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Flashcards in A2-3 Deck (8)
1

Gole, CPA, is engaged to review the Year 2 financial statements of North Co., a nonissuer. Previously, Gole audited North's Year 1 financial statements and expressed an unmodified opinion. Gole decides to include a separate paragraph in the Year 2 review report because North plans to present comparative financial statements for Year 2 and Year 1. This separate paragraph should indicate that:

a.

No auditing procedures were performed after the date of the Year 1 auditor's report.

b.

The Year 1 auditor's report may no longer be relied on.

c.

The Year 2 review report is intended solely for the information of management and the board of directors.

d.

There are justifiable reasons for changing the level of service from an audit to a review.

Choice "a" is correct. If the review report on the current period includes a separate paragraph describing the responsibility assumed for the prior period's financial statements, the additional paragraph should explicitly state that no audit procedures were performed subsequent to the previous period's audit.

Choice "c" is incorrect. The review report can be considered a general use report; no restriction on use is necessary.

Choice "b" is incorrect. The previous year's audit report may still be relied upon.

Choice "d" is incorrect. No mention of the reasons for the change in engagement service is necessary.

2

When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

I.

The report on the unaudited financial statements should be reissued.

II.

The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.

a.

Either I or II.

b.

I only.

c.

II only.

d.

Both I and II.

Choice "a" is correct. When audited financial statements are presented in comparative form with unaudited financial statements from a prior year, the auditor should either reissue his or her report on the unaudited statements or include a separate paragraph in the current year report describing the responsibility assumed for the unaudited statements.

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

3

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be:

~Marked as "unaudited"
~Withheld until audited
~Referred to in the auditor's report
a.

No

Yes

Yes

b.

Yes

No

No

c.

No

Yes

No

d.

Yes

No

Yes

Choice "b" is correct. When unaudited financial statements are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be clearly marked as "unaudited," but should not be referred to in the auditor's report. The statements need not be withheld until audited.

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

4

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, Year 1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, Year 2, and to include all GAAP disclosures for the Year 2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?

a.

Clark may not report on the comparative financial statements because the Year 1 statements are not comparable to the Year 2 statements that include the GAAP disclosures.

b.

Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark's report on the comparative financial statements.

c.

Clark may report on the comparative financial statements provided the Year 1 statements do not contain any obvious material misstatements.

d.

Clark may report on the comparative financial statements provided Clark updates the report on the Year 1 statements that do not include the GAAP disclosures.

Choice "a" is correct. Compiled financial statements that omit substantially all the disclosures required by GAAP are not comparable to financial statements that do include required GAAP disclosures. Accordingly, the Year 1 statements are not comparable to the Year 2 statements and Clark cannot report on them.

Choice "c" is incorrect. The lack of material misstatements does not alter the fact that the statements are not comparable and therefore Clark may not report on them.

Choice "b" is incorrect. Compiled financial statements that omit substantially all of the disclosures required by GAAP are not comparable to financial statements that include such disclosures. Accordingly, Clark may not report on the comparative financial statements, even if an explanatory paragraph is added.

Choice "d" is incorrect. Updating the auditor's report does not change the fact that the financial statements for the two periods are not comparable.

5

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

a.

Compare the prior year's financial statements with those of the current year.

b.

Make inquiries of the entity's lawyers concerning continuing litigation.

c.

Review the successor accountant's working papers for matters affecting the prior year.

d.

Obtain an updated management representation letter from the entity's management.

Choice "a" is correct. Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to compare the prior year's financial statements with those of the current year.

Choice "d" is incorrect. Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant should obtain a letter from the successor accountants. An updated management representation letter is not required.

Choice "c" is incorrect. The predecessor accountant is not required to review the successor accountant's working papers, especially since it is unlikely that the current year documentation includes information relevant to the previous year's financial statements.

Choice "b" is incorrect. The predecessor accountant is not required to make inquiries of the entity's lawyers concerning continuing litigation.

6

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

a.

The type of opinion expressed previously.

b.

That the CPA did not update the assessment of control risk.

c.

The reasons for the change from an audit to a review.

d.

That the audit report should no longer be relied on.

Choice "a" is correct. When the prior period has been audited, the accountant should issue the current period compilation or review report, and any additional paragraph should indicate:

That prior period statements were audited;

The date of the previous report(s);

The opinions expressed, and, if other than unmodified, the reasons for the modification; and

That no auditing procedures have been performed since the previous report date.

Choice "b" is incorrect. The CPA would not mention control risk in the current period review report.

Choice "c" is incorrect. There is no requirement that the reasons for the change be documented.

Choice "d" is incorrect. There is no requirement that the audit report no longer be relied upon.

7

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

a.

Verify that the reissued report will not be used to obtain credit from a financial institution.

b.

Compare the prior year's financial statements with those of the current year.

c.

Review the successor accountant's working papers for matters affecting the prior year.

d.

Make inquiries about actions taken at meetings of the board of directors during the current year.

Choice "b" is correct. Before reissuing a compilation report, the predecessor accountant is required to read the financial statements of the current period and the successor's report. The predecessor accountant is also required to compare the prior year's financial statements with those of the current year before reissuing a compilation report. Finally, the predecessor accountant is required to obtain a letter from the successor accountant that indicates whether the successor accountant is aware of any matter that might have a material effect on the financial statements, including disclosures, reported on by the predecessor accountant. 

Choice "d" is incorrect. Making inquiries about actions taken at meetings of the board of directors during the current year is not a required procedure. 

Choice "a" is incorrect. Verifying that the reissued report will not be used to obtain credit from financial institutions is not a required procedure. 

Choice "c" is incorrect. Reviewing the successor accountant's workpapers for matters affecting the prior year is not a required procedure.

8

Hart, CPA, is engaged to review the year 2 financial statements of Kell Co., a nonissuer.  Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation.  Hart decides to include a separate paragraph in the year 2 review report because comparative financial statements are being presented for year 2 and year 1.  This separate paragraph should indicate the:

a.

Reason for changing the level of service from an audit to a review.

b.

Restriction on the distribution of the report for internal use only.

c.

Substantive reasons for the prior-year's qualified opinion.

d.

Consistency of application of accounting principles between year 2 and year 1.

Choice "c" is correct. Because comparative financial statements are being reported, and last year's audit engagement included a scope limitation on the audited financial statements, Hart should  include a separate paragraph in the review report outlining the substantive reasons for the client's qualified report.

Choice "a" is incorrect. An explanation of why the client is changing from an audit engagement last year, to a review engagement this year, is not required.

Choice "d" is incorrect. A separate paragraph regarding the consistency of the application of accounting principles is not required in a review report unless there is a lack of consistency.

Choice "b" is incorrect.  A review report is not generally restricted as to its use.