NINJA CPA MCQs Notes Flashcards Preview

AUD CPA Review - (Becker, Roger, Wiley, NINJA) > NINJA CPA MCQs Notes > Flashcards

Flashcards in NINJA CPA MCQs Notes Deck (84):
1

True or False:

(1) There is a difference between Program audit and single audit.

(2) AU-C 260.12 explains that the auditor should discuss with those charged with governance any disagreements with management (including disagreements about significant audit adjustments) only they were satisfactorily resolved.

(1) True.

(2) FALSE:

AU-C 260.12 explains that the auditor should discuss with those charged with governance any disagreements with management (including disagreements about significant audit adjustments) regardless of whether or not they were satisfactorily resolved.

2

The form, content, and extent of compilation documentation depend on the circumstances of the engagement, the methodology and tools used, and the accountant's professional judgment. At a minimum, the documentation should include:

what 3 things?

The form, content, and extent of compilation documentation depend on the circumstances of the engagement, the methodology and tools used, and the accountant's professional judgment.

At a minimum, the documentation should include:

these 3 things :

a. The engagement letter,
b. Any findings or issues that, in the accountant's judgment, are significant,

and

c. Communications, whether oral or written, to the appropriate level of management regarding fraud or illegal acts that come to the accountant's attention.

3

Regarding significant findings from the audit, the auditor should communicate with those charged with governance the with what 5 matters?

Regarding significant findings from the audit, the auditor should communicate with those charged with governance the following 5 matters:


1) The auditor's views about qualitative aspects of the entity's significant accounting practices, including accounting policies, accounting estimates, and financial statement disclosures

2) Significant difficulties, if any, encountered during the audit

3) Uncorrected misstatements, other than (that are not) those the auditor believes are trivial, if any

4) Disagreements w/ MGT, if any

5) Other findings or issues, if any, arising from the audit that are, in the auditor's professional judgment, significant and relevant to those charged with governance regarding their oversight of the financial reporting process.

4

(1) What is "Those charged with governance?" (TCWG)

(2) Governance is a collective responsibility carried by whom in the company?

(3) T.C.W.G. often refers to ___ committee of an entity, if one exists.

(4) AU-C ___ establishes standards and provides guidance on the auditor's communication with those charged with governance in relation to an audit of financial statements.

(1) “Those charged with governance:” are the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. In some cases, those charged with governance are responsible for approving the entity's financial statements (in other cases, management has this responsibility).

(2) In some entities, governance is a collective responsibility that may be carried out by:

A Board of Directors,
a committee of the board of directors,
a committee of management,
partners,
equivalent persons,
or some combination thereof.


Those charged with governance are specifically excluded from management, unless they perform management functions. (AR-C 70.07)

(3)
“Those charged with governance” often refers to the Audit Committee of an entity, if one exists, but the meaning of the term is not limited to the audit committee.

(4)
AU-C 260 establishes standards and provides guidance on the auditor's communication with those charged with governance in relation to an audit of financial statements.

5

If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is:

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

B. not independent and, therefore, may not issue a review report.

C. not independent and, therefore, may issue a review report, but may not issue an auditor's opinion.

D. independent because the financial interest is immaterial and, therefore, may issue a review report.

Answer: B. not independent and, therefore, may not issue a review report.

To issue a review report, an accountant must be independent. Independence will be impaired if, during the period of the professional engagement or at the time of expressing an opinion, the CPA or firm had or was committed to acquire any direct or material indirect financial interest in the client. The fact that the client was a nonpublic entity is irrelevant. The immaterial nature of the interest is also irrelevant.

Direct financial interest (material or immaterial) IMPAIRS independence in review engagement.

Material indirect financial interest IMPAIRS independence.

6

A CPA is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when engaged to:

A. Report on financial statements that the CPA generated through the use of computer software.

B. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

C. Provide the client with a financial statement format that does not include dollar amounts.

D. Audit financial statements that the client prepared for use in another country.

Answer: B. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.


The Statements on Standards for Attestation Engagements (SSAE) state that the practitioner shall express a conclusion about the subject matter and the criteria to which it is being evaluated.

Reviewing the MD&A is the subject matter, and the criteria are the rules and regulations adopted by the SEC.

FYI:

The attestation standards apply whenever a CPA is engaged to issue or does issue an exami- nation, review, or agreed-upon procedures report on subject matter (or an assertion about the subject matter) that is the responsibility of another party.

Source: Introduction To Attestation Engagements - CCH Group
tax.cchgroup.com/landingpages/pfx/aasolutions.../pdf/Attest-CH1.pdf

7

(1) In all audits, the auditor should obtain an understanding of each of the ___ components of internal control sufficient to assess the risks of material misstatement of the financial statements and to design and perform further audit procedures.

(2) Auditor obtains understanding of internal control by performing __ ___ procedures to evaluate ___ of controls relevant to an audit of ___ ___ and determine whether they have been _____ (see section 3264).

(3) True or false:

Whether a control has been placed in operation is different from its operating effectiveness.

(4) True or False: In obtaining knowledge about whether controls have been placed in operation, the auditor determines that the entity is using them.

(5) True or false:
Operating effectiveness, on the other hand, is concerned with how the control was applied, the consistency with which it was applied, and by whom it was applied.

(6) True or False:
Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements.

(7) True or false:
The auditor should consider the design of a control in determining whether to consider its implementation. An improperly designed control may represent a significant deficiency in the entity's internal control, and the auditor should consider whether to communicate this to those charged with governance and management.

(8) True or false:
Implementation of a control means that the control exists and that the entity is using it effectively.

(1) In all audits, the auditor should obtain an understanding of each of the five components of internal control sufficient to assess the risks of material misstatement of the financial statements and to design and perform further audit procedures.

(2) The auditor obtains this understanding by performing risk assessment procedures to evaluate the design of controls relevant to an audit of financial statements and determine whether they have been implemented (see section 3264).

(3) True.
Control in operations and operating effectiveness are two different things. An auditor's main job is determine if internal controls over F/S are implemented.


(4) True.
Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented.

(5) True.

(6) True.
Evaluating the design of a control involves considering whether the control, individually or in combination with other controls, is capable of effectively preventing or detecting and correcting material misstatements.

(7) False.
The auditor should consider the design of a control in determining whether to consider its implementation. An improperly designed control may represent a material weakness in the entity's internal control, and the auditor should consider whether to communicate this to those charged with governance and management.

(8) False.
Implementation of a control means that the control exists and that the entity is just using it no matter if its effective or not.

8

Vouching selected items from the payroll register to employee timecards that have been approved by supervisory personnel provides evidence that:

A. internal controls relating to payroll disbursements were operating effectively.

B. payroll checks were signed by an appropriate officer independent of the payroll preparation process.

C. only bona fide employees worked and their pay was properly computed.

D. employees worked the number of hours for which their pay was computed.

Answer: D. employees worked the number of hours for which their pay was computed.

Vouching means = existence.

Employee time-cards that have been approved by supervisory personnel indicate that the supervisor has reviewed the number of hours worked by the employee and signed off with approval.

Therefore, vouching selected items from payroll register to employee time-cards would provide evidence that employees had worked the number of hours for which their pay was computed.

9

Which of the following statements is incorrect regarding notification of third parties if the client refuses to disclose newly discovered facts and their impact on the financial statements?

A. The accountant's disclosure need not detail the specific information regarding the client's refusal.

B. The accountant's disclosure should indicate that information has come to his or her attention which the client has not cooperated in attempting to substantiate and that, if the information is true, the accountant believes the compilation or review report must no longer be used or associated with the financial statements.

C. The accountant's disclosure should include a brief description of the client's conduct or motive with regard to its refusal to notify third parties.

D. Disclosure should not be made unless the accountant believes the financial statements are likely to be misleading.

Answer: C. The accountant's disclosure should include a brief description of the client's conduct or motive with regard to its refusal to notify third parties.

Because: it is incorrect for the The accountant's disclosure to include a brief description of the client's conduct or motive with regard to its refusal to notify third parties since this is hard on to how proof that conduct or motive exists to not notify third parties.

FYI:
If the client has not cooperated:
* The accountant's disclosure need not detail the specific information but can merely indicate that the client has not cooperated with the accountant's attempt to substantiate information that has come to the accountant's attention and that, if the information is true, the accountant believes that the compilation or review report must no longer be used or associated with the financial statements.

No such disclosure should be made unless the accountant believes that the financial statements are likely to be misleading and that the accountant's review report should not be used.

10

True or false:

(1) Assessments on risk is relevant to determine nature of audit procedures to be performed during the fieldwork stage of the audit.

(2) If an assessed risk is lower because of particular characteristics of a class of transactions without consideration of related controls, then the auditor may determine that substantive analytical procedures alone will not provide sufficient appropriate audit evidence.

(3) If assessed risk is lower because of internal controls, then the auditor would do less substantive procedures and just perform test of controls.

(4) The auditor determines that the entity has effective controls and the auditor intends to design substantive procedures based on the effective operation of those controls. As a result, the auditor elects to perform tests of controls to obtain evidence about their operating effectiveness. This often is done for a class of transactions of reasonably uniform, noncomplex characteristics that are routinely processed and controlled by the entity's information system.

(1) True.

AU-C 330.A11 states, “The reasons for the assessment given to a risk are relevant in determining the nature of audit procedures.

(2) False
For example, if an assessed risk is lower because of the particular characteristics of a class of transactions without consideration of the related controls, then the auditor may determine that substantive analytical procedures alone does provide sufficient appropriate audit evidence.

(3) True.
On the other hand, if the assessed risk is lower because of internal controls and the auditor intends to base the substantive procedures on that low assessment, then the auditor performs tests of those controls, as required by paragraph .08a.

(4) True.
Elect perform tests of controls for a class of transactions of reasonably uniform, non-complex characteristics that are routinely processed and controlled by the entity's information system.

11

(1) To participate in the issuance of any report on the issuer company, the public accounting firms must do what 3 things?

(2) PCAOB 3100 requires what from public accounting firms?

(1) To participate in the issuance of any report of the issuer:

Public accounting firms:
* Must register with the PCAOB,
* Sign a consent statement,
* And comply with a request for testimony or the production of documents.

(2) PCAOB Rule 3100 requires that public accounting firms comply with all applicable auditing and related professional practice standards.

12

(1) What is the first step the auditor do to understand management's estimates?

(2) After this first step, the auditor should do what procedures (in combination or just doing one procedure)?

(1) For an auditor to evaluate an issue, the first step is to obtain an understanding of that issue. Therefore, the first procedure an auditor ordinarily would perform when evaluating management's accounting estimates would be to obtain an understanding of how management developed its estimates.

(2) After obtaining this understanding [first step], the auditor should use one or a combination of the following procedures:

* Review and test the process used by management to develop the estimate
* Develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate
* Review subsequent events or transactions occurring prior to the date of the auditor's report

13

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

A. Observation

B. Confirmation

C. Calculation

D. Inspection

Answer: B. Confirmation.

Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting the financial statements.

A confirmation for a third party would be the most efficient process, since the inventory is being held by the third party (public warehouse).

While observation or inspection could provide evidence as to the existence, it would not be the most efficient method available.

14

Which of the following statements is correct regarding an independent auditor's reliance on a client's internal audit staff?

A. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.

B. An independent auditor should assess the organizational status of the director of internal audit.

C. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.

D. An independent auditor should use internal audit workpapers when available.

Answer: B. An independent auditor should assess the organizational status of the director of internal audit.

Before the external auditor uses the internal audit function to obtain audit evidence,

the external auditor should review the function's organizational status and level of competence,

and its application of a systematic and disciplined approach, including quality control.

15

True or false:

When companies use information technology (IT) extensively, evidence may be available only in electronic form, GASP is used to extract this electronic form data.




True.

Information processing presents a couple of areas where control activities are affected: authorization of transactions and the maintenance of adequate documents and records. Auditors should be aware that the audit trail may not be available in traditional hardcopy form or source document, but the actual documentation is housed in the IT system itself. Generalized extraction software will provide evidence from the client databases.

16

(1) Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

A. The entity has rights to the inventory.
B. Inventory is properly valued.
C. Inventory is properly presented in the financial statements.
D. Inventory is complete.








(1) Answer: D. inventory complete.

Reason: Testing that all inventory on hand is reflected in the ending inventory balance is an example of the completeness assertion.

The completeness assertion is a management assertion that all transactions and events that should be presented in the financial statements are included (AU-C 315.A114).

FYI - Example:
An example of a completeness assertion is that all accounts payable are included in the liabilities section of the balance sheet.

An example of a procedure to test this assertion would be to examine all unmatched receiving reports to determine whether or not the expense and corresponding liability have been properly recorded in the books and records.


Explanations for incorrect choices:
Answer (a) is wrong because: That the entity has rights to the inventory is an example of the rights and obligations assertion.

FYI - Rights and obligations are management assertions that all recorded assets are owned by (i.e., are rights of) the entity and that all liabilities are obligations of (i.e., are owed by) the entity at the given date. (AU-C 315.A114)

Answer (b) is wrong because: Inventory is properly valued is an example of the valuation assertion.

FYI - Valuation is the management assertion that all assets, liabilities, revenues, and expenses have been included in the financial statements at the proper amount. (AU-C 315.A114)


Answer (c) is wrong because: Inventory is properly presented in the financial statements is an example of the accuracy and valuation assertion.

17

Which of the following audit procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity's ability to continue as a going concern?

A. Reading the minutes of meetings of the stockholders and the board of directors

B. Comparing the market value of property to amounts owed on the property

C. Reviewing lease agreements to determine whether leased assets should be capitalized

D. Inspecting title documents to verify whether any assets are pledged as collateral

Answer: A. Reading the minutes of meetings of the stockholders and the board of directors

Reason:
* Not necessary to design specific procedures to find going concern issues.
* Existing procedures designed for other audit objectives should identify conditions that indicate substantial doubt of entity's going concern for reasonable time period. Other words, use other current procedures to detect signs of going concerns while doing other audit objectives.

An example of one procedure would be a review of the minutes of meetings of stockholders, board of directors, and important committees of the board. This method is find any evidence/mentions of going concern

The other answer choices deal with auditing specific assertions at the account balance level for fixed assets.

FYI - The results of auditing procedures designed and performed to achieve other audit objectives are normally sufficient to identify circumstances indicating doubt about an entity's continued existence.

Examples of these procedures that may identify such conditions and events are:

a. Analytical procedures,
b. Review of subsequent events,
c. Review of compliance with the terms of debt and loan agreements,
d. Inquiry of an entity's legal counsel about litigation, claims, and assessments (LCA),
and
e. Confirmation with related and third parties of the details of arrangements to provide or maintain financial support.

18

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by which of the following?

A. The staff accountant who performed the substantive auditing procedures

B. The managing partner who has responsibility for all audit engagements at that practice office

C. A manager or partner who has a comprehensive knowledge of the client's business and industry

D. The CPA firm's quality control manager or partner who has responsibility for the firm's peer review program

Answer: C. A manager or partner who has a comprehensive knowledge of the client's business and industry.

Reason: A manager or partner should perform the analytical procedures in the overall review stage (final review stage) because they have a more thorough understanding of the client and the industry when compared to other individuals who have less knowledge of the client and the industry.

The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation.

FYI:

Analytical procedures are a set of audit procedures that examine the relationships between financial and non-financial data.

Analytical procedures encompass such investigation of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

These procedures are used in the planning stage, as a substantive test about particular assertions, and as an overall review of the financial information in the final review stage of the audit.

Analytical procedures include ratio analyses (comparison of ratios to prior years and to industry averages) and reasonableness tests (e.g., comparison of aggregate salaries paid with the number of employees).

19

Which of the following is a false statement regarding communications to management and others that fraud or noncompliance with laws and regulations may have occurred?

A. The accountant need not report matters that are clearly inconsequential.

B. When matters regarding fraud or noncompliance involve senior management, the accountant should report the matter to an individual or group at a higher level with the entity, such as a manager (owner) or the board of directors.

C. The communication must be in writing.

D. When matters regarding fraud or noncompliance involve the owner of the business, the accountant should consider resigning from the engagement.

The communication regarding fraud or noncompliance with laws and regulations may be oral or written.

If the communication is oral, the accountant should document it.

Other words: Auditor can communicate orally with MGT or others or in writing. It does not have to be a "oral" only or "in writing" only.

20

Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters?

A. Letters for underwriters are required by the Securities Act of 1933 for the initial public sale of registered securities.

B. Letters for underwriters typically give negative assurance on unaudited interim financial information.

C. Letters for underwriters usually are included in the registration statement accompanying a prospectus.

D. Letters for underwriters ordinarily update auditors’ opinions on the prior year’s financial statements.

Answer: B. Letters for underwriters typically give negative assurance on unaudited interim financial information.

A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.

Explanation:

A typical comfort letter includes the following:

a. A statement regarding the independence of the accountants

b. An opinion regarding whether the audited financial statements and financial statement schedules included (incorporated by reference) in the registration statement comply as to form in all material respects with the applicable accounting requirements of the Securities Act of 1933 and related rules and regulations adopted by the SEC

c. Negative assurance on whether:
(1) The unaudited summary interim financial information included (incorporated by reference) in the registration statement complies as to form in all material respects with the applicable accounting requirements of the act and related rules and regulations adopted by the SEC.

(2) Any material modifications should be made to the unaudited summary consolidated financial statements included (incorporated by reference) in the registration statement for them to be in conformity with generally accepted accounting principles

d. Negative assurance on whether, during a specified period following the date of the latest financial statements in the registration statement and prospectus,

there has been any change in capital stock,

increase in long-term debt,

or any decrease in other specified financial statement items

21

Which of the following statements regarding the going concern assumption is correct?

A. Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary.

B. The going concern concept reflects the entity's inability to meet its obligations.

C. The auditor is responsible for predicting future conditions or events in assessing the likelihood that the entity will continue as a going concern.

D. The auditor must apply audit procedures designed solely to identify conditions and events that indicate there could be substantial doubt about the entity's ability to continue as a going concern.

The correct answer is A

The statement “Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary” is correct (AU-C 570.02).

The auditor makes a decision based on relevant conditions and events that exist at, or have occurred prior to, the auditor's report.

Information about conditions or events that raise a question about an entity's ability to continue as a going concern is obtained from the application of auditing procedures planned and performed to achieve objectives in the financial statements being audited.

Ordinarily, information that significantly contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.

22

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

A. The anticipated sample size of the planned substantive tests

B. The entity's annualized interim financial statements

C. The results of the internal control questionnaire

D. The contents of the management representation letter

The correct answer is B.

Of the responses listed, an auditor would most likely use the entity's annualized interim financial statements in determining a preliminary judgment about materiality.

Materiality is determined by whether an item's omission or inclusion would affect the judgment of someone relying on the information. It is an issue regarding relative size and importance.

To determine relative size and importance of a specific item, the auditor must be familiar with the overall size and nature of the business or applicable class of revenue, expenses, assets, or liabilities.

Of the responses listed, this determination would best be aided by a review of the annualized interim financial statements.

Explanations to incorrect choices:
Answer (a) is wrong because: Sample size would be affected by the level of materiality, not vice versa.

Materiality determines sample size.
Sample size does not determine materiality.

Answer (c) is wrong because: Internal control questionnaires are pre-printed forms that facilitate tests of controls. Materiality is about a $$ amount threshold to indicate a mistake in a particular account on F/S.

Answer (d) is wrong because: The management representation letter only documents the representations that management normally makes during an audit. It does not aid an auditor in determining materiality.

23

Name at least 5 examples of documentations that accountant should use in a review engagement.

The accountant's documentation in a review engagement should include the following:

* The engagement letter
* The analytical procedures performed
* The expectations when the expectations are not otherwise readily determinable from the documentation of the work performed, and factors considered in the development of those expectations

* Results of the comparison of the expectations to the recorded amounts or ratios developed from recorded amounts

* Management's responses to the accountant's inquiries regarding fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount

* Any additional procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures

* The significant matters covered in the accountant's inquiry procedures and the responses thereto
* Any findings that are significant
* Unusual matters that the accountant considered during the performance of the review procedures, including their disposition

* Communications, whether oral or written, to the appropriate level of management regarding fraud or noncompliance with laws and regulations that come to the accountant's attention

* The representation letter

24

Which of the following:

* Can be used to have a preliminary judgement on Materiality
* Cannot be used to have preliminary judgement on materiality

a. Prior periods' financial results
b. Prior periods' financial positions (balance sheet)
c. Receipts
d. Meeting minutes
e. Period-to-date financial results and financial position (interim F/S)
f. Computer logs
g. Budgets in current period
h. Forecasts in current period

a. Can be used to have a preliminary judgement on Materiality

b. Can be used to have a preliminary judgement on Materiality

c. Can't be used to determine materiality

d. Can't be used to determine materiality

e. Determine materiality

f. Can't be used to determine materiality

g. Determine materiality

h. Determine materiality

When determining materiality, the auditor should consider prior periods' financial results and financial positions, the period-to-date financial results and financial position, and budgets or forecasts for the current period, taking into account significant changes in the entity's circumstances and any relevant changes of conditions in the economy as a whole or the industry in which the entity operates.

25

Which of the following elements underlies (links) the application of GAAS on the standards of fieldwork and reporting?

a. Internal control
b. Corroborating evidence
c. Quality Control
d. Materiality and relative risk

Answer: D. Materiality and risk.

Reason: AU 200 states that Materiality and relative risk underlie the application of all the standards (General, Fieldwork, Reporting in GAAS) .

This is because the entire audit process from Stage one and Last stage is where the auditor always be aware of Materiality and Relative risk.

Explanations to incorrect answers:

Answer (a) is incorrect because a consideration of internal control is one of field standards , NOT a element of underlying (linking) the all the standards in GAAS.

Answer (b) is incorrect because the second fieldwork standard, on evidence, relates most directly to corroborating evidence.

Answer (c) is incorrect because while it is accurate quality control standards encompass the firm's policies and procedures to provide reasonable assurance of conforming with professional standards, standards are not related more directly to fieldwork and reporting standards than to general group of GAAS.

Other words: Quality control standards applies more to the all the services the CPA firm provides to clients. It's not directly related to GAAS since Quality control standards is more general whereas the "Materiality and relative risk" is more directly related to all the GAAS standards.

26

(1) An example of a rights assertion is that the entity has rights to leased property capitalized on the balance sheet. Similarly, the entity has the obligation to make the scheduled payments on the related lease liability.

The audit procedure to test this assertion would be to do what what two things?

(2) An example of a valuation assertion is that accounts receivable have been included in the balance sheet at net realizable (i.e., collectible) amounts.

A procedure to test this assertion would be to do what?

(1) Test Rights assertion:

Trace all additions to capitalized leases to the lease agreement

and then

Verify the entity's right to the asset and that the recorded amount represents the cost of this right to the entity.

(2) Test valuation assertion:

Review the allowance for bad debts for adequacy (e.g., against historical collection records and against collections subsequent to period cutoff).

27

Which organization's mission is “to promote the value of professional accountants worldwide”?

A.American Institute of Certified Public Accountants (AICPA)

B. International Federation of Accountants (IFAC)

C. International Accounting Standards Board (IASB)

D. Securities and Exchange Commission (SEC)

Answer: B. International Federation of Accountants (IFAC)

The International Federation of Accountants (IFAC) is the organization whose mission is to serve the public interest by contributing to the development, adoption, and implementation of high-quality standards and guidance; facilitating the adoption and implementation of high-quality standards and guidance; contributing to the development of strong professional accountancy organizations and accounting firms, and to high-quality practices by professional accountants; promoting the value of professional accountants worldwide; and speaking out on public interest issues.

Key words: Worldwide, International, Code of ethics for professional accountants (IFAC)

28

An accountant had begun to audit the financial statements of a nonpublic entity. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

A. The entity's management does not provide the accountant with a signed representation letter.

B. The accountant is prohibited from corresponding with the entity's legal counsel.

C. The entity's principal creditors no longer require the entity to furnish audited financial statements.

D. The accountant is prevented from examining the minutes of the board of directors' meetings.

Answer: C. The entity's principal creditors no longer require the entity to furnish audited financial statements.

If the auditor has been engaged to perform an audit of the financial statements, certain restrictions, called scope limitations, may cause the auditor to disclaim an opinion on the financial statements (to express no opinion). Restrictions on the scope of the audit would be circumstances such as the timing of the work (not being able to observe the physical inventory count); the inability to obtain sufficient appropriate audit evidence to support an opinion; an inadequacy in the accounting records; management's refusal to provide a signed representation letter; or the inability to correspond with the entity's legal counsel or to review the minutes from the board of director's meetings.

If an auditor has been engaged to perform an audit, he should not agree to change to a compilation due to a scope limitation (which would otherwise require a disclaimer of opinion). An auditor could consider changing the engagement to a compilation if the entity's principal creditors no longer require the entity to furnish audited financial statements.

AU-C 930.10 and .31

Key words: consider change in engagement

29

Application controls pertain to:

A. processing of individual applications in an IT environment.

B. processing of all applications in an IT environment.

C. data processing with an IT environment.

D. the way in which controls are applied in an IT environment.

Answer: A. processing of individual applications in an IT environment.

Application controls are designed to achieve specific control objectives related to specific accounting tasks. They pertain to the processing of individual applications. Application controls are manual or automated procedures that operate at a business process level..

“Application controls” refers to the transactions and data relating to each computer-based application system and are, therefore, specific to each such application. The objectives of application controls, which may be manual or programmed, are to ensure the completeness and accuracy of the records and the validity of the entries made therein. Application controls consist of input controls, processing controls, and output controls.

Other words: Application controls, each computer program, on specific accounting tasks (transactions and data).

AU-C 315.A101

Key words: Identify key risks associated with application controls in a financial it environment

30

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

B. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.

C. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.

D. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

Answer: A. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Key words: Determine nature and scope of engagement, detect unintentional misstatement, ineffective misstatement, conceale, collusion.

31

Which of the following types of engagements is not permitted under the professional standards for reporting on an entity's compliance?

A. Agreed-upon procedures on compliance with the specified requirements of a law

B. Agreed-upon procedures on the effectiveness of internal controls over compliance with a law

C. Review on compliance with specified requirements of a law

D. Examination on compliance with specified requirements of a law

The correct answer is C.

AT 601.07 states that “a practitioner should not accept an engagement to perform a review of an entity's compliance with specified requirements or about the effectiveness of an entity's internal control over compliance or an assertion thereon.”

Other words: Accountant cannot do Review on:
* Entity's compliance with specified requirements
* Or: Review on internal control's effectiveness over compliance or a an assertion on I/C effectiveness over compliance.

Key words: Reports on compliance with laws and regulations, review, specified requirements, internal controls over compliance

Reference: http://pcaobus.org/Standards/Attestation/Pages/AT601.aspx#ps-pcaob_9153526b-7310-47e4-9359-565815f40125

32

When conducting fieldwork for a physical inventory, an auditor cannot perform which of the following steps using a data extraction software package?

A. Observing inventory

B. Selecting sample items of inventory

C. Analyzing data resulting from inventory

D. Recalculating balances in inventory reports

The answer is A.

The auditor uses data extraction software to access client data and to perform audit tests. The audit software processes actual client data to obtain audit information (e.g., select samples, foot files, perform computations) and to duplicate client programs to test client program controls. The data extraction software would allow the auditor to select sample items of inventory for testing, analyze data resulting from inventory, and recalculate balances in inventory reports. The audit software would not observe inventory. The auditor must do that.

Keywords: Examine Inventories or other assets, fieldwork, physical inventory, data extraction software

33

Which of the following representations should not be included in a report on internal control related matters noted in an audit?

A. Significant deficiencies related to the internal control design exist, but none is deemed to be a material weakness.

B. There are no significant deficiencies in the design or operation of the internal control.

C. Corrective follow-up action is recommended due to the relative significance of material weaknesses discovered during the audit.

D. The auditor's consideration of the internal control would not necessarily disclose all significant deficiencies that exist.

The answer is B.

AU-C 265.16 states: “The auditor should not issue a written communication stating that no significant deficiencies were identified during the audit.”

The auditor can report on significant deficiencies in the written communication with those charged with governance even if none is a material weakness. The report would state that “we did not identify any deficiencies in internal control that we consider to be material weaknesses.”

Nothing prevents the auditor from including additional information in the communication, including any corrective follow-up action recommended or other matters the auditor believes would be of benefit to the entity.

The auditor's report would describe the purpose of the consideration of internal control (as a basis for designing the audit procedures in order to express an opinion on the financial statements) and the inherent limitations of internal control. The report should contain a statement that the “consideration of internal control was…not designed to identify all deficiencies in internal control that might be [material weaknesses or material weaknesses or significant deficiencies] and therefore, [material weaknesses or material weaknesses or significant deficiencies] may exist that were not identified.” (AU-C 265.A38)

Keywords: Identify Material Weaknesses, Significant Deficiencies, and Other Control Deficiencies

34

An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?

A. SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant.

B. SSARS only require that the compilation report be printed on the accountant's letterhead.

C. SSARS only require that the report be manually signed by the accountant.

D. SSARS does not require either item.

The answer is D.

AR-C 80.A20 states that the signature of the accountant may be a “manual, printed, or digital as appropriate,” but nothing is stated about plain stationery or letterhead.

Key words: Reports on Compilations, SSARS, letterhead, signature, manual, printed, digital

35

An accountant's understanding with the entity regarding the services to be performed during a compilation or review engagement should include all of the following except:

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

B. the accountant will plan and perform the engagement to obtain reasonable assurance about whether the financial statements are free of material misstatement.

C. the accountant will inform the appropriate level of management of any material errors.

D. the accountant will inform the appropriate level of management of any evidence or information that comes to the accountant's attention that fraud or noncompliance with laws and regulations may have occurred.

The answer is B.

Only an audit is planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatement. A compilation offers no assurance regarding the financial statements. A review offers 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 other answer choices are all phrases that would appear in the engagement letter for both a compilation and a review.

Keywords: Establish an Understanding with the Client and Document the Understanding Through an Engagement Letter or Other Written Communication with the Client

36

Brown, CPA, has accepted an engagement to examine the effectiveness of internal control over financial reporting of Crow Company (a nonissuer). Crow Company’s written assertion about the effectiveness of internal control should be presented:

I. in a separate report that will accompany Brown’s report.
II. in a representation letter to Brown.

A. Neither I nor II

B. Either I or II

C. I only

D. II only

The answer is C.

AT 501.12 states:

Quote:

"An auditor may perform an examination of internal control only if the following conditions are met:

* Management accepts responsibility for the effectiveness of the entity's internal control.

* Management evaluates the effectiveness of the entity's internal control using suitable and available criteria.

* Management supports its assertion about the effectiveness of the entity's internal control with sufficient appropriate evidence...

* Management provides its assertion about the effectiveness of the entity's internal control in a [separate] report that accompanies the auditor's report.

(Emphasis added)"

Key words: reports on internal control

37

In an engagement to review the financial statements of a non-issuer, the accountant most likely would perform which of the following procedures?

A. Physical inspection of inventory

B. Vouching of inventory purchase transactions

C. Analysis of inventory turnover

D. Evaluation of internal control over inventory

The answer is C.

A review does not involve obtaining an understanding of the entity's internal control or testing accounting records through vouching or inspection. Each of these procedures would be performed in an audit in order to obtain sufficient, appropriate audit evidence to support the audit opinion.

A review, however, does involve analytical procedures and inquiry. An analysis of inventory turnover would be an analytical procedure.

Analytical procedures consist:
* Comparison
* Ratio analysis/calculation

Key words: reviews, analytical procedures

38

Management is responsible for making the accounting estimates in the financial statements. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate an amount at the financial statement date. In regards to accounting estimates made by management, the auditor is responsible for:

I. determining the accuracy of the estimate.
II. evaluating the reasonableness of the estimate.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

The answer is B.

The auditor is responsible for evaluating the reasonableness of accounting estimates made by management.

When planning and performing procedures to evaluate accounting estimates, the auditor should consider, with an attitude of professional skepticism, both the subjective and objective factors.

Because estimates are management's judgment based on its knowledge and experience about past and current events and its assumptions about conditions, it expects to exist and courses of action it expects to take.

Therefore, an estimate based on MGT judgment cannot be evaluated based on accuracy only since an estimate can be created based on various factors (market value, the value of a similar asset, etc.). Estimate is a reasonable amount on the F/S and F/S records.

Key words: accounting estimate, evaluation

39

The Statements on Standards for Accounting and Review Services (SSARS) consider which of the following to be a submission of financial statements when the accountant has:

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

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

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

D. Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

The correct answer is D.

The accountant is required to comply with the provisions of [AR-C 80] whenever he or she is engaged to report on compiled financial statements or submits financial statements to a client or to third parties. Submission is defined as a "submission of financial statements” as "presenting to management financial statements that an accountant has prepared."

Generating, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP would meet the definition of submission under the Statements on Standards for Accounting and Review Services (SSARS).

These are NOT EXAMPLES of SSARs' definition on "submission" definition:

* Typing client-prepared financial statements, without modification, as an accommodation to the client;

* Providing a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements;

* And proposing correcting journal entries to be recorded by the client that change client-prepared financial statements.

Key words: SSARs, submission financial statements, computer generated software, present F/S to management.

40

Which of the following statements is correct about the auditor's use of the work of a specialist?

A. The specialist should not have an understanding of the auditor's corroborative use of the specialist's findings.

B. The auditor is required to perform substantive procedures to verify the specialist's assumptions and findings.

C. The client should not have an understanding of the nature of the work to be performed by the specialist.

D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.

Whenever the work of a specialist is used, the auditor should obtain an understanding of the methods and assumptions used by the specialist.

This understanding of the nature of the work to be performed by the specialist should be documented and the auditor, and the client and the specialist should have the same understanding.

The auditor should also evaluate the relevance and reasonableness of those assumptions and methods in the circumstances, giving consideration to the rationale and support provided by the specialist, and in relation to the auditor.

Other words: Client, Auditor, and Specialist should all have same understanding on what the specialist is doing, what the specialist is working to achieve what aim.

Key words: audits, specialist

41

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:

A. Financial Accounting Standards Board.

B. Government Accountability Office.

C. Accounting and Review Services Committee.

D. Auditing Standards Board.

The answer is C.

The preface to the Accounting and Review Services Statements (AR) notes that the

Accounting and Review Services Committee is the committee designated by the AICPA Council to promulgate standards in connection with un-audited financial statements of nonpublic entities.

A nonpublic entity (private company) is any entity other than [that is not] one whose securities trade on a stock exchange or over-the-counter market or that makes a filing with a regulatory agency in preparation for sale of securities (i.e., a nonpublic entity is not required to file financial statements with an agency regulating the issuance of the entity's securities).

Key words: AICPA's Accounting and Review Services Committee, SSARs, compliation (draft unaudited F/S), reviews (not an audit).

42

After the documentation completion date, the auditor must:

A. Not add or change any audit documentation, including signatures, unless he or she documents the date and reason(s) for such additions or changes.

B. Not delete or discard audit documentation before the end of his or her firm's retention period.

C. Both of the answer choices are correct.

D. Neither of the answer choices is correct.

The answer is C:

After the documentation completion date, the auditor must not delete or discard audit documentation before the end of the specified retention period.

When the auditor finds it necessary to make an addition (including amendments) to audit documentation after the documentation completion date, he or she should make the changes necessary to reflect either the performance of the new audit procedure or the new conclusion reached, including:

[Add these attached info to the original/finalized audit documentation on changes to audit work-papers]

* when and by whom such changes were made and (where applicable) reviewed,
* the specific reasons for the changes, and
* the effect, if any, of the changes on the auditor's conclusions.

Key words: Documentation complete date, no changes to audit workpapers after documentation complete date, if change document dates, who change, reasons, effects on conclusions, delete after retention period is over.

43

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:

A. not believe that the bank is obligated to verify confidential information to a third party.
B. sign and return the form without inspecting the accuracy of the client's bank reconciliation.
C. not have access to the client's cutoff bank statement.
D. be unaware of all the financial relationships that the bank has with the client.

The answer is D.

Bank relationships may be complex and can involve various types of collateral, compensating balances, and other arrangements.

Very often confirmation requests are simply completed at the clerical level.

This level of employee may only have access to a specific balance amount with no supporting explanation.

Because of this, the bank employee may be unaware of all the financial relationships that the bank has with the client, thereby limiting the usefulness of the standard bank confirmation request.

Key words: Audit evidence, bank confirmations, banks unaware relationship with client

44

Restrictions imposed by a retail entity that is a new client prevent an auditor from observing any physical inventories. These inventories account for 40% of the entity's assets. Alternative auditing procedures cannot be applied due to the nature of the entity's records. Under these circumstances, the auditor should express:

A. a disclaimer of opinion.
B. a qualified opinion
C. an adverse opinion.
D. an unmodified opinion with an emphasis-of-matter paragraph.

The answer is A.

A disclaimer of opinion is issued when a significant (sufficiently material or client-imposed) scope limitation prevents the auditor from forming an opinion on the financial statements.

A disclaimer is a report that states the auditor does not express an opinion. If an auditor is unable to observe the physical inventory count (and the inventory is material to the financial statements) and cannot perform alternate procedures to verify the accounting assertions associated with the inventory account balance, then the auditor should issue a disclaimer of opinion.

An unmodified opinion is a clean opinion. It states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company. The auditor would be precluded from issuing an unmodified opinion in this circumstance.

A qualified opinion has an “except for” paragraph which highlights any material scope limitations or departures from an applicable financial reporting framework. These are items that are material, but not sufficiently material as to require a disclaimer or adverse opinion. Excepting the items mentioned in the report, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company.

An adverse opinion states that the financial statements do not present fairly the financial position or the results of operations or cash flow in conformity with an applicable financial reporting framework. Adverse opinions result from a sufficiently material departure from an applicable financial reporting framework. The auditor must disclose the reason(s) for the adverse opinion.

Key words: scope limitation, disclaimer of opinion, cannot express opinion, client withdrew data, auditor cannot do alternative procedures.

45

For financial statement audits, Government Auditing Standards (GAS) incorporate the AICPA Statements on Auditing Standards (SAS) and prescribe additional standards on:

I. direct reporting of noncompliance with laws and regulations.
II. reporting on internal controls.

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

You are correct, the answer is A.

Government Auditing Standards require that the financial and compliance audit report include any findings of noncompliance with laws and regulations as well as a report on the study and evaluation of internal controls.

Key words: Government auditing standards (GAS), Generally accepted government auditing standards (GAGAS),

46

The introductory paragraph of an auditor's report contains the following sentences:

Example

We did not audit the financial statements of EZ, Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ, Inc., is based solely on the report of the other auditors.

These sentences:

A. indicate a division of responsibility.
B. assume responsibility for the other auditor.
C. require a departure from an unmodified opinion.
D. are an improper form of reporting.

The answer is A.

Reference to another auditor's report reflects division of responsibility and is not a qualification of opinion. It is disclosed in the introductory paragraph and referred to in the opinion paragraph as follows.

Example

We did not audit the financial statements of B Company, a consolidated subsidiary, which statements reflect total assets and revenues constituting 20 percent and 22 percent, respectively, of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely upon the report of the other auditors.

We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.

Key words: report, audited financial statements, component auditor, reference component auditor, division of responsibility.

47

An exception to the "percentage of coverage" rule in the Single Audit Act Amendments of 2013 allows an auditor to reduce the scope of the audit when the entity is determined to be low risk. For an entity that meets the criteria for a low risk entity, the percentage of federal expenditures covered by the audit can be reduced as a low as:

A. 10%
B. 20%
C. 25%
D. 50%

Answer: B. 20%

When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” rule in the Single Audit Act Amendments of 2013 can be reduced to as low as 20% of the federal funding spent by the entity.

Note - It *was* (C) 25%...now it's 20% (B)

48

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

A. be limited to data derived from the audited financial statements.

B. be distributed only to senior management and the board of directors.

C. state that the presentation is a comprehensive basis of accounting other than GAAP.

D. indicate that the data are not fairly stated in all material respects.

You are correct, the answer is A.

An auditor may report on selected financial data derived from audited financial statements that he or she has audited. Such a report should be limited to the data derived from the audited financial statements.

49

Which of the following circumstances would ordinarily preclude a CPA from issuing a review or a compilation report on the financial statements of a nonissuer client that had originally engaged the CPA to perform an audit?

I. The CPA has been prohibited by the client from corresponding with the entity's legal counsel.
II. The entity refuses to provide the CPA with a signed representation letter.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer: C.

When a client refuses to allow correspondence with legal counsel (a required procedure for an audit) or to provide a representation letter (a required procedure for both an audit and a review), the accountant cannot ignore that there may be reasons behind the client's refusal to cooperate. SSARSs ordinarily preclude the accountant from downgrading the engagement under these circumstances.

FYI:

Reference 3514.05

When the accountant has been engaged to audit the financial statements of a nonissuer and has been prohibited by the client from corresponding with the entity's legal counsel, the accountant ordinarily would be precluded from issuing a review report on the financial statements.

Reference 3514.06

The accountant ordinarily would be precluded from issuing a compilation report if, during the audit or review, the client does not provide the accountant with a signed representation letter.

50

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

A. Testing shipping and receiving cutoff procedures

B. Confirming inventories at locations outside the entity's premises

C. Examining an analysis of inventory turnover

D. Tracing inventory observation test counts to perpetual listings

The correct answer is C.

An analysis of inventory turnover would reveal to the auditor how often the inventory sells, or turns over, in a period of time.

It would assist with identifying slow-moving and obsolete items that are included in the inventory and help the auditor find evidence to support management's assertion of valuation.

Testing shipping and receiving cutoff procedures, confirming inventories at locations outside the entity's premises, and tracing inventory observation test counts to perpetual listings would all help the auditor determine the completeness of the physical inventory.

51

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

A. A CPA in public practice providing tax and management advisory services

B. A CPA in public practice providing auditing and other attestation services

C. A CPA not in public practice

D. All CPAs

Answer B. A CPA in public practice providing auditing and other attestation services


The AICPA Code of Professional Conduct clearly states, “For a member in public practice, the maintenance of objectivity and independence requires a continuing assessment of client relationships and public responsibility”

(ET 55.02). The independence is required in both auditing and other attestation services.

52

An exception to the “percentage of coverage” rule in the Single Audit Act Amendments of 2013 allows an auditor to reduce the scope of the audit when the entity is determined to be low risk. For an entity that meets the criteria for a low risk entity, the percentage of federal expenditures covered by the audit can be reduced as low as:

A. 10%.
B. 20%.
C. 25%.
D. 50%.

You are correct, the answer is B.

When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” rule in the Single Audit Act Amendments of 2013 can be reduced to as low as 20% of the federal funding spent by the entity.

53

The Public Company Accounting Oversight Board was established by which of the following?

A. The Financial Accounting Standards Board

B. The American Institute of Certified Public Accountants

C. The Sarbanes-Oxley Act of 2002

D. The International Accounting Standards Board

You are correct, the answer is C.

The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002. Section 101(a) of the Sarbanes-Oxley Act states:

"There is established the Public Company Accounting Oversight Board, to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors."

54

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:

A. unpaid voucher.

B. debit memo.

C. vendor invoice.

D. credit memo.

The correct answer is B.

The debit memo is usually a notification from a buyer to a seller that tells the seller that a debit was made in the seller’s account on the buyer’s book.

In other words, a debit memo is a way for a buyer to inform a seller that it wants a refund on its purchase.

In the instance when nonconforming goods are returned to a vendor, the purchasing department should prepare a debit memo to be sent to seller with a copy sent to accounting in order for accounting to remove the resulting payable from the accounting records.

55

What is a Credit memorandum?

What is a debit memorandum?

Credit memorandum:

A credit memorandum is a document issued by the seller of goods or services to the buyer, reducing the amount that the buyer owes to the seller under the terms of an earlier invoice.

Debit Memorandum:

A debit memorandum is a way for a buyer to inform the seller that it wants a refund or discount on its purchase.

56

An accountant has been engaged to compile the financial statements of a nonissuer. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should:

A. inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use.

B. withdraw from the engagement and provide no further service concerning these financial statements.

C. quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report.

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

The correct answer is B.

The accountant should never be associated with financial statements that would be misleading, even if the report's use is restricted to internal use.

If the client will not revise the financial statements and modification of the compilation report does not adequately indicate the deficiencies, the accountant must withdraw from the compilation engagement.

57

Which of the following procedures would a CPA most likely perform when reviewing the financial statements of a nonissuer?

A. Verify that the accounting estimates that could be material to the financial statements have been developed

B. Obtain an understanding of the entity's internal control components

C. Assess the entity's ability to continue as a going concern for a reasonable period of time

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

You are correct, the answer is D.

AR-C 90.22 lists recommended inquiries that the accountant should consider making when conducting a review of financial statements.

The accountant should inquire about “actions taken at meetings of stockholders, board of directors, committees of the board of directors, or comparable meetings that may affect the financial statements.”

Remember that a review is less in scope than an audit.

A review does not contemplate an understanding of the entity's internal control or utilize the concept of materiality.

The accountant uses inquiry and analytical procedures when performing a review.

58

Which of the following steps should be performed first in applying analytical procedures?

A. Determine whether the difference between the expectation and the recorded amount is reasonable

B. Investigate and evaluate significant differences from the expectation

C. Develop an expectation of a balance or ratio by using relationships that are expected to exist

D. Compare the client's recorded balance or ratio with the expectation

You are correct, the answer is C.

In planning analytical procedures, the auditor should consider the amount of difference from the expectation that can be accepted without further investigation. As a result, the development of the expectation should be the first step in applying analytical procedures. After developing the expectation, the auditor would then compare the client’s recorded balance or ratio with the expectation, determine whether the difference is reasonable, and then investigate and evaluate significant differences from the expectation.

59

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?

A. The separation of duties between the billing department and the cash receipts approval department

B. The use of an approved price list to determine unit selling price

C. Copies of approved sales orders sent to the shipping, billing, and accounting departments

D. Sales orders sent to the credit department for approval

You are correct, the answer is D.

The auditor should be concerned about improper revenue recognition as a risk of material misstatement due to fraud. In order to lower the risk that the entity will record revenue from fictitious sales, the credit department should approve all sales orders to determine that they are made to actual customers. As a bonus, the approval will ensure that the likelihood of collection for sales made on account is good.

60

In testing the existence assertion for an asset, an auditor ordinarily works from the:

A. financial statements to the potentially unrecorded items.

B. potentially unrecorded items to the financial statements.

C. accounting records to the supporting evidence.

D. supporting evidence to the accounting records.

The correct answer is C.

In designing substantive tests related to the existence assertion, the auditor would select items from those contained in a financial statement amount and search for relevant audit evidence. Accounting records would contain financial statement amounts and such records could be then linked to supporting evidence.

61

An auditor's engagement letter most likely would include a statement regarding:

A. management's responsibility to provide certain written representations to the auditor.

B. conditions under which the auditor may modify the preliminary judgment about materiality.

C. internal control activities that would reduce the auditor's assessment of control risk.

D. materiality matters that could modify the auditor's preliminary assessment of fraud risk.

You are correct, the answer is A.

The engagement letter should contain information such as:

* the objective of the audit (an expression of an opinion on the financial statements);
* the fact that management is responsible for:

- the financial statements,
- establishing and maintaining effective internal control * - over financial reporting,
- identifying and ensuring that the entity complies with laws and regulations,
- adjusting the financial statements to correct material misstatements,
- making all financial records and related information available to the auditor, and providing the auditor with a letter that confirms certain representations made during the audit;
- the scope of the audit work to be performed (in accordance with GAAS);

* the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements;
- mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies;
additional work to be performed, such as tax, consulting, or other services (if applicable);
- any limitations or restrictions on the scope of the study;
work to be performed by the client's staff (if applicable);
the basis of the auditor's fee; and
- the audit work schedule and estimated date of completion.

This list is not inclusive, but it is illustrative of items that should be present. Items that would not be addressed in an engagement letter would be the conditions under which the auditor may modify the preliminary judgment about materiality (these would not be known to the auditor), internal control activities that would reduce the auditor's assessment of control risk (the auditor has not obtained an understanding of the design of internal control or tested controls at this point), and materiality matters that could modify the auditor's preliminary assessment of fraud risk.

62

Based on the understanding of how management developed the estimate, the auditor would not use which of the following approaches in evaluating reasonableness?

A. Review subsequent events or transactions

B. Review the process used by management to develop the estimate

C. Review and test the process used by management to develop the estimate

D. Develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate

[Note: this is a definition / does match the standard's wording test]

The correct answer is B.

In evaluating reasonableness, the auditor should obtain an understanding of how management developed the estimate.

Based on that understanding, the auditor should use one or a combination of the following approaches:

* Review and test the process used by management to develop the estimate.
* Develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate.
* Review subsequent events or transactions occurring prior to the date of the auditor's report.

Reference: AU-C 540.13

63

When an accounting application is processed by computer, an auditor cannot verify the reliable operation of programmed controls by:

A. manually comparing detail transaction files used by an edit program to the program's generated error listings to determine that errors were properly identified by the edit program.

B. constructing a processing system for accounting applications and processing actual data from throughout the period through both the client's program and the auditor's program.

C. manually re-performing, as of a point in time, the processing of input data and comparing the simulated results to the actual results.

D. periodically submitting auditor-prepared test data to the same computer process and evaluating the results.

The correct answer is C.

The auditor cannot verify the reliable operation of programmed controls by manually re-performing, as of a point in time, the processing of input data and comparing the simulated results with the actual results of the computer processed data. This is because the auditor does not ordinarily have complete knowledge of the programmed instructions for programmed controls. Similarly, at no point in time could the auditor match the processing of the input data.

64

Which of the following is not a consideration in accepting or continuing a compilation or review engagement?

A. The firm has sufficient personnel with the necessary capabilities and competencies.

B. Specialists are available, if needed.

C. The firm is able to complete the engagement within the reporting deadline.

D. The firm is able to complete the engagement within the firm's time budget.

The correct answer is D.

Matters to consider in accepting or continuing the client engagement include whether:

* firm personnel have experience with relevant industries or subject matters or the ability to effectively gain the necessary knowledge;
* firm personnel have experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies;
* the firm has sufficient personnel with the necessary competence and capabilities;
* specialists are available, if needed;
* individuals meeting the criteria and eligibility requirements to perform an engagement quality control review are available, where applicable; and
* the firm is able to complete the engagement within the reporting deadline.

65

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

A. Statements on Auditing Standards

B. Statements on Standards for Attestation Engagements

C. Statements on Standards for Accounting and Review Services

D. Statements on Standards for Consulting Services

The correct answer is B.

The practitioner should follow the standards for attestation engagements in performing and reporting on an agreed-upon procedures engagement.

Statements on Standards for Attestation Engagements (SSAEs) are issued by senior technical bodies of the AICPA designated to issue pronouncements on attestation matters.

The AICPA Code of Professional Conduct requires an AICPA member who performs an attest engagement to comply with such pronouncements.

The practitioner should have sufficient knowledge of the SSAEs to identify those that are applicable to his or her attest engagement and should be prepared to justify departures from the SSAEs.

66

An employee in the receiving department keyed in a shipment from a remote terminal and inadvertently omitted the purchase order number. The best systems control to detect this error would be a:

A. batch total.

B. completeness test.

C. sequence check.

D. reasonableness test.

You are correct, the answer is B.

The employee is performing an online data entry function, and the best way to detect this type of error would be through the use of a completeness check performed under program control. A completeness check is a verification that all data required to process a given type of transaction has been entered in the required data fields. If missing data is detected, the operator is generally prompted to enter or complete the submission before it will be accepted for processing.

67

Within the IESBA Code of Ethics for Professional Accountants, a conceptual framework has been developed to establish fundamental principles. These principles include:

A. integrity and objectivity.

B. professional competence and due care.

C. confidentiality and professional behavior.

D. All of the answer choices are correct.

You are correct, the answer is D.

The International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants includes five principles to apply the conceptual framework:

Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior

68

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

A. the auditor's responsibility for ensuring that the appropriate level of management is aware of any significant deficiencies that come to the auditor's attention.

B. management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern.

C. the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors.

D. management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

You are correct, the answer is A.

The engagement letter should contain information such as:

* the objective of the audit (an expression of an opinion on the financial statements);
* the fact that management is responsible for:

- the financial statements,
- establishing and maintaining effective internal control over financial reporting,
- identifying and ensuring that the entity complies with laws and regulations,
- adjusting the financial statements to correct material misstatements,
- making all financial records and related information available to the auditor, and
- providing the auditor with a letter that confirms certain representations made during the audit;

* the scope of the audit work to be performed (in accordance with GAAS);
* the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements;
* mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies;
* additional work to be performed, such as tax, consulting, or other services (if applicable);
* any limitations or restrictions on the scope of the study;
work to be performed by the client's staff (if applicable);
the basis of the auditor's fee; and
* the audit work schedule and estimated date of completion.

This list is not inclusive, but it is illustrative of items that should be present. Items that would not be addressed in an engagement letter would be the auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors, management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern, or management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud (this is the auditor's responsibility).

69

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

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 nor perform procedures to corroborate the information provided by the client.

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

You are correct, the answer is C.

For a compilation engagement, the accountant is not required to make inquiries or perform other procedures to verify, corroborate, or examine information supplied by the entity. These procedures are required in an audit engagement.

Independence is not required in a compilation engagement nor is an opinion rendered in a compilation engagement.

An accountant may base the report on information obtained from prior engagements. For example, knowledge gained from prior engagements may make the accountant aware that the information supplied by the entity is incorrect, incomplete, or otherwise unsatisfactory.

An accountant should perform analytical procedures related to financial data in a review or audit. Performing analytical procedures is not required in a compilation.

70

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 with negative assurance may be issued.

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

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

You are correct, the answer is C.

AR-C 80.22 states, "When the accountant is not independent with respect to the entity, the accountant should indicate the accountant’s lack of independence in a final paragraph of the accountant’s compilation report.”

A compilation expresses no assurance on the financial statements, so a compilation report with negative assurance would not be issued. The accountant must be independent to perform a review engagement; therefore, the engagement would not be upgraded to a review if the accountant were not independent with respect to the entity.

71

Which of the following internal controls most likely addresses the completeness assertion for inventory?

A. Work-in-process account is periodically reconciled with subsidiary records.

B. Employees responsible for custody of finished goods do not perform the receiving function.

C. Receiving reports are pre-numbered and periodically reconciled.

D. There is a separation of duties between payroll department and inventory accounting personnel.

The correct answer is C.

The completeness assertion for inventory states that recorded inventory quantities include all products, materials, and supplies owned by the entity (i.e., goods on hand, in transit, stored, or on consignment at some other location). The control which would most directly address this assertion would assure that all goods received are recorded.

Receiving reports provide evidence that merchandise has been received and has become part of inventory. Thus, pre-numbering receiving reports and periodically reconciling these reports to recorded inventory would directly address the completeness assertion for inventory. “Receiving reports are prenumbered and periodically reconciled” is the best answer.

72

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

A. Preparing monthly journal entries

B. Providing the client with software to generate financial statements

C. Generating financial statements of a nonissuer

D. Providing a blank financial statement format or template

The answer is C.

The presentation of financial statements that the accountant has prepared for a nonissuer (either manually or with computer software) to a client or third parties requires compliance with the Statements on Standards for Accounting and Review Services (SSARS).

The answer choice is specific about the accountant following SSARS for the financial statements of a nonissuer.

IMPORTANT: If an accountant is associated with the unaudited financial statements of an issuer, a disclaimer of opinion is required.

[Note: this answer is definition of Compilation]

Preparing monthly journal entries, providing the client with software to generate financial statements, and providing a blank financial statement format or template are all consulting services. None of these activities involves the generation or submission of financial statements.

73

Which of the following is not an attestation standard?

A. Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report.

B. The report shall identify the assertion being reported on and state the character of the engagement.

C. The work shall be adequately planned and assistants, if any, shall be properly supervised.

D. A sufficient understanding of internal control shall be obtained to plan the engagement.

You are correct, the answer is D.

The attestation standards (AT) include the following standards:

Work shall be adequately planned and assistants, if any, properly supervised (the first Fieldwork Standard, AT 101.42).

Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report (the second Fieldwork Standard, AT 101.51).

The report shall identify the assertion being reported on and state the character of the engagement (the first Reporting Standard, AT 101.63).

74

Which of the following is one purpose of an embedded audit module?

A. Enable continuous monitoring of transaction processing

B. Identify program code that may have been inserted for unauthorized purposes

C. Verify the correctness of account balances on a master file

D. Review the contents of a specific portion of computer memory

The answer is A.

An embedded audit module enables continuous monitoring and analysis of transaction processing, including the functioning of processing controls.

Mapping is a technique for determining whether a computer program contains any unexecuted code that should be examined.
Retrieval and analysis programs such as generalized audit software offer the features and flexibility suitable for verifying the correctness of information on a computer file.

The snapshot method is a technique utilized to capture and print all data pertinent to the analysis of a specific moment in the processing cycle.

75

A weakness in internal control over recording retirements of equipment may cause an auditor to:

A. inspect certain items of equipment in the plant and trace those items to the accounting records.

B. review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

C. trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used.

D. select certain items of equipment from the accounting records and locate them in the plant.

The correct answer is D.

A weakness in internal control over recording retirements of equipment means that it may be possible for a piece of equipment to be retired and thus no longer physically present but still be recorded in the entity's books as held by the entity.

To investigate whether there are any instances of this, an auditor would select certain records and verify whether those assets actually exist.

76

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

A. extend the due dates of existing loans.

B. operate at increased levels of production.

C. accelerate expenditures for research and development projects.

D. issue stock options to key executives.

You are correct, the answer is A.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

If, while performing audit procedures, the auditor discovers a situation that instills doubt about the entity's ability to continue as a going concern, the auditor should discuss these concerns with management. Management's plans to deal with the current situation could mitigate the adverse effects. Examples of these plans would be:

* plans to dispose of assets,
* plans to borrow money or restructure debt,
* plans to reduce or delay expenditures, or
* plans to increase ownership equity.

77

Which of the following matters is an auditor not required to communicate to those charged with governance?

A. Significant adjustments arising from the audit that were recorded by management

B. The basis for the auditor’s conclusions about the reasonableness of management’s sensitive accounting estimates

C. The level of responsibility assumed by the auditor under generally accepted auditing standards

D. The degree of reliance the auditor placed on the written representations from management

You are correct, the answer is D.

The auditor obtains written representations from management to complement other auditing procedures. In many cases, the auditor applies auditing procedures specifically designed to obtain evidential matter concerning matters that also are the subject of written representations. However, the degree of reliance is not required as a communication to those charged with governance.

78

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

A. external policies established by parties outside the entity affect its accounting practices.

B. management is dominated by one individual who is also a shareholder.

C. internal auditors have direct access to the board of directors and the entity's management.

D. the audit committee is active in overseeing the entity's financial reporting policies.

You are correct, the answer is B.

The auditor must consider the client's control environment when measuring control risk. One of the factors of the control environment, management philosophy and operating style, presents as an example the situation where management is dominated by only one or a few individuals. This domination directly affects the control environment because it is the only item listed above over which management has significant influence. The other answers (external policies, internal auditors, and the audit committee) all involve a degree of independence from management.

79

A client that recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person's name, and the individual's password is the same as the UIC. Users are not required to change their passwords at initial login, nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client's computer-access control?

A. Employees can easily guess fellow employees' passwords.

B. Employees are not required to change passwords.

C. Employees can circumvent procedures to segregate duties.

D. Employees are not required to take regular vacations.

You are correct, the answer is D.

This client's system access has several limitations. Employees can easily guess fellow employees' passwords and thereby gain access to areas of the system that should be inaccessible to them. Employees are not required to change passwords; therefore, once a password has been guessed, an unauthorized user could continue to have access to the system. Employees can circumvent procedures to segregate duties by using another coworker's password and accessing processes that are incompatible with their job descriptions (for instance, an employee who signs checks should not have access to the accounts payable ledger).

The fact that employees are not required to take regular vacations is a weakness in internal controls, but it has nothing to do with the computer access.

80

An auditor decides to issue a qualified opinion on an entity’s financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualification pertains to:

A. a client-imposed scope limitation.

B. a departure from generally accepted auditing standards.

C. the possible effects on the financial statements.

D. lack of access to necessary information.

The correct answer is C.

When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.

Note: The question is about what is the wording on the opinion paragraph that deals with "qualified" GAAS problem where the auditor cannot do audit procedures because of some interference. The Opinion paragraph in a GAAS problem would say "possible effects." It will not say client-imposed scope limitation.

Also, this is a situation of a Internal control over financial statement issue where something is going on in the company's IT system that is not allowing the auditors to do its job to check the financial statements are free from material misstatements.

81

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would seek legal advice if the:

A. client receives financial assistance from a federal government agency.

B. evidential matter that is necessary to prove that noncompliance with laws and regulations does not exist.

C. employee's actions affect the auditor's ability to rely on management's representations.

D. notes to the financial statements fail to disclose the employees' actions.

You are correct, the answer is C.

If an entity's management does not take remedial action in response to an auditor's report of noncompliance under applicable law or regulations by employees, the auditor's ability to rely on management representations may be affected.

This because the Management report has a line that says that the MGT has disclosed all knowledge about any immaterial fraud committed by Management, and Internal control employees, and material fraud by employees. Also, MGT rep letter states about whether the MGT disclose or there was known illegal actions done by anyone in the company.

In this case, the auditor should first speak with those charged with governance and then seek legal advice.

82

In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

A. individual overdue balances.

B. individual invoices.

C. small account balances.

D. large account balances.

The correct answer is B.

Selection of the sampling unit is one decision an auditor must make when using statistical sampling. The sampling unit should enable the auditor to use the results of the statistical sampling to make statements about the population.

When the results are useless or cause inefficiency, the selection of another sampling unit would be in order.

In this case changing the sampling unit from account balances to individual invoices may eliminate the described problem.


Key words: audit sampling, invoices, sampling accounts receivable (A/R is like invoices)

83

On June 1, 20X0, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31, 20X0. On April 3, 20X1, the client asked the CPA to audit the client's financial statements for the year ended December 31, 20X1. Is the CPA considered independent with respect to the audit of the client's December 31, 20X1, financial statements?

A. Yes, because the loan was fully secured

B. Yes, because the CPA was not required to be independent at the time the loan was granted

C. No, because the CPA had a loan with the client during the period of a professional engagement

D. No, because the CPA had a loan with the client during the period covered by the financial statements

You are correct, the answer is B.

First, we must read the question carefully. Notice that during the period involved the CPA was not providing audit services to the client, only compilation services. As such, the CPA was not yet a “covered person” as defined by the AICPA. In addition, certain loans could be grandfathered (e.g., if the loans were home mortgages, secured loans, or unsecured loans immaterial to the CPA's net worth). While we may need to be aware of certain grandfather clause specifics in some cases, we do not have to examine them for this particular question.

The correct answer is the best answer choice since the CPA was not a covered person (and not required to be independent) at the time the loan was granted, and the loan had both been fully secured and paid in full well before the CPA was contacted by the client to perform the audit.

The loan in question was allowable at the time of the “professional engagement” as the task involved was compilation, not audit services, and the CPA was not a covered person at the time of the loan.

Being “fully secured” means that the loan is covered by sufficient other collateral and, as such, the lending institution has little risk in the loan. This type of loan, among others, may be “grandfathered” if the CPA were to become a “covered person.”

84

The procedure, “The accountant should modify the accountant's report if there is a change in accounting principles that is adequately disclosed,” is:

A. not required for a compilation or a review.

B. required for a review only.

C. required for both a compilation and review.

D. not required for a compilation but required for a review.

You are correct, the answer is C.

AU-C 708.A4 states:

Quote: "A change in accounting principle is a change from one accounting principle in accordance with the applicable financial reporting framework to another accounting principle in accordance with the applicable financial reporting framework when (1) two or more accounting principles apply or (2) the accounting principle formerly used is no longer in accordance with the applicable financial reporting framework. A change in the method of applying an accounting principle also is considered a change in accounting principle."

Changes in accounting principle having a material effect on the financial statements for an audit they require the addition of an emphasis-of-matter paragraph in the independent auditor's report, the same is required for a compilation or a review.

Other words Accountant's report on Compilation and Accountant's report on Review needs to have an paragraph