Reports on Attestation Engagements

Question 1

A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements to prospective financial statements. Which of the following condi­tions must be met for the practitioner to perform the engagement?

A. The prospective financial statement includes a summary of significant accounting policies.

B. The practitioner takes responsibility for the sufficiency of the agreed-upon procedures.

C. The practitioner and specified parties agree upon the procedures to be performed by the practitioner.

D. The practitioner reports on the criteria to be used in the determination of findings.

Answer 1

C.

One of the conditions that must be met by a practitioner who accepts an engagement to apply agreed-upon procedures in accordance with SSAE to prospective financial statements is that the practitioner and specified parties agree upon the procedures to be performed by the practitioner. The prospective financial statements must include a summary of significant assumptions, not account ting policies. The specified parties, not the practitioner, must take responsibility for the sufficiency of the agreed-upon procedures for their purpose. The practitioner does not report on the criteria to be used in the determination of findings, rather the criteria must be agreed upon between the practitioner and the specified parties.

Question 2

Negative assurance may be expressed when an accountant is requested to report on the

I.Results of applying agreed-upon procedures to an account within unaudited financial statements

II.Compilation of prospective financial statements

A. I only

B. II only

C. Both I and II

D. Neither I nor II

Answer 2

D.

Neither I nor II. In an agreed-upon procedures engagement, the practitioner should not provide negative assurance about whether the subject matter or the assertion is fairly stated based on the criteria. Compilation engagements do not provide any type of assurance.

Question 3

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements 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 3

B.

An attest engagement is one in which a CPA in public practice (or practitioner) is engaged to, or does, issue an examination, review, or agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party. Reports on financial statements are subject to the guidance of Statements on Auditing Standards (SAS) and Statements on Standards for Accounting & Review Services (SSARS). Supplying a client with a blank financial statement format is a service exempt from SAS and SSARS; SSAE do not apply to financial statements.

Question 4

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity’s business. Other than the procedures previously applied to the historical financial statements, the accountant is required to

Reevaluate the entity’s internal control over financial reporting

Determine that the computations of the pro
forma adjustments are mathematically correct

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 4

C.

Other than the procedures applied to the historical financial statements, the procedures the practitioner should apply to the assumptions and pro forma adjustments for either an examination or a review engagement are as follows…. determine that computations of pro forma adjustments are mathematically correct and that the pro forma column reflects the proper application of those adjustments to the historical financial statements.” Reevaluating the entity’s internal control over financial reporting is not a required procedure.

Question 5

A CPA’s report on agreed-upon procedures related to management’s assertion about an entity’s compliance with specified requirements should contain

A. A statement of restrictions on the use of the report

B. An opinion about whether management’s assertion is fairly stated

C. Negative assurance that control risk has not been assessed

D. An acknowledgment of responsibility for the sufficiency of the procedures

Answer 5

A.

A report on an engagement consisting of applying agreed-upon procedures should include a state­ment of restrictions on the use of the report because it is intended to be used solely by the specified parties. The practitioner does not provide an opinion; instead the report should be presented in the form of procedures and findings. Negative assurance is not allowed. The sufficiency of the procedures is solely the responsibility of the specified parties who agreed to those procedures; the practitioner should disclaim responsibility for the suffi­ciency of the procedures.

Question 6

A practitioner’s report on agreed-upon procedures should contain which of the following statements?

A. The procedures performed were those agreed to by the specified parties identified in the report

B. Sufficiency of procedures is the responsibility of the practitioner

C. All classification codes appeared to comply with such performance documents

D. Nothing came to my attention as a result of applying the procedures

Answer 6

The correct answer is (A).

“We have performed the procedures enumerated below, which were agreed to by the audit committees and management of Jeff Company, solely to assist you in evaluating the accompanying Statement of Portfolio Performance Statistics of Ninja fund for the year ended December 31, 2018”.

The above statement which is included in the practitioner’s report on agreed-upon procedures

(B) is incorrect because sufficiency of procedures is the responsibility of the management. “The sufficiency of these procedures is the sole responsibility of management”.

(C) is incorrect because a practitioner should present the results of applying agreed-upon procedures to the specific subject matter in the form of findings and not provide any assurance about whether the subject matter or the assertion is fairly stated based on the criteria.

(D) is incorrect because it provides negative assurance. A practitioner’s report on agreed-upon procedures should not provide any assurance about whether the subject matter or the assertion is fairly stated based on the criteria.

Question 7

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

A. Provide assurance on investment performance statistics prepared by an investment company on established criteria

B. Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities

C. Compile financial statements in conformity with a comprehensive basis of accounting other than GAAP

D. Communicate with an audit committee regarding management’s consultations with another CPA

Answer 7

A.

The AICPA Code of Professional Conduct requires an AICPA member who performs an attestation engagement to comply with Statements on Standards for Attestation Engagements (SSAE). An attest engagement is one in which a member is engaged to issue an examination, review, compilation or agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party (usually management). Attestation services include: agreed-upon procedures (excluding letters to underwriters and consulting services or any attest engagement concerning assertions about solvency); financial forecasts and projections; pro forma financial statements; internal control over financial reporting; compliance reporting (regulatory or contractual); and Management’s Discussion and Analysis. SSAE do not apply to: audits; reviews and compilations of financial statements of nonissuers under SSARS; tax return preparation; advocating, consulting, or advisory services; or operational audits.

Question 8

Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers’ payroll transactions. Dunn expects to consider the effects of Price’s report on the Taft engagement. Price’s report should contain a (an)

A. Description of the scope and nature of Price’s procedures

B. Statement that Dunn may assess control risk based on Price’s report

C. Assertion that Price assumes no responsibility to determine whether QSC’s controls are suitably designed

D. Opinion on the operating effectiveness of QSC’s internal controls

Answer 8

A.

A special-purpose report expressing an opinion on controls at a service organization should include a description of the scope and nature of the auditor’s procedures.

Question 9

Which of the following activities would most likely be considered an attestation engagement?

A. Consulting with management representatives of a firm to provide advice

B. Issuing a report about a firm’s compliance with laws and regulations

C. Advocating a client’s position on tax matters that are being reviewed by the IRS

D. Preparing a client’s tax returns

Answer 9

B.

An attest engagement is one in which a CPA in public practice is engaged to issue an examination, review, or agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party. AT 600 established guidance concerning attest engagements on an entity’s com­pliance with requirements of specified laws, regulations, rules, contracts, etc. AT 100 specifically lists, as engage­ments to which attest standards are inapplicable, engagements performed in accordance with Statements on Standards for Consulting Services, client advocacy engagements, and tax return preparation services.

Question 10

Question # 731 | Blueprint Area: 4 B i : General Standards for Attestation Reports

Which of the following professional services would be considered an attestation engagement?

A. Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service

B. Providing financial analysis, planning, and capital acquisition services as a part-time, in-house controller

C. Advising management in the selection of a computer system to meet business needs

D. Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions

Answer 10

D.

The SSAEs provide guidance concerning attest engagements on prospective financial statements. The other answers would not be considered attest engagements.

Question 11

Which of the following is a requirement for accepting an attestation engagement to report on the controls at a service organization?

A. The description of the controls is completed prior to the signing of the engagement letter.

B. The service auditor has the competence and capability to perform the engagement.

C. The suitability of the evaluation criteria is reviewed by a third party.

D. Management agrees that the service auditor will be responsible for documenting the controls.

Answer 11

The correct answer is (B).

Attest engagement applicable when service auditor is examining Internal Control at a service organization that provides services to user entities. May provide appropriate evidence required by the user auditor relating to the Internal Control of the service organization when those I/C are likely to be relevant to the user’s Internal Control Financial Reporting.

Preconditions:

• Management of service organization acknowledges and accepts its responsibility for the description of the service organization’s system and for Internal Control at the service organization
• Service auditor’s preliminary knowledge indicates that the scope of the engagement will not be so limited that they are unlikely to be useful to user entities and their auditors
• The service auditor has the competence and capability to perform the engagement.

Question 12

A CPA is engaged to examine an entity’s financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an)

A. Adverse opinion

B. Pro forma opinion

C. Qualified opinion

D. Unqualified opinion with an explanatory paragraph

Answer 12

A.

If the CPA believes the assumptions do not provide a reasonable basis for the forecast, the CPA should issue an adverse opinion. The opinion paragraph should include a statement to that effect.

Question 13

Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern’s written assertion about its compliance with contractual requirements to pay royalties. Mill’s report on these agreed-upon procedures should contain a (an)

A. Disclaimer of opinion about the fair presentation of Modern’s financial statements

B. List of the procedures performed (or reference thereto) and Mill’s findings

C. Opinion about the effectiveness of Modern’s internal control activities concerning royalty payments

D. Acknowledgment that the sufficiency of the procedures is solely Mill’s responsibility

Answer 13

B.

A list of or reference to procedures performed, and related findings, are required elements of a report on agreed-upon procedures. No references to fairness of presentation, effectiveness of internal control, or acknowledgement of sufficiency of procedures are required.

Question 14

Which of the following is not an attestation standard?

A. The practitioner must obtain sufficient evidence to provide a reasonable basis for the conclusion that is expressed in the report.

B. The practitioner must identify the subject matter or the assertion being reported on and state the character of the engagement in the report.

C. The practitioner must adequately plan the work and must properly supervise any assistants.

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

Answer 14

D.

A sufficient understanding of internal control for planning an engagement is not an attestation stan­dard. The other answers are attestation standards.

Answer A. is the second standard of fieldwork; answer B. is the first standard of reporting; and answer C. is the first standard of fieldwork.

Question 15

If a service auditor is unable to obtain a written assertion from the service organization’s management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to

A. Increase the substantive testing of the service organization’s controls.

B. Withdraw from the engagement unless prohibited by law.

C. Assess a higher level of detection risk for the engagement.

D. Report management’s action in the auditor’s communication to those charged with governance.

Answer 15

The correct answer is (B).

Service organization’s management should provide a written assertion regarding its system and the suitability of the design and operating effectiveness of controls. However, if management subsequently refuses to provide a written assertion, it is a scope limitation and consequently, the service auditor should withdraw from the engagement. If law or regulation does not allow the service auditor to withdraw from the engagement, the service auditor should disclaim an opinion.

Question 16

In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements?

A. The prospective financial statements depart from AICPA presentation guidelines

B. The practitioner was not able to perform certain procedures deemed necessary

C. The prospective financial statements fail to disclose significant assumptions

D. The significant assumptions do not provide a reasonable basis for the statements

Answer 16

The correct answer is (B).

If the practitioner was not able to perform certain procedures deemed necessary for an examination of prospective financial statements, the practitioner will disclaim an opinion. A practitioner will almost always disclaim an opinion when dealing with a scope limitation – i.e., an inability to perform certain procedures deemed necessary.

(A) is incorrect because a practitioner would issue a qualified or adverse opinion if the prospective financial statements departed from AICPA guidelines.

(C) is incorrect because a practitioner would issue an adverse opinion if the prospective financial statements failed to disclose significant assumptions and these assumptions are pervasive and makes financial statements materially misstated.

(D) is incorrect because A practitioner would issue an adverse opinion if the significant assumptions did not provide a reasonable basis for the statements.

Question 17

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

A. Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements.

B. All of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards.

C. The requirement that the CPA be independent in mental attitude is included in both sets of standards.

D. Both sets of standards are applicable to engagements regarding financial forecasts and projections.

Answer 17

C.

The requirement that the CPA be independent in mental attitude is included in both sets of stan­dards. Only GAAS require the CPA to report on the adequacy of disclosure in the financial statements. The attestation standards do not include a standard similar the GAAS second standard of fieldwork: “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to error or fraud, and to design the nature, timing, and extent of further audit procedures.” Only the attestation standards are applicable to engage­ments regarding financial forecasts and projections.

Question 18

When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that

A. Explains the difference between a compilation and a review

B. Documents the assessment of the risk of material misstatement due to fraud

C. Expresses limited assurance that the actual results may be within the projected range

D. Describes the limitations on the projection’s usefulness

Answer 18

D.

An accountant’s report on a compilation of projected financial statements describes the limitations on the projection’s usefulness. An accountant’s report on a compilation of projected financial statements need not explain the difference between a compilation and a review. An accountant’s report on a compilation of projected financial statements neither documents any assessment of the risk of material misstatement nor expresses any assurance.

Question 19

When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal controls of the organization?

A. The auditor should assess the control risk before obtaining an understanding of internal controls.

B. The auditor should obtain an understanding of the entity’s internal controls after performing substantive procedures.

C. The auditor should obtain an understanding of the effect of the user organization upon the service organization.

D. The auditor should be engaged to perform agreed-upon procedures.

Answer 19

C.

The auditor should obtain an understanding of the effect of the user organization upon the service organization. Accurately assessing control risk before obtaining an understanding of internal controls is almost impossible. Generally, an audit of a service organization doesn’t involve substantive procedures. An audit of a service organization results in the expression of an opinion; the result of an engagement to perform agreedupon procedures is a report merely of procedures performed and related findings.

Question 20

Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to

A. The entity’s principal stockholder, to the exclusion of the other stockholders

B. Potential stockholders in an offering statement

C. A financial institution in a loan application

D. A state or federal regulatory agency

Answer 20

B.

A CPA should not accept an engagement if the CPA’s name will be used in conjunction with a financial projection that will be distributed to those who will not be negotiating directly with the responsible party (unless the projection is used to supplement a financial forecast which was not indicated by this question). The responsible party is the person(s) who are responsible for the assumptions underlying the prospective financial information. The responsible party is usually management, but it can be persons outside the entity, for example, a party considering acquiring the entity. The attestation standards for prospective financial statements distin­guish between forecasts and projections. Relevant to this question, a financial projection is not appropriate for general use. General use refers to the use of the statements by persons with whom the responsible party is not negotiating directly, for example, in an offering statement of an entity’s debt or equity interests. Because recipi­ents of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party’s knowledge and belief, the expected results. Thus, only a financial forecast is appropriate for general use. Limited use refers to the use of the statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. Examples include use in negotiations for a bank loan, submission to a regulatory agency (submission to a regulatory agency is considered limited use even though, by law or regulation, it may be a matter of public record), and use solely within the entity. Thus, the other answer choices describe acceptable engagements as long as the report includes an appropriately worded restriction limiting its use.

Question 21

Which of the following statements is least likely to be included in a practitioner’s report on agreed-upon procedures?

A. The use of the report is subject to specified restrictions.

B. The report has provided limited assurance.

C. The subject matter is the responsibility of the responsible party.

D. The procedures performed were agreed to by the specified parties.

Answer 21

B.

An agreed-upon procedures engagement is one in which a practitioner is engaged to issue a report of findings based on specific procedures performed on subject matter; a written assertion is not required. The practitioner’s report contains a number of elements, including: a statement that the procedures performed were those agreed to by the specified parties; a statement that the sufficiency of the procedures is solely the specified parties’ responsibility and a disclaimer of responsibility on the part of the practitioner for the sufficiency of the procedures; and a statement restricting the report use because it is intended solely for the use of specified parties. No assurance is provided in an agreed-upon procedures engagement, so there would no comment included in a practitioner’s report.

Question 22

Which of the following items should be included in prospective financial statements issued in an attestation engagement performed in accordance with Statements on Standards for Attestation Engagements?

A. All significant assertions used to prepare the financial statements

B. All significant assumptions used to prepare the financial statements

C. Pro forma financial statements for the past two years

D. Historical financial statements for the past three years

Answer 22

B.

[A summary of] all significant assumptions used to prepare the financial statements should be included in prospective financial statements issued in an attestation engagement performed in accordance with SSAE. The summary of significant assumptions is essential to the reader’s understanding of prospective financial statements. Accordingly, the practitioner should not compile or perform an agreed-upon procedures engagement on prospective financial statements that exclude disclosure of the summary of significant assumptions. In an examination engagement if the presentation departs from the presentation guidelines because it fails to disclose assumptions that appear to be significant, the practitioner should express an adverse opinion. The other answers are not required to be included.

Question 23

Each of the following items should be included in a presentation of pro forma financial statements, except

A. The significant assumptions used in developing the pro forma information.

B. The source of the historical information on which the pro forma information is based.

C. An indication that the pro forma information is not necessarily indicative of results.

D. All direct and indirect effects attributed to the related transaction.

Answer 23

The correct answer is (D).

Under the attestation standards, the presentation of pro forma financial statements should describe the following: the transaction (or event) that is reflected in the pro forma financial information, the source of the historical financial information on which it is based, the significant assumptions used in developing the pro forma information, any significant uncertainties about those assumptions, and the pro forma information is not necessarily indicative of results. The presentation should also indicate that the pro forma financial information should be read in conjunction with related historical financial information and that the pro forma financial information is not necessarily indicative of the results that would have been attained had the transaction (or event) actually taken place earlier. However, the standards do not require the presentation to include all direct and indirect effects attributed to the related transaction.

Question 24

Which of the following should a practitioner perform as part of an engagement for agreed-upon proce­dures in accordance with Statements on Standards for Attestation Engagements?

A. Issue a report on findings based on specified procedures performed

B. Assess whether the procedures meet the needs of the parties

C. Express negative assurance on findings of work performed

D. Report the differences between agreed-upon and audit procedures

Answer 24

A.

For an engagement to report on agreed-upon procedures, the accountant issues a report on findings based on the specific procedures performed. The client must take responsibility for determining whether the agreed-upon procedures are sufficient for the intended purpose. An accountant rarely gives negative assurance; in a report on agreed-upon procedures, the accountant explicitly disclaims the expression of any opinion. Generally, no mention is made regarding audit procedures in a report on an attestation engagement.

Question 25

If a statement from the Statements on Standards for Attestation Engagements (SSAE) provides that a procedure or action is one that the practitioner “should consider,” then which of the following interpretations is correct?

A. The practitioner and management must agree on how the procedure will be performed.

B. The consideration of the procedure is presumptively required, whereas carrying out the procedure is not required.

C. The SSAEs use this term for special attestation engagements when referring to unusual situations outside the scope of the typical attestation engagements.

D. Carrying out the procedure or action is required in all cases.

Answer 25

The correct answer is (B).

Statements on Standards for Attestation Engagements (SSAE) use two categories of professional requirements that impose a different degree of responsibility on practitioners, as follows:

• Unconditional requirements. The practitioner must comply with an unconditional requirement wherever it applies. Words “must” or “is required “to indicate an unconditional requirement
• Presumptively mandatory requirements. The practitioner is also required to comply with a presumptively mandatory requirement in all cases, however, if necessary a departure is allowed if the practitioner provides justification for the departure and how the alternative procedures were better suited. Word “should consider” is used to indicate a presumptively mandatory requirement.

So should consider implies the consideration of the procedure or action is presumptively required, whereas carrying out the procedure or action is not.

Question 26

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

Financial Forecast

Financial Projection

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 26

B.

A financial forecast is the only type of prospective financial statement appropriate for general use. General use refers to use of the statements by parties who are not negotiating directly with the responsible party. Because recipients of prospective financial statements distributed for general use are unable to ask the respon­sible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party’s knowledge and belief, the expected results, i.e., a financial forecast. Any type of pros­pective financial statements that would be useful in the circumstances would normally be appropriate for limited use. Thus, a limited use distribution could include either a financial forecast or a projection.

Question 27

According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements?

A. Use of the report is not restricted.

B. The public accounting firm takes responsibility for the sufficiency of procedures.

C. The practitioner is independent from the client and other specified parties.

D. The practitioner sets the criteria to be used in the determination of findings.

Answer 27

C.

According to SSAE, a CPA may perform an agreed-upon procedures attest engagement provided that the CPA is independent. As a consequence of the role of the specified parties in agreeing upon the procedures performed, a practitioner’s report on such engagements should clearly indicate that its use is restricted to those specified parties. The specified parties, not the public accounting firm, are required to take responsibility for the sufficiency of the agreed-upon procedures [for their purposes]. The criteria to be used in the determination of findings are agreed upon between the CPA (practitioner) and the specified parties, not set by the CPA.

Question 28

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

A. Statement that the entity’s internal control was not relied on in the review

B. Disclaimer of opinion on the financial statements from which the pro forma financial information is derived

C. Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur

D. Reference to the financial statements from which the historical financial information is derived

Answer 28

D.

The practitioner’s report on pro forma financial information should include reference to the financial statements from which the historical financial information is derived. The statement in answer a. should not be made in any review engagement. The report on pro forma information is a different engagement from reporting on the financial statements from which the pro forma information was derived; thus, the practitioner would not issue an opinion or disclaimer of opinion on those statements. No reference to uncertainty should be made as that is assumed, based upon the nature of the engagement, and the accountant need only provide a conclusion as to whether any information came to the accountant’s attention to cause the accountant to believe manage­ment’s assumptions do not provide a reasonable basis for the effects directly attributable to the transaction or event or that the pro forma column does not reflect the proper application of those adjustments to the historical financial statements.

Question 29

Which of the following statements should be included in a practitioner’s report on the application of agreed-upon procedures?

A. A statement that the practitioner performed an examination of prospective financial statements

B. A statement of scope limitation that will qualify the practitioner’s opinion

C. A statement referring to standards established by the AICPA

D. A statement of negative assurance based on procedures performed

Answer 29

C.

For an engagement to report on agreed-upon procedures, the accountant issues a report on find­ings based on the specific procedures performed; in this report, the accountant mentions that the engagement was performed in accordance with the attestation standards of the AICPA. If the engagement was to examine prospective financial statements, the practitioner would not issue a report on the application of agreed-upon procedures. In a report on agreed-upon procedures, the accountant explicitly disclaims the expression of any opinion—including both a qualified opinion and negative assurance.

Question 30

If an auditor of a nonissuer concludes that reasonable justification exists to change an audit engagement to an agreed-upon procedures engagement, then the report should

A. Not include a reference to the original audit engagement but may include a reference to procedures that have been performed.

B. Generally not include a reference to the original audit engagement but include an explanatory paragraph discussing the change requested by management.

C. Refer to the original audit engagement only if requested by management and approved by those charged with governance.

D. Refer to the original engagement only if the work performed to the date of the change was not sufficient to complete the revised engagement.

Answer 30

The correct answer is (A).

If an auditor of a nonissuer agree to change in terms of the engagement, only if reasonable justification exists and agrees to a downgrade of service from audit to an agreed-upon procedures engagement. The auditor’s report should be issued on the lower level of service i.e. agreed-upon procedures report with no reference to the original engagement i.e. audit.

However, the auditor/accountant should carefully consider:

• Reasons for the downgrade request, particularly the implications of a restriction on the scope of the audit engagement, whether imposed by management or by circumstances.
• Additional effort needed to complete the original engagement
• Estimated additional cost needed to complete the original engagement

Question 31

An accountant’s standard report on a compilation of a projection should not include a statement that

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

B. The hypothetical assumptions used in the projection are reasonable in the circumstances.

C. The accountant has no responsibility to update the report for future events and circumstances.

D. The compilation of a projection is limited in scope.

Answer 31

B.

A report on a compilation of a financial projection must include a statement that a compilation is limited in scope and does not enable the accountant to express an opinion or any other form of assurance on the PFS or the assumptions. As a compilation report should provide no assurance, a statement that that the assumptions used are reasonable is inappropriate. Reports for all types of engagements involving financial projections must include a caveat that the prospective results may not be achieved and a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

Question 32

A non-issuer engaged a practitioner to perform agreed-upon procedures on specified matters. The date of the practitioner’s report would ordinarily be determined by the occurrence of which of the following events?

A. The receipt of the signed engagement letter from the client.

B. The completion of the agreed-upon procedures.

C. The client’s review and approval of the contents of a draft report.

D. The delivery of the final report to the client.

Answer 32

The correct answer is (B).

An Agreed-Upon Procedures (AUP) engagement is one in which a CPA is hired by a client to issue a report of findings based on specific procedures performed on a specific subject matter. The specified procedures that must be completed are agreed-upon between the CPA and the client. A non-issuer engaged a practitioner to perform agreed-upon procedures on specified matters. The completion of the agreed-upon procedures will mark the date of the practitioner’s report. Once the agreed-upon procedures are complete, the practitioner can issue the report. This is an appropriate date for the report.

Question 33

A CPA is asked to prepare a report on the application of the requirements of an applicable financial reporting framework to a specific transaction. The CPA’s report should include a statement that

A. The engagement was performed in accordance with auditing standards generally accepted in the United States of America

B. Responsibility for the proper accounting treatment rests with the preparers of the financial statements.

C. The CPA is independent of the entity.

D. The evaluation of the requirements is based on a hypothetical transaction.

Answer 33

B.

The report should include a statement that the responsibility for the proper accounting treatment rests with the preparers of the financial statements, who should consult with their continuing accountant. Regarding incorrect answer A., it should include a statement that the engagement was performed in accordance with Statement on Auditing Standards No. 122 §915, Reports on Application of Requirements of an Applicable Financial Reporting Framework, not US GAAS.

Regarding incorrect answer C., the CPA is not required to be independent of the entity, but if the CPA is not, the report should include a statement indicating the CPA’s lack of independence. The CPA is neither required to provide, nor precluded from providing, the reasons for the lack of independence; however, if the CPA chooses to provide the reasons for the lack of independence, the CPA should include all the reasons.

Regarding incorrect answer D., the CPA should only accept an engagement to issue a written report on the application of the requirements of an applicable financial reporting framework to a specific transaction when the transaction involves facts or circumstances of a specific entity. The CPA should not accept an engagement to issue a written report on hypothetical transactions.

Question 34

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

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

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

C. The accountant expresses only limited assurance on the forecasted statements and their assumptions.

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

Answer 34

D.

An accountant’s compilation report on a financial forecast should include a caveat that the prospec­tive results may not be achieved, such as there will usually be differences between the forecasted and actual results because events and circumstances frequently do not occur as expected, and those differences may be material.

Answers A. and C. are not correct because the report should also include a statement that a compila­tion is limited in scope and does not enable the accountant to express an opinion or any other form of assurance on the prospective financial statements or the assumptions. There is no requirement that the forecast be read in conjunction with the audited historical financial statements.

Question 35

When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that

A. Disclaims any form of assurance on the historical financial statements

B. Expresses limited assurance that the results will be within the projected range

C. Describes the limitations on the usefulness of the projection

D. Evaluates the hypothetical assumptions used to prepare the projection

Answer 35

C.

For a projection, a practitioner’s compilation report must include a separate paragraph that describes the limitations on the usefulness of the presentation. A report for an engagement to compile a projection would be unlikely to reference historical financial statements. A compilation engagement involves assisting the client in presenting financial information in the form of financial statements without undertaking to provide any assurance. An evaluation of the assumptions used to prepare a projection is a form of assurance.

Question 36

What information should a practitioner include in the standard report on an examination of prospective financial statements?

A. The prospective results might not be achieved.

B. The projection should be read only in conjunction with the audited historical financial statements.

C. There are no known material modifications that should be made as a result of applying the procedure.

D. The practitioner assumes the responsibility to update the report for events and circumstances occurring after the date of the report.

Answer 36

The correct answer is (A).

Prospective Financial Statements present expected or hypothetical future results of an entity. Standard report on an examination of prospective financial statement should contain a caveat that the prospective results may not be achieved and a statement that the practitioner has no responsibility to update the report for events & circumstances occurring after the report date.

(B) and (C) are not included in a standard report for historical financial statements.

(D) is incorrect because the report includes a statement that the practitioner has no responsibility to update the report for events & circumstances occurring after the report date.

Question 37

Which of the following procedures would be most effective in reducing attestation risk?

A. Discussion with responsible individuals

B. Examination of evidence

C. Inquiries of senior management

D. Analytical procedures

Answer 37

B.

Examination of evidence is the most effective procedure. In the hierarchy of available attest proce­dures, those that involve search and verification (for example, inspection, confirmation, or observation), particu­larly when using independent sources outside the entity, are generally more effective in restricting attestation risk than those involving internal inquiries and comparisons of internal information (for example, analytical pro­cedures and discussions with individuals responsible for the subject matter or the assertion).

Question 38

In an engagement to examine management’s discussion and analysis (MD&A), which of the following best defines control risk?

A. The risk that an assertion within the MD&A will lead to a material misstatement

B. The risk of detecting misstatements that are material to the MD&A presentation taken as a whole

C. The risk that the practitioner will not uncover a material misstatement within an MD&A assertion

D. The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner

Answer 38

D.

The MD&A section is provided in a company’s annual report, along with the financial statements. It provides an overview of the previous year of operations and explains the period’s financial results. Management may also comment on the upcoming year, outlining future goals and new projects. After obtaining an understanding of the entity’s internal controls over preparation of the MD&A section, the CPA assesses control risk for the MD&A content. Control risk may be assessed at the maximum level (i.e. the greatest probability that a material misstatement would occur in an MD&A assertion and would not be prevented or detected in a timely manner) if the CPA believes controls are ineffective.

Question 39

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements when

Testifying as an expert witness in accounting
and auditing matters given stipulated facts

Compiling a client’s financial projection that
presents a hypothetical course of action

A. Yes Yes

B. Yes No

C. No Yes

D. No No

Answer 39

The correct answer is (D)

Statements on Standards for Attestation Engagements (SSAE) do not apply to litigation services or testifying as an expert witness in accounting, auditing taxation etc.

A compilation of a financial projection or forecast is covered under Statement on Standards for Accounting & Review Services (SSARS), not SSAE.

Per SSARS 23, a compilation of a financial projection or forecast is under SSARS and an examination of a financial projection is under SSAE.

Since this question is about a compilation, it would be SSARS and not SSAE.

Question 40

An examination of a financial forecast is a professional service that involves

A. Compiling or assembling a financial forecast that is based on management’s assumptions

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

C. Assuming responsibility to update management on key events for one year after the report’s date

D. Limiting the distribution of the accountant’s report to management and the board of directors

Answer 40

B.

An examination of prospective financial statements… involves 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, and issuing an exami­nation report. This service does not include compiling the forecast, or assuming responsibility to update man­agement on key events afterwards. The report may be for general use, in which case the distribution need not be limited.

Question 41

Which of the following statements concerning prospective financial statements is correct?

A. Only a financial forecast would normally be appropriate for limited use.

B. Only a financial projection would normally be appropriate for general use.

C. Any type of prospective financial statement would normally be appropriate for limited use.

D. Any type of prospective financial statement would normally be appropriate for general use.

Answer 41

C.

The standards state that any type of prospective financial statements that would be useful in the circumstances would normally be appropriate for limited use; therefore, the presentation may be a financial forecast or a financial projection. Only the financial forecast is appropriate for general use.

Question 42

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

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

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

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

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

Answer 42

C.

The standard report includes a statement that there usually will be differences between the forecasted and actual results. The remaining answer choices in “a”, “b”, and “d” would not be included in a standard report.

Question 43

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

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

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

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

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

Answer 43

B.

A standard compilation report of prospective financial statements requires a caveat that the prospective results may not be achieved. An explanation of the difference between a financial forecast and a financial projection is not needed. The practitioner assumes no responsibility to update the report for events and circumstances occurring after the date of the report. A compilation does not consider the entity’s internal controls.

Question 44

A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of

A. Statements on Standards for Accounting and Review Services (SSARS)

B. Statements on Auditing Standards (SAS)

C. Statements on Standards for Consulting Services (SSCS)

D. Statements on Standards for Attestation Engagements (SSAE)

Answer 44

D.

SSAE apply when a CPA in public practice is engaged to issue an examination, review, or agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party. SSARS apply to compilations and reviews of financial statements. SAS apply to audits to financial state­ments. SSCS apply to consulting engagements.

Question 45

When a CPA examines a client’s projected financial statements, the CPA’s report should

A. Explain the principal differences between historical and projected financial statements

B. State that the CPA performed procedures to evaluate management’s assumptions

C. Refer to the CPA’s auditor’s report on the historical financial statements

D. Include the CPA’s opinion on the client’s ability to continue as a going concern

Answer 45

B.

When a CPA examines a projection, the CPA should express an opinion on whether the assump­tions provide a reasonable basis for the projection given the hypothetical assumptions. The standard report includes language such as the following in the scope paragraph, …included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection.

Question 46

An nonissuer engaged a CPA to determine whether the client’s web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of

A. Statements on Assurance Standards

B. Statements on Standards for Attestation Engagements

C. Statements on Standards for Management Consulting Services

D. Statements on Auditing Standards

Answer 46

B.

Attestation engagements involve the issuance of a report on a subject matter or an assertion about a subject matter that is the responsibility of another party. Statements on Auditing Standards apply to financial statement audits of nonissuers. The other two alternatives do not exist.

Question 47

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC’s policies and procedures placed in operation as of a specific date. These policies and procedures are relevant to the schools’ internal control, so Drake’s report will be useful in providing the schools’ independent auditors with information necessary to plan their audits. Drake’s report expressing an opinion on CSC’s policies and procedures placed in operation as of a specific date should contain a(an)

A. Description of the scope and nature of Drake’s procedures

B. Statement that CSC’s management has disclosed to Drake all design deficiencies of which it is aware

C. Opinion on the operating effectiveness of CSC’s policies and procedures

D. Paragraph indicating the basis for Drake’s assessment of control risk

Answer 47

A.

One of the items that should be included in a service auditor’s report expressing an opinion on a description of policies and procedures placed in operation at a service organization is a description of the scope and nature of the service auditor’s procedures. A statement that management had disclosed all design deficiencies of which it is aware is not appropriate in the report. The report should also contain a disclaimer of opinion on the operating effectiveness of the policies and procedures. A paragraph indicating the basis for assessment of control risk is not appropriate in the report.