Accounting & Review Services Flashcards Preview

CPA - AUD > Accounting & Review Services > Flashcards

Flashcards in Accounting & Review Services Deck (39):
1

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

  1. Financial Accounting Standards Board.
  2. General Accounting Office.
  3. Accounting and Review Services Committee.
  4. Auditing Standards Board.

Accounting and Review Services Committee.  The standards that address unaudited financial statements are the Statements on Standards for Accounting and Review Services.

These standards are issued by the AICPA's Accounting and Review Services Committee.

2

The Statements on Standards for Accounting and Review Services are not applicable when: 

  • i.e. An accountant is allowed to prepare without being subject to the Statements on Standards for Accounting and Review Services.

The standards apply to situations in which an accountant prepares, compiles or reviews financial statements of a nonissuer.  These activities below are not considered one of  these three types of services.  

  1. preparing a working trial balance;
  2. assisting in adjusting the books of account;
  3. consulting on accounting, tax, and similar matters;
  4. preparing tax returns ;
  5. providing bookkeeping or data processing services, and
    • preparing monthly journal entries
  6. processing financial data for clients of other accounting firms.

3

Financial Forecasts and Projections

  • Restricted Reports

  1. Any type of report on a projection (since projections are too easily misunderstood to be appropriate for general distribution!).
  2. An agreed-upon procedures report on a forecast.
  3. Any type of report on a "partial presentation" of a forecast (where any omission of the AICPA minimum presentation guidelinescauses a presentation to be inappropriate for general distribution).

Minimum presentation guidelines  -- 

  1. 1. Sales or gross revenues;
  2. 2. Gross profit or cost of sales;
  3. 3. Unusual or infrequently occurring items;
  4. 4. Provision for income taxes;
  5. 5. Discontinued operations or extraordinary items;
  6. 6. Income from continuing operations;
  7. 7. Net income;
  8. 8. Basic and diluted earnings per share;
  9. 9. Significant changes in financial position;
  10. 10. Description of what the responsible party intends the prospective financial statements to represent;
  11. 11. Summary of significant assumptions;
  12. 12. Summary of significant accounting policies.

4

When AICPA professional standards relating to a review of a nonissuer’s (nonpublic entity’s) financial statements uses the term "should" to indicate the accountant’s responsibility to perform a procedure, performance of that procedure is considered:

  1. Unconditionally required—The accountant is required to comply with it.
  2. Presumptively mandatory—The accountant is required to comply with it except in rare circumstances.
  3. Advisory—The accountant should consider this is as general advice and determine whether to follow the procedure.
  4. Optional—There is no requirement under any circumstance that the accountant perform the procedure.

The term "should" refers to a presumptively mandatory requirement.

SSARS use two categories of professional requirements identified by specific terms to define the accountant’s responsibilities.

  1. Unconditional requirement—accountant is required to comply. SSARS uses the words must or is required.
  2. Presumptively mandatory requirement—account is required to comply unless the accountant justifies the departure and explains how alternative procedures were sufficient to achieve the objectives of the presumptively mandatory requirement.   SSARS uses the word should to indicate a presumptively mandatory requirement.

When the term should consider is used the consideration of the procedure is presumptively mandatory but performing the procedure is not.

5

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, year 1. These financial statements omitted substantially all disclosures required by 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?

  1. Clark may not report on the comparative financial statements because the year 1 statements are not comparable to the year 2 statements.
  2. Clark may report on the comparative financial statements provided the year 1 statements do not contain any obvious material misstatements.
  3. Clark may report on the comparative financial statements provided an explanatory paragraph is added.
  4. Clark may report on the comparative financial statements provided Clark updates the report on the year 1 statements.

Clark may not report on the comparative financial statements because the year 1 statements are not comparable to the year 2 statements.  A CPA should not report on compiled comparative financial statements in which one year, but not all years, omit note disclosures.

6

Independence Requirement for Reporting Matters

 

Generally independence is required when the auditor or CPA issues some type of assurance.  

Independence is not required for:

  1. Preparing FS
  2. Compilation of FS

Independence is required for:

  1. Audit Engagements (positive or negative assurance)
  2. Review Engagements (negative assurance)
  3. AUP Engagements

7

An accountant who had begun an audit of the financial statements of a nonpublic entity 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

  • Original engagement that was agreed to? 
  • Scope limitation that caused the change engagement?
     

NO AND NO

8

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

  1. Make inquiries of the employees and senior management regarding transactions with related parties.
  2. Determine whether there is substantial doubt about the entity’s ability to continue as a going concern.
  3. Scan the entity’s records for the period just after the balance sheet date to identify subsequent events requiring disclosure.
  4. Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.

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

Compilation Procedures. To perform a compilation the accountant must

  1. Possess an understanding of the accounting principles and practices in the client’s industry to enable performance of the compilation
  2. Possess a general understanding of the client’s
    • Business transactions,
    • Accounting records,
    • Accounting personnel qualifications,
    • Financial statement accounting basis, and
    • Financial statement form and content.
  3. Read the compiled statements and consider whether they appear to be appropriate and free from obvious material errors

9

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

  1. Perform analytical procedures.
  2. Express negative assurance on the financial statements.
  3. Make management inquiries and examine internal controls.
  4. Perform the engagement even though independence is impaired.

Perform the engagement even though independence is impaired.  The accountant need not be independent to perform a preparation engagement but in such a circumstance should add the following to the report: "I am [we are] not independent with respect to XYZ Company" is added to the report).

10

An accountant has performed a financial statement preparation engagement. When that accountant is unable to include a statement on each page of the financial statements indicating that no assurance is provided, the accountant should issue either a?

  • Disclaimer that makes clear that no assurance is provided on the financial statements or
  • Compilation report in accordance with AR-C section 80.

11

Which of the following circumstances requires modification of the accountant’s report on a review of interim financial information of a publicly held entity?

  1. Inconsistent accounting principle application
  2. Inadequate disclosure

Inadequate disclosure only!!!  Inconsistent accounting principle application does not require report modification and inadequate disclosure does.  

Be sure to look at the reporting differences between reviews and audits.

12

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?

  1. Perform a reasonableness test of the balance by computing days' sales in receivables.
  2. Vouch a sample of subsequent cash receipts from customers.
  3. Confirm individually significant receivable balances with customers.
  4. Review subsequent bank statements for evidence of cash deposits.

Perform a reasonableness test of the balance by computing days' sales in receivables. A reasonableness test is an analytical procedure of the nature included in reviews (along with inquiries of management and employees).

13

Review Engagement for SSARS

  • what procedures are not conducted

A review does not contemplate

  1. obtaining an understanding of the entity's internal control,
  2. assessing fraud risk,
  3. tests of accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation,
  4. the examination of source documents (for example, cancelled checks or bank images); or
  5. other procedures ordinarily performed in an audit.
     

14

Which of the following procedures would a CPA most likely perform when reviewing the financial statements of a nonissuer?

  1. Verify that the accounting estimates that could be material to the financial statements have been developed.
  2. Obtain an understanding of the entity’s internal control components.
  3. Assess the entity’s ability to continue as a going concern for a reasonable period of time.
  4. Make inquiries about actions taken at the board of directors meetings.

Make inquiries about actions taken at the board of directors meetings.  The inquiries included in a review ordinarily include those on actions taken at board of directors meetings.

15

Blue Co., a privately held entity, asked its tax accountant, Cook, a CPA in public practice, to prepare its financial statements in conjunction with preparation of Blue's tax return. These financial statements will be presented alongside the entity's tax return for various purposes (e.g., they will be provided to a bank from which Blue Co. has an outstanding loan). The standards that apply in this situation are:

  1. Statements on Standards for Tax Services.
  2. Statements on Standards for Accounting and Review Services.
  3. Statements on Responsibilities in Unaudited Financial Services.
  4. Statements on Standards for Attestation Engagements.

Statements on Standards for Accounting and Review Services.  Statements on Standards for Accounting and Review Services apply to financial statement preparation of such financial statements; if the financial statements with a tax return are solely for submission to taxing authorities (not the situation here) the SSARS do not apply.

16

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?

  1. Review report on the one statement.
  2. Qualified review report.
  3. Issue no report.
  4. Compilation report with the client’s consent.

Issue no report.  A report may not be issued due to the restriction on procedures (failure to obtain a representation letter). 

17

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

  1. The hypothetical assumptions used in the forecast are reasonable in the circumstances.
  2. The forecast should be read only in conjunction with the audited historical financial statements.
  3. The accountant expresses only limited assurance on the forecasted statements and their assumptions.
  4. There will usually be differences between the forecasted and actual results.

There will usually be differences between the forecasted and actual results.  The attestation standards require a caveat on the fact that there will usually be differences between the forecasted and actual results.

18

Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

  1. Inquiry regarding the client’s principles and practices and the method of applying them.
  2. Inquiry concerning the effectiveness of the client’s system of internal control.
  3. Inquiry to identify transactions between related parties and management.
  4. Inquiry of the client’s professional advisors, including bankers, insurance agents, and consultants.

Inquiry regarding the client’s principles and practices and the method of applying them.  

An auditor must first understand the client’s principles and practices in order to review the financial statements.

19

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

  1. A review is limited to presenting in the form of financial statements information that is the representation of management.
  2. A review consists of inquiries of company personnel and analytical procedures applied to financial data.
  3. The accountant does not express an opinion or any other form of assurance on the financial statements.
  4. The accountant did not obtain an understanding of the entity’s internal control or assess control risk.

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

20

Before performing a review of a nonpublic entity’s financial statements, an accountant should

  1. Complete a series of inquiries concerning the entity’s procedures for recording, classifying, and summarizing transactions.
  2. Apply analytical procedures to provide limited assurance that no material modifications should be made to the financial statements.
  3. Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
  4. Inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.

Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.​

The accountant should possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates. This requirement does not prevent an accountant from accepting a review engagement for an entity in an industry with which the accountant has no previous experience. It does, however, place upon the accountant a responsibility to obtain the required level of knowledge.

21

A review engagement relationship for a nonpublic company ordinarily involves an accountant and:

  1. A responsible party?
  2. Intended users?

 

YES and YES.

A review involves a three-party relationship among:

  1. responsible party (management),
  2. intended users, and
  3. an accountant.

22

An accountant had begun to audit the financial statements of a nonpublic entity.  Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity’s request to change the engagement to a compilation?

  1. The entity’s management does not provide the accountant with a signed representation letter.
  2. The accountant is prohibited from corresponding with the entity’s legal counsel.
  3. The entity’s principal creditors no longer require the entity to furnish audited financial statements.
  4. The accountant is prevented from examining the minutes of the board of director’s meetings.

The entity’s principal creditors no longer require the entity to furnish audited financial statements.  

Before agreeing to such a change the accountants should consider the reasonableness of the reason for the request, the additional work required to complete the audit, and the additional cost involved.  The decision by principal creditors not to require audited financial statements seems to provide a reasonable basis for the request.

23

An accountant has been asked to compile the financial statements of a nonpublic company on a prescribed form that omits substantially all the disclosures required by generally accepted accounting principles.  If the prescribed form is a standard preprinted form adopted by the company’s industry trade association, and is to be transmitted only to such association, the accountant

  1. Need not advise the industry trade association of the omission of all disclosures.
  2. Should disclose the details of the omissions in separate paragraphs of the compilation report.
  3. Is precluded from issuing a compilation report when all disclosures are omitted.
  4. Should express limited assurance that the financial statement are free of material misstatements.

Need not advise the industry trade association of the omission of all disclosures.  The professional standards state that there is a presumption that the information required by a prescribed form is sufficient to meet the needs of the body that designed or adopted it; accordingly, there is no need for that body to be advised of departures from GAAP.

24

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

  1. There will usually be differences between the forecasted and actual results.
  2. The hypothetical assumptions used in the projection are reasonable in the circumstances.
  3. The accountant has no responsibility to update the report for future events and circumstances.
  4. The compilation of a projection is limited in scope.

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

A projection differs from a forecast in that it includes a hypothetical assumption(s)—accountants do not provide assurance on the hypothetical assumption.

25

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles.  If management refuses to correct the financial statement presentations, the CPA should

  1. Disclose the departure in a separate paragraph of the report.
  2. Issue an adverse opinion.
  3. Attach a footnote explaining the effects of the departure.
  4. Issue a compilation report.

The departure should be disclosed in a separate paragraph of the report if the accountant concludes that modification is appropriate.

When the CPA is aware of a departure from GAAP, the matter is described in a fourth paragraph. Also, the third paragraph includes the following term (which we have italicized):

Based on my (our) review, with the exception of the matter described in the following paragraph, ...
 

26

Each page of a nonpublic entity’s financial statements reviewed by an accountant should include the following reference:

  1. Reviewed, No Assurance Expressed.
  2. See Accompanying Accountant’s Footnotes.
  3. Reviewed, No Material Modifications Required.
  4. No such reference is required.

No such reference is required.  SSARS do not require such a reference.

27

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)?

  1. Apply year-end cutoff tests for the sales and purchasing functions.
  2. Compare the financial statements with budgets or forecasts.
  3. Obtain an understanding of the entity’s internal control components.
  4. Document whether control risk is assessed at or below the maximum level.

Compare the financial statements with budgets or forecasts.

Review Procedures. To perform a review the accountant must

  1. Possess an understanding of the accounting principles and practices in the client's industry and an understanding of the entity's business that will provide him/her, through the performance of inquiry and analytical procedures, a reasonable basis for expressing limited assurance that no material modifications need to be made to the financial statements.
  2. Possess a general understanding of the client’s
  • Organization
  • Operating characteristics
  • Assets, liabilities, revenues and expenses

28

Reviews of annual information of nonpublic companies

  1. Are identical in procedures included to those in interim reviews of public companies.
  2. Are only required to be performed of nonpublic companies with assets in excess of 1,000,000.
  3. Include a more detailed analysis of internal control than do interim reviews of public companies.
  4. Are designed to obtain evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications needed.

Are designed to obtain evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications needed.

29

Which of the following statements is correct concerning materiality for purpose of a review of a nonpublic company’s financial statements?

  1. It is an amount that could reasonably be expected to influence user economic decisions.
  2. It ordinarily is an amount smaller than that used in an audit of nonpublic company financial statements.
  3. It will in almost all situations be less than the tolerable misstatement amount for tests of an individual account.
  4. It should be considered for individual misstatements, and not in the aggregate sense for the overall financial statements.

It is an amount that could reasonably be expected to influence user economic decisions.  Nonpublic company reviews, as do audits, consider materiality to be an amount that could reasonably be expected to influence user economic decisions.

30

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)?

  1. The report should not be issued if the accountant is not independent from the entity.
  2. The report should include a statement indicating that the information is the representation of the accountant.
  3. The report should include a description of all procedures performed during the compilation.
  4. The date on the report should be the date of completion of compilation procedures.

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

A compilation report should include:

  • Identification of the financial statements and indication that they are the responsibility of management.
  • Indication that the financial statements have been compiled in accordance with SSARS and that the accountant did not audit or review the financial statements.
  • Signature of CPA firm, city and state, date (completion of compilation procedures).

31

A review of a nonpublic company’s financial statements is considered:

  1. An assurance engagement?
  2. An attest engagement?

BOTH.

Objective of a review—Obtain 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.

  1. In a review the accountant should accumulate review evidence to obtain a limited level of assurance.
  2. A review engagement is an assurance engagement as well as an attest engagement.

32

When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with GAAP, the accountant should

  1. Assess the risk of material misstatement in the financial statements due to fraud.
  2. Perform tests of controls to evaluate the effectiveness of the controls.
  3. Understand the accounting principles of the industry in which the entity operates.
  4. Communicate with the audit committee regarding material weaknesses in internal control.

Understand the accounting principles of the industry in which the entity operates.  when an accountant provides limited assurance (that is, through performing a review), an understanding of the industry is necessary.

33

Which of the following is correct relating to an accountant's responsibility when performing a financial statement preparation engagement?

  1. The accountant must perform substantive tests of balances when the financial statements will be distributed to third parties.
  2. An accountant's preparation report must be included with the financial statements.
  3. The accountant must obtain a representation letter from management.
  4. Each page of the financial statements should have a restriction such as "No assurance is provided on these financial statements."

Each page of the financial statements should have a restriction such as "No assurance is provided on these financial statements."

Nature of Preparation of Financial Statements

  1. As the name would suggest, this involves preparing financial statements for clients. The accountant prepares financial state using the records, documents, explanations, and other information provided by management.
  2. The accountant should ensure that a statement is included on each page of the financial statements indicating "no assurance is provided." If the accountant is unable to include such a statement on each page the accountant should issue either a
  • Disclaimer that makes clear that no assurance is provided on the financial statements or
  • Compilation report in accordance with AR-C section 80.
  1. The accountant need not even consider whether s/he is independent when preparing financial statements.

34

Which of the following types of association with financial statements is least likely to result in a report by the CPAs?

  1. Compilation.
  2. Review.
  3. Preparation.
  4. Audit.

Preparation.  Neither financial statement preparation or compilation require independence as the accountants provide no assurance with either form of engagement. Compilations result in an accountant's report while preparation ordinarily does not.

35

Which of the following is included in compilation performance requirements?

  1. Obtain a knowledge of the client through performance of tests of controls.
  2. Read the financial statements and perform analytical procedures as considered necessary.
  3. Obtain an understanding of the client’s industry (e.g., through AICPA guides, industry publications).
  4. Perform tests of details of transactions only for current assets and liabilities.

Obtain an understanding of the client’s industry (e.g., through AICPA guides, industry publications).

  1. Understand the Industry
  2. Knowledge of the client
  3. Read the financial statements
  4. Other compilation procedures—the accountant is not required to make inquiries or perform other procedures to verify, corroborate, or review information supplied by the entity.
  • However, the accountant may have made inquiries or performed other procedures which revealed misstatements, illegal acts, etc.; in such cases:
  1. The accountant should request that management consider the matters.
  2. When accountant believes financial statements are materially misstated, obtain additional or revised information; if the entity refuses to provide such information the accountant should withdraw from the engagement.

36

Which of the following is correct relating to compiled financial statements?

  1. A compilation report must be issued.
  2. Omission of note disclosures ordinarily results in withdrawal from the engagement.
  3. A written agreement with the client (ordinarily, an engagement letter) is not required.
  4. Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only."

A compilation report must be issued. Remember only a Preparation engagement does not have a report issued.  

37

Which of the following should be included in an accountant’s standard report based upon the review of a nonpublic entity’s financial statements?

  1. A statement that the review was performed in accordance with generally accepted review standards.
  2. A statement that a review consists principally of inquiries and analytical procedures.
  3. A statement that the accountant is responsible for issuing an opinion on the financial statements.
  4. A statement that a review is substantially greater in scope than a compilation.

A statement that a review consists principally of inquiries and analytical procedures. 

A review report should state that

  • A review was performed in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.
  • All information included in the financial statements is the representation of the management (owners) of the entity.
  • A review consists principally of inquiries of company personnel and analytical procedures applied to financial data.
  • A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements taken as a whole and, accordingly, no such opinion is expressed.
  • The accountant is not aware of any material modification that should be made to the financial statements in order for them to be in conformity with GAAP, other than those modifications, if any, indicated in the report.

38

Statements on Standards for Accounting and Review Services (SSARS) establish standards and procedures for which of the following engagements?

  1. Assisting in adjusting the books of account for partnership.
  2. Reviewing interim financial data required to be filed with the SEC.
  3. Processing financial data for clients of other accounting firms.
  4. Compiling an individual’s personal financial statement to be used to obtain a mortgage.

Compiling an individual’s personal financial statement to be used to obtain a mortgage. Issue is public vs. private.  Review answer is wrong because the PCAOB Auditing standards, not the SSARS apply to interim financial data required to be filed with the SEC.

39

An accountant’s standard report issued after compiling the financial statements of a nonpublic entity should state that

  1. I am not aware of any material modifications that should be made to the accompanying financial statements.
  2. A compilation consists principally of inquiries of company personnel and analytical procedures.
  3. Management is responsible for the financial statements.
  4. A compilation is substantially less in scope than a general attestation or assurance engagement.

Management is responsible for the financial statements. 

A compilation report should include:

  1. Identification of the financial statements and indication that they are the responsibility of management.
  2. Indication that the financial statements have been compiled in accordance with SSARS and that the accountant did not audit or review the financial statements.
  3. Signature of CPA firm, city and state, date (completion of compilation procedures).