Gleim 19.1-2 Compilations & Reviews Flashcards Preview

Auditing > Gleim 19.1-2 Compilations & Reviews > Flashcards

Flashcards in Gleim 19.1-2 Compilations & Reviews Deck (57):
1

Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web’s financial statements do not disclose the basis of accounting used, Miller should

A. Issue a special report describing the effect of the incomplete presentation.

B. Withdraw from the engagement and provide no further services to Web.

C. Disclose the basis of accounting in the accountant’s compilation report.

D. Clearly label each page “Distribution Restricted--Material Modifications Required.”

C. Disclose the basis of accounting in the accountant’s compilation repo

Answer C is correct.
Although the accountant is expected to perform no procedures, if (s)he is aware of misapplications of GAAP or the absence of required disclosures, (s)he should disclose that information in the compilation report.

2

Jeffries, CPA, had compiled unaudited financial statements for a nonissuer, the Gold Company. Because the statements would not be used by third parties, as represented by Gold, Jeffries did not include a compilation report. Three months after the statements were issued, the Gold Company asked the CPA’s permission to give a copy of the statements to its banker who had requested financial statements. How should Jeffries respond?

A. Jeffries must audit or review the statements before they are released to the banker.

B. Gold may give the statements to the banker as long as Jeffries’ appropriate compilation report accompanies the statements.

C. Jeffries should advise Gold to let the banker review the statements and take notes but should not give the banker a copy of the statements.

D. Jeffries should advise Gold to retype the statements on plain paper and send them to the banker.

B. Gold may give the statements to the banker as long as Jeffries’ appropriate compilation report accompanies the statements.

Answer B is correct.
The financial statements should be accompanied by a written report when the accountant (1) is engaged to report on compiled statements or (2) submits statements that are reasonably expected to be used by a third party. A submission is a presentation to management of statements the accountant has prepared. The accountant’s reporting objective is to prevent misinterpretation of the degree of responsibility assumed when his/her name is associated with the compiled statements (AR 80).

3

If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used, the accountant should

A. Clearly label each page “unaudited.”

B. Disclose the basis of accounting in the accountant’s report.

C. Disclose the basis in the notes to the financial statements.

D. Recompile the financial statements using generally accepted accounting principles.

B. Disclose the basis of accounting in the accountant’s report.

Answer B is correct.
An accountant may compile financial statements that omit disclosures required by GAAP or a special purpose framework (other comprehensive basis of accounting, or OCBOA). The accountant may compile financial statements that omit substantially all the disclosures required by an applicable reporting framework if the omission is not, to his/her knowledge, done to mislead those who might reasonably be expected to use the statements. When reporting on statements that omit substantially all disclosures, the accountant should include in the compilation report a paragraph stating that (1) management has elected to omit substantially all the disclosures, (2) the omitted disclosures might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters. Furthermore, statements prepared in accordance with an OCBOA are not appropriate in form unless they include (1) a description of the OCBOA, including a summary of significant accounting policies and a description of the primary differences from GAAP, and (2) informative disclosures similar to those required by GAAP.

4

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

A. Compilations.
B. Reviews.
C. Audits.
D. Agreed-upon procedures.

A. Compilations.

Answer A is correct.
A CPA who is a director of the client is not independent. Thus, (s)he must not perform any service for the client that requires independence. A compilation does not require independence, but the report should be modified to disclose the lack of independence.

5

A CPA who is not independent may issue a

A. Compilation report.
B. Comfort letter.
C. Review report.
D. Report expressing a qualified opinion.

A. Compilation report.

Answer A is correct.
An accountant performs a compilation or review in accordance with SSARSs. An auditor who lacks independence may issue a compilation report if (s)he discloses that (s)he is not independent (AR 80).

6

Which of the following statements would be appropriate in an accountant’s report on compiled financial statements of a nonissuer prepared in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?

A. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without providing any assurance.

B. We are not aware of any material modifications that should be made to the accompanying financial statements.

C. A compilation is performed to obtain reasonable assurance about whether the financial statements are free from material misstatement.

D. A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards (GAAS).

A. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without providing any assurance.

Answer A is correct.
The report states, “The objective of a compilation is to assist management in presenting 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 financial statements” (AR 80).

7

When an accountant compiles a nonissuer’s financial statements that omit substantially all disclosures required by U.S. GAAP, the accountant should indicate in the compilation report that the financial statements are

A. Not designed for those who are uninformed about such matters.

B. Not to be given to financial institutions for the purpose of obtaining credit.

C. Compiled in conformity with a comprehensive basis of accounting other than U.S. GAAP.

D. Restricted for internal use only by the entity’s management.

A. Not designed for those who are uninformed about such matters.

Answer A is correct.
The accountant may not accept the engagement unless (1) (s)he modifies the standard compilation report to indicate that substantially all disclosures required by the applicable reporting framework have been omitted and (2) the omission is not, to the accountant’s knowledge, made to mislead users of the statements. The language given is from an example compilation report when substantially all disclosures are omitted.

8

A report on compiled financial statements should state that

A. The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

B. The accountant has compiled the financial statements in accordance with standards established by the Auditing Standards Board.

C. The accountant does not express an opinion but expresses only limited assurance on the compiled financial statements.

D. A compilation is substantially less in scope than a review or an audit in accordance with generally accepted auditing standards.

A. The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Answer A is correct.
According to AR 80, the report on a compilation should state, “The objective of a compilation is to assist management in presenting 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 financial statements.”

9

Which of the following should not be included in an accountant’s standard report based upon the compilation of an entity’s financial statements?

A. A statement that the compilation was performed in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.

B. A statement that the accountant does not express an opinion but provides only limited assurance on the statements.

C. A statement that a compilation assists management in presenting financial information in the form of financial statements.

D. A statement that the accountant has not audited or reviewed the statements.

B. A statement that the accountant does not express an opinion but provides only limited assurance on the statements.

Answer B is correct.
A compilation report does not express an opinion or any other form of assurance (AR 80). A review report may provide limited (negative) assurance.

10

Which of the following accounting services most likely may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services?
I. Preparing a working trial balance
II. Preparing standard monthly journal entries

A. Both I and II.
B. II only.
C. Neither I nor II.
D. I only.

A. Both I and II.

Answer A 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). Standard monthly journal entries and a working trial balance do not meet the definition of a financial statement. Thus, a compilation or review report is not necessary (assuming these items are properly characterized).

11

Compiled financial statements should be accompanied by an accountant’s report stating that

A. A compilation includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.

B. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.

C. The accountant compiled the financial statements in accordance with Statements on Standards for Accounting and Review Services.

D. The accountant is not aware of any material modifications that should be made to the financial statements to conform with U.S. GAAP.

C. The accountant compiled the financial statements in accordance with Statements on Standards for Accounting and Review Services.

Answer C is correct.
The standard compilation report is a disclaimer stating that the accountant has compiled the financial statements in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.

12

When compiling a nonissuer’s financial statements, an accountant is least likely to

A. Read the compiled financial statements and consider whether they appear to include adequate disclosure.

B. Omit substantially all of the disclosures required by generally accepted accounting principles.

C. Perform analytical procedures designed to identify relationships that appear to be unusual.

D. Issue a compilation report on one or more, but not all, of the basic financial statements.

C. Perform analytical procedures designed to identify relationships that appear to be unusual.

Answer C is correct.
In a compilation engagement, the accountant is not required to make inquiries or perform analytical or other procedures to verify, corroborate, or review information supplied by the entity. However, analytical procedures are necessary in review and audit engagements.

13

A CPA should not express negative or limited assurance in a standard

A. Review report on interim financial statements of an issuer.

B. Comfort letter on financial information included in a registration statement of an issuer.

C. Compilation report on financial statements of a nonissuer.

D. Review report on financial statements of a nonissuer.

C. Compilation report on financial statements of a nonissuer.

Answer C is correct.
The standard compilation report states that the financial statements have not been audited or reviewed and, accordingly, the accountant does not express an opinion or any other form of assurance on them (AR 80).

14

In performing a compilation of financial statements of a nonissuer, the accountant decides that modification of the standard report is not adequate to indicate deficiencies in the financial statements as a whole, and the client is not willing to correct the deficiencies. The accountant should therefore

A. Perform a review of the financial statements.

B. Issue a special purpose report.

C. Withdraw from the engagement.

D. Express an adverse audit opinion.

C. Withdraw from the engagement.

Answer C is correct.
If the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements as a whole, the accountant should withdraw from the compilation engagement. (S)he should provide no further services with respect to those financial statements. The accountant may wish to consult with his/her legal counsel upon withdrawal.

15

How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer’s financial statements?

The Financial
Statements Have
Not Been Audited...The Accountant Has Compiled the Financial Statements


A. Implicitly...Explicitly

B. Explicitly...Implicitly

C. Implicitly...Implicitly

D. Explicitly...Explicitly

D. Explicitly...Explicitly

Answer D is correct.
The standard report for the compilation of a nonissuer’s financial statements should state that the financial statements have not been audited or reviewed. The report also should state that a compilation has been performed in accordance with the SSARSs issued by the AICPA.

16

An accountant should not compile unaudited financial statements for management of a nonissuer unless, at a minimum, the accountant

A. Types or reproduces the financial statements.

B. Assists in adjusting the books of account and preparing the trial balance.

C. Applies analytical procedures to the financial statements.

D. Complies with the Statements on Standards for Accounting and Review Services.

D. Complies with the Statements on Standards for Accounting and Review Services.

Answer D is correct.
The accountant should not compile unaudited financial statements of a nonissuer to the client or others unless, as a minimum, (s)he complies with the standards set forth in AR 80 applicable to compilation engagements.

17

Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by U.S. GAAP. Winters may compile such financial statements provided the

A. Reason for omitting the disclosures is explained in the engagement letter and acknowledged in the management representation letter.

B. Financial statements are prepared on a comprehensive basis of accounting other than U.S. GAAP.

C. Omission is not undertaken to mislead the users of the financial statements and is disclosed in the accountant’s report.

D. Use of the financial statements is restricted.

C. Omission is not undertaken to mislead the users of the financial statements and is disclosed in the accountant’s report.

Answer C is correct.
The accountant may not accept the engagement unless (1) (s)he modifies the standard compilation report to indicate that substantially all disclosures required by the applicable reporting framework have been omitted and (2) the omission is not, to the accountant’s knowledge, made to mislead users of the statements. The language given is from an example compilation report when substantially all disclosures are omitted.

18

An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when performing which of the following tasks?

A. Generating financial statements of a nonissuer.

B. Preparing monthly journal entries.

C. Providing a blank financial statement format or template.

D. Providing the client with software to generate financial statements.

A. Generating financial statements of a nonissuer.

Answer A is correct.
An accountant must perform a compilation or review engagement for a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). 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.

19

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?

A. The accountant should include the statement “I am not independent with respect to the entity” in the compilation report.

B. The accountant should include the disclaimer “I am an owner of the entity” in the report.

C. The accountant should refuse the compilation engagement.

D. A report need not be issued for a compilation of a nonissuer.

A. The accountant should include the statement “I am not independent with respect to the entity” in the compilation report.

Answer A is correct.
The accountant has a direct financial interest (ownership) in the client and is therefore not independent. The accountant may perform the service and issue a compilation report. However, (s)he must modify the final paragraph of the standard report to indicate the lack of independence. The accountant also may include the reason(s) for the impairment of independence.

20

Which of the following would not be included in an accountant’s documentation of a compilation of a client’s financial statements?

A. A review of the segregation of duties in the cash disbursement process.

B. A memo to the CFO about a potentially significant fraud revealed during compilation procedures.

C. An engagement letter.

D. Discussion with the client regarding the proper presentation of gross cash flows for investment purchases.

A. A review of the segregation of duties in the cash disbursement process.

Answer A is correct.
The accountant should prepare documentation (working papers) in connection with each compilation engagement to include (1) the engagement letter documenting the understanding with the client; (2) any findings or issues that, in the accountant’s judgment, are significant; and (3) communications, whether oral or written, to the appropriate level of management regarding fraud or noncompliance with laws or regulations that come to the accountant’s attention. However, a compilation does not involve obtaining an understanding of internal control or assessing fraud risk. Thus, the documentation does not include a review of the segregation of duties in the cash disbursement process.

21

Compiled financial statements of a nonissuer intended for third-party use should be accompanied by a report stating that

A. The accountant does not express an opinion or any other form of assurance on the financial statements.

B. The scope of the accountant’s procedures has not been restricted in testing the financial information that is the representation of management.

C. The accountant assessed the accounting principles used and significant estimates made by management.

D. A compilation consists principally of inquiries of entity personnel and analytical procedures applied to financial data.

A. The accountant does not express an opinion or any other form of assurance on the financial statements.

Answer A is correct.
A compilation report contains a disclaimer stating that the accountant has not audited or reviewed the financial statements and does not express an opinion or any other form of assurance on them.

22

Which of the following actions should an accountant take when engaged to compile a company’s financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?

A. Express negative assurance on the financial statements.

B. Perform analytical procedures.

C. Perform the engagement even though independence is compromised.

D. Make management inquiries and examine internal controls.

C. Perform the engagement even though independence is compromised.

Answer C is correct.
An accountant may perform and report on a compilation without being independent if the lack of independence is disclosed in the report.

23

Independence is not required on which of the following types of engagements?

A. Agreed-upon procedures.
B. Compilation.
C. Audit.
D. Review.

B. Compilation.

Answer B is correct.
Statements on Standards for Accounting and Review Services do not require an accountant to be independent when performing a compilation engagement. However, the accountant should disclose the lack of independence in the report.

24

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

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

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

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

Answer D 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).

25

A practitioner has been hired to compile the unaudited financial statements of a nonissuer. The accountant’s compilation report will include a statement that

A. A compilation has been performed in accordance with GAAS.

B. Describes the limited procedures that were performed.

C. The financial statements have been restricted to internal use only.

D. The accountant does not express any form of assurance on the financial statements.

D. The accountant does not express any form of assurance on the financial statements.

Answer D is correct.
According to AR 80, the report on a compilation should state, “The objective of a compilation is to assist management in presenting 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 financial statements.”

26

When compiling the financial statements of a nonissuer, an accountant should

A. Inquire of key personnel concerning related parties and subsequent events.

B. Review agreements with financial institutions for restrictions on cash balances.

C. Perform ratio analyses of the financial data of comparable prior periods.

D. Understand the accounting principles and practices of the entity’s industry.

D. Understand the accounting principles and practices of the entity’s industry.

Answer D is correct.
The accountant should acquire a level of knowledge of the accounting principles and practices of the industry in which the entity operates that will enable him/her to compile financial statements that are appropriate in form for an entity operating in that industry. Also, (s)he should have an understanding of the entity’s business and its accounting principles and practices (AR 80).

27

An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARSs). 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?

Printed on the Accountant’s Letterhead...Manually Signed by the Accountant


A. No...No
B. No...Yes
C. Yes...No
D. Yes...Yes

A. No...No

Answer A is correct.
The compilation report need not be printed on the accountant’s letterhead or manually signed by the accountant. However, the report must be signed by the accounting firm or the accountant as appropriate. Thus, the signature may be manual or printed (AR 80).

28

To compile financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should

A. Identify material misstatements in the financial statements.

B. Obtain a general understanding of the client’s business transactions.

C. Review bank statement reconciliations.

D. Make inquiries of significant customers, vendors, and creditors.

B. Obtain a general understanding of the client’s business transactions.

Answer B is correct.
Under SSARSs, which apply only to nonissuers (nonpublic entities), the accountant should obtain knowledge about the client, including an understanding of the client’s business and accounting principles and practices used.

29

In the course of an engagement to prepare unaudited financial statements, the client requests that the accountant perform normal accounts receivable audit confirmation procedures. (S)he agrees and performs such procedures. The confirmation procedures

A. Are part of an auditing service and change the scope of the engagement to that of an audit in accordance with GAAS.

B. Are not permitted when the purpose of the engagement is to prepare unaudited financial statements and the work to be performed is not in accordance with GAAS.

C. Would require the accountant to issue a report indicating that the audit was conducted in accordance with GAAS but was limited in scope.

D. Are part of an accounting service and are not performed for the purpose of conducting an audit in accordance with GAAS.

D. Are part of an accounting service and are not performed for the purpose of conducting an audit in accordance with GAAS.

Answer D is correct.
Accountants may perform other accounting services either in connection with a compilation or review of unaudited financial statements of a nonissuer or separately.

30

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. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

D. Neither I nor II.

Answer D 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.

31

Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer?

A. Make inquiries of the employees and senior management regarding transactions with related parties.

B. Determine whether there is substantial doubt about the entity’s ability to continue as a going concern.

C. Scan the entity’s records for the period just after the balance sheet date to identify subsequent events that require disclosure.

D. Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.

D. Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.

Answer D is correct.
The practitioner should read the financial statements to determine whether they are in appropriate form and free of obvious material errors.

32

Which of the following representations may an accountant make implicitly when issuing a report on the compilation of a nonissuer’s financial statements?

A. The accountant does not express any assurance on the financial statements.

B. The financial statements have not been audited.

C. A compilation consists principally of inquiries and analytical procedures.

D. The accountant is independent with respect to the entity.

D. The accountant is independent with respect to the entity.

Answer D is correct.
The standard compilation report does not refer to independence unless the accountant chooses to include the word “Independent” in the title. However, an accountant who lacks independence should explicitly state his/her lack of independence in a final paragraph of the report.

33

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

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

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

C. The accountant is not required to make inquiries or perform procedures to corroborate the information provided by the client.

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

C. The accountant is not required to make inquiries or perform procedures to corroborate the information provided by the client.

Answer C is correct.
The accountant should have or obtain an understanding of the industry in which the client operates, including the accounting principles and practices generally used in the industry. This understanding should be sufficient to enable the accountant to compile financial statements that are appropriate in form for an entity operating in that industry. The accountant also should obtain knowledge about the client, including an understanding of the client’s business and accounting principles and practices used by the client. Moreover, before submission of the statements to the client or others, the accountant should read the financial statements and consider whether such financial statements appear to be appropriate in form and free from obvious material errors. However, the accountant is not required to make inquires or perform other procedures to verify, corroborate, or review information supplied by the entity.

34

When engaged to compile the financial statements of a nonissuer, an accountant should possess a level of knowledge of the entity’s accounting principles and practices. This most likely will include obtaining a general understanding of the

A. Internal control awareness of the entity’s senior management.

B. Stated qualifications of the entity’s accounting personnel.

C. Risk factors relating to misstatements arising from illegal acts.

D. Design of the entity’s internal controls that have been implemented.

B. Stated qualifications of the entity’s accounting personnel.

Answer B is correct.
To perform a compilation, the accountant should possess an understanding of the nature of the entity’s business, its accounting records, the qualifications of its accounting personnel, and the content and accounting basis of the financial statements.

35

When financial statements of a nonissuer compiled by a CPA do not include normal disclosures because the statements are intended for internal use only, the CPA should

A. Take no special action because disclosure in this situation is not appropriate.

B. Issue a compilation report on the financial statements but make no mention of the lack of normal disclosures because disclosure in this case is not necessary.

C. Express an adverse opinion on the financial statements because of lack of proper disclosure.

D. Issue a compilation report on the financial statements and include in the report a comment to the effect that the statements are for internal purposes only and do not necessarily contain all required disclosures.

D. Issue a compilation report on the financial statements and include in the report a comment to the effect that the statements are for internal purposes only and do not necessarily contain all required disclosures.

Answer D is correct.
The accountant may compile financial statements that omit substantially all the disclosures required by an applicable reporting framework if the omission is not, to his/her knowledge, done to mislead those who might reasonably be expected to use the statements. When reporting on statements that omit substantially all disclosures, the accountant should include in the compilation report a paragraph stating that (1) management has elected to omit substantially all the disclosures, (2) the omitted disclosures might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters. Furthermore, if the statements are not expected to be used by a third party, (1) the accountant need not issue a compilation report, and (2) each page of the statements should contain wording restricting their use (AR 80).

36

Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should

A. Inquire of the client’s personnel whether the financial statements omit substantially all disclosures.

B. Read the financial statements to consider whether the financial statements are free from obvious material errors.

C. Apply analytical procedures to selected financial data to discover any material misstatements.

D. Corroborate at least a sample of the assertions management has embodied in the financial statements.

B. Read the financial statements to consider whether the financial statements are free from obvious material errors.

Answer B is correct.
Before issuing the report, the accountant should read the compiled financial statements and consider whether they appear to be appropriate in form and free from obvious material errors. For example, arithmetic or clerical mistakes or mistakes in the application of accounting principles (AR 80).

37

An accountant’s compilation report should be dated as of the date of

A. The latest subsequent event referred to in the notes to the financial statements.

B. Completion of field work.

C. Completion of the compilation.

D. Transmittal of the compilation report.

C. Completion of the compilation.

Answer C is correct.
When an accountant has performed a compilation for a nonissuer, the date of the report should be the date of the completion of the compilation (AR 80).

38

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by U.S. GAAP. Ford may comply with General’s request provided the omission is clearly indicated in Ford’s report and the

A. Distribution of the financial statements and Ford’s report is restricted to internal use only.

B. Omitted disclosures would not influence any potential creditor’s conclusions about General’s financial position.

C. Reason for omitting the disclosures is acknowledged in the notes to the financial statements.

D. Omission is not undertaken with the intention of misleading the users of General’s financial statements.

D. Omission is not undertaken with the intention of misleading the users of General’s financial statements.

Answer D is correct.
An entity may request the accountant to compile financial statements that omit substantially all the disclosures required by an applicable financial reporting framework. The accountant may compile such statements if the omission is not, to his/her knowledge, intended to mislead those who might reasonably be expected to use the statements.

39

If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is

A. Not independent and, therefore, may issue a compilation report, but may not issue a review report.

B. Not independent and, therefore, may not issue a compilation report.

C. Independent because the financial interest in the nonissuer is immaterial.

D. Not independent and, therefore, may not be associated with the financial statements.

A. Not independent and, therefore, may issue a compilation report, but may not issue a review report.

Answer A is correct.
If a member of the AICPA has an immaterial direct financial interest in the client, (s)he is not independent (Ethics Interpretation 101-1). When the accountant issues a report on a compilation for an entity from which (s)he is not independent, the accountant’s report should be modified. The accountant should indicate his/her lack of independence in a final paragraph of the report and is permitted but not required to disclose the reasons (AR 80). An accountant must not perform a review if his/her independence is impaired for any reason (AR 90).

40

When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued?

A. The standard compilation report may be issued, regardless of independence.

B. A compilation report may be issued if the engagement is upgraded to a review.

C. A compilation report with special wording that notes the accountant’s lack of independence may be issued.

D. A compilation report with negative assurance may be issued.

C. A compilation report with special wording that notes the accountant’s lack of independence may be issued.

Answer C is correct.
A report may be issued, but it should state that the accountant is not independent. The accountant is permitted, but not required, to include the reason for the lack of independence.

41

An accountant has been engaged to compile the financial statements of a nonissuer. The financial statements contain many departures from U.S. 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

A. Quantify the effects of the departures from U.S. GAAP and describe the departures from U.S. GAAP in a special report.

B. Inform management that the engagement can proceed only if distribution of the accountant’s report is restricted to internal use.

C. Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions.

D. Withdraw from the engagement and provide no further service concerning these financial statements.

D. Withdraw from the engagement and provide no further service concerning these financial statements.

Answer D is correct.
If the accountant believes that modification of the compilation report is not adequate to indicate the deficiencies, (s)he should withdraw from the engagement.

42

An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take?

A. Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge about the industry.

B. Decline the engagement.

C. Request that management engage an independent industry expert to consult with the accountant.

D. Accept the engagement and obtain an adequate level of knowledge about the industry.

D. Accept the engagement and obtain an adequate level of knowledge about the industry.

Answer D is correct.
The accountant should have an understanding of the industry in which the client operates, including the accounting principles and practices generally used. Lack of knowledge about the industry does not prevent the accountant from accepting a compilation engagement. But the accountant is responsible for obtaining the required knowledge.

43

An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that

A. Substantially all disclosures required by GAAP are included in the financial statements.

B. The compilation is limited to presenting information that is the representation of management.

C. The accountant has not audited or reviewed the financial statements.

D. The financial statements should not be used to obtain credit.

A. Substantially all disclosures required by GAAP are included in the financial statements.

Answer A is correct.
An accountant may compile financial statements that omit substantially all disclosures required by an applicable reporting framework if the omission is not, to his/her knowledge, made to mislead users of the statements. When reporting on such statements, the accountant should include in the compilation report a paragraph with the following statements: (1) Management has elected to omit substantially all disclosures; (2) if the omitted disclosures were included, they might influence the user’s conclusions; and (3) the statements are not designed for those who are not informed about such matters. Accordingly, the standard compilation report implies that substantially all disclosures required by GAAP are included in the financial statements because it does not mention disclosures.

44

An accountant may compile a nonissuer’s financial statements intended for third-party use that omit all of the disclosures required by U.S. GAAP only if the omission is

I. Clearly indicated in the accountant’s report

II. Not undertaken with the intention of misleading the financial statement users

A. Both I and II.
B. I only.
C. Either I or II.
D. II only.

A. Both I and II.

Answer A is correct.
An accountant may accept an engagement to compile financial statements that omit substantially all disclosures required by U.S. GAAP, provided the omission is clearly indicated in the report and is not, to his/her knowledge, undertaken with the intention of misleading those who might reasonably be expected to use such financial statements (AR 80).

45



When an accountant attaches a compilation report to a nonissuer’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are

A. Special-purpose financial statements that are not comparable to those of prior periods.

B. Not compiled in accordance with Statements on Standards for Accounting and Review Services.

C. Prepared in conformity with a comprehensive basis of accounting other than GAAP.

D. Not designed for those who are uninformed about the omitted disclosures.

D. Not designed for those who are uninformed about the omitted disclosures.

Answer D is correct.
When disclosures are omitted, a paragraph is added to the standard compilation report stating that management has elected to omit substantially all disclosures required by GAAP and that, if the omissions were included, they might influence the users’ conclusions.

46

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

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

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

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

D. The date on the report should be the date of completion of the compilation.

D. The date on the report should be the date of completion of the compilation.

Answer D is correct.
A compilation report should be dated as of the date of completion of the compilation, and each page of the financial statements should include the statement “See Accountant’s Compilation Report.”

47

Which of the following statements should be included in an accountant’s standard report based on the compilation of a nonissuer’s financial statements?

A. A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards.

B. A compilation’s objective is to present in the form of financial statements information that is the representation of management.

C. A compilation is designed to detect material modifications that should be made to the financial statements.

D. A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.

B. A compilation’s objective is to present in the form of financial statements information that is the representation of management.

Answer B is correct.
The standard compilation report contains three paragraphs. The first paragraph identifies the financial statements and presents a disclaimer of assurance. The second paragraph states that management is responsible for the preparation and fair presentation of the statements. The third paragraph explains the accountant’s responsibility to follow SSARS and the objective of a compilation.

48

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

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

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

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

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

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

Answer C 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).

49

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

Compiling financial statements generated through the use of computer software.....Reproducing client-prepared financial statements, without modification, for the client

A. No...No
B. Yes...No
C. No...Yes
D. Yes...Yes

B. Yes...No

Answer B is correct.
A compilation is a service that assists management to present financial information in the form of financial statements without undertaking to provide any assurance. When the accountant is engaged to submit statements that are reasonably expected to be used by a third party, they should be accompanied by a written report. A submission of financial statements is a presentation to management of statements that an accountant has prepared. Thus, compiling financial statements generated through the use of computer software is a submission. Reproducing client-prepared financial statements, without modification, for the client is not.

50

The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that

A. A review consists of inquiries of company personnel and analytical procedures applied to financial data.

B. The accountant did not obtain an understanding of the entity’s internal control or assess risks.

C. A review is limited to presenting in the form of financial statements information that is the representation of management.

D. The accountant does not express an opinion or any other form of assurance on the financial statements.

A. A review consists of inquiries of company personnel and analytical procedures applied to financial data.

Answer A is correct.
The standard report for a review states, “A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). 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.”

51

Which of the following should be the first step in reviewing the financial statements of a nonissuer?

A. Completing a series of inquiries concerning the entity’s procedures for recording, classifying, and summarizing transactions.

B. Obtaining a general understanding of the entity’s organization, its operating characteristics, and its products or services.

C. Applying analytical procedures designed to identify relationships and individual items that appear to be unusual.

D. Comparing the financial statements with statements for comparable prior periods and with anticipated results.

B. Obtaining a general understanding of the entity’s organization, its operating characteristics, and its products or services.

Answer B is correct.
In a review, the auditor expresses limited assurance concerning the financial statements. In performing the review, the auditor should first obtain an understanding of the entity and the entity’s industry. This will provide a foundation for completing the review.

52

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review

A. Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

B. Provides only limited assurance that the financial statements are fairly presented.

C. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

D. Includes examining, on a test basis, information that is the representation of management.

A. Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

Answer A is correct.
The first paragraph of the review report contains a sentence stating, “A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.”

53

Which of the following statements is true regarding analytical procedures in a review engagement?

A. Analytical procedures are required to be used to assist in forming an overall conclusion.

B. Analytical procedures are not required to be used as a substantive test.

C. Analytical procedures involve the use of both financial and nonfinancial data.

D. Analytical procedures do not involve comparisons of recorded amounts to expected amounts.

C. Analytical procedures involve the use of both financial and nonfinancial data.

Answer C is correct.
Comparisons of financial data may be made between current-year account balances and balances of one or more comparable periods. Nonfinancial information may be used to consider the relationships of current-year account balances with relevant nonfinancial information, such as physical production statistics.

54

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. 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.

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

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

B. 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 B 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).

55

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review

A. Is substantially less in scope than an audit.

B. Is substantially more in scope than a compilation.

C. Provides limited assurance that internal control is functioning as designed.

D. Provides only limited assurance that the financial statements are fairly presented.

A. Is substantially less in scope than an audit.

Answer A is correct.
According to AR 90, financial statements reviewed by an accountant should be accompanied by a report stating that a review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements taken as a whole, and, accordingly, no such opinion is expressed.

56

The accountant should make inquiries about events subsequent to the date of the financial statements, but prior to the date of the report, that would have a material effect on the financial statements when performing

Review Services...Compilation Services

A. Yes...Yes
B. Yes...No
C. No...No
D. No...Yes

B. Yes...No

Answer B is correct.
The accountant’s inquiry and analytical procedures for review engagements should consist of inquiries of persons having responsibility for financial and accounting matters related to material subsequent events. Moreover, the accountant should obtain written representations from management about all statements and periods covered by the review report, which is dated no earlier than when the accountant had sufficient review evidence to provide limited assurances. Specific representations include, among others, information about subsequent events. The date of the representation letter should be the date of the accountant’s report (AR 90). However, compilations do not require the accountant to make inquiries or perform other procedures to verify, corroborate, or review information about events prior or subsequent to the date of the financial statements.

57

Which of the following procedures most likely would not be included in a review engagement of a nonissuer?

A. Obtaining a management representation letter.

B. Assessing the risks of material misstatement.

C. Inquiring about subsequent events.

D. Obtaining an engagement letter.

B. Assessing the risks of material misstatement.

Answer B is correct.
A review does not require (1) obtaining an understanding of the entity’s internal control; (2) assessing fraud risk; (3) testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, and confirmation; (4) examining source documents (for example, canceled checks or bank images); or (5) performing other procedures ordinarily performed in an audit. For example, an auditor (but not an accountant performing a review) should perform risk assessment procedures to identify and assess the risks of material misstatement.