Becker AUD 2.2 - Compilation and Review of FS Flashcards Preview

AUD CPA Review - (Becker, Roger, Wiley, NINJA) > Becker AUD 2.2 - Compilation and Review of FS > Flashcards

Flashcards in Becker AUD 2.2 - Compilation and Review of FS Deck (41):

Another word of management representation letter.

Representation letter


What are the 3 things that is included on a representation letter (a.k.a. management representation letter) on REVIEW interim financial info?

1) Mgt says to the best of their knowledge, NO events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the INTERIM FINANCIAL INFORMATION.

2) Mgt acknowledge their responsibility for the design and implementation of program sand controls to prevent and detect fraud (INTERNAL CONTROL)

3) Mgt. made available to auditors all financial records and related datea.


Which one is of "no assurance" or "limited assurance:"


Compilation = no assurance
Review = limited assurance (only does negative assurance)

FYI - Audit provides reasonable assurance or positive assurance and tests for completeness.


What are the Performance Requirements applied to doing an Review of F/S?

1) Understanding with client be established.
2) Learn and/or obtain sufficient knowledge of entity's business
3) Inquires should be addressed to appropriate individuals
4) Analytical procedures should be performed
5) Review - other Analytical Procedures should be performed
6) Client representation letter - Management representation letter provided to auditor.
7) Professional judgement should be used to evaluate results
8) Accountant (CPA) should communicate RESULTS.
*9) Also look at results of prior audit.


When there is a change from audit to review as requested by client due to scope limitation, the CPA's review report should include what items? What not to include?

CPA's review report should not include:

1) Reference to scope limitation that caused the change in engagement type
2) Reference to CPA"s justification change in engagement
3) Description on auditing procedures that were completed before the engagement was changed

CPA's review report includes: a statement that says that the review was substantially less in scope than an audit. FYI - this statement is only needed as long the CPA concludes that there is reasonable justification for the change and there are no additional requirements due to change.


True or false.

When performing a review engagement, the accountant should perform procedures to accumulate evidence to provide reasonable basis for obtaining limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. The accountant should use professional judgement to determine nature, timing extent of review procedures, which consists primarily of inquiries (like with management) and analytical procedures (includes financial ratios on F/S).

It does not include obtaining external evidence.


This because obtaining corroborating external evidence (inquire with outside third parties like customers, creditors, vendors, banks) is a Required Audit procedure. Not review procedure.

FYI - Review does include reading available minutes of latest stockholders meeting.


Rule on accountant do compilation work and create compilation report when the accountant lacks independence.

The accountant that lacks independence in doing compilation work does the following:

1) Not required to have independence to do the compilation work. Accountant can still do compilation even when lack independence.
2) Complete the compilation work and create a compilation report that states reason for lack of independence.
3) Does not have to withdraw from compilation engagement nor consult with legal counsel to accept compilation engagement.

FYI - when accountant lacks independence, the accountant can still do compilation but not a review nor audit engagement. Audits and Review and Agreed upon procedures all require to have independence (of FACT and APPEARANCE this includes where accountant is not directly related to the owner of the business or a major officer/Board Director of company and/or the company's accounting personnel).


Name the paragraphs (in order) that goes on an Compilation Report.

1) Intro paragraph: state that F/S have bee compiled, state that the accountant has NOT reviewed or audited the FS.

2) Management's responsibility: MGT responsible for prepare/fair presentation on F/S in accordance with applicable financial framework working and Design, implementation and maintaining internal controls related to compiling FS

3) Accountant's Responsibility: conduct compilation in accordance with SSARS issued by the AICPA and
State the objective of compilation to assist management in presenting the financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the F/S

4) 4th paragraph that discloses omissions on disclosures on the F/S. Also state that if discourses are included in F/S, then such FS may influence user's conclusions and such FS is not designed for those not aware of omitted disclosures. Also state accountant's knowledge that the omission is NOT intended to mislead any person who might be expected to use such FS.


True or false.

Practitioners in compiling FS are required to disclose reasons for an independence impairment to the compilation report.


Accountants have the OPTION to disclose reasons on why they lack independence in doing the compilation F/S. It is not a requirement.


In doing a review of FS: what is not required in doing review work?

Not required to
1) Test internal controls (including understanding internal controls)
2) Perform audit tests like cutoffs, determine control risk, detection risk, and Inherent risk to determine audit risk. Also, not required to inquire customers, vendors, creditors, examine cash receipts and year-end inventory count, inspecting or vouching.
3) Assess fraud risk

Another item:
4) Not required but can do a communication with predecessor accountant regarding acceptance of engagement and matters of continuing accounting significance.


Review - examples of analytical procedures

1) Compare FS with budgets or forecasts
2) Conduct ratio analysis i.e. inventory turnover ratio
3) Comparing to prior periods or an industry average.
4) Involve the use of both financial and nonfinancial data
5) Study relationships between FS elements expected to conform to predictable patterns.
6) Inquire management about actions taken at board of directors' meetings.
7) Compare FS with anticipated results in budgets and forecasts.


According to Statements on Standards for Accounting and Review, the objective of a compilation is to?

To assist management in presenting financial information in the form of FS.

To state the following:
1) The accountant (creating the compilation report) has not audited or reviewed the FS
2) Compilation was done in accordance with the SSARS

FYI - Compilation report is not to represent the accountant only the management's financial situation. Date of compilation report is the Date of completing the compilation.


True or false

Compilation procedures does not include the following:
Determine there is substantial doubt on going concern.
Inquire with employees and senior management regarding transactions with related parties.
Scan entity's report for the period just after the balance sheet to identify subsequent events.



When there is a justified change from review to compilation, the compilation should include a reference to the original engagement.

True or false.


Change from review to compilation. The compilation report not refers the original engagement.

FYI - also the new report not refer to any auditing procedures/review previous procedures performed, or to the scope limitation.


True or false.

For review reports, when the accountant discovers a material departure from GAAP rules in the financial statements (i.e. not capitalizing leases that are really, really capitalize leases), the accountant can modify the review report or withdraw from the engagement.



Are opinions issued on Review reports?

No, they are not.

But, they can be modified by stating in the third paragraph that "based on my review, with the exception of the matter described in the following (later) paragraph, I am not aware of any material modifications..."


True or false.

Compilation is not an audit and it is not a review. It does not deal with testing nor deals with inquiries with management/board of directors nor conduct analytical procedures.



What is the reason(s) for an accountant withdraw from a REVIEW engagement?

Accountant did not get the management representation letter. (FYI - it's required to get a MGT rep. letter in order to complete review. Otherwise, can't do the review and therefore unable to issue review report).

Management refused for the accountant to modify the Review report to state that the FS have departures from GAAP rules.


When does the accountant can submit an engagement letter (not a compilation report) when doing a compilation with the client?

When the unaudited FS of the client company is not going to be used by third parties. This is where the F/S are marked as "restricted to use."

FYI - for compilations where there is no compilation report given, it is not required to get a written rep. letter from company's management.


True or false.

Compilation reports disclaims an opinion that it is not providing an opinion on the compiled FS.



Statements on Standards for Accounting and Review Services (SSARS) are created by the AICPA in connection with the unaudited FS of _____.

Nonissuers (non-public / private companies; not registered with SEC).


True or false

Reproducing client-prepared FS without modification as accommodation to client complies with SSARS.

False. This because re-producing client produced FS without modification means the accountant (in an accountant engagement) did not create the FS for the company. The accountant just create another duplicate of the already-created FS.


True or false in each situation

1) Review report can say "a review is substantially less in scope than an audit
2) Review report states that it provides limited assurance that the FS is fairly presented.

1) True

2) False. This because "provides assurance that the FS is fairly presented" is not explicitly shown on the Review Report.


An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with requirements of SSARS when what both conditions exist?

1) Accountant and client has established understanding that the FS is to assist in financial plan not obtain credit and
2) Nothing comes to the accountant's attention during the engagement indicating that the FS will be used to obtain credit.


True or false on these:

1) Ratio analysis is used for relationships analysis between balance sheet accounts
2) Trend analysis is used more for examining income statement accounts.

1) True
2) True


An accountant may issue review report on 1 FS, such as BS and not other related FS, if the scope of the accountant's inquiry and analytical procedures has not been ___.



If accoutnant beleives that modifying the standard report (compliation or reiew) is not adequate to indicate deficiens in the FS taken as a whole, what should the accountant do in this case?

Accountant withdraws from engagement and provide no further services with respect to those FS.

Note: Accountant can request the MGT to consider the effects of the major GAAP departure on FS (such as effect of complex, illegal schemes), so the MGT can rectify it.



Define "Submission"

Define "Preparation"

Submission = presenting FS to a client or 3rd party that accountant (not client's accountant; the CPA firm's accountant) has prepared either manually or through a computer software. [NOTE: sounds like compilation right here]

Preparation: IMPLIES that the accountant has created FS that would otherwise not exist.


Preparing FS that are in conformity with another comprehensive basis of accounting (OCBOA) constitutes a submission of FS under SSARS.

True or false



If FS are expected to be used by 3RD party, SSARS requires the accountant to???

Submit a Compilation Report or Review Report.


Can an accountant accepts an engagement to do a compilation or a review in an industry the accountant is not aware of but plans to gain knowledge in it?

Yes, the accountant can. This because there is no rule that says the accountant must have prior industry knowledge to do review or compilation.


When can an accountant omit all GAAP required disclosures in the nonissuer's FS?

When (1) Accountant's compilation report discloses that the GAAP disclosures were omitted from FS

(2) Omitted GAAP disclosures were not undertaken with intention to mislead the FS.


True or false:

The review standard report on FS should state that the Accountant is not aware of any material modifications that should be made to the FS for them to conform with GAAP.


This wording is clearly stated in a Standard Review Report saying that the FS under limited assurance are free from any material misstatements in accordance with GAAP.


True or false.

Is independence explicitly stated in a standard compilation report of an accountant that is completely independent of the client company ?


This because "lack of independence" is disclosed in the compilation report.
IF the accountant is truly independent to the compilation report, then independence its implied and not explicitly stated in FS.


True or false.

Review includes analytical procedures. The analytical procedures include:
1) Tests accounting records
2) Tests MGT's assertions regarding continuing existence
3) Inquire of entity's attorneys', customers, vendors, bankers/creditors.


Review's analytical procedures does not deal with
1) Testing, including does that involves getting external evidential materials
2) Inquiring with outside people such as attorneys, legal counsel, customers, vendors, and bankers/creditors.


True or false:

In doing a review engagement on a nonissuer company, inquiring related party transactions is party of the inquiry and analytical procedures used in a review.



In a review engagement, when a evidence for substantial doubt for going concern is fully disclosed in the FS,

The CPA is not required or not permitted to modify the accountant's review report.

Not required.

FYI - it's only permitted based on circumstances or events where there no disclosure in the FS footnotes in regards to departure from GAAP.


True or false

The Accounting and Review Services committee is the authoritative body under AICPA to create standards on accountant's association with unaudited FS of nonissuer.



When accountant provides morethan one service (i.e. compliation and review or compilation and audit) concerning FS of nonissuer, the accountant issues the lowest level of service rendered.

True or false.


Accountant issues report for the highest level of service rendered.


True or false

Accountants in doing compilation or reviews is never allowed to depart from SSARS guidelines.


This because accountant's can depart from SSARS guidelines as long they can justify it.

FYI - SSARS are standards, not recommendations that must be followed with exceptions that needs justification.


True or false.

Examining loan documents is considered as an analytical procedure in a review.


Examining loan documents is an audit procedure. Not a review analytical procedure.