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Flashcards in Other Reports Deck (53):
1

The CPA firm of General & Grant has been asked to do a review of the financial statements prepared for the Appomattox Company. Members of this firm are currently making inquiries of the members of the company’s management that have responsibility over the accounting function. Which of the following is not likely to be included in these inquiries?
Were the financial statements prepared according to US GAAP?
Did the company face any unusual situations this period that might affect the financial statements?
What percentage of the year-end receivables has been confirmed directly with the customer?
Were there any significant transactions that occurred near the end of the year?

Did the company face any unusual situations this period that might affect the financial statements?

A review is mostly an overview of financial statements looking for general signs of material misstatements. A, B, and D are all questions asked in general about the preparation of the financial statements under review. In a review, evidence is not typically gathered about individual accounts. That is done for an audit. Thus, the CPA is not likely to ask specific questions about receivables unless there is some reason to think a material misstatement is present. Furthermore, confirmation is normally a task carried out by the CPA and not by the reporting company.

2

Each page of a nonpublic entity's financial statements reviewed by an accountant should include the following reference

AR 100.41 states, Each page of the financial statements reviewed by the accountant should include a reference, such as, "See Accountant's Review Report."

3

An auditor’s report would be designated a special report when it is issued in connection with:

Compliance with aspects of regulatory requirements related to audited financial statements.

Special reports are issued in connection with various types of statements including: (1) financial statements which are prepared in conformity with another comprehensive basis of accounting other than US GAAP such as the cash basis; (2) specified elements, accounts, or items found in a financial statement (such as a report on just the amount of sales made during a period of time) ON DUPLICATE KEY UPDATE question=VALUES(question), explanation=VALUES(explanation); (3) compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements; and (4) financial information presented in prescribed forms or schedules that require a prescribed form for the auditor’s reports.

4

In a standard report on condensed financial statements that are derived from a public entity's audited financial statements, a CPA should indicate that the

CPA has audited and expressed an opinion on the complete financial statements.

Auditing statements (AU 552.06) provides a sample report on condensed financial statements when the auditor issued a standard report on the audited financial statements.

5

An accountant's report on a review of pro forma financial information should include a

The objective of pro forma financial information is to show what the significant effects on historical financial information might have been had a consummated or proposed transaction occurred at an earlier date.

An accountant can be engaged to examine or review pro forma financial information. In a review report, the accountant should identify the pro forma information, refer to the financial statements from which the historical information is derived and state whether such financial statements were audited or reviewed, state that the review was in accordance with AICPA standards, explain the objective of pro forma information and its limitations, and provide negative assurance regarding the pro forma information.

6

Ronaldo is on the engagement team for an upcoming review of a private company's financial statements. According to the AICPA's Statements on Standards for Accounting and Review Services, Ronaldo and his team should engage in which of the following activities during engagement planning? I. Plan detailed tests of transactions and II. Establish and understanding with management in an engagement letterIII. Consider the scope of the engagement in meeting the client's need IV. Obtain an understanding of the client and its industry

II, III, and IV only

According to the AICPA's SSARSs, engagement planning should include establishing an understanding with management in an engagement letter, obtaining an understanding of the client and its industry, and considering the scope of the engagement in meeting the client's needs. Review procedures primarily consist of inquiry and analytical procedures, not detailed tests of transactions and balances

7

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

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

A financial projection is a prospective financial statement that presents, to the best of the knowledge of the party responsible for its preparation, given one or more hypothetical assumptions, an entity's financial position, results of operations, and changes in cash flows. As compared to a financial forecast, which is available for general use, a financial projection is a limited use report that is not appropriate for general distribution. Limited use refers to the use of prospective financial statements by the responsible party and third parties with whom the responsible party is dealing directly, such as a bank that is able to question the responsible party directly about the information.

8

During the review of financial statements for a nonpublic company, the CPA would be least likely to

Obtain written confirmation from management regarding loans to officers.

In performing a review, it is not intended that the CPA will question third parties or perform certain other procedures normally performed during an audit. However, if the accountant becomes aware that information is incorrect or otherwise unsatisfactory, the accountant should perform whatever procedures are necessary to permit the accountant to achieve limited assurance that the financial statements do not have material deviations from GAAP or OCBOA.

9

When third party use of prospective financial statements is expected, an accountant may not accept an engagement to

Perform a review.

Statements on Standards for Accountants' Reports on Prospective Financial Information do not permit the CPA performing reviews of such information.

10

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity's financial statements?

The accountant does not contemplate obtaining an understanding of internal control.

AR 100.04 states that neither a review nor a compilation engagement contemplates "obtaining an understanding of internal control or assessing control risk, testing of accounting records and of responses to inquiries by obtaining corroborating evidential matter..."

11

An accountant's compilation report on a financial forecast should include a statement that the

Compilation does not include evaluation of the support of the assumptions underlying the forecast.

The standard report on the compilation of a forecast includes a statement that the compilation is limited to presentation, in the form of a forecast, information that is the management's representation and does not include evaluation of the support of the assumptions underlying the forecast.

12

Which of the following statements represents a quality control requirement under government auditing standards?
A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit.
A CPA who conducts government audits is required to undergo an annual external quality control review when an appropriate internal quality control system is not in place.
A CPA who conducts government audits may not make the CPA's external quality control review report available to the public.
An external quality control review of a CPA's practice should include a review of the working papers of each government audit performed since the prior external quality control review.

A CPA seeking to enter into a contract to perform an audit should provide the CPA's most recent external quality control review report to the party contracting for the audit.

Government auditing standards include a general standard stating that each audit organization conducting government audits should have an appropriate internal quality control system in place and participate in an external quality control review program. A CPA seeking to enter into a contract to perform an audit subject to government auditing standards should provide the CPA's most recent external quality review report to the party contracting for the audit.

13

In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is

Determined separately for each major federal financial assistance program.

Under the Single Audit Act, the auditor considers materiality in relation to each such program. When reaching a conclusion as to whether the effect of noncompliance is material to a major federal financial assistance program, an auditor ordinarily should consider the nature of the noncompliance and the amount affected by the noncompliance in relation to the nature and amount of the major federal financial assistance program under audit.

14

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should

Disclose the departure in a separate paragraph of the report.

If the financial statements contain a departure from GAAP that the client refuses to change, the CPA should disclose this fact in a separate paragraph of his Review Report.

15

An accountant's report on examined prospective financial statements should include all of the following except
An identification of the prospective financial statements presented.
A statement that the examination of the prospective financial statements were made in accordance with GAAS.
A caveat that the prospective results may not be achieved.
A statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

A caveat that the prospective results may not be achieved.

The standard report on the examination of prospective financial statements includes: (1) n identification of the prospective financial statements presented, (2) a caveat that the prospective results may not be achieved and (3) a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. The engagement is not an audit, hence no reference is made to GAAS.

16

One example of a "special report," as defined by Statements on Auditing Standards, is a report issued in connection with

Compliance with a contractual agreement not related to the financial statements.

There are four types of special reports, one of which is reporting on financial statements prepared using a comprehensive basis of accounting other than GAAP. This is defined as a definite set of criteria having substantial support that is applied to all material items appearing in financial statements. Price-level financial statements qualify as a basis of accounting having substantial authoritative support.

17

Under most circumstances, a CPA cannot receive a fee that is contingent on the outcome of the work being done. Such an action is viewed as damaging to the CPA’s appearance of independence. In which of the following situations is the CPA allowed to accept a contingent fee?
The review of a client’s financial statements rather than an audit
The preparation of a client’s federal income tax return
The compilation of a client’s financial statements that the CPA expects to be used by a third party
The representation of a client during an IRS examination of a federal income tax return

The representation of a client during an IRS examination of a federal income tax return

Rule 302 of the AICPA Code of Professional Conduct prohibits contingent fees that are based on the findings of the work of a CPA. However, contingent fees are allowed in certain types of tax matters such as an IRS examination where the final outcome is set by an independent party. The work is not being performed for the benefit of the public in any way but rather the final judgment is made by the IRS, a party that is unrelated to the reporting company and does not care whether the CPA is independent.

18

Comfort letters are generally signed by the client's

Independent auditor.

A comfort letter, also known as letter to an underwriter, is sent by the independent auditor to the underwriter.

19

An examination of prospective financial statements is a professional service that involves all of the following except
Evaluating the preparation of the prospective financial statements.
Evaluating the support underlying the assumptions.
Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines.
Issuing a compilation report.

Evaluating the support underlying the assumptions.

An examination of prospective financial statements (PFS) is a professional service that involves (1) evaluating the preparation of the prospective financial statements, (2) evaluating the support underlying the assumptions, (3) evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines, and (4) issuing an examination report, not a compilation report.

20

An accountant has been engaged to review a nonpublic entity's financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant should

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

AR 100 states that if the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements taken as a whole, he should withdraw from the compilation or review engagement and provide no further services with respect to those financial statements.

21

The Baez Company produces a financial forecast of the company’s financial statements two years into the future. The company has asked the CPA firm of Ochs and Phil to examine and report on these forecasted statements. Which of the following statements is presented in the scope paragraph prepared by the CPA firm in reporting on this financial forecast to explain the procedures that have been followed?
“such procedures, as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast.”
“such procedures, as we considered necessary to evaluate both the likelihood of attaining these results and the integrity of the management that derived the reported results.”
“such procedures, as we considered necessary to ensure the control of operations in this period and the likelihood that results may vary significantly from the numbers reported."
“such procedures, as we considered necessary to ensure the agreement of the board and the management as to the methods used to forecast results and the mathematical accuracy of the figures derived.”

“such procedures, as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the forecast.”

In the examination of a financial forecast, a CPA is interested in ensuring that the assumptions (growth rate, for example) that underlie the statements are reasonable, have been properly disclosed, and were actually followed. In addition, the CPA must ensure that the financial statements follow the official guidelines as to the form and presentation of such forecasted data.

22

When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter will most likely receive

Negative assurance on the capsule information.

When procedures short of an audit are applied to information, such as capsule information, a comfort letter will generally provide negative assurance.

23

A CPA's report on a forecast should include all of the following except
A caveat as to the ultimate attainment of the forecasted results.
A statement that the CPA assumes no responsibility to update the report for events occurring after the date of the report.
A description of what the forecast information is intended to represent.
An opinion as to whether the forecast is fairly presented.

A description of what the forecast information is intended to represent.

Statements on Standards for Accountants' Services on Prospective Financial Information states that forecasts take the form of historical financial statements. Thus, there is no need to explain what the information is since the forecast represents financial statements. The other answers are part of the accountant's report.

24

The CPA firm of Hay and Worth is auditing the financial statements of LaBrendCorporation. LaBrend has used a special purpose financial reporting framework. Which of the following statements is true?
The cash basis qualifies as a special purpose financial reporting framework but the tax basis does not.
The cash basis qualifies as a special purpose financial reporting framework as does the tax basis.
The tax basis qualifies as a special purpose financial reporting framework but the cash basis does not.
A balance sheet and income statement must be included in the financial statements.

The cash basis qualifies as a special purpose financial reporting framework as does the tax basis.

The auditor wants to make certain that any reader of the statements is adequately warned that US GAAP has not been followed. Thus, an emphasis-of-a-matter paragraph should be added after the opinion paragraph to explain this distinction. In addition, the statements are normally given different titles (such as the statement of assets and liabilities arising from cash transactions rather than balance sheet) to draw more attention to the difference in the method being used. Special purpose financial reporting frameworks include the cash basis, the tax basis, the contractual basis, and statements that follow a regulatory basis.

25

Which one of the following is generally more important in a review than in a compilation?
Determining the accounting basis on which the financial statements are to be presented.
Gaining familiarity with the industry accounting principles and practices.
Obtaining a signed engagement letter.
Obtaining a signed representation letter.

Obtaining a signed representation letter.

The accountant performing a review is required to obtain a letter of representation from members of management who the accountant believes are responsible for and knowledgeable, directly or through others in the organization, about the matters covered in the representation letter. Normally, the CEO and the CFO sign the representation letter. A representation letter is not required for a compilation engagement.

26

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonpublic entity?
Comparing the financial statements with anticipated results in budgets and forecasts.
Observing the safeguards over access to and use of assets and records.
Inquiring of management about actions taken at the board of directors' meetings.
Studying the relationships of financial statement elements expected to conform to predictable patterns.

Observing the safeguards over access to and use of assets and records.

A review does not provide a basis for the expression of such an opinion because a review does not contemplate obtaining an understanding of the internal control structure or assessing control risk, tests of accounting records and of responses to inquiries by obtaining corroborating evidential matter through inspection, observation or confirmation, and certain other procedures ordinarily performed during an audit. A review may bring to the accountant's attention significant matters affecting the financial statements, but it does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit.

27

Fox is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards (the Yellow Book). Fox detected noncompliance with requirements that have a material effect on the program. Fox's report on compliance should express
An adverse or disclaimer of opinion.
No assurance on the compliance tests.
Reasonable assurance on the compliance tests.
A qualified or adverse opinion.

A qualified or adverse opinion.

Audit literature states that when the audit of an entity's compliance with requirements governing a major federal financial assistance program detects noncompliance with those requirements that the auditor believes have a material effect on that program, the auditor should express a qualified or adverse opinion. The auditor should state the basis for such an opinion in the report.

28

In reporting on compliance with laws and regulations during a financial statement audit in accordance with Government Auditing Standards, an auditor should include in the auditor's report

Material instances of fraud and illegal acts that were discovered.

Government Auditing Standards include additional reporting standards for financial statement audits. One of those standards requires that the report on the financial statements describe the scope of the auditors' testing of compliance with laws and regulations and internal controls and present the results of those tests. The standard goes on to state that in presenting the results of those tests, auditors should report irregularities, illegal acts, and other material noncompliance. Discoveries of fraud, which is a type of illegal act involving the obtaining of something of value through willful misrepresentation, would also be reported.

29

The January Company is a small corporation that sells men’s clothing in Billings, Montana. The company does not issue securities to the public and is not required to have audited financial statements. However, Jeter and Cano, CPAs are hired to do a review of the company’s annual financial statements. In performing the review, the CPAs discover that a material amount of expenses was capitalized during the year. How does this impact the report issued by the CPAs?
An adverse opinion must be rendered because the company did not follow U.S. GAAP.
A disclaimer of opinion must be rendered because the company did not follow U.S. GAAP.
The material misstatement must be disclosed by the CPAs in a separate paragraph to their report.
The CPAs must decide between a qualified opinion and an adverse opinion based on the magnitude and nature of the problem.

The material misstatement must be disclosed by the CPAs in a separate paragraph to their report.

An opinion is given as the result of an audit. The CPAs carried out a review and not an audit so no type of opinion can be rendered at all. For a review, CPAs are required to include an extra explanatory paragraph in their report to draw attention to any material departure from U.S. GAAP.

30

The Duran Unified School District hires Tiffany's accounting firm to audit its afterschool program, which uses a federal grant to help low income children improve reading and writing skills. During her work, she finds several material errors and omissions in the school district's records on the use of the federal funds. The school superintendent asks for a meeting with Tiffany, during which he states that he knows there are problems with the records, but that he will spread word about her firm's good work among several influential friends if she issues a favorable audit report. This situation suggests which of the following types of independence impairments under Government Accountability Office (GAO) guidelines:
Organizational
Personal
External
Coercive

External

This is an example of an external threat to independence. An organizational threat refers to an auditor being in the same reporting unit as an audited entity. A personal threat refers to an auditor having a personal connection to or interest in the audited entity. The GAO guidelines do not refer to a "coercive" threat.

31

A CPA firm audited the financial statements of Winehouse, Inc. but eventually gave a disclaimer of opinion because of an inability to gain sufficient evidence about the opening inventory balance. The management of the company has produced supplementary information to reflect financial performance for that year. Management has asked the CPA firm to report on whether this supplementary information is fairly stated, in all material respects, in relation to the financial statements taken as a whole. What response is appropriate?
The CPA firm can accept the job and provide the opinion.
The CPA firm can accept the job and provide the opinion but only if the financial statements were created using US GAAP.
The CPA firm can accept the job and provide the opinion but only because the balance in question was a beginning balance.
The CPA firm cannot accept the job and express an opinion on the supplementary information.

The CPA firm cannot accept the job and express an opinion on the supplementary information.

To avoid confusion by the reader of the audit report, an auditor cannot express an opinion on supplementary information when the auditor’s report on the audited statements has an adverse opinion or a disclaimer of opinion. The wording of that opinion might overshadow the disclaimer rendered on the statements as a whole.

32

company is talking with a local CPA about doing either a compilation or a review of its financial statements for the current period. Which of the following statements is true?
In a compilation, the CPA provides limited (sometimes referred to as negative) assurance.
For the most part, a compilation is limited to making inquiries and carrying out analytical procedures.
A review is a presentation of client information in the form of financial statements.
A review might well include a comparison of the results for the current period to anticipated numbers in a budget or forecast.

A review might well include a comparison of the results for the current period to anticipated numbers in a budget or forecast.

A review consists primarily of inquiry of company officials and the performance of analytical procedures. In this way, the CPA is able to provide limited assurance that nothing was noted that indicated the presence of any material modifications that needed to be made to be in conformity with generally accepted accounting principles. Comparing current figures to anticipated figures helps to highlight balances that do not appear to be correct or normal. In contrast, a compilation is primarily the presentation of the client numbers in the form of financial statements with no assurance at all being given.

33

The term "special report" may include all of the following except reports on financial statements
Of an organization that has limited the scope of the audit.
Prepared for a limited purpose such as a report that relates only to certain aspects of financial statements.
Of a not-for-profit organization which follows accounting practices differing in some respects from those followed by business enterprises organized for profit.
Prepared in conformity with a cash basis of accounting.

Of an organization that has limited the scope of the audit.

Special auditor's reports are those that apply only to: (1) financial statements prepared in conformity with 'other comprehensive basis of accounting'; (2) specific elements, accounts, or items of a financial statement; (3) compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements; or (4) financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report.

34

An auditor is reporting on cash-basis financial statements. These statements are best referred to in his opinion by which one of the following descriptions?
Cash balance sheet and the source and application of funds.
Balance sheet and income statement resulting from cash transactions.
Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.
Financial position and results of operations arising from cash transactions.

Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.

Statements upon which the CPA reports that are not GAAP representations but rather "special reports" should not use the terms "Balance Sheet," "Income Statement," etc. Such terms are associated with GAAP and should not be used with statements that are not GAAP.

35

The auditor's report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards, the "Yellow Book", is required to include:I. The scope of the auditor's testing of internal controlsII. Uncorrected misstatements that were determined by management to be immaterial
I only.
II Only.
Both I and II.
Neither I nor II.

I only.

Government Auditing Standards require that the auditor "include in their report on the financial statements either a (1) description of the scope of the auditors' testing of internal controland the results of those tests or an opinion, if sufficient work was performed, or (2) reference to a separate report(s) containing that information..."

36

An auditor notes reportable conditions in a financial statement audit conducted in accordance with Government Auditing Standards. In reporting on the internal control structure, the auditor should state that

The auditor obtained an understanding of the design of relevant policies and procedures, and determined whether they have been placed in operation.

When the auditor has noted reportable conditions in a financial statement audit conducted in accordance with Government Auditing Standards, the auditor's report on the internal control structure should contain a description of the scope of the auditor's work, stating that the auditor obtained an understanding of the design of relevant policies and procedures, determined whether these policies and procedures have been placed in operation, and assessed control risk.

37

Which of the following is an attestation engagement?
Management advisory service.
Tax return preparation.
Compilation of the financial statements.
Examination of prospective financial information.

Examination of prospective financial information.

In an attest engagement, a practitioner issuers a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. Hence, the examination of prospective financial information, which requires the issuance of an examination report, is an attestation engagement.

38

When reporting on an examination of a company's compliance with requirements of specified laws, the practitioner has identified an instance of material noncompliance. Management has agreed to include this instance in its written assertion. The examination report should include
No modification from the standard form.
An opinion paragraph that is unmodified and an explanatory paragraph.
A qualified or adverse opinion.
A disclaimer of opinion.

A qualified or adverse opinion.

Even though management has properly disclosed an instance of material noncompliance, the CPA's report must relate directly to that subject matter when the opinion is modified. Thus, a qualified or adverse opinion must be rendered due the material nature of the noncompliance.

39

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that
Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
States whether the financial statements are fairly presented in conformity with another comprehensive basis of accounting.
Justifies the reasons for departing from generally accepted accounting principles.
Refers to the note to the financial statements that describes the basis of accounting.

Refers to the note to the financial statements that describes the basis of accounting.

When reporting on financial statements prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles (GAAP), an independent auditor's report should include a paragraph that states the basis of presentation and refers to the note in the financial statements that discusses the basis of presentation and describes how that basis differs from GAAP. The separate paragraph in the auditor's report does not include any justification, opinion, or explanation as presented in the other answers.

40

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards?
An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.
An auditor should briefly describe in the auditor's report the method of statistical sampling used in performing tests of controls and substantive tests.
An auditor should report on the scope of the auditor's testing of internal controls.
An auditor should determine the extent to which the entity's programs achieve the desired level of results.

An auditor should report on the scope of the auditor's testing of internal controls.

Government Auditing Standards include additional reporting standards for financial statement audits. One of those standards requires that the report on the financial statements describe the scope of the auditor's testing of compliance with laws and regulations and internal controls.

41

The CPA firm of General & Grant has been asked to do a review of the financial statements prepared for the Appomattox Company. Members of this firm are currently making inquiries of the members of the company’s management that have responsibility over the accounting function. Which of the following is not likely to be included in these inquiries?
Were the financial statements prepared according to US GAAP?
Did the company face any unusual situations this period that might affect the financial statements?
What percentage of the year-end receivables has been confirmed directly with the customer?
Were there any significant transactions that occurred near the end of the year?

What percentage of the year-end receivables has been confirmed directly with the customer?

A review is mostly an overview of financial statements looking for general signs of material misstatements. A, B, and D are all questions asked in general about the preparation of the financial statements under review. In a review, evidence is not typically gathered about individual accounts. That is done for an audit. Thus, the CPA is not likely to ask specific questions about receivables unless there is some reason to think a material misstatement is present. Furthermore, confirmation is normally a task carried out by the CPA and not by the reporting company.

42

A CPA should not submit unaudited financial statements of a nonpublic company to a client or others unless, as a minimum, the CPA complies with the provisions applicable to

Compilation engagements.

Since the statements are unaudited and the company is nonpublic, the appropriate standards are compilation standards.

43

Tammy Sue is conducting an audit of the town of Groseclose. The town is rather small and has been struggling to find help with some non-audit accounting services. Tammy Sue researches Government Accountability Office (GAO) guidelines and finds that, as long as she complies with supplemental safeguards, she may perform any of the following services, except for
Advising Groseclose staff on how to integrate their billing and accounting information systems
Posting adjusting transactions recommended during the audit into Groseclose's accounting information system
Providing guidance on proper accounting methods for an unusual transaction
Reviewing applications of five different individuals seeking a job with the town

Posting adjusting transactions recommended during the audit into Groseclose's accounting information system

Posting transactions is an activity that threatens independence to the degree that supplemental safeguards cannot ensure independence. Basically, the independent auditor is auditing her own work and that is never allowed. Other activities are acceptable under GAO guidelines if supplemental safeguards are in place.

44

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

Withdraw from the engagement.

Should the client refuse to make changes and the modifications in the accountant's report are not sufficient, the CPA should withdraw from the engagement.

45

Because of the pervasive effects of laws and regulations on the financial statements of governmental units, an auditor should obtain written management representations acknowledging that management has

Identified and disclosed all laws and regulations that have a direct and material effect on its financial statements.

An auditor is required to obtain a client representation letter from management as part of every audit conducted in accordance with generally accepted auditing standards. Among the items covered in such a letter are violations or possible violations of laws and regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency. In audits of governmental entities, auditors should consider obtaining additional representations from management acknowledging that management is responsible for the entity's compliance with laws and regulations applicable to it and that management has identified and disclosed to the auditor all laws and regulations that have a direct and material effect on the determination of financial statement amounts.

46

Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that a review
Consists principally of inquiries of company personnel and analytical procedures applied to financial data.
Provides only limited assurance that the financial statements are fairly presented.
Includes examining, on a test basis, information that is the representation of management.
Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

Consists principally of inquiries of company personnel and analytical procedures applied to financial data.

Financial statements of a nonpublic entity reviewed by an accountant should be accompanied by a report stating that a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.

47

An examination of a financial forecast is a professional service that involves
Compiling or assembling a financial forecast that is based on management's assumptions.
Limiting the distribution of the accountant's report to management and the board of directors.
Evaluating the preparation of a financial forecast and the support underlying management's assumptions.
Assuming responsibility to update management on key events for one year after the report's date.

Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

An accountant may be engaged to examine, compile, or apply agreed-upon procedures to financial forecasts or other prospective financial statements. An examination of a financial forecast involves evaluating the preparation of the forecasted statements, evaluating the support underlying the assumptions used in preparing the statements, evaluating the presentation of the statements for conformity with AICPA guidelines, and issuing an examination report.

48

Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonpublic entity's financial statements?
Analytical procedures designed to test the accounting records by obtaining corroborating audit evidence.
Inquiries concerning the entity's procedures for recording and summarizing transactions.
Analytical procedures designed to test management's assertions regarding continued existence.
Inquires of the entity's attorney concerning contingent liabilities.

Inquiries concerning the entity's procedures for recording and summarizing transactions.

Inquiries and analytical procedures ordinarily performed during a review of a nonpublic company's financial statements include inquiries concerning the company's procedures for recording and summarizing transactions. These procedures would not include obtaining corroborating audit evidence, management's assertions concerning continued existence, or the company's attorney's opinion concerning contingent liabilities.

49

Peach and Posie, CPAs, has been hired to express an opinion on the adequacy of the design of internal controls and procedures at Howard's HR Services, which is utilized by other firms as a service provider. This report should contain: I. A statement that the distribution of the report should be restricted to the service organization, user firms, and the independent auditors of user firms
II. A description of the tests of controls undertaken in the engagement
III. An opinion that the controls were designed suitably to provide absolute assurance that control objectives would be achieved if such controls were operating effectively
IV. A disclaimer of opinion on the operating effectiveness of the internal controls
I and II only
II and III only
II, III, and IV only
I and IV only

I and IV only

This type of engagement does not involve tests of controls. As follows, report on the operating effectiveness of controls in place should contain a disclaimer of opinion as to whether controls operated effectively. In addition, the opinion should state whether controls were designed suitably to provide reasonable, not absolute, assurance of achieving control objectives. Finally, the report should state that the use of the report should be restricted.

50

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?
Review report with a qualification.
Review report with a disclaimer.
Review report and footnote exceptions.
Compilation report with the client's consent.

Compilation report with the client's consent.

Failure by the client's management to provide a representation letter covering all of the periods under review precludes the completion of a review. The accountant may issue a compilation report as an accountant is not required to verify, corroborate, or review information supplied for a compilation.

51

Compiled financial statements should be accompanied by an accountant's report stating that
A compilation includes the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.
The accountant compiled the financial statements in accordance with Statements on Standards Accounting and Review Services.
A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is to express an opinion.
The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.

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

According to AR 100.14, the compilation report should state, "A compilation has been performed in accordance with Statements on Standards Accounting and Review Services issued by the AICPA.

52

Rick Rolls is auditing a governmental agency, but is also employed by a governmental agency. Under which of the following situations, would Rick be considered free of organizational impairments to independence under the guidelines of the Government Accountability Office (GAO)?
Rick is a federal employee auditing a state government program
Rick is a legislative auditor assigned to audit a judicial branch program
The head of Rick's audit organization was elected by voters
All of the above

All of the above

All of these scenarios would lead to a presumption of independence under the independence guidelines of the GAO.

53

Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditor to make an assertion that the auditor believes is not justified, the auditor should

Reword the form or attach a separate report.

Reports on preprinted forms is a type of special report. GAAS specifically states that if the auditor is not satisfied with the wording of the form, it should be reworded.