Chapter 1 (Auditing)

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements? An accountant may accept an engagement to review the financial statements. An accountant may accept an engagement to compile the financial statements. An accountant may accept an engagement to either compile or review the financial statements. An accountant cannot accept an engagement to either compile or review the financial statements.

An accountant may accept an engagement to either compile or review the financial statements.

An accountant's understanding with the entity regarding the services to be performed during a compilation or review engagement should include which of the following? Management's responsibilities All of the answer choices are correct. The limitations of the engagement The objectives of the engagement

All of the answer choices are correct.

Which of the following is a false statement regarding communications between predecessor and successor accountants? If the prospective client refuses to permit the predecessor accountant to respond or the predecessor's response is limited due to unusual circumstances, the successor accountant should consider the reasons and implications in connection with acceptance of the engagement. A successor accountant is required to communicate with a predecessor accountant in connection with acceptance of a compilation or review engagement. The inquiries may be oral or written. Matters subject to inquiry include information that might bear on the integrity of management and the predecessor's knowledge of any fraud or noncompliance with laws and regulations perpetrated within the client.

A successor accountant is required to communicate with a predecessor accountant in connection with acceptance of a compilation or review engagement.

Which of the following statements would least likely appear in an auditor's engagement letter? Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. During the course of our audit, we may observe opportunities for economy in, or improved controls over, your operations. Management is responsible for the entity's financial statements. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the

After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement

AU-C 210.A23 includes other items which may be included, if applicable, but are not required in an engagement letter. These other items might include: All of the answer choices listed are correct. conditions under which access to audit documentation may be granted to others. additional services to be provided relating to regulatory requirements. arrangements regarding fees and billings.

All of the answer choices listed are correct.

Which of the following statements is correct concerning an auditor's responsibilities regarding financial statements? The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence. An auditor may not draft an entity's financial statements based on information from management's accounting system. An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion.

Which of the following matters does an auditor usually include in the engagement letter? Indications of negative cash flows from operating activities Identification of working capital deficiencies Arrangements regarding fees and billing Analytical procedures that the auditor plans to perform

Arrangements regarding fees and billing

Which of the following factors most likely would cause an auditor to question the integrity of management? Managerial decisions are dominated by one person who is also a stockholder. Management has an aggressive attitude toward financial reporting and meeting profit goals. Audit tests detect material fraud that was known to management, but not disclosed to the auditor. Weaknesses in internal control reported to the audit committee are not corrected by management.

Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

"At the conclusion of our audit, we will request certain written representations from you about the financial statements and related matters." What is the most likely source of this statement? Audit inquiry letter to legal counsel Management representation letter Communication with predecessor auditor Auditor's engagement letter

Auditor's engagement letter

"Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses." What is the most likely source of this statement? Partner's engagement review program Communication with predecessor auditor Auditor's engagement letter Management representation letter

Auditor's engagement letter

"The objective of our audit is to express an unmodified opinion on the financial statements although it is possible that facts or circumstances encountered may preclude us from expressing an unmodified opinion." What is the most likely source of this statement? Auditor's engagement letter Auditor's communication with the audit committee Auditor's report Letter for underwriters

Auditor's engagement letter

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonpublic entity. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the: 1) additional audit effort necessary to complete the audit. 2) reason given for Tech's request. Both I and II I only II only Neither I nor II

Both I and II

When making acceptance and continuance decisions with regard to client relationships and specific engagements, an accountant should consider which of the following regarding the integrity of a client? 1) The nature of the client's operations, including its business practices 2) Information concerning the attitude of the client's principal owners, key management, and those charged with governance toward such matters as aggressive interpretation of accounting standards and internal control over financial reporting I only II only Both I and II Neither I nor II

Both I and II

Which of the following circumstances would ordinarily preclude a CPA from issuing a review or a compilation report on the financial statements of a nonissuer client that had originally engaged the CPA to perform an audit? The CPA has been prohibited by the client from corresponding with the entity's legal counsel. The entity refuses to provide the CPA with a signed representation letter. I only Both I and II II only Neither I nor II

Both I and II

Which of the following would ordinarily be considered a reasonable basis for requesting a change from an audit or review engagement to a review or compilation engagement? 1) A change in circumstances that affects the entity's requirement for an audit (review) 2) A misunderstanding concerning the nature of an audit, review, or compilation I only II only Both I and II Neither I nor II

Both I and II

Which of the following services, if any, may an accountant who is not independent provide? Reviews, but not compilations No services Compilations, but not reviews Both compilations and reviews

Compilations, but not reviews

Which of the following factors most likely would cause an auditor not to accept a new audit engagement? The close proximity to the end of the entity's fiscal year An inability to perform preliminary analytical procedures before assessing control risk Concluding that the entity's management probably lacks integrity An inadequate understanding of the entity's internal control

Concluding that the entity's management probably lacks integrity

A successor auditor ordinarily should request to review the predecessor's working papers relating to: Contingencies: Yes; Internal control: Yes Contingencies: No; Internal control: Yes Contingencies: Yes; Internal control: No Contingencies: No; Internal control: No

Contingencies: Yes; Internal control: Yes

Which of the following activities by small-business clients best demonstrates management integrity in the absence of a written code of conduct? Emphasizing ethical behavior through oral communication and management example Reporting regularly to the board of directors about operations and finances Documenting internal control procedures using flowcharts rather than narratives Developing and maintaining formal descriptions of accounting procedures

Emphasizing ethical behavior through oral communication and management example

Which of the following activities would be most helpful to a CPA in deciding whether to accept a new audit client? Evaluating the CPA's ability to properly service the client Reviewing industry benchmarking data Considering the client's compensation methods Evaluating the most recent peer review of the client's previous auditor

Evaluating the CPA's ability to properly service the client

Cameron, CPA, is engaged to audit the financial statements of GreeneCo, a nonissuer. Prior to completion of the audit, GreeneCo requests Cameron to change the engagement to a compilation. Before accepting the change, Cameron should consider all of the following except: Greene's ability to continue as a going concern. the reason given for the client's request. the additional cost to complete the audit. the additional effort required to complete the audit.

Greene's ability to continue as a going concern.

Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? Hill, the successor auditor Post, the predecessor auditor Monday's controller or CFO The chairman of Monday's board of directors

Hill, the successor auditor

An accountant is not precluded from issuing a report with respect to financial statements for an entity with respect to which the accountant is not independent of which type of engagement? 1) Compilation of financial statements 2) Review of financial statements Both I and II II only Neither I nor II I only

I only

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement? Management acknowledges that the entity has had recurring operating losses. Management is unwilling to permit inquiry of its legal counsel. The CPA does not understand the entity's operations and industry. The CPA is unable to review the predecessor auditor's working papers.

Management is unwilling to permit inquiry of its legal counsel.

Which of the following is not a consideration in accepting or continuing a compilation or review engagement? Firm personnel have knowledge of relevant industries or subject matters or the ability to effectively gain the necessary knowledge. Firm personnel have experience with relevant regulatory or reporting requirements or the ability to effectively gain the necessary competencies. Individuals meeting the criteria and eligibility requirements to evaluate the operating effectiveness of the entity's internal controls are available, where applicable. Individuals meeting the criteria and eligibility requirements to perform an engagement quality control review are available, where applicable.

Individuals meeting the criteria and eligibility requirements to evaluate the operating effectiveness of the entity's internal controls are available, where applicable.

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements. Management has a reputation for consulting with several accounting firms about significant accounting issues. Internal control activities requiring the segregation of duties are subject to management override. The details of most recorded transactions are not available after a specified period of time.

It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? Management's refusal to permit the CPA to perform substantive tests before the year-end The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques Management's disregard of its responsibility to maintain an adequate internal control environment

Management's disregard of its responsibility to maintain an adequate internal control environment

Which of the following matters is generally included in an auditor's engagement letter? Management's responsibility for the entity's compliance with laws and regulations Management's vicarious liability for noncompliance with laws and regulations by its employees The auditor's responsibility to search for significant internal control deficiencies The factors to be considered in setting preliminary judgments about materiality

Management's responsibility for the entity's compliance with laws and regulations

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement? Facts known to the predecessor auditor that might bear on the integrity of management Disagreements between the predecessor auditor and management as to significant accounting policies and principles Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years The predecessor auditor's understanding of the reasons for the change of auditors

Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the: 1) scope limitation that caused the changed engagement. 2) original engagement that was agreed to. I only II only Neither I nor II Both I and II

Neither I nor II

Which type of engagement is an accountant precluded from accepting if he or she has no previous experience in the prospective client's industry? 1) Compilation of financial statements 2) Review of financial statements I only II only Both I and II Neither I nor II

Neither I nor II

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should: 1) refer to the scope limitation that caused the change. 2) describe the auditing procedures that have already been applied. I only II only Both I and II Neither I nor II

Neither I nor II

A CPA in public practice must be independent in fact and appearance when providing which of the following services? Compilation of personal financial statements Compilation of a financial forecast None of the answer choices are correct. Preparation of a tax return

None of the answer choices are correct.

If an accountant concludes, based on his or her professional judgment, that there is reasonable justification to change an audit or review engagement to a review or compilation engagement, and he or she has complied with the standards applicable to the changed engagement, his or her report should include descriptions of which of the following? Scope limitations that resulted in the changed engagement None of the answer choices are correct. Any auditing or review procedures that may have been performed The original engagement

None of the answer choices are correct.

Which of the following actions could an accountant take when engaged to compile a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? Make management inquiries and examine internal controls Express negative assurance on the financial statements Perform the engagement even though independence is compromised Perform analytical procedures

Perform the engagement even though independence is compromised

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year? Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of acceptance of the engagement Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory Assessment of control risk below the maximum level Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory

If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do? Withdraw from the engagement. Review the risk assessment of the opening balances of the financial statements. Disclaim an opinion due to a scope limitation. Discuss the matter with the client's legal counsel.

Review the risk assessment of the opening balances of the financial statements.

Which of the following statements most likely would be included in an engagement letter from an auditor to a client? The CPA firm will adjust the financial statements to correct misstatements before issuing a report. The CPA firm will involve information technology specialists in the performance of the audit. The CPA firm is responsible for ensuring that the client complies with applicable laws. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.

The CPA firm will involve information technology specialists in the performance of the audit.

Which of the following statements is correct regarding both a compilation and a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)? The CPA must obtain an understanding of the client's internal control. The CPA should assess fraud risk. The CPA must establish an understanding with the client regarding the services to be performed and document it in an engagement letter. The reports contain a statement that the engagement is substantially less in scope than an audit.

The CPA must establish an understanding with the client regarding the services to be performed and document it in an engagement letter.

Which of the following statements is correct regarding a review of a nonissuer's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? The accountant is required to assess the risk of fraud. It is not necessary for the accountant to obtain a management representation letter. An opinion is expressed in the review report. The accountant must be independent to issue the review report.

The accountant must be independent to issue the review report.

Which of the following applies to an accountant conducting a review of interim financial information? The accountant must obtain sufficient appropriate evidence by performing procedures to afford a reasonable basis for an opinion. The accountant must maintain independence in mental attitude in all matters relating to the engagement. The accountant must express an opinion on the financial statements taken as a whole. The accountant must indicate in the report those circumstances in which generally accepted accounting principles have not been consistently observed in the current period in relation to the preceding period.

The accountant must maintain independence in mental attitude in all matters relating to the engagement.

A nonissuer requests that a CPA change an audit engagement to a review engagement. If the accountant agrees to the change, how, if at all, should the accountant's review report be modified?The accountant should issue the review report without mentioning the change in engagement. The accountant should include in the review report the circumstances that resulted in the change in engagement. The accountant should include in the review report a disclaimer of an audit opinion. The accountant should include in the review report a reference to the original engagement but not the reason for the change.

The accountant should issue the review report without mentioning the change in engagement.

An accountant had begun to audit the financial statements of a nonpublic entity. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation? The accountant is prohibited from corresponding with the entity's legal counsel. The entity's management does not provide the accountant with a signed representation letter. The entity's principal creditors no longer require the entity to furnish audited financial statements. The accountant is prevented from examining the minutes of the board of directors' meetings.

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

Which of the following is not a consideration in accepting or continuing a compilation or review engagement? The firm is able to complete the engagement within the firm's time budget. The firm is able to complete the engagement within the reporting deadline. Specialists are available, if needed. The firm has sufficient personnel with the necessary capabilities and competencies.

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

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted? The integrity of the entity's management is suspect. Management fails to modify prescribed controls for changes in conditions. The entity has no formal written code of conduct. Procedures requiring segregation of duties are subject to management override.

The integrity of the entity's management is suspect.

A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to perform the engagement? The practitioner takes responsibility for the sufficiency of the agreed-upon procedures. The practitioner and specified parties agree upon the procedures to be performed by the practitioner. The practitioner reports on the criteria to be used in the determination of findings.

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

Which of the following factors most likely would cause a CPA to not accept a new audit engagement? The prospective client has already completed its physical inventory count. The prospective client is unwilling to make all financial records available to the CPA. The CPA is unable to review the predecessor auditor's working papers. The CPA lacks an understanding of the prospective client's operations and industry.

The prospective client is unwilling to make all financial records available to the CPA.

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? The inability to review the predecessor auditor's working papers The prospective client's unwillingness to permit inquiry of its legal counsel The indications that management has not investigated employees in key positions before hiring them The CPA's lack of understanding of the prospective client's operations and industry

The prospective client's unwillingness to permit inquiry of its legal counsel

The understanding with the client regarding a financial statement audit generally includes which of the following matters? The responsibilities of the auditor The expected opinion to be issued The preliminary judgment about materiality The contingency fee structure

The responsibilities of the auditor

Which of the following is correct regarding the communication between successor and predecessor auditors? The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor. The successor auditor should contact the predecessor auditor prior to proposing an audit engagement. The client should be present during the communications between the predecessor auditor and the successor auditor. The successor and predecessor auditors should communicate with each other in writing regarding potential problems.

The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor.

Which of the following conditions most likely would pose the greatest risk in accepting a new integrated audit engagement? Staff will need to be rescheduled to cover this new client. There will be a client-imposed scope limitation. The firm will have to hire a specialist in one audit area. The client's financial reporting system has been in place for 10 years.

There will be a client-imposed scope limitation.

A successor auditor is required to attempt communication with the predecessor auditor prior to: performing test of controls. making a proposal for the audit engagement. testing beginning balances for the current year. accepting the engagement

accepting the engagement

A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." The above passage is most likely from: a letter of audit inquiry. a comfort letter. a representation letter. an engagement letter.

an engagement letter.

An auditor's document includes the following statement: "Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, including those caused by error or fraud, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations. However, we will inform the appropriate level of management of any material errors and any evidence or information that comes to our attention during the performance of our review procedures that indicates fraud may have occurred." The above passage is most likely from: the emphasis-of-matter or other-matter paragraph of a "subject to" qualified auditor's report. an engagement letter. a comfort letter. the emphasis-of-matter or other-matter paragraph of a compliance report on a governmental entity subject to GAO standards.

an engagement letter.

Accepting an engagement to compile an entity's financial projection most likely would be inappropriate if the projection is to be included in: a comprehensive document to be used in negotiating a new labor contract. an offering statement of the entity's initial public offering of common stock. a mortgage application for the purpose of expanding the entity's facilities. a report to the audit committee that is not sent to the stockholders.

an offering statement of the entity's initial public offering of common stock.

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's working paper analyses relating to: contingencies. balance sheet accounts. both contingencies and balance sheet accounts. neither contingencies nor balance sheet accounts.

both contingencies and balance sheet accounts.

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding: disagreements with management about auditing procedures. the competency of the client's internal audit staff. specialized accounting principles of the client's industry. the uncertainty inherent in applying sampling procedures.

disagreements with management about auditing procedures

A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client's management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except: issue an accountant's review report with a separate paragraph discussing the change in engagement scope. consider the additional audit effort and cost required to complete the audit. evaluate the possibility that financial statement information affected by the limitation on work to be performed may be incorrect or incomplete. consider the reason given for the client's request and assess whether the request is reasonable.

issue an accountant's review report with a separate paragraph discussing the change in engagement scope

An auditor's engagement letter most likely would include a statement that: limits the auditor's responsibility to detect errors and fraud. describes the auditor's responsibility to evaluate going concern issues. lists potential significant deficiencies discovered during the prior year's audit. explains the analytical procedures that the auditor expects to apply.

limits the auditor's responsibility to detect errors and fraud.

An auditor's engagement letter most likely would include: management's acknowledgment of its responsibility for maintaining effective internal control. the auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. a reminder that the board of directors is responsible for employee noncompliance with laws and regulations. a request for permission to contact the client's lawyer for assistance in identifying litigation, claims, and assessments.

management's acknowledgment of its responsibility for maintaining effective internal contro

An auditor's engagement letter most likely would include a statement regarding: internal control activities that would reduce the auditor's assessment of control risk. materiality matters that could modify the auditor's preliminary assessment of fraud risk. management's responsibility to provide certain written representations to the auditor. conditions under which the auditor may modify the preliminary judgment about materiality.

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

As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only its balance sheet. Under these circumstances, the CPA: may audit only Maxim's balance sheet if the CPA disclaims an opinion on the other financial statements. may audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited. may not audit only Maxim's balance sheet if the amount of the loan is material to the financial statements taken as a whole. may not audit only Maxim's balance sheet if Maxim is a nonissuer.

may audit only Maxim's balance sheet if access to the information underlying the basic financial statements is not limited.

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to: minimize the likelihood of associating with clients whose management lacks integrity. document objective criteria for the CPA firm's responses to peer review comments. provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities. monitor the risk factors concerning misstatements arising from the misappropriation of assets.

minimize the likelihood of associating with clients whose management lacks integrity.

An accountant agrees to the client's request to change an engagement from a review to a compilation of financial statements. The compilation report should include: reference to a departure from GAAS. information about review procedures already performed. scope limitations that may have resulted in the change of engagement. no reference to the original engagement.

no reference to the original engagement.

If requested to perform a compilation engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is: not independent and, therefore, may not be associated with the financial statements. not independent and, therefore, may not issue a compilation report. independent because the financial interest in the nonissuer is immaterial. not independent and, therefore, may issue a compilation report, but may not issue a review report.

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

The procedure, "The entity's successor accountant should communicate with the predecessor accountant to obtain access to the predecessor's workpapers," is: required for a compilation only. not required for a compilation but required for a review. not required for either a compilation or a review. required for both a review and compilation.

not required for either a compilation or a review.

Part of an auditor's process of establishing whether the preconditions for an audit are present involves obtaining management's acknowledgement of its responsibility for all of the following except: providing the auditor with restricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. providing the auditor with access to all information that is relevant to the preparation and fair presentation of the financial statements. the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements. the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework.

providing the auditor with restricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence

In auditing the financial statements of Star Corp., Land, CPA, discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should: request Star to reissue the prior year's financial statements with the appropriate revisions. notify Tell about the information and make inquiries about the integrity of Star's management. notify Star's audit committee and stockholders that the prior year's financial statements cannot be relied on. request Star to arrange a meeting among the three parties to resolve the matter.

request Star to arrange a meeting among the three parties to resolve the matter.

A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these circumstances, the CPA's review report should include a: statement that a review is substantially less in scope than an audit. reference to the scope limitation that caused the changed engagement. reference to the CPA's justification for agreeing to change the engagement. description of the auditing procedures that were completed before the engagement was changed.

statement that a review is substantially less in scope than an audit.

An accountant's understanding with the entity regarding the services to be performed during a compilation or review engagement should include all of the following except: the accountant will inform the appropriate level of management of any material errors. the accountant will inform the appropriate level of management of any evidence or information that comes to the accountant's attention that fraud or noncompliance with laws and regulations may have occurred. the accountant will plan and perform the engagement to obtain reasonable assurance about whether the financial statements are free of material misstatement. the engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations.

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

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes: the auditor's responsibility for ensuring that the appropriate level of management is aware of any significant deficiencies that come to the auditor's attention. management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors. management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

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

AU-C 210.10 ("Agreement on Audit Engagement Terms") requires a CPA to establish an understanding with the client for each engagement and outline the details of that understanding. The understanding should address certain areas. These areas do not include: the objective and scope of the engagement. the responsibilities of management. the fee for the engagement. the limitations of the engagement.

the fee for the engagement.

Quality control policies and procedures that are established to decide whether to accept a new client should provide the CPA firm with reasonable assurance that: the likelihood of associating with clients whose management lacks integrity is minimized. client-prepared schedules that are necessary for the engagement are completed on a timely basis. sufficient corroborating evidence to support the financial statement assertions is available. the CPA firm's duty to the public concerning the acceptance of new clients is satisfied.

the likelihood of associating with clients whose management lacks integrity is minimized

The successor auditor may request information from the predecessor auditor on any of the following items, except: management's integrity. communications to those charged with governance regarding fraud. the predecessor auditor's office policies. the reasons for the change of auditors.

the predecessor auditor's office policies.

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonpublic entity (nonissuer), and not on the other related financial statements. Smith may do so only if: Smith is not aware of any material modifications needed for the balance sheet to conform with GAAP. Smith compiles and reports on the related statements of income, retained earnings, and cash flows. the scope of Smith's inquiry and analytical procedures is not restricted. Cone is a new client, and Smith accepts the engagement after the end of Cone's fiscal year.

the scope of Smith's inquiry and analytical procedures is not restricted.

An accountant's compilation report on a financial projection that does not contain a range should include a statement that: the compilation includes an evaluation of the support for the assumptions underlying the projection. the projection is limited to presenting, in the form of financial statements, information that is the accountant's representation. the accountant's responsibility to update the report for future events and circumstances is limited to one year. there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected.

there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected.

The purpose of an engagement letter is: to help avoid misunderstandings with respect to the engagement. to release the auditor from liability for errors and irregularities not detected by the audit. to obtain permission to communicate with the predecessor auditor. to obtain assurances from management regarding assertions in the financial statements.

to help avoid misunderstandings with respect to the engagement.

When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with generally accepted accounting principles, the accountant should: understand the accounting principles of the industry in which the entity operates. assess the risk that a material misstatement could occur in a financial statement assertion. confirm with the entity's lawyer that material loss contingencies are disclosed. develop audit programs to determine whether the entity's financial statements are fairly presented.

understand the accounting principles of the industry in which the entity operates.

A successor auditor makes specific and reasonable inquiries of the predecessor auditor regarding the predecessor's: understanding of the reasons for the change in auditors. methodology used in applying sampling techniques. opinion on subsequent events that have occurred since the balance sheet date. perception of the competency and reliance on the client's legal department.

understanding of the reasons for the change in auditors.

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's: opinion of any subsequent events occurring since the predecessor's audit report was issued. understanding of the reasons for the change of auditors. awareness of the consistency in the application of GAAP between periods. evaluation of all matters of continuing accounting significance.

understanding of the reasons for the change of auditors.

When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except: whether there has been any turnover of the component's board members. whether a separate audit report is to be issued on the component. the degree of independence of the component management from the parent entity. the legal requirements regarding the appointment of the auditor.

whether there has been any turnover of the component's board members.

An accountant has been engaged to compile the financial statements of a nonissuer. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should: obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions. inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use. withdraw from the engagement and provide no further service concerning these financial statements. quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report.

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

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: issue a modified review report, provided the entity agrees that the financial statements will not be used to obtain credit. withdraw from the engagement and provide no further services concerning these financial statements. determine the effects of the departures from GAAP and issue a special report on the financial statements. inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use.

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

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: engagement letter. working papers. engagement letter and working papers. None of the answer choices are correct.

working papers.