Audit Reporting 2 Flashcards
1
Q
A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?
A
When auditing a governmental entity under the Single Audit Act, the auditor should perform the engagement both in accordance with GAAS and in accordance with Generally Accepted Government Auditing Standards that impose several additional audit requirements.
2
Q
An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client’s management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first?
A
The agency that provided the grant
3
Q
The auditor’s report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book) is required to include
I. The scope of the auditor’s testing of internal controls.
II. Uncorrected misstatements that were determined by management to be immaterial.
A
I ONLY
Government Auditing Standards require that the auditor report on the scope and results of tests of internal control over financial reporting and compliance with laws and regulations.
4
Q
An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise’s internal controls either in the report on the financial statements or in
A
In a governmental audit, the auditor has the choice of issuing a combined audit and internal control report or issuing separate reports.
5
Q
Which of the following is correct about reporting on compliance with laws and regulations in a financial audit under Government Auditing Standards (the Yellow Book)?
A
In some circumstances, auditors are required to report fraud and illegal acts directly to parties external to the audited entity.
Auditors are required to report known or likely fraud, illegal acts, violations of contracts or grants, or abuse directly to outside parties when:
(1) management fails to report such information as required by law or regulation; or
(2) management fails to take timely and appropriate action to respond to fraud, illegal acts, violations, or abuse that is likely to be material to the financial statements and involves government agency funding.
6
Q
In an audit in accordance with Government Auditing Standards, an auditor is required to report on the auditor’s tests of the entity’s compliance with applicable laws and regulations.
This requirement is satisfied by designing the audit to provide
A
Reasonable assurance of detecting misstatements that are material to the financial statements.
7
Q
The concept of materiality for financial statements audited under the Single Audit Act of 1984 differs from materiality in an audit in accordance with generally accepted auditing standards.
Under the Act, materiality is
A
Determined separately for each major federal financial assistance program.
“Major” programs are defined in terms of federal government expenditures rather than in terms of the state or local entity being audited.
8
Q
Reporting on internal control structure under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards require a
A
Description of the scope of the auditors’ testing of internal control over financial reporting.
It can be included as a separate report or in a combined report with the report on compliance with laws and regulations.
9
Q
An auditor most likely would be responsible for assuring that management communicates significant deficiencies in the design of the internal control structure
A
To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
10
Q
Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has
A
Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.
11
Q
An auditor was engaged to conduct a performance audit of a governmental entity in accordance with Government Auditing Standards. These standards do require, as part of this auditor’s report
A
A statement of the audit objectives and a description of the audit scope.
Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.
The pertinent views of the entity’s responsible officials concerning the auditor’s findings.
12
Q
Which of the following statements represents a quality control requirement under government auditing standards?
A
A CPA seeking to enter into a contract to perform an audit should provide the CPA’s most recent external quality control review report to the party contracting for the audit.
13
Q
In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is
A
Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter.
The auditor must first report fraud or illegal acts to the auditee’s governing body. The auditee, in turn, must report these acts to appropriate parties. If the auditee fails to do so, the auditor must report directly to these external parties.
14
Q
Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to
A
Issue a qualified compliance report describing the subsequent noncompliance.
If the material noncompliance occurred subsequent to the period associated with the audit report, the auditor would not modify the opinion.
The auditor should perform procedures up to the date of the auditor’s report to identify subsequent events related to the entity’s compliance.
15
Q
How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, define a subrecipient?
A
As a nonfederal entity that expends federal awards received from another entity to carry out a federal program
16
Q
Tell, CPA, is auditing the financial statements of Youth Services Co. (YSC), a not-for-profit organization, in accordance with Government Auditing Standards. Tell’s report on YSC’s compliance with laws and regulations is required to contain statements of
Positive assurance
Negative assurance
A
BOTH
The auditor is required to give positive assurance on the items tested as to compliance with laws and regulations. The auditor provides negative assurance on the items not tested.
17
Q
In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity’s compliance with laws and regulations. This report should
A
State that compliance with laws and regulations is the responsibility of the entity’s management.
18
Q
The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the
A
Accounting and Review Services Committee.
The standards that address unaudited financial statements are the Statements on Standards for Accounting and Review Services (SSARs)
These standards are issued by the AICPA’s Accounting and Review Services Committee.
19
Q
Unconditional requirements in the clarified Statements on Standards for Accounting and Review Services are indicated by the word
A
Must
Unconditional Requirements—Indicated by the word must, the accountant is required to comply with such a requirement without exception whenever the requirement is relevant.
20
Q
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when
A
The Statements on Standards for Accounting and Review Services are not applicable when:
1) preparing a working trial balance;
2) assisting in adjusting the books of account;
3) consulting on accounting, tax, and similar matters;
4) preparing tax returns ;
5) providing bookkeeping or data processing services, and
6) processing financial data for clients of other accounting firms.
21
Q
SSARS are used for:
A
(1) reviews
(2) compilations
(3) prepare financial statements for a client without issuing an accompanying report.
22
Q
Presumptively Mandatory Requirements for SSARS
A
Indicated by the word should, the accountant is expected to comply with such a requirement, except in rare circumstances.
23
Q
Application and Other Explanatory Material (Including Appendices of the SSARSs)
A
These are not requirements and are presented separately within the SSARSs. Indicated by the words may, might, or could, they may explain what a requirement means or provide examples of appropriate procedures.
24
Q
The clarified SSARSs applicable to preparation engagements (AR-C 70) applies to the following engagements
A
- financial statements prior to audit or review by another accountant;
- financial statements to be presented alongside the tax return;
- personal financial statements for presentation alongside a financial plan;
- single financial statements (e.g., just a balance sheet) with substantially all disclosures omitted; and
- financial statements using general ledger information outside of an accounting software system.
25
Which of the following statements concerning a compilation of specific elements, accounts, or items of a financial statement is correct
The compilation cannot be relied upon to disclose errors, fraud, or illegal acts.
A compilation engagement involves assembling in appropriate form the data that is the responsibility of management without any form of assurance. It does not involve the performance of any verification procedures
26
If prior-period compiled financial statements have been restated and the predecessor accounting firm decides not to reissue its report, the successor accounting firm
May be engaged to reissue the prior-period report.
27
An accountant has been engaged to compile the financial statements of a nonpublic entity. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should
Withdraw from the engagement and provide no further service concerning these financial statements.
28
An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct?
The accountant is required to include the statement "I am not independent with respect to the entity" in the compilation report.
29
Which of the following services, if any, may an accountant who is not independent provide?
Compilations, but not reviews.
30
General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the
Omission is not undertaken with the intention of misleading the users of General's financial statements.
31
Which of the following is correct regarding a compilation of financial statements engagement in accordance with Statement on Standards for Accounting and Review Services?
The accountant is not required to make inquiries nor perform procedures to corroborate the information provided by the client.
32
Before issuing a report on the compilation of financial statements of a nonpublic entity, the accountant should
Read the financial statements to consider whether the financial statements are free from obvious material errors.
33
Jones Retailing, a nonpublic entity, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the
An accountant may compile financial statements lacking substantially all disclosures provided that:
1) the omission is clearly indicated in his/her report; and
2) the omission is not intended to mislead those who might reasonably be expected to use the compiled statements.
34
Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonpublic entity. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the
1) the reason for the client's request;
| 2) the additional effort required to complete the audit; and 3) the estimated additional cost to complete the audit.
35
Compiled financial statements should be accompanied by a report stating that
"I (We) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management."
36
Miller, CPA, is engaged to compile the financial statements of Web Co., a nonpublic entity, in conformity with the income tax basis of accounting.
If Web's financial statements do not disclose the basis of accounting used, Miller should
Disclose the basis of accounting in the accountant's compilation report.
37
When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are
Not designed for those who are uninformed about the omitted disclosures.
The accountant must also believe that there is no intent to mislead those who might reasonably be expected to use such financial statements.
38
Financial statements of a nonpublic entity subject to a compilation engagement should be accompanied by the accountant's report stating that
The accountant does not express an opinion or any other form of assurance on the financial statements.
39
During a review of financial statements, an accountant decides to emphasize a matter in the review report. Which of the following is an example of a matter that the accountant would most likely want to emphasize?
The entity has had significant transactions with related parties.
An emphasis-of-matter paragraph addresses an issue that is already properly identified in the financial statements of the entity. GAAP requires disclosure of significant transactions with related parties, so it is likely that the practitioner would choose to comment further on those related party issues.
40
If an accountant is performing a review engagement for a nonissuer 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?
Other Matter paragraph
The term “other-matter paragraph” applies to topics that are not reported in the financial statements, such as the accountant's role in the review engagement or other engagement-related issues.
41
Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS)?
Obtain a management representation letter.
42
Which of the following statements is correct regarding a review of a nonpublic entity's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?
A review provides "negative assurance" for which the accountant is required to be independent.
43
A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a
Statement that a review is substantially less in scope than an audit.
44
The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with Statements on Standards for Accounting and Review Services?
Performing inquiries and analytical procedures
The basis for conclusions for a review engagement primarily consists of inquiries and analytical procedures
45
Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services?
Developing an understanding of internal control
46
Baker, CPA, was engaged to review the GAAP-based financial statements of Hall Company, a nonpublic entity. Evidence came to Baker's attention that indicated substantial doubt as to Hall's ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall's financial statements.
Which of the following statements best describes Baker's reporting responsibility concerning this matter?
Baker is not required to modify the accountant's review report.
A review provides limited assurance that the financial statements are presented in conformity with GAAP. In the case of substantial doubt about an entity's ability to continue as a going concern, GAAP requires that the uncertainty be adequately disclosed.
47
Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonpublic entity's financial statements?
Inquiries concerning the entity's procedures for recording and summarizing transactions
Inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions and accumulating information for disclosure in the financial statements would be appropriate for a review engagement.
48
During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware of a material departure from GAAP.
If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should
Disclose the departure from GAAP in a separate paragraph of the report.
49
An accountant's standard report on a review of the GAAP-based financial statements of a nonpublic entity should state that the accountant
Is not aware of any material modifications that should be made to the financial statements for them to conform with accounting principles generally accepted in the United States.
50
An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation?
The accountant should disclose the lack of independence in the accountant's compilation report.
51
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate
(1) that the prior period's financial statements were audited;
(2) the date of the previous report;
(3) the type of opinion expressed;
(4) the reasons for any modification of the report; and
(5) that no auditing procedures were performed after the date of the previous report.
52
When engaged to compile the financial statements of a nonpublic entity, an accountant is required to possess a level of knowledge of the entity's accounting principles and practices.
This requirement most likely will include obtaining a general understanding of the
Stated qualifications of the entity's accounting personnel.
53
An accountant has been engaged to compile the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS).
Do the SSARSs require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?
NO to BOTH
54
An audit of a nonissuer's internal control over financial reporting in an integrated audit will generally
Be more extensive in scope than the assessment of control risk made during the financial statement audit.
In a financial statement audit, consideration is given to internal control in terms of its impact on the fair presentation of the financial statements. In an examination of internal control over financial reporting, the purpose of the engagement is to express an opinion on the operating effectiveness of internal control over financial reporting.
55
An auditor's report expressing an unmodified opinion on an entity's internal control over financial reporting in an integrated audit of a nonissuer should state that the
Entity maintained effective internal control over financial reporting as of a specific date.
56
Before an auditor can accept an engagement to audit internal control over financial reporting in an integrated audit of a nonissuer, all of the following conditions must be met
- Management must accept responsibility for the effectiveness of the entity's internal control over financial reporting;
- Management must evaluate the effectiveness of the entity's internal control using suitable and available criteria;
- Management must support its assessment about the effectiveness of the entity's internal control with sufficient documentation; and
- Management must provide its written assessment about the effectiveness of the entity's internal control over financial reporting, in a report that accompanies the auditor's report.
57
Brown, CPA, has been engaged to audit and report on Crow Company's written assessment about the effectiveness of Crow's internal control over financial reporting in an integrated audit under AICPA standards. In what form may Crow appropriately present its written assessment?
In a separate report that will accompany Brown's report.
58
Snow, CPA, was engaged by Master Co., a nonpublic company, to audit and report on the effectiveness of Master's internal control over financial reporting in an integrated audit.
Snow's report should state that
Because of the inherent limitations of internal control over financial reporting, misstatements may occur and not be detected.
An audit report on internal control over financial reporting should include a paragraph describing the inherent limitations of internal control over financial reporting and the fact that misstatements may occur and not be detected and corrected as a result.
59
If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should
Express an adverse opinion on the entity's internal control.
60
Which of the following statements correctly describes the “top-down approach” used during an audit of internal control over financial reporting?
Begin by understanding the overall risks to internal control over financial reporting at the financial statement level.
A “top-down approach” begins at the financial statement level; uses the auditor's evaluation of overall risks to internal control over financial reporting; considers entity-level controls; considers significant account balances, disclosures, and their relevant assertions; and so on.
61
In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units?
Testing controls over specific risks at business units that are material to the company's consolidated financial statements.
62
An auditing procedure that is applicable to "testing operating effectiveness" that is not associated with "testing design effectiveness" is
Reperformance of the control procedure.
inquiry, observation and inspection of relevant documentation. In addition to those procedures, the PCAOB adds reperformance of the control for "testing operating effectiveness."
63
PCAOB Auditing Standard No. 5 directs auditors to begin their study of internal control at the financial statement level and the overall risks to internal control over financial reporting, then consider "entity-level" controls, followed by focusing on the relevant assertions for significant accounts and disclosures. This approach is best described as a
Top-down approach.
64
According to PCAOB auditing standards, when the auditor issues separate reports on the financial statements and on internal control over financial reporting,
Each report should include a paragraph that references the other related report.
65
PCAOB auditing standards apply when an issuer's auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management. Which of the following statements is correct?
PCAOB auditing standards do not require an auditor to report whether a previously reported material weakness continues to exist, so such an engagement is voluntary.
66
According to PCAOB auditing standards, a "stated control objective" is best described as
The specific control objective identified by management that, if achieved, would result in the material weakness no longer existing.
67
According to PCAOB auditing standards, in evaluating whether a material weakness exists, an auditor should focus on materiality at the
Financial statement level.
"In planning the audit of internal control over financial reporting, the auditor should use the same materiality considerations he or she would use in planning the audit of the company's annual financial statements."
68
Which legislation is most directly associated with pension and welfare plans?
Employee Retirement Income Security Act of 1974
69
An employee benefit plan that provides healthcare benefits to participants is best characterized as a (an)
Welfare plan.
70
Which of the following pension plans is specifically associated with charitable organizations and public school entities?
403(b) plans
71
When filing a Form 5500 with the Department of Labor, an audit normally is required for an employee benefit plan that is identified as a
Large plan having at least 100 participants at the start of the plan year.
72
What terminology does the AICPA's Audit and Accounting Guide, Employee Benefit Plans, use in commenting on the types of audits relevant to employee benefit plans?
Full-scope and limited-scope audits
73
A limited-scope audit of an employee benefit plan requires the auditor to evaluate each of the following, except for
the plan investments and investment activities.
74
A “qualified, regulated financial institution” associated with a limited-scope audit engagement of an employee benefit plan may include each of the following types of financial institutions, except for
an investment company.
A qualified, regulated financial institution may include an insurance company, a bank, or a trust company that is subject to periodic state or federal examination.
75
To justify a limited-scope audit, the qualified financial institution holding the plan assets must furnish a certification stating that the investments and related investment activity are
“Complete and accurate.”
76
A limited-scope audit report includes each of the following
An overall disclaimer of opinion on the plan's financial statements.
An “other matter” paragraph commenting on supplemental schedules required by the Department of Labor, including a disclaimer of opinion on those supplemental schedules.
An opinion that the form and content of the financial statements and supplemental schedules comply with Department of Labor rules and regulations.
77
Which financial statement is specifically mentioned in the first paragraph of the auditor's report on an employee benefit plan's comparative financial statements?
The auditor's report references the statements of net assets available for benefits and the related statement of changes in net assets available for benefits.
78
Audit areas in a “full-scope audit” (the alternative to a “limited-scope audit”)
(1) plan investments and investment income,
(2) employee and employer contributions,
(3) payments of benefits,
(4) participant demographic and payroll data,
(5) loans to participants,
(6) the allocation of investment income to individual participants,
(7) liabilities and plan obligations, and
(8) administrative expenses.
79
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?
Statements on Standards for Attestation Engagements.
That is defined as examining, reviewing, or performing agreed-upon procedures on subject matter or an assertion by the responsible party about the subject matter. The engagement described here is an examination (resulting in the expression of opinion) on management's assertion about the square footage of a warehouse.
80
The attestation standards and generally accepted auditing standards differ conceptually in two main areas:
1) the attestation standards provide a framework for the attest function beyond historical financial statements; and
2) the attestation standards provide for the growing number of attest services in which the practitioner expresses assurances in forms other than the positive opinion.
81
A company engages a practitioner to assist the audit committee by performing specific procedures that were agreed to by the audit committee. Which of the following statements is correct regarding the procedures to be performed?
The specific procedures performed should be listed in the practitioner's report to the audit committee.
The agreed-upon procedures report enumerates the procedures performed (and the resulting findings) in the body of the report or by reference to an appropriate appendix or exhibit associated with the report.
“Negative assurance” is associated with a review engagement, not an agreed-upon procedures engagement.
82
An engagement letter for an examination should address all of the following matters
The objective and scope of the examination engagement.
A statement about the inherent limitations of an examination engagement.
A statement that identifies the criteria for measurement or evaluation of the subject matter involved.
83
A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of
Statements on Standards for Attestation Engagements (SSAE).
"An examination, review, or agreed-upon procedures engagement performed under the attestation standards related to subject matter or an assertion that is the responsibility of another party." "
84
When the practitioner determines that the subject matter of an examination engagement has a misstatement that is both material and pervasive, the practitioner should express a (an)
Adverse opinion.
85
When the practitioner determines that the subject matter of an examination engagement is materially misstated, but that the misstatement is not pervasive, the practitioner should express a (an)
Qualified opinion directly on the subject matter.
When expressing either a qualified or an adverse opinion due to misstatement of the subject matter, the practitioner should express the opinion directly on the subject matter.
86
What should the practitioner do when the responsible party (who is also the engaging party) declines to provide a written assertion for a review engagement?
Withdraw from the engagement when that is permitted by applicable law.
87
If the engaging party is not the responsible party and the responsible party refuses to provide a written assertion
The practitioner need not withdraw but should disclose that refusal in the practitioner's report and restrict the use of the report to the engaging party
88
Which of the following statements about a practitioner's review report for an attestation engagement is correct?
The practitioner's review report should include a disclaimer of opinion.
The review report should include a statement that a review is substantially less in scope than an examination, and a disclaimer of opinion should be included.
89
The practitioner's review report for an attestation engagement should include a restricted-use paragraph in all of the following circumstances
When the criteria used to evaluate the subject matter are available only to certain parties.
When the engaging party is not the responsible party and the responsible party declines to provide the requested written representations but does provide satisfactory oral responses to the practitioner.
When the criteria used to evaluate the subject matter are appropriate only for a limited number of parties.
90
A practitioner's report on agreed-upon procedures should contain which of the following statements?
The procedures performed were those agreed to by the specified parties identified in the report.
91
Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements?
Issue a report on findings based on specified procedures performed.
92
Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures?
A statement referring to standards established by the AICPA.
"This agreed-upon procedures engagement was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants."
93
Financial Forecast:
“Prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take.”
For a forecast—The practitioner should evaluate whether there is a reasonably objective basis for the forecast and whether sufficiently objective assumptions can be developed for each key factor identified.
94
Financial Projection
“Prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows. A financial projection is sometimes prepared to present one or more hypothetical courses of actions for evaluation, as in response to a question such as ‘What would happen if …?’
For a projection—The practitioner should evaluate whether the hypothetical assumptions are consistent with the purpose of the projection; the practitioner need not obtain support for the hypothetical assumptions, however.
95
If the prospective financial information departs in a material way from AICPA presentation guidelines
The practitioner should express a qualified or adverse opinion.
96
If the prospective financial information fails to disclose any “significant assumptions” or if one or more of the significant assumptions are not suitably supported or do not provide a reasonable basis for the forecast or projection
The practitioner should express an adverse opinion.
97
Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to
All stockholders of record as of the report date.
Financial projections are based on one or more hypothetical assumptions which must be clearly understood by the reader of the projection.
As a result, the distribution of financial projections is limited to the responsible party and third parties with whom the responsible party is negotiating directly.
98
An accountant's compilation report on a financial projection that does not contain a range should include a statement that
There will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected.
99
A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner issue?
Adverse.
100
Pro Forma Financial Information:
“A presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.”
AT-C 310, Reporting on Pro Forma Financial Information, applies to examination or review engagements involving pro forma financial information.
It does not apply to agreed-upon procedures engagements involving pro forma financial information
101
Examination or Review Engagements on Pro Forma Financial Information- PreConditions
- The document containing the pro forma financial information must also include the historical financial statements (or the historical financial statements must be readily available);
- For an examination, the historical financial statements must have been audited; for a review, the historical financial statements must have been either audited or reviewed—they cannot express a higher level of assurance on the pro forma information than on the historical financial statements;
102
Which of the following standards should a CPA firm apply in a review of pro forma financial information?
Statements on Standards for Attestation Engagements
103
A practitioner reporting on pro forma financial information does not possess an understanding of the client's business and the industry in which the client operates. The practitioner should take which of the following actions?
Review industry trade journals.
104
Each of the following items should be included in a presentation of pro forma financial statements
The significant assumptions used in developing the pro forma information.
The source of the historical information on which the pro forma information is based.
An indication that the pro forma information is not necessarily indicative of results.
105
An accountant's report on a review of pro forma financial information should include a
Reference to the financial statements from which the historical financial information is derived.
An accountant's report on a review of pro forma financial information should include a reference to the financial statements from which the historical financial information is derived and a statement as to whether such statements were audited or reviewed. Any modification of the report on the historical financial statements should also be identified.
106
An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following?
State in the audit report that separate reports will be issued.
Each report should include a separate paragraph that references the other report.
107
A practitioner has examined a client's compliance with debt covenants associated with a bank loan and is ready to issue a report. Which of the following standards apply to the report?
Compliance attestation standards.
108
Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties.
Mill's report on these agreed-upon procedures should contain a (an)
List of the procedures performed (or reference thereto) and Mill's findings.
The report would include a list of the procedures performed (or reference thereto) and the findings.
An agreed-upon procedures report does not include a disclaimer of opinion about the fair presentation of the financial statements. An agreed-upon procedures report includes the statement that the practitioner was not engaged to and did not conduct an examination.
109
A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain
A statement of limitations on the use of the report.
The report is intended to be used solely by the specified users and, as a result, restrictions on distribution need to be clearly stated.
110
Content of the Practitioner's Examination Report
- A title that includes the word “independent”;
- An appropriate addressee;
- Identification of the compliance matters being reported on (or the assertion involved);
- Identification of the specified requirements; should also identify the criteria, if those criteria are not included in the compliance requirement;
- Statement identifying management's responsibility for compliance and the practitioner's responsibility to express an opinion;
- Statement that the examination was conducted in accordance with attestation standards established by the AICPA and other statements describing the examination engagement;
- Statement describing the nature of an examination engagement;
- Statement that describes any significant inherent limitations;
- Statement that the examination does not provide a legal determination;
- An opinion whether the entity complied with the specified requirements, in all material respects, or whether management's assertion is fairly stated;
- The signature of the practitioner's firm;
- The city and state where the practitioner practices; and
- The date of the report.
111
Precondition to accept an MD&A engagement
Must have audited the annual financials for the latest period applicable to the MD&A presentation; any other financials involved must have been audited (or at least reviewed if interim/quarterly financials) by the practitioner or a predecessor auditor.
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Four Assertions Implicitly Embodied in the MD&A Presentation
- Occurrence—Whether reported events actually occurred during the period.
- Consistency with the financials—Whether historical amounts have been accurately derived from the financials.
- Completeness of the explanation—Whether the description of matters comprising the MD&A presentation is complete.
- Presentation and disclosure—Whether information in the MD&A is properly classified, described, and disclosed.
113
Required elements of MD&A—The presentation includes the elements required by the SEC:
- Discussion of financial condition (liquidity and capital resources);
- Discussion of changes in financial condition;
- Discussion of results of operations.
SEC expects MD&A to reflect events at or near the filing date
Dating report—As of completion of the examination procedures.
114
Review of MD&A—Results in Negative Assurance
Purpose—To report whether the practitioner has any reason to believe that:
- The presentation does not include the elements required by the SEC;
- The historical financial amounts are not accurately derived from the financials; and
- The underlying information, assumptions, etc., do not provide a reasonable basis for the disclosures within the MD&A.
Restricted-use paragraph—One sentence. Restrict the distribution when the MD&A presentation and the practitioner's report are not intended to be filed with the SEC under the 1933 and 1934 Securities Acts.
115
Which of the following forms of auditor association are possible relating to management’s discussion and analysis (MD&A)?
Review
Examination
BOTH
Professional standards provide for both review and examinations of MD&A.
116
Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?
WebTrust
In a WebTrust assurance engagement, the practitioner expresses an opinion on management's assertions regarding business practices, transaction integrity, and information protection.
117
Five principles and criteria associated with Trust Services (assurance)
1. Security—The system is protected from unauthorized access.
2. Availability—The system is available for operation and use as committed or agreed.
3. Processing integrity—System processing is complete, accurate, timely, and authorized.
4. Confidentiality—Information designated as confidential is protected as committed or agreed.
5. Privacy—Personal information is collected, used, retained, and disclosed in conformity with the commitments in the entity's privacy notice
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SysTrust
To provide assurance on systems generating information and representations generally
To earn the CPA's unqualified opinion for a SysTrust engagement, an entity's system would also have to meet the above Trust Services principles; the SysTrust engagement would evaluate management's written assertions about the effectiveness of controls over the entity's system relative to applicable attestation standards.
119
An auditor's report expressing an unmodified opinion on a nonissuer's internal control over financial reporting in an integrated audit should contain a
A statement that the designing, implementing, and maintaining internal control over financial reporting is the responsibility of management.
120
In reporting on an entity's internal control over financial reporting in an integrated audit of a nonissuer, an auditor should include a paragraph that describes the
Inherent limitations of internal control.
because of inherent limitations of any internal control, errors or irregularities could occur and not be detected.
121
According to PCAOB auditing standards, when one or more material weaknesses exist, what type of opinion should the auditor express on internal control over financial reporting?
An adverse opinion.
If there are deficiencies that . . . result in one or more material weaknesses, the auditor must express an adverse opinion on the company's internal control over financial reporting."
122
According to PCAOB auditing standards, which of the following audit procedures is not generally associated with performing walkthroughs?
Confirmation. (substantive procedure)
The following procedures as applicable to performing walkthroughs: inquiry, observation, inspection of relevant documentation, and reperformance of control procedures.
123
According to PCAOB auditing standards, which of the following is not ordinarily considered an indicator of a material weakness in internal control over financial reporting?
The issuer has engaged in material transactions with related party entities.
124
According to PCAOB auditing standards, the auditor is required to communicate, in writing, all identified material weaknesses to
Management and the audit committee.
125
According to PCAOB auditing standards, in reporting whether a previously reported material weakness continues to exist, the auditor may appropriately issue
An unqualified opinion or a disclaimer of opinion.
126
When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that
Describes the limitations on the usefulness of the presentation.
An examination report on a projection must be restricted to the specified users who are informed with respect to the hypothetical assumptions associated with a projection.
127
Which of the following professional services would be subject to the Statements on Standards for Attestation Engagements (SSAEs)?
An engagement to report on an entity's compliance with statutory requirements
128
A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain
A statement of limitations on the use of the report.
The report is intended to be used solely by the specified users and, as a result, restrictions on distribution need to be clearly stated.
