Accounting and review service engagements Flashcards
(10 cards)
Which of the following is the correct statement regarding analytical procedures used in a review conducted at the conclusion of an audit?
A. The procedures should be conducted by the quality control partner responsible for the CPA firm’s peer review program.
B. The procedures are performed as part of obtaining sufficient appropriate audit evidence to support the opinion.
C. The procedures may result in the auditor performing additional substantive tests of details.
D. The procedures used in the review near the conclusion of the audit are optional.
C. The procedures may result in the auditor performing additional substantive tests of details.
Analytical procedures consist of the study of data comparisons and relationships (ie, ratios) using high-level data. They require an auditor to develop an expectation based on knowledge of the client’s business. This expectation is then compared with client representations. Significant differences should be investigated.
Analytical procedures may be performed at three different stages of an audit:
Planning (required)
Substantive testing (optional)
Overall review (required)
At the conclusion of the audit (aftersufficientappropriate audit evidence has been obtained), analytical procedures are required in order to identify relationships that were not identified earlier in the engagement (Choices B and D). This overall review assists the auditor in assessing conclusions reached and in evaluating the financial statement presentations.
If these procedures suggest misstated account balances, the auditor may need to perform additional tests of details to obtain sufficient evidence to support the final opinion. Procedures should be performed by an engagement manager or partner with overall knowledge of the client’s business and industry (Choice A).
Things to remember:
Analytical procedures must be performed at the conclusion (ie, overall review phase) of an audit. These procedures are designed to identify relationships that were not identified earlier in the engagement and should be performed by the engagement manager/partner. If the procedures suggest misstated account balances, additional tests of details should be performed to satisfactorily complete the engagement.
The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity should state that
A. A review is limited to presenting in the form of financial statements information that is the representation of management.
B. A review consists of inquiries of company personnel and analytical procedures applied to financial data.
C. The accountant does not express an opinion or any other form of assurance on the financial statements.
D. The accountant did not obtain an understanding of the entity’s internal control or assess control risk.
B. A review consists of inquiries of company personnel and analytical procedures applied to financial data.
An accountant expresses a conclusion, not an opinion, in a review of financial statements (F/S). The conclusion addresses whether the entity’s F/S are prepared in accordance with an applicable financial reporting framework. The conclusion is based on obtaining limited assurance, primarily through the performance of inquiries and analytical procedures.
The required components of a standard unmodified review report are reflected in the mnemonic FAMILIAR, shown above.
(Choice A) A compilation, not a review, is limited to presenting (in the form of financial statements) information that is the representation of management. A review includes performing procedures that lead to offering a conclusion.
(Choice C) Although a review report indicates that the accountant does not express an opinion, limited assurance is provided in the review report.
(Choice D) Because a review provides only limited assurance, neither obtaining an understanding of internal control nor assessing control risk procedures is required. The review report would not state which procedures were not performed.
Things to remember:
In a review of financial statements (F/S), the accountant’s report expresses a conclusion (not an opinion) regarding whether the entity’s F/S are in accordance with an applicable financial reporting framework. The conclusion is based on obtaining limited assurance, primarily through the performance of inquiries and analytical procedures.
When an accountant is engaged to prepare financial statements, each of the following requirements applies, except:
A. The accountant should verify the completeness of information provided by management for the financial statements.
B. The engagement documentation should include the engagement letter and a copy of the prepared financial statements.
C. The agreed-upon terms of the engagement should include identification of the applicable financial framework to be used.
D. The accountant should include a statement on each page of the financial statements indicating that no assurance is provided.
A. The accountant should verify the completeness of information provided by management for the financial statements.
A preparation is a professional service in which accountants assemble financial statements (F/S). Because no procedures are performed to verify the accuracy or completeness of the information provided by management, a preparation engagement provides no assurance.
(Choices B and C) To ensure that both parties (ie, management and the accountant) agree to their respective responsibilities regarding the preparation engagement, the terms of the engagement should be documented in a signed engagement letter. Because the applicable financial reporting framework is an essential element of those terms, it will be identified in the engagement letter.
(Choice D) To ensure that F/S users do not misinterpret the accountant’s role in preparing the F/S, the accountant should include a statement on each page of the F/S indicating that no assurance is provided. If this is not possible, the accountant should issue a disclaimer stating that no assurance is provided, withdraw from the engagement, or upgrade the engagement to a compilation.
Things to remember:
Because a preparation engagement provides no assurance, an accountant will not verify the accuracy or completeness of the information provided. An engagement letter for a preparation should include the terms of the engagement, including the reporting framework to be used. Prepared financial statements should include a statement on each page that no assurance is provided.
Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to
A. The entity’s principal stockholder, to the exclusion of the other stockholders.
B. Potential stockholders in an offering statement.
C. A financial institution in a loan application.
D. A state or federal regulatory agency.
B. Potential stockholders in an offering statement.
Prospective financial statements (F/S) represent information about the future. A projection represents what management believes will occur given certain hypothetical assumptions based on a “what-if” scenario (eg, projecting what would happen to an entity’s profit if a certain regulation were passed). A projection is based on hypothetical propositions that may not be understood by all F/S users (ie, general public); therefore, a projection is for limited use by individuals who are knowledgeable about the proposition (eg, principal shareholder).
When accepting an engagement (eg, examination, compilation) in connection with projected F/S, CPAs must consider for whom the information is intended. It is acceptable to present a projection in connection with a loan application because the parties involved can discuss the nature of the projection in detail to obtain a comprehensive understanding (Choice C). Likewise, it is acceptable to provide a projection to a single principal stockholder or a state or federal regulatory agency requesting the projection (Choices A and D).
However, it is inappropriate to accept an engagement if the projection is intended for a large group of users, such as potential stockholders (ie, general public) in an offering statement.
Things to remember:
A projection represents what management believes will occur given certain specific hypothetical assumptions based on a “what-if” scenario. An accountant should accept an engagement to compile a financial projection only if distribution is limited to those who are knowledgeable enough to understand it (eg, principal shareholder, bank).
All of the following financial information can be reviewed except
A. Annual financial statements.
B. Single financial statement.
C. Pro forma financial statements.
D. Prospective financial statements.
D. Prospective financial statements.
In a review of financial statements (F/S), an accountant expresses a conclusion regarding whether an entity’s F/S are in accordance with an applicable financial reporting framework. The conclusion is based on obtaining limited assurance, primarily through the performance of inquiries and analytical procedures.
Prospective F/S present expected or hypothetical future results of an entity and require management to make significant assumptions about future events. Prospective F/S can take the form of a forecast or a projection and can be the subject of compilation, examination, or agreed-upon procedures engagement.
Review engagements for prospective information are not permitted because inquiry and analytical procedures are not expected to provide sufficient appropriate evidence to issue a review report. Review engagements may be performed in accordance with SSARS for annual F/S or single F/S (such as a balance sheet). They may also be performed on pro forma F/S under SSAEs (Choices A, B, and C).
Things to remember:
When users seek some level of assurance regarding prospective financial statements, an accountant is permitted to perform only an attestation engagement. Reviews are not permitted because inquiry and analytical procedures are not expected to provide sufficient appropriate evidence to issue a review report.
A CPA compiled the financial statements of a nonissuer for the fiscal period ending March 31, Year 1. The financial statements omitted substantially all disclosures required by GAAP. What is the CPA’s reporting responsibility concerning the proposed engagement?
A. The CPA should not issue a report on the financial statements because they lack GAAP disclosures.
B. The CPA should issue an unmodified report on the financial statements provided they do not contain any obvious material misstatements.
C. The CPA should issue a modified report on the financial statements with a separate paragraph indicating management has elected to omit substantially all disclosures.
D. The CPA should issue an unmodified report on the financial statements with management’s reasons for omitting GAAP disclosures.
C. The CPA should issue a modified report on the financial statements with a separate paragraph indicating management has elected to omit substantially all disclosures.
CPAs perform compilation engagements to assist management in the presentation of financial statements (F/S). An unmodified compilation engagement report is appropriate when the F/S are prepared in conformity with GAAP and nothing appears inaccurate, incomplete, or otherwise unsatisfactory.
When compiled F/S omit significantly all GAAP disclosures, the CPA must issue a modified compilation report (Choice A). The report should contain a separate paragraph that indicates:
Management has elected to omit substantially all disclosures required by GAAP
The information, had it not been omitted, may have influenced conclusions about the entity’s performance or financial position
The F/S are designed exclusively for those knowledgeable about such matters
(Choice B) In this scenario, a CPA cannot issue an unmodified compilation report. Even if the complied F/S do not contain any obvious material misstatements, the lack of disclosures may prevent an uninformed reader from reaching correct conclusions about the entity’s financial position.
(Choice D) The CPA is not required to include management’s rationale for omitting significantly all GAAP disclosures. Instead, the CPA should issue a modified compilation report indicating that management elected to omit the disclosures.
Things to remember:
Compilation engagements assist management in the preparation of financial statements (F/S) according to the appropriate financial reporting framework (ie, GAAP). When the F/S omit significantly all required GAAP disclosures, a modified compilation report is issued with a separate paragraph explaining that management elected to exclude the disclosures.
An accountant’s standard report on a compilation of a projection should not include a statement that
A. The projected results may not be achieved.
B. The hypothetical assumptions used in the projection are reasonable in the circumstances.
C. The accountant has no responsibility to update the report for future events and circumstances.
D. Management is responsible for the financial statements.
B. The hypothetical assumptions used in the projection are reasonable in the circumstances.
Accountants performing compilation services assist management in presenting financial statements (F/S). Accountants can compile either historical or prospective (ie, forward-looking) F/S, including both forecasts and projections.
Compiling financial projections consists of presenting the financial results management would expect to happen if a given hypothetical situation (eg, a recession) were to occur in the future. Projected F/S, like all prospective F/S, should include a summary of the significant management assumptions on which they are based. An accountant’s compilation report on prospective F/S will include, in addition to the basic elements (CARD), a statement that:
Projected (or forecasted) results may not be achieved (Choice A).
The accountant assumes no responsibility to update the report (Choice C).
Unlike audits or reviews, compilation engagements do not provide any form of assurance, such as a statement about whether a projection or forecast appears reasonable.
(Choice D) In a compilation engagement, the accountant assists management in presenting F/S. Because the underlying information is provided by management, the client retains all responsibility for the F/S, a fact indicated in the report.
Things to remember:
Unlike audits or reviews, compilation engagements do not provide an opinion, conclusion, or any level of assurance. Therefore, the standard report on the compilation of a projection does not include a statement that the projection appears reasonable.
An accountant has been engaged to review a nonissuer’s financial statements. During the engagement, the accountant uncovered a complex scheme involving client noncompliance (ie, illegal acts) that materially and pervasively affects the financial statements. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is not adequate to communicate the deficiencies. Under these circumstances, the accountant should
A. Disclaim an opinion.
B. Issue an adverse conclusion.
C. Withdraw from the engagement.
D. Issue a qualified conclusion.
C. Withdraw from the engagement.
In a review of financial statements (F/S), an accountant expresses a conclusion (not an opinion) that is based on obtaining limited (ie, negative) assurance, primarily through inquiries and analytical procedures.
If nothing comes to the accountant’s attention indicating that the F/S need material modification to conform with the applicable financial reporting framework, the accountant will issue an unmodified review report. If the accountant determines that the F/S are materially misstated, the accountant should express a modified conclusion.
When the accountant concludes that the effects of the matter(s) giving rise to the modification are:
Material but not pervasive to the F/S, a qualified conclusion is expressed
Material and pervasive to the F/S, an adverse conclusion is expressed
In this scenario, the accountant uncovered a complex scheme involving illegal acts and management refuses to adjust the F/S to reflect the effect of the illegal acts. Because the accountant would not want to be associated with a client that violates the law, the accountant should withdraw from the engagement.
(Choice A) Reviews result in conclusions, not opinions. Because an opinion is not issued, a disclaimer of opinion cannot be issued either.
(Choices B and D) Modified conclusions can be issued in most circumstances in which a material issue must be addressed. However, the severity of committing and hiding illegal acts is beyond a modified conclusion and the accountant should withdraw.
Things to remember:
If an accountant believes that modification of a standard review report is not adequate to indicate deficiencies in the financial statements, such as misstatements resulting from material and pervasive illegal acts, the accountant should withdraw from the engagement.
An accountant’s standard report issued after compiling the financial statements of a nonpublic entity should state that
A. The accountant was not aware of any material modifications that should be made to the accompanying financial statements.
B. A compilation consists principally of inquiries of company personnel and analytical procedures.
C. The accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management.
D. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.
C. The accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management.
In a compilation engagement, an accountant assists a client in presenting F/S and issues a report to accompany them. The compilation engagement requires the accountant to read the F/S to verify that there are no obvious material misstatements, but the accountant does not provide any assurance. As with other engagements (eg, audit, review), a report on a compilation engagement must describe the nature of the service so that users do not misinterpret the report.
For a compilation, the report should state that the accountant did not audit or review the F/S and was not required to perform any procedures to verify the accuracy or completeness of the information presented. To ensure the nature of the service is understood, the report will also state explicitly that the accountant does not offer an opinion (as in an audit) or a conclusion (as in a review), or provide any assurance on the F/S.
(Choice B) A review, not a compilation, consists principally of inquiries and analytical procedures.
(Choices A and D) A review report, not a compilation report, states that the accountant is not aware of material modifications that should be made to the F/S (ie, limited assurance). Similarly, a review report states that a review is substantially less in scope than an audit.
Things to remember:
A report on a compilation engagement includes a statement that the accountant was not required to verify the information presented and does not provide any assurance on the F/S.
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?
A. Review report with a qualification.
B. Review report with a disclaimer.
C. Review report and footnote exceptions.
D. Compilation report with the client’s consent.
D. Compilation report with the client’s consent.
For review engagements, accountants are required to obtain a written representation letter from management. Representations are dated as of the date of the review report (ie, the date on which the accountant has determined that sufficient appropriate review evidence has been obtained).
If management does not provide the required representations, the accountant cannot issue a review, even with qualifications or footnotes (Choices A and C). Because an opinion is not expressed in a review report, a disclaimer of an opinion cannot be issued (Choice B). One option is for the accountant to withdraw from the engagement.
Alternatively, with the client’s consent, the engagement can be downgraded to a compilation, which does not require a management representation letter. The compilation report can make no reference to the original engagement or the reasons for the downgrade. Such a reference would only confuse the reader regarding the nature of the work the accountant performed.
Things to remember:
If management does not provide an accountant with a written representation letter, the accountant cannot issue a review report, even with qualifications or footnotes. Because no opinion is rendered, a disclaimer cannot be issued either. The accountant can withdraw from the engagement or downgrade to a compilation with a client’s consent. A compilation does not require a management representation letter.
