d" is correct. Neither an understanding of internal control nor an assessment of fraud risk is required in a review of the financial statements of a nonissuer performed in accordance with SSARS. In addition, the auditor's inability to perform required procedures prevents the issuance of a review report, rather than resulting in modification of the report.

Choices "a", "c", and "b" are incorrect, based on the above explanation.

50

Which of the following actions should an accountant take when engaged to compile a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a.

Perform analytical procedures.

b.

Perform the engagement even though independence is compromised.

c.

Express negative assurance on the financial statements.

d.

Make management inquiries and examine internal controls.

Choice "b" is correct. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reason(s) for the lack of independence.

Choice "a" is incorrect. A compilation in accordance with SSARS does not require analytical procedures.

Choice "c" is incorrect. An accountant provides no assurance (not even negative assurance) based on a compilation in accordance with SSARS.

Choice "d" is incorrect. A compilation in accordance with SSARS does not require inquiry of management or examination of internal controls.

51

When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued?

a.

A compilation report with negative assurance may be issued.

b.

A compilation report with special wording that notes the accountant's lack of independence may be issued.

c.

The standard compilation report may be issued, regardless of independence.

d.

A compilation report may be issued if the engagement is upgraded to a review.

Choice "b" is correct. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. However, the last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reason(s) for the lack of independence.

Choice "c" is incorrect. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. However, the last paragraph of the report should disclose this lack of independence.

Choice "a" is incorrect. No assurance (not even negative assurance) is provided in a compilation report.

Choice "d" is incorrect. If the engagement is upgraded to a review, a review report would be issued. However, note that an accountant must be independent in order to issue a review report.

52

Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer?

a.

Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.

b.

Determine whether there is substantial doubt about the entity's ability to continue as a going concern.

c.

Scan the entity's records for the period just after the balance sheet date to identify subsequent events requiring disclosure.

d.

Make inquiries of the employees and senior management regarding transactions with related parties.

Choice "a" is correct. Before issuing a compilation report, accountants should read the compiled financial statements and consider whether they are appropriate in form and free from obvious material errors.

Choice "d" is incorrect. The accountant is not required to make inquiries during a compilation engagement. Performance requirements are generally limited to having an understanding of the industry and business and reading the financial statements.

Choice "b" is incorrect. The accountant is not required to determine whether there is substantial doubt about the entity's ability to continue as a going concern during a compilation engagement. (However, if an accountant becomes aware that there is a going concern uncertainty, the accountant should request that management consider the effect on the financial statements, evaluate management's conclusions, and consider the effect of the matter on the compilation report.)

Choice "c" is incorrect. The accountant is not required to scan the entity's records or to identify subsequent events during a compilation engagement. (However, if an accountant becomes aware that a subsequent event has occurred, the accountant should request that management consider the effect on the financial statements, evaluate management's conclusions, and consider the effect of the matter on the compilation report.)

53

In an engagement to review the financial statements of a nonissuer, the accountant most likely would perform which of the following procedures?

a.

Physical inspection of inventory.

b.

Analysis of inventory turnover.

c.

Evaluation of internal control over inventory.

d.

Vouching of inventory purchase transactions.

Choice "b" is correct. In an engagement to review the financial statements of a nonissuer, the accountant is required to perform analytical procedures, which might include analysis of ratios such as inventory turnover and comparing to prior periods or an industry average. 

Choice "a" is incorrect. In an engagement to review the financial statements of a nonissuer, the accountant is not required to perform audit procedures, such as inspecting or vouching.

Choice "d" is incorrect. In an engagement to review the financial statements of a nonissuer, the accountant is not required to perform audit procedures, such as inspecting or vouching.

Choice "c" is incorrect. In an engagement to review the financial statements of a nonissuer, the accountant is not required to evaluate internal control.

54

Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a.

The report should include a description of other procedures performed during the compilation.

b.

The report should include a statement indicating that the information is the representation of the accountant.

c.

The report should not be issued if the accountant is not independent from the entity.

d.

The date on the report should be the date of completion of the compilation.

Choice "d" is correct. The date on a compilation report should be the date of completion of the compilation.

Choice "c" is incorrect. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence. The accountant is permitted, but not required, to disclose the reason(s) for the lack of independence.

Choice "b" is incorrect. A compilation report states that management is responsible for the financial statements. The report would not include a statement indicating that the information is the representation of the accountant, since this is not the case.

Choice "a" is incorrect. A compilation report does not include a description of the very minimal procedures performed during the compilation.

55

Which of the following statements would be appropriate in an accountant's report on compiled financial statements of a nonissuer prepared in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a.

A compilation is performed to obtain reasonable assurance about whether the financial statements are free from material misstatement.

b.

We are not aware of any material modifications that should be made to the accompanying financial statements.

c.

A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards (GAAS).

d.

We were not required to perform any procedures to verify the accuracy or completeness of the information provided by management.

Choice "d" is correct. The accountant's report in a compilation engagement should include a statement that the accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management.

Choice "b" is incorrect. The accountant should not provide any form of assurance with respect to compiled financial statements.

Choice "c" is incorrect. The standard compilation report does not compare the scope of a compilation engagement with that of an audit engagement.

Choice "a" is incorrect. An audit, not a compilation, is performed to obtain reasonable assurance about whether the financial statements are free from material misstatement.

56

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that:

a.

The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.

b.

A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

c.

A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

d.

Management is responsible for the preparation and fair presentation of the financial statements.

Choice "d" is correct. Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that management is responsible for the preparation and fair presentation of the financial statements.

Choice "a" is incorrect. The report does not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted.

Choice "c" is incorrect. An audit (and not a review) includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Choice "b" is incorrect. The report does not state that a review is greater in scope than a compilation. In addition, presenting financial statements that are free of material misstatements is not the objective of a compilation.

57

Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?

a.

A statement that the accountant has not audited or reviewed the financial statements.

b.

A statement that management is responsible for the financial statements.

c.

A statement that the accountant performed the compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA.

d.

A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

Choice "d" is correct. An accountant's standard compilation report of an entity's financial statements should not include a statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. An accountant should not express any level of assurance on compiled financial statements.

Choice "c" is incorrect. An accountant's standard compilation report should include the statement that the accountant performed the compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA.

Choice "a" is incorrect. An accountant's standard compilation report should include the statement that the accountant has not audited or reviewed the financial statements.

Choice "b" is incorrect. An accountant's standard compilation report should include the statement that management is responsible for the financial statements.

58

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a.

Obtain an understanding of the entity's internal control components.

b.

Apply year-end cutoff tests for the sales and purchasing functions.

c.

Compare the financial statements with budgets or forecasts.

d.

Document whether control risk is assessed at or below the maximum level.

Choice "c" is correct. This is an analytical review procedure. Analytical review procedures are required to be performed in a review engagement in accordance with SSARS.

Choice "b" is incorrect. This is an audit procedure, not a review procedure.

Choice "a" is incorrect. Obtaining an understanding of internal controls is not required for a review engagement performed in accordance with SSARS.

Choice "d" is incorrect. Documenting the assed level of control risk is an audit procedure, not a review procedure.

59

An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct?

a.

The accountant should include the statement "I am not independent with respect to the entity" in the compilation report.

b.

The accountant should refuse the compilation engagement.

c.

A report need not be issued for a compilation of a nonissuer.

d.

The accountant should include the disclaimer "I am an owner of the entity" in the report.

Choice "a" is correct. An ownership interest in the entity makes the accountant not independent with respect to the entity. An accountant is not precluded from issuing a report with respect to a compilation of financial statements for an entity with respect to which the accountant is not independent. If the accountant is not independent, he or she should specifically disclose the lack of independence. Practitioners have the option, but are not required, to disclose the reasons for an independence impairment in the report. If disclosure is made, then all reasons for independence impairment must be presented.

Choice "b" is incorrect. The accountant need not refuse the compilation engagement but should instead disclose the lack of independence in the compilation report. 

Choice "c" is incorrect. A report must be issued for a compilation of a nonissuer.

Choice "d" is incorrect. This is inappropriate language for a compilation report when the accountant is not independent.

60

Which of the following situations would preclude an accountant from issuing a review report on a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

a.

Finished-goods inventory does not include any overhead amounts.

b.

The accountant was engaged to review only the balance sheet.

c.

The owner of a company is the accountant's father.

d.

Land has been recorded at appraisal value instead of historical cost.

Choice "c" is correct. If the owner of the company is the accountant's father, the accountant would not be independent. In order to issue a review report, the accountant must be independent.

Choice "b" is incorrect. The accountant can review only the balance sheet.

Choice "d" is incorrect. The accountant can issue a review report that may be modified for the departure from GAAP.

Choice "a" is incorrect. The accountant can issue a review report that may be modified for the departure from GAAP.

61

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:

a.

Disclose the departure from GAAP in a separate paragraph of the accountant's report.

b.

Issue an adverse opinion because of the departure from GAAP.

c.

Emphasize that the financial statements are for limited use only.

d.

Express no assurance of any kind on the entity's financial statements.

Choice "a" is correct. Failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the standard review report or withdraw from the engagement. If modification to the report is sufficient to disclose the departure from GAAP, then the accountant may modify the review report.

Choice "b" is incorrect. An opinion is not issued with a review report. Instead, the report may be modified to disclose the departure from GAAP.

Choice "d" is incorrect. The accountant may still provide limited assurance with respect to the entity's financial statements in the review report, as long as the departures from GAAP are disclosed. A paragraph should be added at the end of the review report that should state, "Based on my review, except for the issue noted in the 'known departures from accounting principles generally accepted in the United States of America' paragraph, I am not aware of any material modifications…"

Choice "c" is incorrect. There is no need for the accountant to restrict the use of the financial statements.

62

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

a.

Provides only limited assurance that the financial statements are fairly presented.

b.

Is substantially less than in scope than an audit.

c.

Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

d.

Includes examining, on a test basis, information that is the representation of management.

Choice "b" is correct. Financial statements reviewed by an accountant should be accompanied by a report stating that a review is substantially less in scope than an audit. 

Choice "a" is incorrect. The review report provides limited assurance that the accountant is not aware of any material modifications that need to be made to the accompanying financial statements. The term "presented fairly" is used in the opinion paragraph of the audit report.

Choice "d" is incorrect. Examination of client information is part of an audit engagement, not a review engagement.

Choice "c" is incorrect. Although this statement is true, it is not explicitly stated in the accountant's review report.

63

Financial statements of a nonissuer compiled without audit or review by an accountant should be accompanied by a report stating that:

a.

The scope of the accountant's procedures has not been restricted in testing the financial information that is the representation of management.

b.

The accountant has not audited or reviewed the financial statements.

c.

The accountant evaluated the appropriateness of the accounting principles used and the reasonableness of significant accounting estimates made by management.

d.

A compilation primarily includes applying analytical procedures to management's financial data and making inquiries of company management.

Choice "b" is correct. Financial statements compiled by an accountant should be accompanied by a report stating that the financial statements have not been audited or reviewed.

Choice "a" is incorrect. There is no discussion of the scope of the accountant's procedures in a compilation report.

Choice "c" is incorrect. This statement is part of the standard audit report, not the accountant's compilation report.

Choice "d" is incorrect. It is a review report, not a compilation report, that states that a review primarily includes applying analytical procedures to management's financial data and making inquiries of company management.

64

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

a.

Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors.

b.

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

c.

Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.

d.

Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

Choice "b" is correct. In a compilation engagement, the accountant should read the financial statements for obvious material misstatements.

Choice "c" is incorrect. Compiled financial statements may be used to obtain credit.

Choice "a" is incorrect. As part of a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements. Inquiry is not part of a compilation engagement.

Choice "d" is incorrect. Analytical procedures are part of a review engagement, but not necessary for a compilation engagement.

65

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

a.

Studying the relationships of financial statement elements expected to conform to predictable patterns.

b.

Inquiring of management about actions taken at the board of directors' meetings.

c.

Comparing the financial statements with anticipated results in budgets and forecasts.

d.

Observing the safeguards over access to and use of assets and records

Choice "d" is correct. Observing safeguards over access to and use of assets and records is part of the study and evaluation of the client's internal control; such an evaluation is not conducted in a review.

Choice "c" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

Choice "b" is incorrect. As part of a review engagement, the accountant inquires of management about actions taken at the board of directors' meetings.

Choice "a" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

66

Lawrence, CPA, is compiling the unaudited financial statements of DML Products, a nonissuer. Which procedure is Lawrence least likely to perform as part of this engagement?

a.

Issue a compilation report.

b.

Obtain an understanding of DML's staff qualifications.

c.

Evaluate the relationships of DML's financial statement elements that would be expected to conform to a predictable pattern.

d.

Establish an understanding with DML about the nature and limitations of the services to be performed.

Choice "c" is correct. The study of relationships among financial statement elements is part of performing analytical procedures. The auditor is not required to perform analytical procedures as part of a compilation engagement.

Choice "d" is incorrect. An understanding with the client regarding the nature and limitations of the services to be performed is a basic understanding required for all engagements.

Choice "b" is incorrect. An accountant performing a compilation is required to have a general understanding of the client's business, including staff qualifications.

Choice "a" is incorrect. An accountant who compiles unaudited financial statements is required to issue a compilation report.

67

An accountant's report on a review of the unaudited financial statements of a nonissuer:

a.

Should be based on the accountant's inquiry, analytical review procedures, and corroboration of key account balances.

b.

May be issued despite the accountant's lack of independence, as long as the situation is properly disclosed within the report.

c.

Should provide limited assurance on the financial statements.

d.

Need not be issued if the financial statements are not expected to be used by third parties.

Choice "c" is correct. An accountant's report on a review of the unaudited financial statements of a nonissuer should provide limited assurance on the financial statements by stating that the accountant performed procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements.

Choice "d" is incorrect. A review report is required to be issued in a review engagement, even if the financial statements are not expected to be used by third parties.

Choice "b" is incorrect. An accountant must be independent of the client to issue a review report on its financial statements.

Choice "a" is incorrect. A review does not require corroboration of key account balances. This type of work is done in an audit engagement.

68

An accountant who is conducting a review of the unaudited financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services would be required to:

a.

Obtain a general understanding of the client's business and internal control.

b.

Communicate with the predecessor auditor regarding acceptance of the engagement and matters of continuing accounting significance.

c.

Determine, based on inquiry and analytical review procedures, whether the financial statements are presented fairly in all material respects.

d.

Obtain a management representation letter.

Choice "d" is correct. In a review engagement, the accountant is required to obtain a representation letter from management.

Choice "c" is incorrect. While the accountant would perform inquiry and analytical review procedures in a review engagement, only in an audit engagement would the auditor need to determine whether the financial statements are presented fairly in all material respects. In a review engagement, there is a lesser degree of assurance provided.

Choice "b" is incorrect. The accountant may choose to communicate with the predecessor auditor, but is not required to do so.

Choice "a" is incorrect. The accountant is not required to obtain an understanding of the client's internal control in a review of unaudited financial statements of a nonissuer performed in accordance with SSARS.

69

An accountant's compilation report on the unaudited financial statements of a nonissuer should:

a.

Indicate that the financial statements are not designed for those who are not informed about internal company matters.

b.

Disclaim an opinion on the financial statements.

c.

State that the accountant has no responsibility to update the report for events and circumstances occurring after the date of the report.

d.

Provide negative assurance on the financial statements.

Choice "b" is correct. The report should state that the accountant does not express an opinion on the financial statements.

Choice "d" is incorrect. The report should state that the accountant does not express any form of assurance on the financial statements.

Choice "c" is incorrect. The report would not state that the accountant has no responsibility to update the report for events and circumstances occurring after the date of the report. Language similar to this is included in reports on prospective financial statements.

Choice "a" is incorrect. The report would not indicate that the financial statements are not designed for those who are not informed about internal company matters. If management omitted all disclosures required by GAAP, a statement similar to this would be used; however, the question does not indicate that this is the case.

70

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

a.

The entity declines to provide the accountant with a signed representation letter.

b.

The entity does not have reasonable justification for making a change in accounting principle.

c.

The entity prepares its financial statements on the income tax basis of accounting.

d.

The entity requests the accountant to report only on the balance sheet, and noton the other financial statements.

Choice "a" is correct. The accountant is required to obtain a representation letter from management. When the client does not provide such a letter, the review is incomplete and the accountant may not issue the review report.

Choice "b" is incorrect. Lack of a reasonable justification for a change in accounting principle is a departure from GAAP, generally resulting in a modified report. It would not require the accountant to withdraw from the engagement.

Choice "c" is incorrect. The income tax basis is a special purpose framework. It is acceptable for an auditor to review special purpose financial statements and there would be no need to withdraw.

Choice "d" is incorrect. A review engagement may involve reporting on only one financial statement as long as the scope of the engagement is not limited. There would be no need to withdraw in this circumstance.

71

A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a:

a.

Statement that a review is substantially less in scope than an audit.

b.

Reference to the scope limitation that caused the changed engagement.

c.

Description of the auditing procedures that were completed before the engagement was changed.

d.

Reference to the CPA's justification for agreeing to change the engagement.

Choice "a" is correct. As long as the CPA concludes that there is a reasonable justification for the change, there are no additional requirements due to the change. Since the new engagement is a review, it is required that a statement be made that the review is substantially less in scope than an audit.

Choice "b" is incorrect. The review report would not contain a reference to the scope limitation that caused the change in engagement.

Choice "c" is incorrect. The review report would not mention auditing procedures performed before the engagement was changed.

Choice "d" is incorrect. The review report would not reference the justification for the change in engagement.

72

In an accountant's review of interim financial information, the accountant typically performs each of the following, except:

a.

Inquiring of the accounting department's management.

b.

Applying financial ratios to the interim financial information.

c.

Reading the available minutes of the latest stockholders' meeting.

d.

Obtaining corroborating external evidence.

Choice "d" is correct. When performing a review engagement, the accountant should perform procedures to accumulate evidence to provide a reasonable basis for obtaining 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. The accountant should use professional judgment to determine the nature, timing and extent of review procedures, which consist primarily of inquiry and analytical procedures. As such, obtaining corroborating external evidence would generally not be required. 

Choices "c", "b", and "a" are incorrect per the above explanation.

73

An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation?

a.

The accountant should withdraw from the engagement.

b.

The accountant should disclose the lack of independence in the accountant's compilation report.

c.

The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement.

d.

The accountant should compile the pro forma financial statements but should not provide a compilation report.

 

Choice "b" is correct. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence and may disclose the reasons for the lack of independence.

Choice "c" is incorrect. As there is no requirement for independence in a compilation engagement, there is no need for legal counsel.

Choice "a" is incorrect. Withdrawal is not required, as independence is not required in compilation engagements.

Choice "d" is incorrect. A compilation report is required if the compilation engagement is completed.

74

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

a.

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

b.

To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.

c.

We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.

d.

We have made available to you all financial records and related data.

Choice "a" is correct. This statement would likely be found in an engagement letter, not a management representation letter.

Choice "b" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer.

Choice "c" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer.

Choice "d" is incorrect. This statement would likely be found in a representation letter from management, thus it is an incorrect answer.

75

When performing a review of interim financial information, an accountant would typically do each of the following, except:

a.

Consider the results from the latest audit.

b.

Perform analytical procedures.

c.

Make inquiries of management.

d.

Test controls related to the preparation of annual financial information.

Choice "d" is correct. A review consists principally of performing analytical procedures and making inquiries about the interim financial information. As such, a test of controls would likely not be performed during a review, although the auditors understanding of the entity's internal control may be updated during the review engagement.

Choice "a" is incorrect. An auditor should consider the results from the latest audit when performing an interim review.

Choice "b" is incorrect. Analytical procedures are a normal part of a review engagement.

Choice "c" is incorrect. Inquiries are a normal part of a review engagement.

76

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

a.

Reviews.

b.

Agreed-upon procedures.

c.

Compilations.

d.

Audits.

Choice "c" is correct. An accountant who is not independent with respect to an entity, including a member of the board, may compile financial statements for such an entity and issue a report. The last paragraph of the report should disclose this lack of independence.

Choice "a" is incorrect. A review would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation.

Choice "d" is incorrect. An audit would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation.

Choice "b" is incorrect. An agreed upon procedures engagement would not be allowed in cases where the auditor's independence is impaired, as it would be in this situation.

77

The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with Statements on Standards for Accounting and Review Services?

a.

Performing tests of details of major account balances.

b.

Obtaining an understanding of internal control to assess control risk.

c.

Performing inquiries and analytical procedures.

d.

Having previous experience in the client's industry.

Choice "c" is correct. The requirements of a review completed in accordance with SSARS include the requirement that inquiries be made to appropriate individuals and analytical procedures be performed.

Choice "a" is incorrect. The inability to perform detail testing on major account balances would not prevent a review to be performed in accordance with SSARS. Detail testing is an auditing procedure, not a procedure performed during a review engagement.

Choice "b" is incorrect. Obtaining an understanding of internal control is not required for a review performed in accordance with SSARS.

Choice "d" is incorrect. While an accountant should obtain sufficient knowledge regarding the company's industry and business during the review engagement, he or she is not required to have previous experience in the client's industry.

78

Which of the following procedures most likely would be performed in a review engagement of a nonissuer's financial statements in accordance with Statements on Standards for Accounting and Review Services?

a.

Observing a year-end inventory count.

b.

Making inquiries of management.

c.

Assessing the internal control system.

d.

Examining subsequent cash receipts.

Choice "b" is correct. When performing a review, inquiries should be made with members of management that have direct financial and accounting responsibilities. For example, the inquiries would include: the accounting principles/practices used by the entity and the method of applying them; any unusual or complex situations that may affect the financial statements; material subsequent events; and, significant journal entries or adjustments.

Choice "a" is incorrect. This is an audit procedure that is not performed during a review engagement.

Choice "c" is incorrect. Developing an understanding of the client's internal control system is not required in a review engagement performed in accordance with SSARS.

Choice "d" is incorrect.  Examining cash receipts is an audit procedure that is not required in a review.

79

An accountant was asked by a potential client to perform a compilation of its financial statements.  The accountant is not familiar with the industry in which the client operates.  In this situation, which of the following actions is the accountant most likely to take?

a.

Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge about the industry.

b.

Request that management engage an independent industry expert to consult with the accountant.

c.

Decline the engagement.

d.

Accept the engagement and obtain an adequate level of knowledge about the industry.

Choice "d" is correct. An accountant can accept a compilation engagement with no previous experience in the client's industry. The accountant is then responsible for acquiring an adequate level of knowledge of the industry's accounting principles and practices.

Choice "b" is incorrect. Requesting an industry consultant to assist the accountant is not necessary.

Choice "c" is incorrect. Under the above scenario, the accountant is not required to decline the engagement but should accept the engagement and then obtain knowledge of industry practices and related accounting principles.

Choice "a" is incorrect. The accountant can still accept the engagement but must acquire adequate knowledge during the compilation engagement.

80

To compile financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should:

a.

Identify material misstatements in the financial statements.

b.

Review bank statement reconciliations.

c.

Obtain a general understanding of the client's business transactions.

d.

Make inquiries of significant customers, vendors, and creditors.

Choice "c" is correct. In order to compile a nonissuer's financial statements, the accountant should obtain an understanding of the client's transaction types and frequency of transactions.

Choice "a" is incorrect. The accountant is not required to identify material misstatements in the financial statements for a compilation.

Choice "b" is incorrect. Reviewing banks statement reconciliations is an audit test and is not required for a compilation.

Choice "d" is incorrect. Making inquiries would be done as part of a review, not a compilation.

81

Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services?

a.

Developing an understanding of internal control.

b.

Remaining independent.

c.

Performing basic analytical procedures.

d.

Providing a form of limited assurance.

Choice "a" is correct. A review prepared in accordance with SSARS does not require an understanding of internal controls.

Choice "c" is incorrect. A review engagement under SSARS requires that analytical procedures be performed.

Choice "b" is incorrect. Independence is required in a review engagement.

Choice "d" is incorrect. In a review engagement, the accountant provides limited assurance that there are no material modifications that should be made to the financial statements.

82

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.

Review subsequent bank statements for evidence of cash deposits.

b.

Perform a reasonableness test of the balance by computing days' sales in receivables.

c.

Vouch a sample of subsequent cash receipts from customers.

d.

Confirm individually significant receivable balances with customers.

Choice "b" is correct.  When evaluating the accounts receivable balance under a review engagement, the accountant would perform analytical procedures such as computing the current period's days' sales in receivables ratio. Once computed, this ratio could be compared to the client's prior period's ratio and /or an industry average ratio to determine if the reported accounts receivable balance (and its relationship to sales) is reasonable.

Choice "c" is incorrect. Audit testing, which includes tests of accounting records by obtaining sufficient supporting auditing evidence, is not part of a review engagement.

Choice "d" is incorrect. Confirmation is an audit procedure that is not required in a review engagement.

Choice "a" is incorrect. This audit procedure (test) would not be performed in a review engagement, but may be done in an audit engagement.

83

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.

Consider the reason given for the client's request and assess whether the request is reasonable.

b.

Consider the additional audit effort and cost required to complete the audit.

c.

Issue an accountant's review report with a separate paragraph discussing the change in engagement scope.

d.

Evaluate the possibility that financial statement information affected by the limitation on work to be performed may be incorrect or incomplete.

Choice "c" is correct. When an accountant determines that a change in the scope of an engagement from an audit to a review is appropriate, the accountant would issue a review report and would not refer to the original engagement, any procedures performed as part of the engagement, or any scope limitation.

Choices "b", "d", and "a" are incorrect. All of these items should be considered by the accountant when determining whether the change in engagement is justified.

84

An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services. The accountant determined that the entity maintained its accounts on a comprehensive basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions?

a.

Advised management to make the adjustments necessary for the account balances to conform with GAAP.

b.

Modified the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting.

c.

Requested that management justify the use of the other comprehensive basis of accounting in the management representation letter.

d.

Withdrawn from the engagement because the entity has not been following GAAP.

Choice "b" is correct. An accountant asked to review financial statements on a comprehensive basis of accounting other than generally accepted accounting principles should modify the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting.

Choice "d" is incorrect. An accountant is permitted to review financial statements that are prepared on a comprehensive basis of accounting other than GAAP.

Choice "a" is incorrect. Financial statements are allowed to be prepared using a comprehensive basis of accounting other than generally accepted accounting principles. In order for the financial statements to be considered in appropriate form, the financial statements would need to include:

A description of the other comprehensive basis of accounting (OCBOA), including a summary of significant accounting policies and description of the primary differences from GAAP.

Disclosures similar to those required by GAAP if the financial statements contain items similar to those included in financial statements prepared in accordance with GAAP.

Choice "c" is incorrect. Management does not need to justify the use of the other comprehensive basis of accounting in the management representation letter.

85

Which of the following is correct regarding a compilation of financial statements engagement in accordance with Statement on Standards for Accounting and Review Services?

a.

The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client.

b.

The accountant should perform analytical procedures to financial data.

c.

The accountant may not base the report on information obtained from prior engagements with the same client.

d.

If the accountant's independence is impaired, a qualified opinion must be issued.

Choice "a" is correct. An accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client in a compilation engagement. These procedures are required in an audit engagement.

Choice "d" is incorrect. Independence is not required in a compilation engagement nor is an opinion rendered in a compilation engagement.

Choice "c" is incorrect. An accountant may base the report on information obtained from prior engagements. For example, knowledge gained from prior engagements may make the accountant aware that the information supplied by the entity is incorrect, incomplete, or otherwise unsatisfactory.

Choice "b" is incorrect. An accountant should perform analytical procedures related to financial data in a review or audit. Performing analytical procedures is not required in a compilation.

86

Which of the following would not be included in an accountant's documentation of a compilation of a client's financial statements?

a.

An engagement letter.

b.

Discussion with the client regarding the proper presentation of gross cash flows for investment purchases.

c.

A review of the segregation of duties in the cash disbursement process.

d.

A memo to the CFO about a potentially significant fraud revealed during compilation procedures.

Choice "c" is correct. Documentation provides the support that the accountant compiled with SSARS when performing the compilation engagement. SSARS does not require internal control procedures, such as review of segregation of duties, to be performed in a compilation engagement.

Choice "b" is incorrect. Significant issues, such as discussing with the client the proper presentation of investment purchases, which relate to the financial statements should be included in the documentation of a compilation.

Choice "a" is incorrect. An engagement letter should be included in the documentation of a compilation.

Choice "d" is incorrect. Written communications with management regarding fraud that came to the accountant's attention during a compilation should be included in the documentation of a compilation.

87

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 notissue a review report.

b.

Independent because the financial interest in the nonissuer is immaterial.

c.

Not independent and, therefore, may not be associated with the financial statements.

d.

Not independent and, therefore, may not issue a compilation report.

Choice "a" is correct. An accountant who has a direct financial interest, no matter how small, is considered to not be independent. Independence is not required for a compilation engagement since no assurance is given. However, a review engagement provides limited assurance, and therefore requires independence. Consequently, a review report may not be issued when the accountant is not independent.

Choice "b" is incorrect. An accountant who has any direct financial interest, even if immaterial, is considered to not be independent.

Choice "c" is incorrect. A compilation engagement permits an accountant to be associated with the financial statements even if the accountant lacks independence.

Choice "d" is incorrect. An accountant who is not independent of the entity may compile financial statements for such an entity and issue a compilation report. This is permitted as long as the accountant discloses their lack of independence in the report.

88

When reviewing the financial statements of a nonissuer in accordance withStatements on Standards for Accounting and Review Services, an accountant's procedures should include:

a.

Inquiring into actions taken at meetings of the Board of Directors.

b.

Applying substantive tests of transactions.

c.

Obtaining an understanding of internal control.

d.

Assessing fraud risk.

Choice "a" is correct. An inquiry within the organization, such as actions taken at meetings of the Board of Directors, is a procedure performed in a review.

Choice "c" is incorrect. Reviews in accordance with SSARS do not require an accountant to obtain an understanding of internal control.

Choice "d" is incorrect. Assessing fraud risk is included as a procedure in an audit and is not required as part of a review.

Choice "b" is incorrect. Applying substantive tests of transactions is an audit procedure and is not required as part of a review.

89

Which of the following applies to an accountant conducting a review of interim financial information?

a.

The accountant must indicate in the report those circumstances in which generally accepted accounting principles have not been consistently observed in the current period in relation to the preceding period.

b.

The accountant must obtain sufficient appropriate evidence by performing procedures to afford a reasonable basis for an opinion.

c.

The accountant must maintain independence in mental attitude in all matters relating to the engagement.

d.

The accountant must express an opinion on the financial statements taken as a whole.

Choice "c" is correct. An accountant must maintain independence in mental attitude in all matters relating to the engagement in a review.

Choice "a" is incorrect. Inconsistencies in the application of accounting principles do not require modification of the review report as long as the financial statements include adequate disclosure. However, at the accountant's discretion, a separate paragraph of the report may be used to discuss the inconsistency.

Choice "d" is incorrect. An accountant must express an opinion on the financial statements taken as a whole in an audit, not a review.

Choice "b" is incorrect. An accountant must obtain sufficient appropriate evidence by performing procedures to afford a reasonable basis for an opinion in an audit, not a review.

90

An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that:

a.

The accountant has not audited or reviewed the financial statements.

b.

Substantially all disclosures required by GAAP are included in the financial statements.

c.

The financial statements should not be used to obtain credit.

d.

The compilation is limited to presenting information that is the representation of management.

Choice "b" is correct. A standard compilation report implies that substantially all disclosures required by GAAP are included in the financial statements.

Choice "a" is incorrect. The standard compilation report explicitly states that the accountant has not reviewed or audited the financial statements.

Choice "c" is incorrect. The financial statements may be used to obtain credit.

Choice "d" is incorrect. The standard compilation report addresses this by stating, "Management is responsible for the financial statements..."

91

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the:

a.

Omitted disclosures would not influence any potential creditor's conclusions about General's financial position.

b.

Omission is not undertaken with the intention of misleading the users of General's financial statements.

c.

Distribution of the financial statements and Ford's report is restricted to internal use only.

d.

Reason for omitting the disclosures is acknowledged in the notes to the financial statements.

Choice "b" is correct. The accountant may compile financial statements that omit substantially all disclosures provided that:

The accountant's report clearly indicates the omission by including an additional paragraph disclosing such omissions. This paragraph should state that if the disclosures were included, they might influence the user's conclusions, and should indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures; and

To the accountant's knowledge, the omission is not intended to mislead any person who might be expected to use such financial statements.

Choice "c" is incorrect. Internal use restriction is not required in such circumstances.

Choice "d" is incorrect. Disclosure of the reason for omission of the disclosures is not a requirement.

Choice "a" is incorrect. This answer discusses only the creditors while the correct answer discusses a broader range of users, in general.

92

Which of the following would be considered an analytical procedure?

a.

Developing the current year's expected net sales based on the entity's sales trend of prior years.

b.

Evaluating management's plans for dealing with the adverse effects of recurring operating losses.

c.

Projecting a deviation rate by comparing the results of a sample with the actual population characteristics.

d.

Examining a sample of paid vendors' invoices for proper approval by an authorized supervisor.

Choice "a" is correct. Developing the current year's expected net sales based on the entity's sales trend of prior years is an analytical procedure.

Choice "d" is incorrect. Analytical procedures involve developing an expectation (based on plausible relationships) and comparing recorded amounts or ratios based on recorded amounts to that expectation. Examining a sample of paid vendors' invoices for proper approval is not an analytical procedure.

Choice "c" is incorrect. Projecting a deviation rate by comparing the results of a sample with the actual population characteristics is not an analytical procedure. This is a sampling procedure used to evaluate sample results.

Choice "b" is incorrect. Analytical procedures involve developing an expectation (based on plausible relationships) and comparing recorded amounts or ratios based on recorded amounts to that expectation. Evaluating management's plans for dealing with the adverse effects of recurring operating losses is not an analytical procedure.

93

Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer?

a.

Testing of internal controls over cash receipts.

b.

Analytical review of payroll tax expense.

c.

Testing the aging of accounts payable.

d.

Confirmation of notes receivable.

Choice "b" is correct. Review engagements should include analytical procedures, such as analytical review of payroll tax expense.

Choice "a" is incorrect. Testing of internal controls is not required in a review engagement for financial statements of a nonissuer.

Choice "c" is incorrect. Audit procedures, such as testing the aging of accounts payable, are not required in a review engagement.

Choice "d" is incorrect. Audit procedures, such as confirmation of notes receivable, are not required in a review engagement.

94

Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under Statements on Standards for Accounting and Review Services?

a.

The accountant was not able to come to an understanding with representatives of the organization for services to be performed.

b.

There was a lack of independence between the accountant and client.

c.

The accountant had no prior experience with similar organizations within the industry.

d.

A substantial portion of generally accepted accounting principles disclosures was omitted.

Choice "a" is correct. An accountant should establish an understanding with management and, when appropriate, those charged with governance, regarding the services to be performed for a compilation engagement. An accountant generally should decline a compilation engagement when the accountant is unable to come to an understanding with representatives of the organization regarding the services to be performed.

Choice "d" is incorrect.  An accountant may compile financial statements that omit substantially all disclosures required by the applicable financial reporting framework (but are otherwise in conformity with the financial reporting framework) provided that the omission is not intended to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Choice "b" is incorrect. An accountant who is not independent with respect to an entity may compile financial statements for such an entity and issue a report. The last paragraph of the compilation report should disclose the lack of independence.

Choice "c" is incorrect. An accountant who has no prior experience with similar organizations within the industry may compile the financial statements. However, the accountant is responsible for gaining the required level of knowledge to appropriately perform the compilation engagement. For example, the accountant may attend industry-specific accounting conferences and/or read appropriate literature to obtain the required level of knowledge.

95

Which of the following statements is true with regard to review services performed under Statements on Standards for Accounting and Review Services?

a.

An accountant must have extensive knowledge of the client's business, industry, and the economy to perform a review.

b.

In a review, an accountant gives no assurance as to generally accepted accounting principles on the financial statements.

c.

To perform a review, an accountant need not be independent but should disclose that fact.

d.

In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements.

Choice "d" is correct. In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements. This limited assurance is expressed in the report by the statement "we are not aware of any material modifications."

Choice "c" is incorrect. An accountant must be independent of the client to issue areview report on the financial statements. However, an accountant does not need to be independent for a compilation engagement, but should disclose that fact in the compilation report.

Choice "a" is incorrect. An accountant does not need to have extensive knowledge of the client's business, industry, and the economy to perform a review. However, the accountant is responsible for gaining the required level of knowledge to appropriately perform a review. For example, the accountant may attend industry specific accounting conferences and/or read appropriate literature to obtain the required level of knowledge.

Choice "b" is incorrect. In a review, an accountant will express limited (negative) assurance as to generally accepted accounting principles on the financial statements. No assurance is provided in a compilation.

96

West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer. Lake's financial statements are prepared in conformity with the cash basis of accounting. If Lake's financial statements do not disclose the basis of accounting used, which of the following statements best describes West's reporting responsibility concerning this matter?

a.

West should disclose the basis of accounting used in West's compilation report.

b.

West should quantify the effects of the differences between GAAP and the cash basis and disclose them in the notes to Lake's financial statements.

c.

West should quantify the effects of the differences between GAAP and the cash basis and disclose them in West's compilation report.

d.

West should disclose the basis of accounting used in the notes to Lake's financial statements.

Choice "a" is correct. West should modify the compilation report to disclose the basis of accounting used in West's compilation report.

Choice "d" is incorrect. Lake's management is responsible for the financial statement notes. West may not make the final decision to modify the financial statement notes; however, West is allowed to modify his compilation report.

Choice "c" is incorrect. West should modify the compilation report to disclose the basis of accounting used in West's compilation report, but does not need to quantify the effects of the differences between GAAP and the cash basis.

Choice "b" is incorrect. Lake's management is responsible for the financial statement notes. West may not make the final decision to modify the financial statement notes; however, West is allowed to modify his compilation report.

97

Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer performed in accordance withStatements on Standards for Accounting and Review Services?

a.

Ask management about the entity's procedures for recording transactions.

b.

Obtain an understanding of the entity's internal control components.

c.

Assess the risk of material misstatement arising from fraudulent financial reporting.

d.

Send a letter of inquiry to the entity's attorney regarding pending litigation.

Choice "a" is correct. Review engagements should include inquiries within the client's organization, such as asking management about the entity's procedures for recording transactions.

Choice "b" is incorrect. An understanding of internal control is not required in a review of the financial statements of a nonissuer performed in accordance with SSARS.

Choice "d" is incorrect. Review engagements should include inquiries within the client's organization. External inquiries, such as a letter of inquiry to the entity's attorney, are not required in a review engagement for a nonissuer.

Choice "c" is incorrect. An accountant is not required to assess the risk of material misstatement arising from fraudulent financial reporting in a review of a nonissuer. However, an auditor is required to assess the risk of material misstatement arising from fraudulent financial reporting in an audit engagement.

v

98

Which of the following procedures regarding accounts payable would an accountant most likely perform during a nonissuer's review engagement performed in accordance with Statements on Standards for Accounting and Review Services?

a.

Comparing ratios developed from recorded amounts to expectations developed by the accountant.

b.

Assessing fraud risk within the accounts payable function.

c.

Obtaining confirmations of the year-end accounts payable amounts from the client's five largest vendors.

d.

Obtaining an understanding of the entity's internal control over accounts payable.

Choice "a" is correct. Analytical procedures, such as comparing ratios developed from recorded amounts to expectations developed by the accountant, are performed during a nonissuer's review engagement.

Choice "d" is incorrect. Obtaining an understanding of the entity's internal control is not required in a review engagement performed in accordance with SSARS.

Choice "b" is incorrect. Assessing fraud risk is required in an audit, not a review.

Choice "c" is incorrect. External inquiries, such as confirming account balances, are not required in a review.

99

A nonissuer has asked an accountant to compile its financial statements that omit substantially all disclosures required by generally accepted accounting principles (GAAP). The accountant may comply with the entity's request provided that the:

a.

Omission is not employed in order to mislead the users of the financial statements and is properly disclosed in the accountant's report.

b.

Omission is acknowledged in the notes to the financial statements and is consistent with the prior-year's financial statements.

c.

Financial statements will not be used to obtain credit from a third-party financial institution.

d.

Financial statements are compiled in conformity with a comprehensive basis of accounting other than GAAP.

Choice "a" is correct. An accountant may compile financial statements that omit substantially all disclosures required by the applicable financial reporting framework (but are otherwise in conformity with the financial reporting framework) provided that the omission is not intended to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Choice "d" is incorrect. The financial statements may be presented in accordance with GAAP. In order for the accountant to compile financial statements that omit substantially all disclosures required by the applicable reporting framework, the accountant must believe the omission is not intended to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Choice "c" is incorrect. The financial statements may be used to obtain credit as long as the omission is not intended to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Choice "b" is incorrect.  An accountant may compile financial statements that omit substantially all disclosures required by the applicable financial reporting framework (but are otherwise in conformity with the financial reporting framework) provided that the omission is not intended to mislead the users of the financial statements and is properly disclosed in the accountant's report.

100

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

~~Advising a client regarding the selection of computer software
~~Advocating a client's position before the IRS
a.

No

Yes

b.

Yes

Yes

c.

Yes

No

d.

No

No

Choice "d" is correct. Statements on Standards for Accounting and Review Services(SSARS) apply to unaudited financial statements of a nonpublic entity. SSARS do not apply to advising a client regarding the selection of computer hardware and advocating a client's position before the IRS.

Choices "b", "c", and "a" are incorrect, per the above explanation.