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Flashcards in A2-6 Deck (48)
1

When a CPA examines a client's projected financial statements, the CPA's report should:

a.

Include the CPA's opinion on the client's ability to continue as a going concern.

b.

Explain the principal differences between historical and projected financial statements.

c.

Refer to the CPA's auditor's report on the historical financial statements.

d.

State that the CPA performed procedures to evaluate management's assumptions.

Choice "d" is correct. When a CPA examines projected financial statements, the standard report should include a statement that the examination "…included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection."

Choice "b" is incorrect. The accountant's report on the examination of projected financial statements would not explain the principal differences between historical and projected financial statements.

Choice "c" is incorrect. The accountant's report on the examination of projected financial statements would not make any reference to the CPA's auditor's report on the historical financial statements.

Choice "a" is incorrect. The accountant's report would not express an opinion on the client's ability to continue as a going concern.

2

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to:

a.

Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

b.

Report on financial statements that the CPA generated through the use of computer software.

c.

Audit financial statements that the client prepared for use in another country.

d.

Provide the client with a financial statement format that does not include dollar amounts.

Choice "a" is correct. A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

Choice "b" is incorrect. Attestation standards were created to provide assurance on representations other than historical financial statements and in forms other than the positive opinion. Unless the financial statements in question are something other than historical financial statements (which is not indicated in the question), it is likely that other standards (SAS, SSARS) would be more appropriate for this engagement.

Choice "d" is incorrect. An attest engagement is one in which a CPA is engaged to issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party. Providing the client with a financial statement format does not fall under this description.

Choice "c" is incorrect. Statements on Standards for Attestation Engagements(SSAE) do not apply to audits of financial statements. (The CPA would, however, be required to comply with GAAS when engaged to audit financial statements prepared for use in another country.)

3

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when:

~Testifying as an expert witness in accounting and auditing matters given stipulated facts
~Compiling a client's financial projection that presents a hypothetical course of action
a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

Choice "c" is correct. Statements on Standards for Attestation Engagements provide guidance with respect to compilation of a financial projection, but they do not address services involving advocating for a client, such as testifying as an expert witness.

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

4

Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a (an):

a.

Opinion about the effectiveness of Modern's internal control activities concerning royalty payments.

b.

Disclaimer of opinion about the fair presentation of Modern's financial statements.

c.

Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

d.

List of the procedures performed (or reference thereto) and Mill's findings.

Choice "d" is correct. A report on agreed-upon procedures should include a list of the procedures performed (or reference thereto) and the related findings.

Choice "b" is incorrect. An agreed-upon procedures engagement to evaluate compliance with contractual requirements does not address the fair presentation of financial statements.

Choice "a" is incorrect. A report on agreed-upon procedures should be in the form of procedures and findings. An opinion is not provided.

Choice "c" is incorrect. A report on agreed-upon procedures would indicate that the sufficiency of the procedures is solely the responsibility of the specified parties, who in this case would be the group of royalty recipients (not Mill).

5

In an attest engagement, use of the accountant's report should be restricted to specified parties in all of the following situations, except:

a.

When the criteria used to evaluate the subject matter are appropriate for only a limited number of parties.

b.

When reporting directly on the subject matter and a written assertion has not been provided.

c.

When reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

d.

When reporting on an agreed-upon procedures engagement.

Choice "c" is correct. There is no requirement that the accountant's report be restricted to specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

Choice "a" is incorrect, since use of the accountant's report should be restricted to specified parties when the criteria used to evaluate the subject matter are appropriate for only a limited number of parties.

Choice "b" is incorrect, since use of the accountant's report should be restricted to specified parties when reporting directly on the subject matter and a written assertion has not been provided.

Choice "d" is incorrect, since use of the accountant's report should be restricted to specified parties when reporting on an agreed-upon procedures engagement.

6

Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

a.

EDIFACT.

b.

ElectroNet.

c.

TechSafe.

d.

WebTrust.

Choice "d" is correct. A WebTrust engagement is an attestation engagement designed to measure transaction integrity, information protection, and disclosure of business practices. When an unmodified report is issued, the client may add theCPA WebTrust Seal to its Web site, indicating that its site is a reasonably safe and private place for e-commerce.

Choice "b" is incorrect. ElectroNet is an Internet service provider.

Choice "a" is incorrect. EDIFACT refers to standards developed by the United Nations for Electronic Data Interchange for Administration, Commerce, and Transport. These standards facilitate information flow among trading partners in many industries. The scope and format of these standards is similar, but not identical, to those developed in the United States.

Choice "c" is incorrect. TechSafe is a distractor.

7

An entity engaged a CPA to determine whether the client's web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of:

a.

Statements on Auditing Standards.

b.

Statements on Assurance Standards.

c.

Statements on Standards for Management Consulting Services.

d.

Statements on Standards for Attestation Engagements.

Choice "d" is correct. A WebTrust engagement is an attestation engagement in which the CPA determines whether the client's web site meets defined criteria relating to transaction integrity, information protection, and disclosure of business practices. Attestation engagements should be performed in accordance with Statements on Standards for Attestation Engagements (SSAEs).

Choice "b" is incorrect. Statements on Assurance Standards is a distractor; there is no such standard.

Choice "c" is incorrect. Consulting services provided by CPAs range from advice on accounting-related matters to a wide range of services involving diverse technical disciplines. Consulting services performed by CPAs should be performed in accordance with Statements on Standards for Consulting Services (SSCSs).

Choice "a" is incorrect. Audits (generally of financial statements) performed by CPAs should be performed in accordance with Statements on Auditing Standards (SASs).

8

A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain:

a.

An acknowledgment of responsibility for the sufficiency of the procedures.

b.

An opinion about whether management's assertion is fairly stated.

c.

Negative assurance that control risk has not been assessed.

d.

A statement of limitations on the use of the report.

Choice "d" is correct. The practitioner's report on agreed-upon procedures related to management's assertion about the entity's compliance with specified requirements is intended solely for the use of specified parties. Thus, the report should include a statement of limitations on the use of the report.

Choice "b" is incorrect. The report is in the form of procedures and findings. Since the work performed is less in scope than an examination, the accountant disclaims any opinion.

Choice "c" is incorrect. The auditor does not provide any negative assurance relative to assessment of control risk or to compliance with the specified requirements.

Choice "a" is incorrect. The report contains a statement that the sufficiency of the procedures is solely the responsibility of the parties specifying the procedures and a disclaimer of responsibility on the part of the accountant.

9

An examination of a financial forecast is a professional service that involves:

a.

Compiling or assembling a financial forecast that is based on management's assumptions.

b.

Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

c.

Assuming responsibility to update management on key events for one year after the report's date.

d.

Limiting the distribution of the accountant's report to management and the board of directors.

Choice "b" is correct. An examination of a financial forecast is a professional service that involves:

Evaluating the preparation of the prospective financial statements,

Evaluating the support underlying the assumptions,

Evaluating the presentation of the prospective financial statements in conformity with AICPA guidelines, and

Issuing an examination report.

Choice "a" is incorrect. Compiling or assembling a financial forecast based on management's assumptions is part of a compilation engagement, not an examination engagement.

Choice "d" is incorrect. A financial forecast may be issued for general use.

Choice "c" is incorrect. The accountant's standard report specifically states that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

10

An accountant's compilation report on a financial forecast should include a statement that:

a.

There will usually be differences between the forecasted and actual results.

b.

The forecast should be read only in conjunction with the audited historical financial statements.

c.

The hypothetical assumptions used in the forecast are reasonable in the circumstances.

d.

The accountant expresses only limited assurance on the forecasted statements and their assumptions.

Choice "a" is correct. The accountant's compilation report on a client's financial forecast should include a caveat that the prospective results may not be achieved.

Choice "b" is incorrect. The historical financial statements upon which the forecast is based need not be audited, nor must they accompany the forecast compilation.

Choice "d" is incorrect. The accountant expresses no assurance in the compilation report on forecasted statements.

Choice "c" is incorrect. A compilation of a financial forecast would not include evaluation of the support for the assumptions underlying the forecast.

11

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

a.

None of the generally accepted auditing standards are included in the attestation standards.

b.

The attestation standards do not permit an attest engagement to be part of a business acquisition study or a feasibility study.

c.

The attestation standards provide a framework for the attest function beyond historical financial statements.

d.

The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards.

Choice "c" is correct. Attestation standards provide a framework for the attest function beyond historical financial statements.

Choice "d" is incorrect. The independence standard is almost the same for both attest engagements and audits.

Choice "b" is incorrect. An attest engagement may be part of a larger engagement (such as a business acquisition study or a feasibility study).

Choice "a" is incorrect. Attestation standards include two standards that parallel GAAS: planning/supervision and evidence. They do not include the internal control standard.

12

Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to:

a.

All employees who work for the entity.

b.

All stockholders of record as of the report date.

c.

Potential stockholders who request a prospectus or a registration statement.

d.

A bank with which the entity is negotiating for a loan.

Choice "d" is correct. Financial projections are hypothetical, "what if" prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions, financial projections are "restricted use" reports, whose use is restricted to the responsible party and those third parties with whom the responsible party is negotiating directly.

Choices "a", "c", and "b" are incorrect. Only financial forecasts (based on expected conditions) are appropriate for general use.

13

An accountant's report on a review of pro forma financial information should include a:

a.

Reference to the financial statements from which the historical financial information is derived.

b.

Disclaimer of opinion on the financial statements from which the pro forma financial information is derived.

c.

Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur.

d.

Statement that the entity's internal control was not relied on in the review.

Choice "a" is correct. The accountant's report on a review of pro forma financial information should include a reference to the financial statements from which the historical information is derived and a statement as to whether such financial statements were audited or reviewed.

Choice "d" is incorrect. No statement on the entity's internal control is necessary.

Choice "b" is incorrect. If the auditor has audited the financial statements from which the pro forma financial information is derived, an opinion on those statements may be expressed.

Choice "c" is incorrect. The report on a review of pro forma financial information would include an explanation of the objective and limitations of the information, but would not discuss the uncertainty surrounding occurrence of the transaction or event

14

An accountant's standard report on a compilation of a projection should not include a:

a.

Statement that the accountant expresses only limited assurance that the results may be achieved.

b.

Disclaimer of responsibility to update the report for events occurring after the report's date.

c.

Statement that a compilation of a projection is limited in scope.

d.

Separate paragraph that describes the limitations on the presentation's usefulness.

Choice "a" is correct. A compilation of prospective financial statements is not intended to provide assurance on the prospective financial statements or the assumptions underlying such statements. 

Choice "c" is incorrect. The report on a compilation should include a statement that a compilation is limited in scope.

Choice "b" is incorrect. The report on a compilation should include a statement that the accountant assumes no responsibility to update the report for events subsequent to the report date.

Choice "d" is incorrect. The report on a compilation should include a separate paragraph that describes the limitations on the presentation's usefulness.

15

Which of the following is not an attestation standard?

a.

The work shall be adequately planned and assistants, if any, shall be properly supervised.

b.

A sufficient understanding of internal control shall be obtained to plan the engagement.

c.

Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report.

d.

The report shall identify the assertion being reported on and state the character of the engagement.

Choice "b" is correct. A sufficient understanding of internal control is not required to be obtained in an attestation engagement.

Choice "c" is incorrect. In an attestation engagement, sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report.

Choice "d" is incorrect. An attestation report should identify the assertion being reported on and state the character of the engagement.

Choice "a" is incorrect. In an attestation engagement, the work should be adequately planned and assistants, if any, should be properly supervised.

16

An accountant's compilation report on a financial forecast should include a statement that the:

a.

Compilation does not include evaluation of the support of the assumptions underlying the forecast.

b.

Hypothetical assumptions used in the forecast are reasonable.

c.

Range of assumptions selected is one in which one end of the range is less likely to occur than the other.

d.

Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant's representation.

Choice "a" is correct. An accountant's compilation report on a financial forecast should include a statement that the compilation does not include evaluation of the support of the assumptions underlying the forecast. (An examination of the financial forecast would include evaluation of the support).

Choice "b" is incorrect. An accountant does not give any form of assurance related to hypothetical assumptions, which are not used in financial forecasts anyway. (Hypothetical assumptions are used in financial projections).

Choice "c" is incorrect. No mention of the range of assumptions selected is made in the compilation report.

Choice "d" is incorrect. A compilation is limited to presenting, in the form of a forecast, information that is management's representation.

17

Which of the following professional services would be considered an attest engagement covered by the Statements on Standards for Attestation Engagements (SSAEs)?

a.

An engagement to report on management's discussion and analysis (MD&A).

b.

A management consulting engagement to provide EDP advice to a client.

c.

An income tax engagement to prepare federal and state tax returns.

d.

The compilation of financial statements from a client's accounting records.

Choice "a" is correct. An engagement to report on management's discussion and analysis (MD&A) would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice "b" is incorrect. A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice "c" is incorrect. An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement.

Choice "d" is incorrect. The compilation of financial statements from a client's accounting records (a compilation engagement) is considered to be an attest engagement. However, compilations are covered by SSARS (Statements on Standards for Accounting and Review Services.) (Note that although a compilation of prospective financial statements is covered under Statements on Standards for Attestation Engagements, the question does not indicate that prospective financial statements are involved).

Choice "a" is correct. An engagement to report on management's discussion and analysis (MD&A) would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice "b" is incorrect. A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party's assertion.

Choice "c" is incorrect. An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement.

Choice "d" is incorrect. The compilation of financial statements from a client's accounting records (a compilation engagement) is considered to be an attest engagement. However, compilations are covered by SSARS (Statements on Standards for Accounting and Review Services.) (Note that although a compilation of prospective financial statements is covered under Statements on Standards for Attestation Engagements, the question does not indicate that prospective financial statements are involved).

18

Negative assurance may be expressed when an accountant is requested to report on the:

a.

Audit of historical financial statements.

b.

Compliance with the provisions of the Foreign Corrupt Practices Act.

c.

Results of performing a review of management's assertion.

d.

Compilation of prospective financial statements.

Choice "c" is correct. Negative assurance may be expressed when an accountant is requested to report on the results of performing a review of management's assertion.

Choice "d" is incorrect. No assurance is provided in a compilation of prospective financial statements.

Choice "b" is incorrect. Whether an entity is in compliance with the provisions of the Foreign Corrupt Practices Act is a legal determination. An accountant may perform an examination or an agreed-upon procedures engagement with respect to such compliance but may not perform a review, and therefore would not express negative assurance.

Choice "a" is incorrect. When reporting on an audit of historical financial statements, negative assurance is not an appropriate reporting option. The auditor must either express an opinion (positive assurance) or disclaim an opinion (no assurance).

19

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a (an):

a.

Unmodified opinion with a separate explanatory paragraph.

b.

"Except for" qualified opinion.

c.

"Subject to" qualified opinion.

d.

Adverse opinion.

Choice "d" is correct. When an accountant examines a financial forecast that fails to disclose significant assumptions used to prepare the forecast, the accountant should issue an adverse opinion.

Choice "b" is incorrect. A qualified opinion might be appropriate when AICPA presentation guidelines are not followed, but would not be used when "several significant assumptions used to prepare the forecast" are not disclosed.

Choice "c" is incorrect. "Subject to" is not acceptable wording for an accountant's report.

Choice "a" is incorrect. An unmodified opinion is not acceptable when significant assumptions are not disclosed.

20

Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a:

a.

Financial forecast.

b.

Projected balance sheet.

c.

Partial presentation.

d.

Financial projection.

Choice "c" is correct. "Partial presentations" are presentations of prospective financial information which would not ordinarily be appropriate for general use because they omit one or more of these essential elements: (a) sales or gross revenue, (b) gross profit or cost of sales, (c) unusual or infrequently occurring items, (d) provision for income taxes, (e) discontinued operations or extraordinary items, (f) income from continuing operations, (g) net income, (h) earnings per share, and (i) significant changes in financial position.

Choices "b", "a", and "d" are incorrect. Projected balance sheets, financial forecasts and financial projections are forms of prospective financial statements.

21

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity's business. Other than the procedures previously applied to the historical financial statements, the accountant is required to:

~Reevaluate the entity's internal control over financial reporting
~Determine that the computations of the pro forma adjustments are mathematically correct
a.

No

No

b.

Yes

Yes

c.

No

Yes

d.

Yes

No

Choice "c" is correct. The accountant should evaluate the pro forma adjustments, but need not reevaluate the entity's internal control over financial reporting.

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

22

Which of the following activities would most likely be considered an attestation engagement?

a.

Preparing a client's tax returns.

b.

Issuing a report about a firm's compliance with laws and regulations.

c.

Advocating a client's position on tax matters that are being reviewed by the IRS.

d.

Consulting with management representatives of a firm to provide advice.

Choice "b" is correct. Attest engagements may result in reports related to compliance with laws and regulations.

Choices "d", "c", and "a" are incorrect. Attestation engagements specifically exclude consulting services, advocacy services, and return preparation.

23

Which of the following professional services would be considered an attestation engagement?

a.

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions.

b.

Advising management in the selection of a computer system to meet business needs.

c.

Providing financial analysis, planning, and capital acquisition services as a part-time, in-house controller.

d.

Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service.

Choice "a" is correct. Preparing future financial statements constitutes a compilation of prospective financial statements, which is considered to be an attestation service.

Choices "d" and "b" are incorrect. Attestation engagements specifically exclude advocacy services and consulting services.

Choice "c" is incorrect. Attest engagements include those in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party, as well as engagements related to prospective financial statements. Performing the role of in-house controller part-time does not fit into any of these categories.

24

When an accountant compiles a financial forecast, the accountant's report should include a(an):

a.

Explanation of the differences between a financial forecast and a financial projection.

b.

Disclaimer of opinion on the reliability of the entity's internal controls.

c.

Caveat that the prospective results of the financial forecast may not be achieved.

d.

Statement that the accountant's responsibility to update the report is limited to one year.

Choice "c" is correct. Whenever an accountant reports on prospective financial statements, the report should include a caveat that prospective results may not be achieved.

Choice "a" is incorrect. A compilation report on a financial forecast does not include an explanation of the differences between a forecast and a projection.

Choice "d" is incorrect. Whenever an accountant reports on prospective financial statements, the report should include a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

Choice "b" is incorrect. A compilation report on a financial forecast does not include a disclaimer of opinion on the reliability of the entity's internal controls.

25

Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability?

a.

MAS AttestSure.

b.

MAS AssurAbility.

c.

CPA WebMaster.

d.

CPA SysTrust.

Choice "d" is correct. A SysTrust engagement is an attest engagement that provides assurance on the reliability of any defined electronic system.

Choice "b" is incorrect. There is no professional engagement by this name.

Choice "c" is incorrect. There is no professional engagement by this name.

Choice "a" is incorrect. There is no professional engagement by this name.

26

An accountant's standard report on a compilation of a projection should not include a statement that:

a.

The accountant has no responsibility to update the report for future events and circumstances.

b.

There will usually be differences between the projected and actual results.

c.

The hypothetical assumptions used in the projection are reasonable in the circumstances.

d.

The compilation of a projection is limited in scope.

Choice "c" is correct. An accountant's standard report on a compilation of a projection does not include a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.

Choice "b" is incorrect. An accountant's standard report on a compilation of a projection does state that there will usually be differences between the projected and actual results.

Choice "a" is incorrect. An accountant's standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances.

Choice "d" is incorrect. An accountant's standard report on a compilation of a projection does state that the compilation of a projection is limited in scope ("A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.")

27

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

a.

Explains the difference between a compilation and a review.

b.

Documents the assessment of the risk of material misstatement due to fraud.

c.

Describes the limitations on the projection's usefulness.

d.

Expresses limited assurance that the actual results may be within the projected range.

Choice "c" is correct. The accountant's report on compiled projected financial statements should include a separate paragraph that describes the limitations on the projection's usefulness. For example, the paragraph states that there will usually be differences between projected and actual results, and indicates that the accountant has no responsibility to update the report for events occurring after the date of the report.

Choice "a" is incorrect. The accountant's report on compiled projected financial statements does not include an explanation of the difference between a compilation and a review.

Choice "b" is incorrect. The accountant's report on compiled projected financial statements does not document the assessment of the risk of material misstatement due to fraud.

Choice "d" is incorrect. The accountant's report on compiled projected financial statements does not express limited assurance that the actual results may be within the projected range. In fact, it specifically states that no opinion or any other form of assurance is expressed, and that there usually will be differences between projected and actual results.

28

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:

a.

Accountant also examines the prospective financial statements.

b.

Distribution (use) of the report is restricted to the specified users.

c.

The accountant takes responsibility for the adequacy of the procedures performed.

d.

Provisions of Statements on Standards for Accounting and Review Services (SSARS) are followed.

Choice "b" is correct. In an agreed-upon procedures engagement, use of the report is restricted to the specified users.

Choice "d" is incorrect. Statements on Standards for Accounting and Review Services apply to the unaudited financial statements of a nonissuer, not to engagements to apply agreed-upon procedures to prospective financial statements.

Choice "a" is incorrect. There is no requirement that the accountant also examine prospective financial statements in an agreed-upon procedures engagement.

Choice "c" is incorrect. In an agreed-upon procedures engagement, the specified parties (and not the accountant) take responsibility for the sufficiency of the procedures for their purposes.

29

A CPA is engaged to examine an entity's financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an):

a.

Qualified opinion.

b.

Adverse opinion.

c.

Pro forma opinion.

d.

Unmodified opinion with an explanatory paragraph.

Choice "b" is correct. If one or more of the significant assumptions do not provide a reasonable basis for the financial statements, an adverse opinion would be issued.

Choice "c" is incorrect. A pro forma financial statement is one that shows historical financial statements as they would have been if a hypothetical event had occurred. The term "pro forma opinion" is not used.

Choice "a" is incorrect. A qualified opinion might be issued if AICPA presentation guidelines were not followed, but when the basis for the financial statements is not reasonable, only an adverse opinion is acceptable.

Choice "d" is incorrect. If one or more of the significant assumptions do not provide a reasonable basis for the financial statements, an adverse opinion would be issued. An unmodified opinion with an explanatory paragraph would not be sufficient.

30

Which of the following prospective financial statements is(are) appropriate for general use?

~Financial forecast
~Financial projection
a.

No

Yes

b.

Yes

No

c.

Yes

Yes

d.

No

No

Choice "b" is correct. A financial forecast is appropriate for general use, but a financial projection is not.

Choice "c" is incorrect. A financial projection is not appropriate for general use.

Choice "a" is incorrect. A financial forecast is appropriate for general use, but a financial projection is not.

Choice "d" is incorrect. A financial forecast is appropriate for general use.

31

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

a.

The requirement that the CPA be independent in mental attitude is included in both sets of standards.

b.

All of the standards in generally accepted auditing standards are included in the attestation standards.

c.

Both sets of standards are applicable to engagements regarding financial forecasts and projections.

d.

Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements

Choice "a" is correct. The requirement that the CPA be independent in mental attitude is included in both sets of standards.

Choice "d" is incorrect. The attestation standards are much broader in scope than auditing standards, and they do not make reference to financial statements.

Choice "b" is incorrect. There are differences; for example, auditing standards include an internal control standard, whereas attestation standards do not.

Choice "c" is incorrect. Attestation standards, but not auditing standards, apply to engagements regarding financial forecasts and projections.

32

Accepting an engagement to compile an entity's financial projections most likely would be inappropriate if the projections are to be included in a(an):

a.

Comprehensive document to be used in negotiating a new labor contract.

b.

Report to the audit committee that is not sent to the stockholders.

c.

Offering statement of the entity's initial public offering of common stock.

d.

Mortgage application for the purpose of expanding the entity's facilities.

Choice "c" is correct. Financial projections are not appropriate for general use, and therefore should not be included in an offering statement of the entity's initial public offering of common stock.

Choice "d" is incorrect. Financial projections are appropriate for limited use, such as a mortgage application for the purpose of expanding the entity's facilities.

Choice "a" is incorrect. Financial projections are appropriate for limited use, such as a comprehensive document to be used in negotiating a new labor contract.

Choice "b" is incorrect. Financial projections are appropriate for limited use, such as a report to the audit committee that is not sent to the stockholders.

33

A practitioner has been engaged to apply agreed-upon procedures in accordance withStatements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to perform the engagement?

a.

The prospective financial statements include a summary of significant accounting policies.

b.

The practitioner reports on the criteria to be used in the determination of findings.

c.

The practitioner and specified parties agree upon the procedures to be performed by the practitioner.

d.

The practitioner takes responsibility for the sufficiency of the agreed-upon procedures.

Choice "c" is correct. The practitioner and specified parties should agree upon the procedures to be performed by the practitioner.

Choice "a" is incorrect. The prospective financial statements should include a summary of significant assumptions, not a summary of significant accounting policies.

Choice "d" is incorrect. The specified parties (not the practitioner) should take responsibility for the sufficiency of the agreed-upon procedures.

Choice "b" is incorrect. The practitioner and specified parties should agree regarding the criteria to be used in the determination of findings, but there is no requirement that the practitioner report on the criteria.

34

An accountant's compilation report on a financial forecast should include a statement that:

a.

The accountant expresses only limited assurance on the forecasted statements and their assumptions.

b.

The forecast should be read only in conjunction with the audited historical financial statements.

c.

There will usually be differences between the forecasted and actual results.

d.

The hypothetical assumptions used in the forecast are reasonable in the circumstances.

Choice "c" is correct. An accountant's compilation report on a financial forecast should include a statement that there will usually be differences between the forecasted and actual results.

Choice "d" is incorrect. An accountant's compilation report on a financial forecast does not state that the hypothetical assumptions used in the forecast are reasonable in the circumstances. In fact, the report specifically states that no form of assurance is provided with respect to the assumptions.

Choice "b" is incorrect. An accountant's compilation report on a financial forecast does not state that the forecast should be read only in conjunction with the audited historical financial statements.

Choice "a" is incorrect. An accountant's compilation report on a financial forecast does not state that the accountant expresses only limited assurance on the forecasted statements and their assumptions. In fact, the report specifically states that no form of assurance is provided with respect to the statements or the assumptions.

35

Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?

a.

Compare the prospective financial statements with the entity's historical results for the prior year.

b.

Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

c.

Make inquiries prior to the date of the report about possible future transactions that may impact the forecast once the report is issued.

d.

Test the entity's internal controls to determine if adequate controls exist so that financial projections can be reasonably achieved.

Choice "b" is correct. An accountant performing an engagement to compile prospective financial statements should make inquiries about the accounting principles used in the preparation of the prospective financial statements.

Choice "d" is incorrect. The accountant does not test the entity's internal controls to determine if adequate controls exist so that financial projections can be reasonably achieved. The test of an entity's internal controls is an audit procedure, not a compilation procedure.

Choice "c" is incorrect. The practitioner has no responsibility to update the report for events and circumstances occurring after the date of the report.

Choice "a" is incorrect. This is not a required procedure when compiling prospective financial statements.

36

Which of the following components is appropriate in a practitioner's report on the results of applying agreed-upon procedures?

a.

A title that includes the phrase "independent audit."

b.

A list of the procedures performed, as agreed to by the specified parties identified in the report.

c.

A statement that the report is unrestricted in its use.

d.

A statement that management is responsible for expressing an opinion.

Choice "b" is correct. A list of the procedures performed, as agreed to by the specified parties in the report, is appropriate in a practitioner's report on the results of applying agreed-upon procedures. 

Choice "d" is incorrect. An opinion is not expressed in a report on applying agreed-upon procedures. The practitioner provides a listing of procedures and findings. Additionally, it is never appropriate for management to express an opinion. 

Choice "a" is incorrect. A report on the results of applying agreed-upon procedures is not an independent audit and the practitioner states this in his/her report.

Choice "c" is incorrect. A report on the results of applying agreed-upon procedures is always restricted use and the practitioner states this in his/her report.

37

Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to:

a.

A state or federal regulatory agency.

b.

Potential stockholders in an offering statement.

c.

The entity's principal stockholder, to the exclusion of the other stockholders.

d.

A financial institution in a loan application.

Choice "b" is correct. Financial projections are appropriate only for limited use. Limited use means that the financial statements will only be used by the responsible party alone or by parties negotiating directly with the responsible party (the issuing company).

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

38

Which of the following is least likely to be included in an examination report related to a financial projection?

a.

An opinion that the projection is presented in conformity with AICPA guidelines.

b.

An indication that had the accountants performed additional procedures, other matters might have come to their attention that would have been reported.

c.

A statement that the report is intended solely for the information and use of specified parties.

d.

An opinion that the underlying assumptions provide a reasonable basis for the projection.

Choice "b" is correct. This statement would be included in an agreed-upon procedures report, not an examination report.

Choice "a" is incorrect. The report would include an opinion that the projection is presented in conformity with AICPA guidelines.

Choice "c" is incorrect. The report would include a statement that the report is intended solely for the information and use of specified parties.

Choice "d" is incorrect. The report would include an opinion that the underlying assumptions provide a reasonable basis for the projection.

39

An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:

a.

Engagement does not include an evaluation of the support for the assumptions underlying the projection.

b.

Accountant's responsibility to update the projection for future events and circumstances is limited to one year.

c.

Projection omits all hypothetical assumptions and presents the most likely future financial position.

d.

Projection may not be included in a document with audited historical financial statements.

Choice "a" is correct. When an accountant accepts a compilation engagement, he or she should indicate that it is limited in scope and would not include an opinion or assurance on the projected financial statements or the related assumptions.

Choice "d" is incorrect. A projection may be included in a document with audited historical financial statements. The compilation report would also be included with the document to make clear the that the accountant provides no opinion or any other form of assurance.

Choice "b" is incorrect. Updating the projection is the responsibility of company management, not the accountant. The compilation report specifically states that the accountant has no responsibility to update the report for events and circumstances occurring after the date of the report.

Choice "c" is incorrect.  A projection is based on hypothetical assumptions.

40

Which of the following items should be included in prospective financial statements issued in an attestation engagement performed in accordance with Statements on Standards for Attestation Engagements?

a.

All significant assertions used to prepare the financial statements.

b.

All significant assumptions used to prepare the financial statements.

c.

Pro forma financial statements for the past two years.

d.

Historical financial statements for the past three years.

Choice "b" is correct. When performing an attestation engagement related to a client's prospective financial statements, the accountant should ensure that the client discloses all significant assumptions that are used for the prospective financial statements.

Choice "a" is incorrect. The client is not required to disclose the significant assertions used for the prospective financial statements, but must disclose the significant assumptions used.

Choice "c" is incorrect. Pro forma financial statements are not required in an attestation engagement related to prospective financial statements.

Choice "d" is incorrect. Historical financial statements are not required in an attestation engagement related to prospective financial statements.

41

According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements?

a.

The practitioner sets the criteria to be used in the determination of findings.

b.

The practitioner is independent from the client and other specified parties.

c.

Use of the report is not restricted.

d.

The public accounting firm takes responsibility for the sufficiency of procedures.

Choice "b" is correct.  One of the conditions/policies that must exist in an agreed-upon procedures attestation engagement is that the practitioner be independent from the client and other specified parties pertaining to the engagement.

Choice "c" is incorrect. The reporting requirements include a statement regarding the restriction of use of the report as it is intended solely for the specified parties.

Choice "d" is incorrect. A condition for agreed-upon procedures engagements is that the specified parties and not the auditor take responsibility for the sufficiency of the procedures for their purposes.

Choice "a" is incorrect. The specified parties define the criteria to be used to determine findings.

42

Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements?

a.

Issue a report on findings based on specified procedures performed.

b.

Report the differences between agreed-upon and audit procedures.

c.

Assess whether the procedures meet the needs of the parties.

d.

Express negative assurance on findings of work performed.

Choice "a" is correct. An agreed-upon procedures engagement is one in which the practitioner is engaged to issue a report of findings based on specific procedures performed.

Choice "c" is incorrect. The sufficiency of the procedures is solely the responsibility of the specified parties, not the practitioner.

Choice "d" is incorrect. The report includes a listing of the procedures performed and the related findings, but does not provide any assurance on these items.

Choice "b" is incorrect. The practitioner does not report on the differences between agreed-upon and audit procedures.

43

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

a.

Disclaims any form of assurance on the historical financial statements.

b.

Describes the limitations on the usefulness of the projection.

c.

Expresses limited assurance that the results will be within the projected range.

d.

Evaluates the hypothetical assumptions used to prepare the projection.

Choice "b" is correct. A compilation of a financial projection report describes the limitations on the usefulness of the projection by including a caveat that the prospective results may not be achieved.

Choice "a" is incorrect. A compilation of a financial projection report disclaims any assurance on the projected, not historical, financial statements.

Choice "c" is incorrect. No assurance is provided in a compilation of projected financial statements.

Choice "d" is incorrect. An examination, not a compilation, of a financial projection evaluates the hypothetical assumptions used to prepare the projection.

44

Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures?

a.

A statement of scope limitation that will qualify the practitioner's opinion.

b.

A statement that the practitioner performed an examination of prospective financial statements.

c.

A statement referring to standards established by the AICPA.

d.

A statement of negative assurance based on procedures performed.

Choice "c" is correct. A statement referring to standards established by the AICPA should be included in a practitioner's report on the application of agreed-upon procedures.

Choice "b" is incorrect. Agreed-upon procedure reports state that the practitioner didnot conduct an examination of the subject matter.

Choice "a" is incorrect. No opinion is rendered in an agreed-upon procedure engagement. An opinion is rendered in an examination or audit engagement.

Choice "d" is incorrect. Agreed-upon procedure engagements do not provide any assurance.

45

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to:

a.

Communicate with an audit committee regarding management's consultations with another CPA.

b.

Provide assurance on investment performance statistics prepared by an investment company on established criteria.

c.

Compile financial statements in conformity with a comprehensive basis of accounting other than GAAP.

d.

Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities.

Choice "b" is correct. A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to provide assurance on investment performance statistics prepared by an investment company on established criteria. SSAE provide guidance on engagements other than reporting on historical financial statements.

Choice "d" is incorrect. Statements on Auditing Standards addresses the auditor's responsibilities when engaged to issue letters (commonly referred to as comfort letters) to a broker or dealer of securities.

Choice "c" is incorrect. Statements on Standards for Accounting and Review Services addresses the requirements for a CPA to engage in the compilation of financial statements with an applicable financial reporting framework, such as a comprehensive basis of accounting other than GAAP.

Choice "a" is incorrect. Statement on Auditing Standards and PCAOB Auditing Standards address the auditor's responsibilities when communicating with an audit committee regarding management's consultations with another CPA for nonissuer and issuer engagements, respectively.

46

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

a.

Statements on Standards for Consulting Services.

b.

Statements on Standards for Attestation Engagements.

c.

Statements on Standards for Accounting and Review Services.

d.

Statements on Auditing Standards.

Choice "b" is correct. The practitioner should refer to Statements on Standards for Attestation Engagements for an attestation engagement. In an attest service, the practitioner is engaged to issue a report on subject matter or on an assertion about the subject matter (in this case, the square footage of the warehouse), that is the responsibility of another party (in this case, management).

Choice "d" is incorrect. Statements on Auditing Standards apply to audits of financial statements.

Choice "c" is incorrect. SSARS provide standards with respect to compilations and reviews of financial statements. SSARS also apply to engagements in which the accountant is engaged to compile or issue a compilation report on specified elements, accounts, or items of a nonissuer's financial statements, or on pro forma financial information of a nonissuer.

Choice "a" is incorrect. Statements on Standards for Consulting Services apply to consulting services. In a consulting service, the practitioner develops the findings, conclusions, and recommendations presented.

47

Which of the following characteristics of prospective financial statements would require the practitioner to include in a report on the prospective financial statements a paragraph that restricts the use and distribution of the report?

a.

They are considered a financial projection.

b.

They contain a range of forecasted results.

c.

They are prepared by a practitioner who lacks independence.

d.

They are considered a financial forecast.

Choice "a" is correct. Prospective financial statements considered a financial projection would require a paragraph restricting the use and distribution of the report.

Choice "d" is incorrect. Prospective financial statements considered a financial forecast are appropriate for general use and are not required to have a paragraph that restricts the use and distribution of the report.

Choice "b" is incorrect. Forecasted financial statements are not required to be restricted when they contain a range of forecasted results.

Choice "c" is incorrect. A practitioner may issue a compilation of prospective financial statements if the practitioner is not independent. Lack of independence does not require a restricted use paragraph. However, in such circumstances, the practitioner's report would be modified to indicate his or her lack of independence in a separate paragraph of the practitioner's report. A practitioner may not issue an examination of prospective financial statements if he or she is not independent.

48

Which of the following statements is least likely to be included in a practitioner's report on agreed-upon procedures?

a.

The procedures performed were agreed to by the specified parties.

b.

The use of the report is subject to specified restrictions.

c.

The report has provided limited assurance.

d.

The subject matter is the responsibility of the responsible party.

 

Choice "c" is correct. Agreed-upon procedure engagements provide no assurance. Reviews provide limited (negative) assurance.

Choice "b" is incorrect. An agreed-upon procedures report should be restricted. The report should include a statement of restrictions on the use of the report because it is intended to be used solely by the specified parties.

Choice "d" is incorrect. An agreed-upon procedures report should include a statement that the subject matter is the responsibility of the responsible party.

Choice "a" is incorrect. An agreed-upon procedures report should include the procedures performed by the specified parties.