Accounting and Review Service Engagements Flashcards
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
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.
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
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.
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.
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.
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
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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.
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
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.
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
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.
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.
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.
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.
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.
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.
C.
A review performed in accordance with SSARS does not contemplate obtaining an understanding of the entity’s internal control.
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
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.
