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1
Q

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

A

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

Accountants may perform other accounting services either in connection with a preparation, compilation, or review of unaudited financial statements of a nonissuer or separately.

2
Q

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

A

Issue a compilation report on the financial statements and include in the report that the statements are not designed for those who are not informed about such matters.

The accountant may compile financial statements that omit substantially all the disclosures required by an applicable reporting framework if the omission is not, to his or her knowledge, done to mislead those who might reasonably be expected to use the statements. When reporting on statements that omit substantially all disclosures, the accountant should include in the compilation report a paragraph stating that (1) management has elected to omit substantially all the disclosures, (2) the omitted disclosures might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters.

3
Q

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?

A

Communicating any material weaknesses discovered during the consideration of internal control.

A review does not involve obtaining an understanding of internal control or performing many other procedures ordinarily performed in an audit. Thus, the communication of material weaknesses is required in an audit, not a review.

4
Q

Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker’s attention that indicated substantial doubt as to Hall’s ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall’s financial statements. Which of the following statements best describes Baker’s reporting responsibility concerning this matter?

A

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

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

5
Q

Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARSs)?

A

Obtain a management representation letter.

The procedures performed during a review of financial statements in accordance with SSARSs include making inquiries, applying analytical procedures, and obtaining management representations.

6
Q

Which of the following accounting services is not a preparation service under the Statements on Standards for Accounting and Review Services?

I. Preparing a working trial balance
II. Preparing standard monthly journal entries

A

Both I & II.

Standard monthly journal entries and a working trial balance do not meet the definition of a financial statement. Thus, their preparation is not a service under SSARSs.

7
Q

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate

A

The type of opinion expressed previously.

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

8
Q

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

A

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

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

9
Q

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

printed on the accountant’s letterhead:
Manually signed by the accountant:

A

No
No

The compilation report need not be printed on the accountant’s letterhead or manually signed by the accountant. However, the report must be signed by the accounting firm or the accountant as appropriate. Thus, the signature may be manual, printed, or digital.

10
Q

An accountant began an audit of the financial statements of a nonissuer and was asked to change the engagement to a review because of a restriction on the scope of the audit. If the change is reasonably justified, the accountant’s review report should refer to the

Auditing procedures that may have been performed:
reason for change:

A

No
No

The accountant may conclude, based upon his or her professional judgment, that changing the engagement is reasonably justified. If (s)he then complies with the standards applicable to the changed engagement, (s)he should issue an appropriate review report. The report should not refer to (1) the original engagement, (2) any auditing procedures that may have been performed, or (3) scope limitations that resulted in the changed engagement (AR-C 90).

11
Q

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

A

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

A review does not require obtaining an understanding of internal control or assessing risks, testing accounting records, or performing other procedures ordinarily performed in an audit (AR-C 90).

12
Q

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

A

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

AR-C 70 describes the accountant’s responsibilities for preparation services. A preparation of financial statements includes preparation of personal financial statements for presentation with a financial plan.

13
Q

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

A

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

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

14
Q

SSARSs are primarily useful for the preparation, compilation, and review of financial statements for

A

private companies.

SSARSs describe the standards for preparation, compilation, and review of financial statements for nonissuers (private companies).

15
Q

An accountant performed a review engagement of the financial statements of a nonissuer oil and gas refinery. Which of the following would be included in the accountant’s documentation?

A

A memo on a discussion with the CFO regarding a suspected kiting scheme.

A memo of a discussion with the CFO about a potentially significant fraud revealed during review procedures should be included in the documentation.

16
Q

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

A

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

AR-C 80 describes the accountant’s procedures and reporting responsibilities for compilations. The accountant should obtain an understanding of the applicable financial reporting framework. This framework may be a special purpose framework, e.g, a(n) (1) cash basis, (2) tax basis, (3) regulatory basis, (4) contractual basis, or (5) other basis. An other basis uses a definite set of logical, reasonable criteria applied to all material items in the statements. The FASB’s guidance (ASC 274-10) for presenting personal financial statements (a statement of financial condition and a statement of changes in net worth) apparently meet the criteria of an other basis of accounting.

17
Q

An accountant normally accepts a SSARSs engagement if

A

Management, not the accountant, accepts responsibility for the financial statements.

The accountant should not accept an engagement if the accountant has reason to believe that (1) relevant ethical requirements cannot be satisfied, (2) the accountant’s preliminary understanding of the engagement circumstances indicates that information needed to perform the engagement is likely to be unavailable or unreliable, or (3) the accountant has cause to doubt management’s integrity. Moreover, management always must accept responsibility for the financial statements.

18
Q

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

A

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

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

19
Q

An accountant has been engaged to compile pro forma financial statements. During the accountant’s acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation?

A

The accountant should disclose the lack of independence in the accountant’s compilation report.

Pro forma financial information is intended to show the significant effects on historical financial information if an underlying transaction or event had occurred earlier. Example transactions are business combinations and dispositions of a significant part of a business. If an accountant is not independent, (s)he nevertheless may report on a compilation of pro forma financial information. But the lack of independence requires modification of the report (AR-C 120).

20
Q

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

A

Withdraw from the engagement.

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

21
Q

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

A

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

The accountant should read the financial statements after obtaining an understanding of the reporting framework and the entity’s significant accounting policies. The accountant then should consider whether the financial statements appear to be appropriate in form and free from obvious material misstatements. However, the accountant is not required to make inquires or perform other procedures to verify, corroborate, or review information supplied by the entity.

22
Q

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

A

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

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

23
Q

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

A

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

In a review, the accountant should possess or obtain a sufficient understanding of the industry and knowledge of the entity. The understanding of the industry includes the accounting principles and practices generally used. The knowledge of the entity includes an understanding of (1) the entity’s business and (2) its accounting principles and practices. The understanding should suffice to (1) identify the assertions in the financial statements having a greater likelihood of material misstatement and (2) design procedures to address those risks.

24
Q

Which of the following inquiry or analytical procedures ordinarily are performed in an engagement to review a nonissuer’s financial statements?

A

Inquiries concerning unusual or complex situations that may have an effect on the financial statements.

These procedures include inquiries about, among other things, unusual or complex situations that may affect the financial statements. These inquiries should be addressed to members of management with responsibility for financial and accounting matters

25
Q

In a preparation service, management’s omission of substantially all disclosures ordinarily included in the financial statements should be disclosed

A

On the face of the financial statements.

A notation that management has elected to omit substantially all disclosures should be placed on the face of the financial statements.

26
Q

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

A

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

A compilation report should be dated as of the date of completion of the compilation, and the accountant may request that each page of the financial statements include the statement “See Accountant’s Compilation Report.”

27
Q

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

I. Clearly indicated in the accountant’s report
II. Not undertaken with the intention of misleading the financial statement users

A

Both I & II.

An accountant may accept an engagement to compile financial statements that omit substantially all disclosures required by U.S. GAAP, provided the omission is clearly indicated in the report and is not, to his or her knowledge, intended to mislead those who might reasonably be expected to use such financial statements (AR-C 80).

28
Q

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

A

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

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

29
Q

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if

A

The scope of Smith’s inquiry and analytical procedures is not restricted.

An accountant may be asked to issue a review report on one financial statement, such as the balance sheet, and not on the other related financial statements, such as the statements of income, changes in shareholders’ equity, and cash flows. (S)he may do so if the scope of his or her inquiry and analytical procedures has not been restricted (AR-C 90).