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Flashcards in Gleim 19 - Other Assurance Services Deck (24):
1

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

A. That the CPA did not update the assessment of the risks of material misstatement.

B. That the auditor’s report should no longer be relied on.

C. The reasons for the change from an audit to a review.

D. The type of opinion expressed previously.

D. The type of opinion expressed previously.

Answer D is correct.
The separate paragraph is added to the current period’s review report when the prior-period report is reissued. The separate paragraph should indicate (1) that the prior-period statements were audited, (2) the date of the previous report, (3) the type of opinion expressed, (4) the substantive reasons if the opinion was not unmodified, and (5) that no audit procedures were performed after the date of the previous report (AR 200).

2

One of the conditions required for an accountant to submit a written personal financial plan containing unaudited financial statements to a client without complying with the requirements of AR 80, Compilation of Financial Statements, is that the

A. Accountant expresses limited assurance that the financial statements are free of any material misstatements.

B. Client agrees that the financial statements will not be used to obtain credit.

C. Accountant compiled or reviewed the client’s financial statements.

D. Engagement letter acknowledges that the financial statements will contain departures from U.S. GAAP.

B. Client agrees that the financial statements will not be used to obtain credit.

Answer B is correct.
The accountant should have an understanding with the client, preferably written, that the statements will be used solely to assist the client and the client’s advisors to develop the client’s personal financial objectives. They also should not be used to obtain credit or for any purposes other than developing these objectives. In addition to this understanding, nothing must come to the accountant’s attention during the engagement that indicates a use of the statements that violates the understanding (AR 600).

3

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

A. Statement that a review is substantially less in scope than an audit.

B. Reference to the CPA’s justification for agreeing to change the engagement.

C. Reference to the scope limitation that caused the changed engagement.

D. Description of the auditing procedures that were completed before the engagement was changed.

A. Statement that a review is substantially less in scope than an audit.

Answer A is correct.
If the accountant concludes that the change is reasonable and complies with the standards for a review, (s)he should issue a review report. The standard review report states, “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. Accordingly, I (we) do not express such an opinion.”

4

An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, changes in shareholders’ equity, and cash flows. The accountant may issue the requested review report only if

A. The balance sheet is part of a comprehensive personal financial plan developed to assist the entity.

B. The scope of the accountant’s inquiry and analytical procedures has not been restricted.

C. The balance sheet is not to be used to obtain credit or distributed to the entity’s creditors.

D. There have been no material changes during the year in the entity’s accounting principles.

B. The scope of the accountant’s inquiry and analytical procedures has not been restricted.

Answer B is correct.
The accountant may accept an engagement to issue a review report on one financial statement of a nonissuer, e.g., the balance sheet, if the scope of his/her procedures has not been limited (AR 90).

5

A practitioner’s compilation report on a financial forecast should include a statement that

A. The forecast should be read only in conjunction with the audited historical financial statements.

B. The practitioner expresses only limited assurance on the forecasted statements and their assumptions.

C. There will usually be differences between the forecasted and actual results.

D. The hypothetical assumptions used in the forecast are reasonable in the circumstances.

C. There will usually be differences between the forecasted and actual results.

Answer C is correct.
The compilation report states that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance. It adds that there will usually be differences between the forecasted and actual results.

6

Statements on Standards for Accounting and Review Services (SSARSs) require an accountant to report when the accountant has

A. Provided a client with a financial statement format that does not include monetary amounts, to be used by the client in preparing financial statements.

B. Typed client-prepared financial statements, without modification, as an accommodation to the client.

C. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.

D. Prepared, through the use of computer software, financial statements to be used by third parties.

D. Prepared, through the use of computer software, financial statements to be used by third parties.

Answer D is correct.
The accountant should not consent to the use of his/her name in association with unaudited financial statements of a nonissuer to be used by third parties unless (1) the auditor has compiled or reviewed the financial statements in compliance with SSARSs, or (2) the financial statements are accompanied by an indication that the accountant has not compiled or reviewed the statements and that the accountant assumes no responsibility for them (i.e., issue a disclaimer).

7

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

A. Inquire of management about related party transactions.

B. Communicate internal control deficiencies to senior management.

C. Corroborate litigation information with the entity’s attorney.

D. Review the predecessor accountant’s working papers.

A. Inquire of management about related party transactions.

Answer A is correct.
A review consists primarily of making inquiries of management, applying analytical procedures, and obtaining a management representation letter.

8

A practitioner may accept an agreed-upon procedures engagement to calculate the rate of return on a specified investment and verify that the percentage agrees with the percentage in an identified schedule provided that

A. The practitioner’s report does not enumerate the procedures performed.

B. The practitioner accepts responsibility for the sufficiency of the procedures.

C. The practitioner is also the entity’s continuing auditor.

D. Use of the practitioner’s report is restricted.

D. Use of the practitioner’s report is restricted.

Answer D is correct.
An independent practitioner may accept such an engagement if (1) the specified parties agree to the procedures and take responsibility for their sufficiency, (2) the subject matter is subject to reasonably consistent measurement, (3) evidence is expected to exist providing a reasonable basis for the findings, (4) the use of the report is restricted, and (5) other conditions are met. The report should state that it is intended solely for the information and use of the specified parties and is not intended to be used and should not be used by anyone other than these specified parties.

9

Performing inquiry and analytical procedures is the primary basis for an accountant to issue a

A. Review report on comparative financial statements for a nonissuer in its second year of operations.

B. Management advisory report prepared at the request of a client’s audit committee.

C. Report on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act.

D. Review report on prospective financial statements that present an entity’s expected financial position, given one or more hypothetical assumptions.

A. Review report on comparative financial statements for a nonissuer in its second year of operations.

Answer A is correct.
A review engagement consists primarily of inquiries of management, analytical procedures applied to financial data, and written management representations. Among other things, inquiries should be made about changes in the entity’s business activities or accounting principles and practices. Analytical procedures are performed to identify relationships and items that appear to be unusual. One common analytical procedure is the comparison of the financial statements with statements for prior periods.

10

When an accountant compiles a financial forecast, the accountant’s report should include a(n)

A. Disclaimer of opinion on the reliability of the entity’s internal controls.

B. Explanation of the differences between a financial forecast and a financial projection.

C. Statement that the accountant’s responsibility to update the report is limited to 1 year.

D. Caveat that the prospective results of the financial forecast may not be achieved.

D. Caveat that the prospective results of the financial forecast may not be achieved.

Answer D is correct.
The standard report states that a compilation is limited in scope and does not enable the accountant to express an opinion or any other form of assurance. It adds that there will usually be differences between the forecasted and actual results (AT 301).

11

Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to

A. All employees who work for the entity.

B. A bank with which the entity is negotiating for a loan.

C. All shareholders of record as of the report date.

D. Potential shareholders who request a prospectus or a registration statement.

B. A bank with which the entity is negotiating for a loan.

Answer B is correct.
A projection is based on one or more hypothetical assumptions and, therefore, should be considered for limited use only. Limited use of prospective financial statements means use by the responsible party and those with whom that party is negotiating directly. Examples of appropriate use include negotiations for a bank loan and submission to a regulatory body. A projection is inappropriate for distribution to those who will not be negotiating directly with the responsible party.

12

In a review engagement, the accountant should establish an understanding with the entity regarding the services to be performed. The understanding should include all of the following except a

A. Provision that the engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations.

B. Description of the report the accountant expects to issue.

C. Provision that any errors, fraud, or noncompliance with laws and regulations that come to the accountant’s attention need not be reported to the entity.

D. Description of the nature and limitations of the services to be performed.

C. Provision that any errors, fraud, or noncompliance with laws and regulations that come to the accountant’s attention need not be reported to the entity.

Answer C is correct.
The engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations. However, the accountant agrees to inform the appropriate level of management of (1) any material errors and (2) evidence or information coming to the accountant’s attention that fraud or noncompliance may have occurred. But the accountant need not report clearly inconsequential noncompliance (AR 90).

13

Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected financial position, results of operations, and cash flows. Such prospective financial statements are known as

A. Pro forma financial statements.

B. Financial forecasts.

C. Partial presentations.

D. Financial projections.


D. Financial projections.

Answer D is correct.
Prospective statements include forecasts and projections. The difference between a forecast and a projection is that only the latter is based on one or more hypothetical assumptions, which are conditions or actions not necessarily expected to occur.

14

Which of the following prospective financial statements is(are) appropriate for general use?

Financial forecast...Financial projection

A. Yes...No

B No...No

C. Yes...Yes

D. No...Yes

A. Yes...No

Answer A is correct.
A financial forecast is based on conditions the responsible party expects to exist and the course of action it expects to take. A projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as “What would happen if . . .?” PFSs are for general use if they are for use by persons with whom the responsible party is not negotiating directly, e.g., in an offering statement of the party’s securities. Only a forecast is appropriate for general use. All other presentations are for limited use.

15

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?

A. Performing basic analytical procedures.

B. Providing any form of assurance.

C. Developing an understanding of internal control.

D. Remaining independent.

C. Developing an understanding of internal control.

Answer C is correct.
Under SSARSs, which apply only to nonissuers (nonpublic entities), the objective of a review is to express limited assurance that no material modifications should be made to the statements for them to conform with the applicable financial reporting framework. A review is less in scope than an audit. For example, a review does not involve obtaining an understanding of the entity’s internal control.

16

After an auditor had been engaged to perform the first audit for a nonissuer, the client requested to change the engagement to a review. In which of the following situations would there be a reasonable basis to comply with the client’s request?

A. The client’s bank required an audit before committing to a loan, but the client subsequently acquired alternative financing.

B. The auditing procedures were substantially complete and the auditor determined that an unmodified opinion was warranted, but there was a disagreement concerning the audit fee.

C. The auditor was prohibited by the client from corresponding with the client’s legal counsel.

D. Management refused to sign the client representation letter.

A. The client’s bank required an audit before committing to a loan, but the client subsequently acquired alternative financing.

Answer A is correct.
An auditor engaged to perform an audit may be requested to change the engagement to a review or compilation. The request may result from (1) a change in circumstances affecting the need for an audit, (2) a misunderstanding as to the nature of one of the services, or (3) a scope restriction. Before agreeing to the change, the auditor should consider the reason for the request and the additional effort and cost to complete the audit. A scope restriction should be given special consideration. When the client has no need for an audit, the auditor should honor the request because it has no negative implications, and the cost to complete the audit would be substantial. The subsequent report should not refer to the original engagement, any auditing procedures performed, or scope limitations that resulted in the changed engagement (AR 90).

17

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to

A. Compare the prior year’s financial statements with those of the current year.

B. Review the successor accountant’s working papers for matters affecting the prior year.

C. Verify that the reissued report will not be used to obtain credit from a financial institution.

D. Make inquiries about actions taken at meetings of the board of directors during the current year.

A. Compare the prior year’s financial statements with those of the current year.

Answer A is correct.
Before reissuing a report, the predecessor should consider whether the report is still appropriate. The predecessor should read the current financial statement, compare the prior financial statements with the current financial statements, and obtain a letter from the successor requesting any information that might affect the prior financial statements.

18

Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. 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?

A. Baker is not required to modify the accountant’s review report.

B. Baker is not permitted to modify the accountant’s review report.

C. Baker should issue an accountant’s compilation report instead of a review report.

D. Baker should express a qualified opinion in the accountant’s review report.

A. Baker is not required to modify the accountant’s review report.

Answer A is correct.
AR 90 states that, normally, neither an uncertainty about an entity’s ability to continue as a going concern nor an inconsistency in the application of accounting principles should cause the accountant to modify the standard report, provided the financial statements appropriately disclose such matters. Nothing in this statement, however, is intended to preclude an accountant from emphasizing in a separate paragraph of the report a matter regarding the financial statements. Nevertheless, if management’s conclusions about a going-concern issue are unreasonable, or if disclosure is inadequate, the accountant must follow the guidance for departures from GAAP.

19

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when

I. Reproducing client-prepared financial statements, without modification, as an accommodation to a client

II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses

A. Both I and II.

B. Neither I nor II.

C. II only.

D. I only.

B. Neither I nor II.

Answer B is correct.
An accountant performs a compilation or review in accordance with SSARSs. A compilation is a service to assist management in presenting financial statements without undertaking to obtain or provide any assurance. A review is a service to obtain limited assurance that no material modifications need to be made to the statements for them to be in accordance with the applicable reporting framework. A submission of financial statements is defined as presenting to management financial statements that the accountant has prepared (AR 60). Thus, reproducing client-prepared financial statements, without modification, as an accommodation to a client or preparing standard monthly journal entries is not a compilation or review of financial statements.

20

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

A. Making inquiries of management about actions taken at meetings of the shareholders and the board of directors.

B. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

C. Applying analytical procedures designed to corroborate management’s assertions that are embodied in the financial statement components.

D. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.

B. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

Answer B is correct.
In a compilation, the accountant should read the compiled financial statements and consider whether the statements appear to be in appropriate form and free from obvious material errors. Examples are arithmetic or clerical mistakes or mistakes in the application of accounting principles (AR 80).

21

Which of the following statements is correct regarding a review engagement of a nonissuer’s financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARSs)?

A. A review provides an accountant with a basis for expressing limited assurance on the financial statements.

B. A review report contains an accountant’s opinion of the financial statements taken as a whole.

C. An accountant need not establish an understanding with the client in writing.

D. An accountant must obtain an understanding of the client’s internal control when performing a review.

A. A review provides an accountant with a basis for expressing limited assurance on the financial statements.

Answer A is correct.
Accountants undertake review engagements to express limited assurance that they are not aware of any material modifications that should be made to the statements for them to conform with the applicable reporting framework (AR 90).

22

Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?

A. Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

B. Compare the prospective financial statements with the entity’s historical results for the prior year.

C. Test the entity’s internal controls to determine if adequate controls exist so that financial projections can be reasonably achieved.

D. Make inquiries prior to the date of the report about possible future transactions that may impact the forecast once the report is issued.

A. Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

Answer A is correct.
A compilation provides no assurance on the prospective financial statements or on the underlying assumptions. Thus, the accountant need not assess risk or apply substantive procedures during a compilation. But the accountant should determine the accounting principles to be used in the preparation of the statements.

23

Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?

A. Compiling an individual’s personal financial statement to be used to obtain a mortgage.

B. Reviewing interim financial information required to be filed by public companies with the SEC.

C, Processing financial data for clients of other accounting firms.

D. Assisting in adjusting the books of account for a partnership.

A. Compiling an individual’s personal financial statement to be used to obtain a mortgage.

Answer A is correct.
AR 80 describes the accountant’s procedures and reporting responsibilities for compilations. An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with the requirements of AR 80 if the accountant (1) has a documented understanding with the client about its use, (2) has no reason to believe that the financial statements will be used to obtain credit or for any purpose other than the financial plan, and (3) issues a report describing the engagement (AR 600).

24

Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?

A. Inquiry to identify transactions between related parties and management.

B. Inquiry of the client’s professional advisers, including bankers, insurance agents, and consultants.

C. Inquiry regarding the client’s principles and practices and the method of applying them.

D. Inquiry concerning the effectiveness of the client’s system of internal control.

C. Inquiry regarding the client’s principles and practices and the method of applying them.

Answer C is correct.
Review procedures consist of inquiries and analytical procedures. The accountant should understand the accounting principles and practices used by the client to (1) measure, (2) recognize, (3) record, and (4) disclose all significant accounts and disclosures in the statements (AR 90).