Accounting and Review Service Engagements

Question 1

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements 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

Answer 1

The correct answer is (D)

Statements on Standards for Attestation Engagements (SSAE) do not apply to litigation services or testifying as an expert witness in accounting, auditing taxation etc.

A compilation of a financial projection or forecast is covered under Statement on Standards for Accounting & Review Services (SSARS), not SSAE.

Per SSARS 23, a compilation of a financial projection or forecast is under SSARS and an examination of a financial projection is under SSAE.

Since this question is about a compilation, it would be SSARS and not SSAE.

Question 2

According the PCAOB’s auditing standard for engagement quality reviews, the reviewer should evaluate the significant judgments that relate to engagement planning, including all of the following except

A. The consideration of the firm’s recent engagement experience with the company and risks identified in connection with the firm’s client acceptance and retention process

B. The consideration of the company’s business, recent significant activities, and related financial reporting issues and risks

C. The judgments made about materiality and the effect of those judgments on the engagement strategy

D. Review the engagement completion document and confirm with the engagement partner that there are no significant unresolved matters

Answer 2

D.

Reviewing the engagement completion document and confirming with the engagement partner that there are no significant unresolved matters is not a significant judgment related to engagement planning; this function generally is done in the review stage. Considering recent engagement experience with the company is a task appropriate to the planning stage. Considering the company’s business and recent activity is a task appropriate to the planning stage. Considering materiality is a task appropriate to the planning stage.

Question 3

An auditor notes significant deficiencies in a financial statement audit conducted in accordance with Government Auditing Standards. In reporting on internal control, the auditor should state that

A. Expressing an opinion on the entity’s financial statements provides no assurance on internal control.

B. The auditor obtained an understanding of the design of relevant policies and procedures, and determined whether they have been placed in operation.

C. The specified government funding or legislative body is responsible for reviewing internal control as a condition of continued funding.

D. The auditor has not determined whether any of the significant deficiencies described in the report are so severe as to be material weaknesses.

Answer 3

B.

The auditor should obtain a sufficient understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and to determine whether they have been implemented. This includes governmental audits. GAGAS requires that the auditor include in their report on the financial statements either a description of the scope of the auditors’ testing of internal control and the results of those tests or an opinion, if sufficient work was performed; or reference to the separate report(s) con­taining that information. GAGAS requires that auditors identify those significant deficiencies that are individually or in the aggregate considered to be material weaknesses.

Question 4

In assessing the competence of the internal audit function, an external auditor most likely would obtain information about the

A. Quality of the internal auditors’ working paper documentation

B. Organization’s commitment to integrity and ethical values

C. Influence of management on the scope of the internal auditors’ duties

D. Organizational level to which the internal audit function reports

Answer 4

A.

The quality of the internal audit function’s documentation reflects on their competence. The other answers are related to their objectivity.

Editor’s note: The two key words to remember regarding internal auditors as it pertains to the CPA Exam are: objectivity and competence. Competence relates to the core ability to perform the function, and objectivity relates to how impartial the internal auditors are in relation to the organization they work for.

Question 5

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider

The average dollar value of the check requests

The allowable risk of assessing control risk too low

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 5

C.

Check authorization is an internal control. In tests of internal controls, the auditor is determining the rate of occurrence of a deviation from the control procedure, not testing the dollar amounts reported in the financial statements. The allowable risk of assessing control risk too low affects the degree of assurance desired by the auditor. If a high degree of assurance is sought, sampling risk must be low. Sample size and risk are inversely related.

Question 6

According to the AICPA Code of Professional Conduct, what would a covered member most appropriately do upon learning that another member of an attest engagement team is considering employment with the client?

A. Notify an appropriate person in the firm.

B. Disassociate from the engagement.

C. Report the situation to the client’s board of directors.

D. Advise the engagement partner to withdraw the firm from the engagement.

Answer 6

The correct answer is (A).

Upon learning that another member of an attest engagement team is considering employment with the client, a covered member must notify an appropriate person in the firm. This could be consequential to independence and the covered member must notify someone in the CPA firm.

(B) is incorrect because the situation does not require the said covered member to be dissociated from the engagement. Instead, the member considering employment with the client should be dissociated.

(C) is incorrect because the situation is not required to be reported to the client’s board of directors.

(D) is incorrect because the firm need not withdraw from the engagement. It is enough if the member considering employment with the client is dissociated from the engagement.

Question 7

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 Auditing Standards

B. Statements on Standards for Attestation Engagements

C. Statements on Standards for Accounting and Review Services

D. Statements on Standards for Consulting Services

Answer 7

The correct answer is Option (B).

The Statements on Standards for Attestation Engagements are applicable to engagements to issue an assertion about subject matter that is the responsibility of another party. In an attest service, the practitioner is engaged to issue a report on subject matter or on an assertion about the subject matter which in this case is the square footage of the warehouse, that is the responsibility of another party, in this case, the management.

Option (A) is incorrect as The Statements on Auditing Standards provide guidance for audits of Financial Statements and reviews of interim Financial Statements when the corresponding annual Financial Statements are expected to be audited by the same auditor.

Option (C) is incorrect as The Statements on Standards for Accounting and Review Services are applicable to engagements to compile and review Financial Statements.

Option (D) is incorrect as The Statements on Standards for Consulting Services provide guidance for a wide array of ser­vices with little relation to financial statements, including information technology selection and implementation, support services, and business plan preparation.

Question 8

In order to opine on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole, all of the following conditions must be met except for

A. The supplementary information was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements.

B. The supplementary information relates to the same period as the financial statements.

C. The auditor issued an audit report on the financial statements that contained neither an adverse opinion nor a disclaimer of opinion.

D. The supplementary information will accompany the entity’s audited financial statements, or such audited financial statements will be made available upon request.

Answer 8

D.

Being available upon request is not considered readily available. One of the conditions that must be met is that the supplementary information will accompany the entity’s audited financial statements, or such audited financial statements will be made readily available by the entity. Audited financial statements are deemed to be readily available if a third party user can obtain the audited financial statements without any further action by the entity. For example, financial statements on an entity’s website may be considered readily available, but being available upon request is not considered readily available.

Question 9

Which of the following statements is false in regard to an audit of internal control over financial reporting conducted in accordance with the standards of the Public Company Accounting Oversight Board (PCAOB)?

A. The auditor may rely upon the judgments of others regarding the sufficiency of evidence.

B. The auditor may use the work of others to alter the nature, timing, or extent of the work that the auditor performs.

C. The extent to which the auditor may use the work of others depends on their objectivity.

D. As the risk associated with a control increases, the need for the auditor to perform his or her own work on the control increases.

Answer 9

A.

Judgments about evidence sufficiency and other factors affecting the opinion must be the auditor’s. The other statements are true. Editor’s note: You’re the one signing the report with your name on it, so it better be your professional judgment (not someone else’s) that came to the opinion.

Question 10

An auditor scans a client’s investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The pri­mary purpose of this procedure is to obtain evidence about management’s financial statement assertions of

A. Rights and obligations; and existence or occurrence

B. Valuation and allocation; and rights and obligations

C. Existence or occurrence; and classification

D. Classification; and valuation and allocation

Answer 10

D.

Classification concerns whether financial information is appropriately presented in the proper accounts within the financial statements. Valuation and allocation deals with whether assets, liabilities, and equity interests are valued properly and any resulting valuation or allocation adjustments are appropriately recorded. When accounting for investments, the classification has an impact on the appropriate method of valu­ation in the financial statements. Rights and obligations concern whether, at a given date, recorded assets indeed represent rights of the entity and liabilities represent obligations. Reviewing investment records regarding trans­fers between categories (internal documents) provides little evidence that ownership rights in the investments still exists at the balance sheet date, that the investment is not pledged as loan collateral, that the investments exist at the balance sheet date, or that an external transaction involving the investment occurred during the period.

Question 11

According to US GAAS, an auditor’s professional judgment

A. Should be documented so that it is sufficient to enable an experienced auditor, having no previous connection with the audit, to understand all professional judgments made

B. Is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or by sufficient appropriate audit evidence

C. Is exercised primarily during the planning and review stages of an audit

D. Is not used regarding decisions about the nature, extent, and timing of audit procedures used to meet the requirements of US GAAS and gather audit evidence, but is relevant to decisions regarding materiality and audit risk

Answer 11

B.

Professional judgment is not to be used as the justification for decisions that are not otherwise supported by the facts and circumstances of the engagement or by sufficient appropriate audit evidence.

Regarding incorrect answer A., it would be true if it stated that the significant, not all, professional judgments made should be documented.

Regarding incorrect answer C., professional judgment needs to be exercised throughout (in planning and performing) the audit; not just during the planning and review stages.

Regarding incorrect answer D., all of the matters mentioned involve professional judgment. Other such decisions which, in particular, require the exercise of professional judgment include evaluating whether sufficient appropriate audit evidence has been obtained and whether more needs to be done to achieve the objectives of US GAAS and thereby, the overall objectives of the auditor; the evaluation of management’s judgments in applying the entity’s applicable financial reporting framework; and the drawing of conclusions based on the audit evidence obtained, e.g., assessing the reasonableness of the estimates made by management in preparing the financial statements.

Question 12

An auditor’s program to examine long-term debt most likely would include steps that require

A. Comparing the carrying amount of the debt to its year-end market value

B. Correlating interest expense recorded for the period with outstanding debt

C. Verifying the existence of the holders of the debt by direct confirmation

D. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt

Answer 12

B.

An auditor’s program to examine long-term debt should include a step where the auditor reconciles interest expense with debt outstanding during the year (period). This step would provide information as to the completeness and valuation of the account balance. The auditor is not concerned with the year-end market value of the debt. The auditor would not verify the existence of the holders of the debt by direct confirmation. Outstanding balances, terms, and conditions are confirmed with the credit grantor or independent trustee. The search for unrecorded liabilities would generally be made by scanning cash disbursements made in the period following the balance sheet date. Also, the accounts payable subsidiary ledger would not likely provide evidence as to long-term liabilities.

Question 13

When an accountant compiles a client’s financial statements accompanied by supplemental information, which of the following is a required element of the accountant’s separate report on the supplemental information?

A. A statement that the information has been compiled from information that is the representation of management without audit or review.

B. A list of the procedures performed by the accountant during the compilation.

C. A statement that the accountant did not become aware of any material modifications that should be made to the information.

D. A confirmation of the independence of the accountant with respect to the information presented.

Answer 13

The correct answer is (A).

When supplementary information accompanies financial statements and the accountant’s compilation report thereon, the accountant should clearly indicate the degree of responsibility, if any, the accountant is taking with respect to such information in either, an other-matter paragraph in the compilation report on the financial statements, or a separate report on the supplementary information.

The other-matter paragraph or the separate report on the supplementary information should state the following:

The information is presented for purposes of additional analysis and is not a required part of the basic financial statements;

The information is the representation of management; and

The information was subject to the compilation engagement, however, the accountant has not audited or reviewed the information and, accordingly, does not express an opinion, a conclusion, nor provide any assurance on such information.

(B) is incorrect because the accountant does not list out the procedures performed in a compilation report.

(C) is incorrect because the accountant does not provide any limited/negative assurance in a compilation report.

(D) is incorrect because independence is not required for undertaking a compilation engagement.

Question 14

During the review of work performed for a review engagement, the supervising accountant becomes aware that information provided by management is incorrect. In this situation, the accountant should

A. Make inquiries of management regarding the intent to commit fraud.

B. Conclude that the financial statements are misstated.

C. Disclaim an opinion due to a scope limitation.

D. Request that management considers the effect of the related matters on the financial statements.

Answer 14

The correct answer is (D).

During the review of work performed for a review engagement, the supervising accountant becomes aware that information provided by management is incorrect. In this situation, the accountant should request that management consider the effect of the related matters on the financial statements.

(A) Is incorrect because misstatement or error is not tantamount to fraud.

(B) Is incorrect because financial statements would be misstated based on the materiality and not due to a single identified misstatement.

(C) Is incorrect because an identified misstatement would never lead to a scope limitation.

Question 15

Which of the following statements is not true of both an engagement to review interim financial statements according to PCAOB auditing standards and SSARS?

A. The objective of a review differs significantly from that of an audit.

B. A review includes primarily applying analytical procedures and making inquiries.

C. A review requires obtaining an understanding of the entity’s internal control over financial reporting.

D. The CPA should possess an understanding of the entity’s industry, including the accounting principles and practices generally used.

Answer 15

C.

A review performed in accordance with SSARS does not contemplate obtaining an understanding of the entity’s internal control.

Question 16

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

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

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

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

D. Caveat that the prospective results may not be achieved

Answer 16

The correct answer is (C).

The practitioner’s standard report on a compilation of prospective financial statements should include a statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective financial statements or the assumptions; a statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report; and a caveat that the prospective results may not be achieved.

It should also include an identifi­cation of the prospective financial statements presented by the responsible party and a statement that the prac­titioner compiled the prospective financial statements in accordance with Statements on Standards for Accounting & Review Services established by the AICPA.

Question 17

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

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

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

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

D. The date on the report should be the date that the accountant has completed the required procedures.

Answer 17

D.

The date on the report should be the date that the accountant has completed the required procedures. The accountant is not precluded from including a description of the reasons(s) that the accountant’s independence is impaired; however, if the accountant elects to do so, all the reasons should be included. The accountant utilizes information that is the representation of management. Any other procedures that the accountant might have performed as part of the compilation engagement should not be described in the report.

Question 18

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

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

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

C. The accountant is not required to make inquiries nor perform procedures to corroborate the infor-mation provided by the client.

D. The accountant should perform analytical procedures to financial data.

Answer 18

C.

An accountant is not required to corroborate information provided by the client or perform analytics for a compilation engagement. An accountant is prohibited from issuing any opinion for a compilation. An accountant may use information obtained from prior engagements with the same client in connection with a compilation engagement.

Question 19

An engagement to prepare financial statements in accordance with SSARS

A. Requires a written report to be issued

B. Is a nonattest service and does not require a determination about whether the accountant is independent of the entity

C. Requires the accountant to obtain an understanding of the entity sufficient to identify areas in the financial statements where there is a greater likelihood that material misstatements may arise

D. Does not require a written engagement agreement

Answer 19

B.

An engagement to prepare financial statements is a nonattest service and does not require a determination about whether the accountant is independent of the entity.

There is no requirement to report on the financial statements. (Each page of the financial statements should include a statement indicating that no assurance is provided on the financial statements or the accountant will be required to either issue a disclaimer that makes it clear that this is the case—such a disclaimer is not considered to be a report—or perform a compilation engagement.)

For an engagement to prepare financial statements, the accountant should obtain an understanding of the financial reporting framework and the significant accounting policies intended to be used in the preparation of the financial statements. Obtaining an understanding of the entity sufficient to identify areas in the financial statements where there is a greater likelihood that material misstatements may arise is part of the knowledge requirement for a review engagement.

All SSARS engagements require the agreed-upon terms of the engagement to be documented in an engagement letter or other suitable form of written agreement

Question 20

An accountant may consider requesting that management include a reference on each page of the financial statements to the accountant’s written compilation or review report. The primary purpose of this reference is to

A. Provide users with an understanding of the procedures performed during the engagement

B. Minimize the possibility that a user of the financial statements may infer an unintended level of reliance on the financial statements

C. Identify the financial statements covered by the report and management’s responsibility for them

D. Satisfy US Securities and Exchange Commission regulations

Answer 20

B.

Such a reference is not required; however, the accountant’s written report may become unattached from the financial statements an accountant has compiled or reviewed. To minimize the possibility that a user of the financial statements may infer, through the accountant’s association with the financial statements, an unintended level of reliance on the financial statements, the accountant may consider requesting that management include a reference on each page of the financial statements to the accountant’s written compilation or review report.

Question 21

When a CPA is associated with the financial statements of a public entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include a (an)

A. Regulation S-X exemption

B. Report on pro forma financial statements

C. Unaudited association report

D. Disclaimer of opinion

Answer 21

The correct answer is (D).

The disclaimer of opinion is the means by which the accountant complies with the fourth standard of reporting when associated with unaudited financial statements in these circumstances.

The disclaimer may accompany the unaudited financial statements or it may be placed directly on them.

In addition, each page of the financial statements should be clearly and conspicuously marked as unaudited.

Question 22

If an accountant is performing a review engagement for a non-issuer and considers it necessary to communicate a matter that is not presented in the financial statements, then the accountant should include this information in which of the following paragraphs in the review report?

A. The opinion paragraph.

B. The introductory paragraph.

C. The other-matter paragraph.

D. The emphasis-of-matter paragraph.

Answer 22

The correct answer is (C).

The other-matter paragraph is a paragraph included in the report that refers to a matter other than those presented or disclosed in the financial statements that, in the accountant’s judgment, is relevant to the readers’ understanding of the review and the accountant’s responsibilities or the review report.

If an accountant is performing a review engagement for a non-issuer and considers it necessary to communicate a matter that is not presented in the financial statements, then the accountant should include this information in the other-matter paragraph.

Question 23

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

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

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

Answer 23

D.

A compilation is not intended to provide assurance on the prospective financial statements or the assumptions underlying such statements; thus, an accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the engagement does not include an evaluation of the support for the assumptions underlying the projection. Prospective financial statements may be included in a document that also contains audited historical financial statements. The standard report on a compilation of prospective financial statements includes a statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report; it does not extend to one year. A financial forecast, not a projection, omits all hypothetical assumptions and presents the most likely future financial position.

Question 24

In which of the following engagements would a practitioner provide limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date?

A. A compilation of a financial projection.

B. A review of pro-forma financial information.

C. An examination of Management’s Discussion and Analysis.

D. An audit of condensed interim financial information.

Answer 24

The correct answer is (B).

Pro-forma financial statements are used to demonstrate the effect of a future or hypothetical event by showing how it would have affected the historical financial statements if it had occurred during the period covered by those financial statements. The practitioner may either examine or review pro-forma financial statements and provide reasonable or limited assurance as to the assumptions and presentations of pro-forma data being reasonable. The practitioner providing limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date is a review of pro-forma financial information.

Question 25

Which of the following situations precludes an accountant from preparing financial statements that omit substantially all disclosures required by the selected financial reporting framework? A. The accountant is not independent. B. The accountant becomes aware that the omission was undertaken with the intention of misleading users of the financial statements. C. The entity's management has given the accountant permission to disclose the omission in the financial statements. D. The entity's management has directed the accountant to omit the accountant's name from each page of the financial statements.

Answer 25

The correct answer is (B). An accountant should not prepare Financial Statements that omit substantially all disclosures required by the financial reporting framework if the accountant becomes aware that the omission was undertaken with the intention of misleading users of such financial statements. However, If after discussions with management, the accountant prepares financial statements that omit substantially all disclosures required by the applicable financial reporting framework, the accountant should disclose such omission in the financial statements. (A) is incorrect because independence is not required for the preparation of financial statements. (C) is incorrect because if the entity's management has given the accountant permission to disclose the omission in the financial statements then the accountant can prepare the financial statements. (D) is incorrect because omission of accountant's name from each page of the financial statements will not preclude him from

Question 26

An accountant has been asked to review the balance sheet of a nonissuer and not other related statements of income, retained earnings, and cash flows. The accountant may review the balance sheet only if A. The balance sheet is not to be used to obtain credit or distributed to the entity’s creditors. B. The balance sheet is part of a comprehensive personal financial plan developed to assist the entity. C. There have been no material changes during the year in the entity’s accounting principles. D. The scope of the accountant’s inquiry and analytical procedures has not been restricted.

Answer 26

D. An accountant may review a single financial statement, such as a balance sheet, and not other related financial statements, such as the statements of income, retained earnings, and cash flows, if the scope of the accountant's inquiry and analytical procedures has not been restricted.

Question 27

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement? A. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness. B. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance. C. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance. D. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.

Answer 27

C. The objective of a review differs significantly from the objective of a compilation. The inquiry and analytical procedures performed in a review should provide the accountant with a reasonable basis for express­ing limited assurance that there are no material modifications that should be made to the financial statements. No expression of assurance is contemplated in a compilation.

Question 28

Which of the following statements is correct regarding both a compilation and a review engagement performed in accordance with the SSARS? A. The accountant should assess fraud risk. B. The accountant should obtain an understanding of the entity's internal control. C. The agreed-upon terms of the engagement should be documented in an engagement letter or other suitable form of written agreement. D. The report explicitly states that the engagement is substantially less in scope than an audit.

Answer 28

C. The agreed-upon terms of the engagement should be documented in an engagement letter or other suitable form of written agreement for all SSARS engagements. The accountant should agree upon the terms of the engagement with management or those charged with governance, as appropriate. It should be signed by the accountant or the accountant's firm and management or those charged with governance, as appropriate. Neither engagement contemplates obtaining an understanding of internal control or assessing fraud risk. Only a review report includes a statement that a review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole, and that, accordingly, the accountant does not express such an opinion.

Question 29

Each of the following statements concerning the compilation of financial statements on certain prescribed forms is correct, except: A. A prescribed form cannot depart from generally accepted accounting principles or fail to include all required disclosures. B. A prescribed form is any standard preprinted form designed by the body to which it will be submitted. C. The information required by a prescribed form is presumed to be sufficient to meet the needs of the body that designed it. D. A form designed by the entity whose financial statements are being compiled is not considered to be a prescribed form.

Answer 29

The correct answer is (A). A prescribed form is any standard preprinted form designed or adopted by the body to which it is to be submitted. A departure from the requirements of the prescribed form or related instructions will be treated as the equivalent of a departure from an applicable financial reporting framework in determining its effect on his or her report. A prescribed form can depart from generally accepted accounting principles provided a statement of departure is included in the prescribed form.

Question 30

If prior-period compiled financial statements have been restated and the predecessor accounting firm decides not to reissue its report, the successor accounting firm A. May be engaged to reissue the prior-period report. B. May not be engaged to reissue the prior-period report. C. Must disclose the prior-period misstatements in the introductory paragraph of its current-year report. D. Must issue a combined report of both the prior-period and current-period financial statements.

Answer 30

The correct answer is (A). When prior-period financial statements have been restated, the predecessor accountant would normally reissue his or her report. If the predecessor decides not to reissue his or her report, the successor accountant may be engaged to report on the financial statements for the prior year. If the predecessor accountant does not reissue his or her report and the successor accountant is not engaged to report on the prior year financial statements, the successor accountant should indicate in the introductory paragraph of his or her compilation or review report that a predecessor accountant reported on the financial statements of the prior period before restatement.

Question 31

An accountant should perform analytical procedures during an engagement performed in accordance with SSARS to Compile financial statements Review financial statements A. No No B. Yes Yes C. Yes No D. No Yes

Answer 31

D. For a financial statement compilation, an accountant is not required to make inquiries or perform other procedures to verify, corroborate, or review information supplied by the entity. A review involves performing inquiries and analytical procedures to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework.

Question 32

When performing an engagement in accordance with SSARS to review general-purpose financial statements, an accountant most likely would A. Obtain an understanding of the entity's internal control B. Limit the distribution of the review report C. Confirm a sample of significant accounts receivable balances D. Ask about actions taken at meetings of the board of directors

Answer 32

D. The accountant should inquire of members of management who have responsibility for financial and accounting matters concerning the financial statements about actions taken at meetings of stockholders, the board of directors, committees of the board of directors, or comparable meetings that may affect the financial statements. A review does not contemplate obtaining an understanding of the entity's internal control; assessing fraud risk; testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit. Thus, it is unlikely the accountant would obtain an understanding of the entity’s internal control or confirm a sample of significant accounts receivable balances. And, although nothing in SSARS precludes an accountant from including an alert in any review report that restricts [limits] its use [distribution], review reports on financial statements prepared in accordance with a general-purpose framework ordinarily do not include such an alert.

Question 33

Pro forma financial information compiled according to SSARS A. Is presented to show what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date B. May be presented with the related historical financial statements or on a stand-alone basis C. Must be based on historical financial statements that have been audited D. Must include a summary of significant assumptions that have been corroborated by the accountant

Answer 33

A. The objective of pro forma financial information is to show what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. An accountant may agree to compile pro forma financial information only if the document that contains it includes (or incorporates by reference) the related historical financial statements. Further, the presentation should also indicate that the pro forma financial information should be read in conjunction with the related historical financial information. The related historical financial statements are not required to have been audited; however, they must have been compiled, reviewed, or audited. Further, the accountant's compilation or review report or the auditor's report on the historical financial statements should be included (or incorporated by reference) in the document containing the pro forma financial information. The presentation should describe the significant assumptions used in developing the pro forma adjustments, and any significant uncertainties about those assumptions. An accountant may not report on compiled pro forma financial information if the summary of significant assumptions is not presented; however, the accountant is not required to corroborate them. (The accountant should read such compiled pro forma financial information, including the summary of significant assumptions, and consider whether the information appears to be appropriate in form and free of obvious material errors.)

Question 34

Which of the following statements concerning a compilation of specific elements, accounts, or items of a financial statement is correct? A. The accountant performing the compilation must be independent with regard to the client B. The compilation cannot be relied upon to disclose errors, fraud, or illegal acts C. The compilation involves compiling financial statements for different subsidiaries of the company D. The compilation must be performed in conformance with an accounting basis consistent with GAAP

Answer 34

The correct answer is (B). Independence of the accountant is not required for a compilation engagement. Compilation report may be issued on one or more individual financial statements without compiling a complete set of statements or just for a single subsidiary. Compilation engagements are performed in accordance with Statements on Standards for Accounting and Review Services. So by elimination, The compilation cannot be relied upon to disclose errors, fraud, or illegal acts. In a compilation engagement, an accountant will apply accounting and financial reporting expertise to assist management in the presentation of the financial statements and report without undertaking to obtain or provide any assurance. An accountant is not required to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements. At a minimum, the accountant must read the compiled statements for appropriate format and obvious material misstatement. Accountant performing compilation must not accept unreasonable information. The accountant has no responsibility to perform any investigative procedures to substantiate the client’s representations. The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.

Question 35

An accountant performing a non-issuer's review engagement is considering the appropriateness of a client's balance for accrued wages. The accountant should perform each of the following procedures, except A. Testing the process used by management to determine the balance. B. Comparing the current-year balance to the prior-year balance. C. Obtaining representations from management regarding the year-end balance. D. Making inquiries of the payroll accountant regarding the completeness of the account balance.

Answer 35

The correct answer is (A). This is a review engagement completed under the rules of SSARS. Review engagements do not require testing of processes used by management to determine balances. Testing is done as part of an audit for assurance purposes. Reviews provide limited assurance that there are no material misstatements. While performing a non-issuer's review engagement, an accountant must do the following: * Inquire of management and other client personnel as to the methods used to develop financial data. * Perform analytical procedures on the financial data contained within the financial statements, comparing them to prior years, budgets, to determine if the numbers conform to predictable patterns. * Establish an understanding with the management in an engagement letter clearly specifying the objectives of the review. * Obtain a management representation letter for all financial statements and periods covered by the review report

Question 36

Which of the following matters should an accountant include when establishing an understanding with a client regarding the services to be performed for a compilation engagement? A. The effect that independence impairments, if present, will have on the expected form of the accountant's report. B. The dates on which the accountant will be present to observe the taking of the physical inventory. C. The assistance that the accountant will receive from internal auditors in performing account analysis. D. The accountant's responsibility for the preparation and fair presentation of the financial statements.

Answer 36

The correct answer is (A). Both management and the accountant have an interest in documenting the terms of the compilation engagement before the commencement of the engagement to help avoid misunderstandings with respect to the engagement. For the purposes of a compilation engagement, independence is not required. However, to avoid misunderstanding, an agreement is reached with the management that it acknowledges and understands its responsibilities and the effect that independence impairments, if present, will have on the expected form of the accountant’s report.

Question 37

Which, if any, engagement(s) performed in accordance with SSARS may involve financial statements that are allowed to omit substantially all disclosures required by the applicable financial reporting framework? A. Only an engagement to prepare financial statements B. Both an engagement to prepare financial statements and a compilation engagement C. Only a compilation engagement D. No SSARS engagements allow such a departure

Answer 37

B. The SSARS guidance for both an engagement to prepare financial statements and a compilation engagement allow financial statements that omit substantially all disclosures required by the AFRF. For an engagement to prepare financial statements, the accountant is required to disclose such an omission on the face of the financial statements or in a selected note to the financial statements. For a compilation engagement, the report should be modified to include a separate paragraph that includes statements that indicate (1) management elected to omit substantially all disclosures required by the AFRF; (2) if the omitted disclosures were included, they might influence the user's conclusions about the entity's financial position, results of operations, and cash flows (or the equivalent for presentations other than GAAP); and accordingly, (3) the financial statements are not designed for those who are not informed about such matters. For both engagements, an accountant should not prepare financial statements that omit substantially all disclosures required by the AFRF if the accountant becomes aware that the omission was undertaken with the intention of misleading users of such financial statements.

Question 38

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services for the preparation of financial statements when providing these services I.Drafting financial statement notes II.Maintaining depreciation schedules A. I only B. II only C. Both I and II D. Neither I nor II

Answer 38

D. These are both examples of services that involve merely assisting a client in preparing financial statements which are not subject to the SSARS guidance for the preparation of financial statements. This SSARS guidance is only applicable when the accountant is engaged to prepare financial statements. The accountant is required to exercise professional judgment as to whether the SSARS guidance on the preparation of financial statements is applicable

Question 39

Which of the following statements is true regarding analytical procedures in a review engagement? A. Analytical procedures are not required to be used as a substantive test. B. Analytical procedures do not involve comparisons of recorded amounts to expected amounts. C. Analytical procedures are required to be used in the final review stage. D. Analytical procedures involve the use of both financial and nonfinancial data.

Answer 39

The correct answer is (D). Analytical procedures involve a comparison of both financial and relevant nonfinancial information. (A) is incorrect as Inquiry and analytical procedures are the primary means of evaluating financial statement transactions and balances in a review engagement. (B) is incorrect as analytical procedures involve comparisons of recorded amounts to expectations developed based on plausible relationships. (C) is incorrect as Inquiry and analytical procedures are the primary means of evaluating financial statement transactions and balances in a review engagement, but there is no requirement that they are also used as a final review at the end of the engagement. Note that in an audit, there is such a requirement.

Question 40

When compiling the financial statements of a nonissuer, an accountant should A. Review agreements with financial institutions for restrictions on cash balances B. Obtain an understanding of the applicable financial reporting framework and the significant accounting policies to be used in the preparation of the financial statements C. Inquire of key personnel concerning related parties and subsequent events D. Perform ratio analyses of the financial data of comparable prior periods

Answer 40

B. The accountant should obtain an understanding of the AFRF and the significant accounting policies to be used in the preparation of the financial statements. Answers A., C., and D. represent procedures beyond the scope of a compilation.

Question 41

An engagement to prepare financial statements in accordance with SSARS A. Requires the accountant to be independent of the client B. Requires the accountant to make limited inquiries of management C. Requires the accountant to include a reference on each page of the financial statements restricting their use D. Does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express a conclusion or otherwise report on the financial statements

Answer 41

D. An engagement to prepare financial statements does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express a conclusion or otherwise report on the financial statements.

Question 42

Which of the following procedures is ordinarily performed by an accountant during an engagement to com­pile financial statements? A. Make inquiries of the employees and senior management regarding transactions with related parties. B. Determine whether there is substantial doubt about the entity’s ability to continue as a going concern. C. Scan the entity’s records for the period just after the balance sheet date to identify subsequent events requiring disclosure. D. Consider whether the financial statements appear to be appropriate in form and free from obvious material errors.

Answer 42

D. When engaged to compile the financial statements of a nonissuer, an accountant should read the financial statements and consider whether they appear to be appear to be appropriate in form and free from obvious material errors. This would include mistakes in the compilation of the financial statements, including arithmetical or clerical mistakes; and mistakes in the application of accounting principles, including inadequate disclosure. A compilation does not contemplate performing inquiries, analytical procedures or other procedures performed in a review. Accordingly, it would not include performing procedures regarding related-party transactions, going concern issues, or subsequent events. (A compilation does not provide a basis for expressing any level of assurance on the financial statements.) Note: Even though an accountant is not required to perform these pro­cedures, if going concern or subsequent event issues come to the accountant’s attention, the accountant should request that management consider the possible effects on the financial statements. The accountant should then evaluate management’s response and consider its effect on the compilation report.