ACC 580 SU 2, 18, 19, 20

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 and II. b. II only. c. Neither I nor II. d. I only.

a. Both I and 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.

Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client? a. A policy-making position in the client's finance division. b. A marketing position related to the client's primary products. c. A senior position in the client's human resources division. d. A staff position in the client's research and development division.

a. A policy-making position in the client's finance division. Significant influence is defined in the FASB's Accounting Standards Codification. It means the ability to exercise significant influence over the financial, operating, or accounting policies of the entity, for example, by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director or (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer, or chief accounting officer. Thus, a policy-maker in the finance division has significant influence.

Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARSs)? a. A review provides an accountant with a basis for expressing limited assurance on the financial statements. b. An accountant must obtain an understanding of the client's internal control when performing a review. c. An accountant need not establish an understanding with the client in writing. d. A review report contains an accountant's opinion of the financial statements taken as a whole.

a. A review provides an accountant with a basis for expressing limited assurance on the financial statements. Accountants undertake review engagements to express limited assurance that they are not aware of any material modifications that should be made to the statements for them to conform with the applicable reporting framework (AR-C 90).

Which of the following statements should be included in a practitioner's report on the application of agreed-upon procedures? a. A statement referring to standards established by the AICPA. b. A statement that the practitioner performed an examination of prospective financial statements. c. A statement of negative assurance based on procedures performed. d. A statement of scope limitation that will qualify the practitioner's opinion.

a. A statement referring to standards established by the AICPA. An agreed-upon procedures engagement is an attestation engagement in which a practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter. A statement referring to the standards established by the AICPA is included in all practitioner reports on attestation engagements. Thus, it should be included in a practitioner's report on the application of agreed-upon procedures.

Which of the following statements concerning prospective financial statements is true? a. Any type of prospective financial statements 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 statements would normally be appropriate for general use. d. Only a financial forecast would normally be appropriate for limited use.

a. Any type of prospective financial statements would normally be appropriate for limited use. Limited use of PFSs means use by the responsible party and those with whom that party is negotiating directly, e.g., in a submission to a regulatory body or in negotiations for a bank loan. These third parties can communicate directly with the responsible party. Consequently, any PFSs useful in the circumstances are appropriate for limited use.

In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsification of accounting records directly to a federal inspector general when the falsification is a. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter. b. Discovered after the auditor's report has been made available to the federal inspector general and to the public. c. Voluntarily disclosed to the auditor by low-level personnel as a result of the auditor's inquiries. d. Reported by the auditor to the audit committee as a significant deficiency in internal control.

a. Communicated by the auditor to the auditee and the auditee fails to make a required report of the matter. Under Government Auditing Standards, auditors should report fraud, noncompliance, and abuse directly to parties outside the auditee (for example, to a federal inspector general or a state attorney general) in two circumstances. These requirements are in addition to any legal requirements for direct reporting. First, if auditors have communicated such fraud, noncompliance, or abuse to the auditee and (s)he fails to report them, the auditors should communicate their awareness of that failure to the auditee's governing body. If the auditee does not make the required report as soon as practicable after the auditor's communication with its governing body, the auditors should report the fraud, noncompliance, or abuse directly to the external party specified in the law or regulation. Second, management is responsible for taking timely and appropriate steps to remedy fraud, noncompliance, or abuse that auditors report to it. When fraud, noncompliance, or abuse involves assistance received directly or indirectly from a government agency, auditors may have a duty to report it directly if management fails to take remedial steps. If auditors conclude that such failure is likely to cause them to depart from the standard report or resign from the audit, they should communicate that conclusion to the auditee's governing body. Then, if the auditee does not report the fraud, noncompliance, or abuse as soon as practicable to the entity that provided the government assistance, the auditors should report directly to that entity.

A CPA should not express negative or limited assurance in a standard a. Compilation report on financial statements of a nonissuer. b. Review report on interim financial statements of an issuer. c. Comfort letter on financial information included in a registration statement of an issuer. d. Review report on financial statements of a nonissuer.

a. Compilation report on financial statements of a nonissuer. The compilation report states that the financial statements have not been audited or reviewed and, accordingly, the accountant does not express an opinion or any other form of assurance on them (AR-C 80).

Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer? a. Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles. b. Determine whether there is substantial doubt about the entity's ability to continue as a going concern. c. Make inquiries of the employees and senior management regarding transactions with related parties. d. Scan the entity's records for the period just after the balance sheet date to identify subsequent events that require disclosure.

a. Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles. The accountant should read the financial statements to determine whether they are in appropriate form and free of obvious material misstatements.

At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers? a. Every 3 years. b. Annually. c. Every 2 years. d. As requested by the firm.

a. Every 3 years. A registered public accounting firm is inspected at least once every 3 calendar years. This requirement must be met beginning with the 3-year period following the calendar year in which its application for registration with the PCAOB is approved. But the requirement does not apply unless the firm, during any of the 3 previous calendar years, (1) issued an audit report for at least 1, but no more than 100, issuers or (2) was substantially involved in preparing or providing an audit report for at least one issuer.

Which of the following professional services would be considered an attestation engagement? a. Examining the financial statements for one year in the future based on client expectations and predictions. b. Providing financial analysis, planning, and capital acquisition services as a part-time, in-house controller. c. Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service. d. Advising management in the selection of a computer system to meet business needs.

a. Examining the financial statements for one year in the future based on client expectations and predictions. Statements on Standards for Attestation Engagements (SSAEs) apply generally to performance of an examination, review, or agreed-upon procedures attestation engagement to report on subject matter, or an assertion about it, that is the responsibility of another party. The subject matter may be prospective financial statements (PFSs). PFSs include financial forecasts and projections. A forecast is based on the responsible party's assumptions reflecting the conditions it expects to exist and the course of action it expects to take. Furthermore, a review is not permitted to be performed with regard to a forecast or projection. However, a practitioner may examine or apply agreed-upon procedures to PFSs.

A practitioner in an attestation review engagement intends to express a qualified conclusion in the report based on a misstatement that is material but not pervasive. The practitioner should use the language a. Except for the effects. b. Subject to the outcome. c. Scope limitation. d. The responsible party's assertion.

a. Except for the effects. If the subject matter is misstated and not corrected, the practitioner should determine whether an "except for the effects" qualification is appropriate. A qualified conclusion normally is expressed when the misstatement is material but not pervasive. In this case, the assurance should be directly on the subject matter, not on the assertion.

The report on a financial statement audit performed in accordance with generally accepted governmental auditing standards (GAGAS) should I. Describe the scope of tests of compliance with laws and regulations II. Refer to a separate report describing the scope of compliance tests III. Provide positive assurance about compliance with laws and regulations a. I or II. b. I and III. c. II only. d. II and III.

a. I or II. The report (or separate reports) on financial statements should describe the scope of the auditor's testing of internal control over financial reporting and compliance with laws and regulations and grant or contract provisions. The report should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and on compliance. Auditors should report all of the following: (1) significant deficiencies and material weaknesses in internal control, (2) instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance, (3) noncompliance with provisions of contracts or grant agreements that has a material effect on the audit, and (4) abuse that has a material effect on the audit. But an opinion may be expressed if sufficient appropriate evidence is obtained.

A practitioner accepted an engagement to examine the entity's compliance with a contractual agreement. The practitioner should perform the following: I. Plan the engagement. II. Perform procedures to provide reasonable assurance of detecting material noncompliance. III. Consider subsequent events. IV. Create a report containing limited assurance whether the entity is in compliance. a. I, II, and III. b. II, III, and IV. c. I and IV. d. I, II, III, and IV.

a. I, II, and III. The following summarizes the practitioner's procedures in a compliance attestation examination engagement:Obtain an understanding of the specified compliance requirements.Obtain an understanding of the relevant portions of internal control over compliance to plan the engagement and to assess control risk.Obtain a written representation letter from the responsible party.Form an opinion.

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. Report the differences between agreed-upon and audit procedures. c. Express negative assurance on findings of work performed. b. Assess whether the procedures meet the needs of the parties.

a. Issue a report on findings based on specified procedures performed. An agreed-upon procedures engagement is one in which a practitioner is engaged by a client to issue a report of findings based on specific procedures performed on subject matter.

When an accountant attaches a compilation report to a nonissuer's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are a. Not designed for those who are uninformed about the omitted disclosures. b. Prepared in conformity with a special purpose framework other than GAAP. c. Not compiled in accordance with Statements on Standards for Accounting and Review Services. d. Single-purpose financial statements that are not comparable to those of prior periods.

a. Not designed for those who are uninformed about the omitted disclosures. When disclosures are omitted, a paragraph is added to the compilation report stating that (1) management has elected to omit substantially all disclosures required by GAAP and (2), if the omissions were included, they might influence the users' conclusions.

Which of the following services, if any, may an accountant who is not independent provide? a. Preparations and compilations but not reviews. b. Reviews but not preparations. c. Both compilations and reviews. d. No services.

a. Preparations and compilations but not reviews. A compilation provides no assurance. Thus, the accountant need not be independent. The report describes the compilation service and disclaims an opinion or conclusion or any other form of assurance on the financial statements. The accountant discloses a lack of independence in the report. An accountant who prepares financial statements need not be, or determine whether (s)he is, independent. Also, no report is required.

The auditor's responsibilities under the Single Audit Act include a. Reporting on compliance with grant requirements. b. Expressing an opinion on internal control. c. Designating the cognizant agency. d. Submitting a data collection form.

a. Reporting on compliance with grant requirements. Under the Single Audit Act, audit reporting should include an opinion on the fairness of the financial statements, a report on internal control, and a report on compliance with grant requirements.

The AICPA Code of Professional Conduct does not include enforceable Rules of Conduct on which of the following? a. Responsibilities to colleagues. b. Accounting principles. c. Professional competence and due professional care. d. Independence and integrity and objectivity.

a. Responsibilities to colleagues. The Code previously included two rules regarding colleagues, but they were deleted after threats of antitrust actions against the profession by the Federal Trade Commission and the U.S. Justice Department. The principles express the profession's recognition of its responsibilities to colleagues as well as to the public and clients, but adherence to them is not mandatory.

The appearance of independence of a CPA, or that CPA's firm, is most likely to be impaired if the CPA a. Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation. b. Accepts a token gift from an attest client. c. Provides appraisal, valuation, or actuarial services for an attest client. d. Joins a trade association, which is an attest client, and serves in a nonmanagement capacity.

a. Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation. Independence is impaired with regard to the client if, during the period of the professional engagement, a covered member was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client, and the value of the estate's holdings in the client exceeded 10% of the estate's assets. Mere designation as a trustee or executor does not impair independence, but actual service does.

An auditor determines that a client who received a federal grant fraudulently reported information to the federal government. The client's management refuses to acknowledge the fraud. Which of the following parties should the auditor contact first? a. The agency that provided the grant. b. The recipients of the client's services. c. The state attorney general's office. d. The state accountancy board.

a. The agency that provided the grant. Inconsequential fraud should be communicated to the appropriate level of management. Other fraud should be reported directly to those charged with governance. In determining a responsibility to report fraud outside the entity, the auditor's legal obligation may, in some circumstances, override the duty of confidentiality. Thus, the auditor should contact the agency that provided the grant because management refuses to acknowledge the fraud.

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations? a. The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client. b. The auditor's grandparent was in an accounting role at the audit client and ended employment before the period under audit began. c. The auditor's cousin has an insurance policy obtained from the issuer before it became an audit client. d. The auditor has an automobile loan at standard terms from the audit client that is collateralized by the automobile.

a. The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client. Under SEC independence rules, certain financial relationships prevent an auditor from being independent of the client. For example, an auditor is not independent if (1) the auditor has a direct (or material indirect) investment in an entity, (2) the entity has an investment in the client that is material to the entity, or (3) the entity can exercise significant influence over the client.

The Single Audit Act is intended to be the definitive legislation concerning the audit of federal awards administered by nonfederal entities. Which of the following statements is a false statement about the act? a. The auditor must designate one of the grant providers as a cognizant agency to act as a liaison between the auditee and the federal agencies providing funds. b. The act requires federal auditors to rely on single audit findings, to base any supplemental auditing on them, and to pay any additional auditing costs. c. The single audit concept changes the focus from individual grants to grant recipients. d. Audit reporting should cover an opinion on the fairness of the financial statements, a report on internal control, and a report on compliance with grant requirements.

a. The auditor must designate one of the grant providers as a cognizant agency to act as a liaison between the auditee and the federal agencies providing funds. A recipient expending more than $50 million per year in federal awards must have a cognizant agency for audit. The designated agency is the federal awarding agency that provides the predominant amount of direct funding, unless the OMB specifies another cognizant agency or the cognizant agency reassigns cognizance to another federal awarding agency. The cognizant agency overseeing the audit process acts as a liaison among the auditor, the auditee, and the granting agencies. Guidance for the application of the Single Audit Act is provided in OMB Audit Requirements for Federal Awards (2 CFR 200). Generally accepted governmental auditing standards (GAGAS) and generally accepted auditing standards (GAAS) apply when appropriate.

In which of the following situations will a practitioner disclaim an opinion on an examination of prospective financial statements? a. The practitioner was not able to perform certain procedures deemed necessary. b. The significant assumptions do not provide a reasonable basis for the statements. c. The prospective financial statements fail to disclose significant assumptions. d. The prospective financial statements depart from AICPA presentation guidelines.

a. The practitioner was not able to perform certain procedures deemed necessary. If the auditor becomes aware of a management-imposed scope limitation after accepting the engagement, a disclaimer of opinion should be issued.

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met? a. The prospective financial statements include a summary of significant assumptions. b. The client agrees that the practitioner will decide appropriate procedures to be performed. c. Use of the agreed-upon procedures report is not restricted. d. The practitioner sets the criteria to be used in the determination of findings.

a. The prospective financial statements include a summary of significant assumptions. A practitioner may accept an engagement to apply agreed-upon procedures to PFSs if the practitioner is independent and (1) the specified parties agree to the procedures and take responsibility for their sufficiency, (2) an alert restricts report use to specified parties, and (3) the statements include a summary of significant assumptions.

When a CPA is associated with financial statements that do not comply with promulgated GAAP because the statements would be misleading without the departure, the CPA is not required to disclose a. The reason the departure does not have a material effect on the statements. b. The departure. c. The approximate effects of the departure in comparison to the application of GAAP. d. The reasons compliance would have been misleading.

a. The reason the departure does not have a material effect on the statements. Under the Accounting Principles Rule, a CPA who performs services that require representations of conformity with promulgated GAAP is required to describe (1) the departure, (2) the approximate effects of the departure (if practicable), and (3) the reasons compliance would result in misleading financial statements. But this requirement applies only if the effect on the statements or data is material.

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA's ability a. To maintain an impartial attitude on all matters that come under the CPA's review. b. To be unyielding in all matters dealing with auditing procedures. c. To independently choose between alternate accounting principles and auditing standards. d. To independently distinguish between accounting practices that are acceptable and those that are not.

a. To maintain an impartial attitude on all matters that come under the CPA's review. According to the Principles, "Objectivity is a state of mind, a quality that lends itself to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest."

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession? a. A CPA fails to give a client copies of the CPA's workpapers related to a completed and issued work product upon the client's request because the client has not paid fees payable to the CPA for the work product. b. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA. c. A CPA signs a document containing immaterial, false, and misleading information or permits or directs another CPA to do so. d. A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it.

b. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA. Solicitation or knowing disclosure of May 1996 or later CPA examination questions or answers without written authorization by the AICPA is an act discreditable to the profession.

Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards (the Yellow Book)? a. An auditor should report recommendations for actions to correct problems and improve operations. b. An auditor should report on the scope of the auditor's testing of compliance with laws and regulations. c. An auditor should determine the extent to which the entity's programs achieve the desired results. d. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable.

b. An auditor should report on the scope of the auditor's testing of compliance with laws and regulations. According to additional government standards for financial statement audits, the report on the financial statements should either (1) describe the scope of the auditor's testing of compliance with laws and regulations and internal controls over financial reporting and present the results of those tests or (2) refer to separate report(s) containing that information. If the scope of the work performed is sufficient, an opinion on internal control and compliance can be expressed. In presenting the results of those tests, auditors should report (1) significant deficiencies and material weaknesses in internal control; (2) instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance; (3) noncompliance with provisions of contracts or grant agreements that has a material effect on the audit; and (4) abuse that has a material effect on the audit. In some circumstances, auditors should report fraud and noncompliance directly to parties external to the audited entity.

According to an additional requirement in Government Auditing Standards, the elements of a finding for a financial audit include a. Criteria, condition, and an opinion. b. Condition, cause, and effect. c. Condition, effect, and an opinion. d. Criteria, report distribution, and an opinion.

b. Condition, cause, and effect. The elements needed for a finding depend on the objectives of the audit but include criteria, condition, cause, and effect or potential effect. The criteria element is the required or desired state (e.g., law or contract) or expectation with respect to the program or operation. The condition element is a situation that exists. The cause element is the reason or explanation for the condition. The effect or potential effect element is a clear, logical link to establish the impact or potential impact of the difference between the situation that exists (condition) and the required or desired state (criteria).

When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on I. Positive aspects of the program applicable to audit objectives II. The scope of the auditor's testing of internal controls a. Both I and II. b. II only. c. I only. d. Neither I nor II.

b. II only. Government Auditing Standards imposes more stringent reporting requirements than GAAS. Under GAGAS, the report on the financial statements should describe (in the same report or a separate report) the scope of the auditor's testing of (1) compliance with laws and regulations and grant or contract provisions and (2) internal control over financial reporting. Auditors also should state whether the tests provided sufficient appropriate evidence to support opinions on internal control and compliance. The auditors should report (1) significant deficiencies and material weaknesses in internal control; (2) instances of fraud and noncompliance with provisions of laws or regulations that have a material effect on the audit and any other instances that warrant the attention of those charged with governance; (3) noncompliance with provisions of contracts or grant agreements that has a material effect on the audit; and (4) abuse that has a material effect on the audit. In some circumstances, auditors should report fraud, noncompliance, or abuse directly to parties external to the audited entity. The report on internal control should identify significant deficiencies and material weaknesses but need not provide any assurance on internal control design or effectiveness. Accomplishments of the program, especially those management improvements in one area that may be applicable elsewhere, should be reported in a performance audit, not a financial audit, if they relate to audit objectives.

Generally, management's discussion and analysis (MD&A) may be presented a. Only in an annual report. b. In documents filed with the SEC. c. Orally. d. On a quarterly basis.

b. In documents filed with the SEC. MD&A may be presented in an annual report or other documents filed with the SEC.

In an audit of an entity's compliance with applicable compliance requirements, an auditor obtains written representations from management acknowledging a. Expression of positive assurance to the auditor that the entity complied with all applicable compliance requirements. b. Its responsibilities for compliance, including disclosure of noncompliance. c. Employment of internal auditors who can report their findings, opinions, and conclusions objectively. d. Implementation of controls designed to detect all noncompliance.

b. Its responsibilities for compliance, including disclosure of noncompliance. The auditor obtains written representations from management about its responsibilities for (1) understanding and complying with the compliance requirements and (2) establishing and maintaining controls that provide reasonable assurance that the entity administers government programs in accordance with the compliance requirements. Among other things, the auditor also requests representations that management has disclosed all known noncompliance with the applicable compliance requirements, including that subsequent to the period covered by the auditor's report.

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position? a. Four years. b. One year. c. Two years. d. Three years.

b. One year. The SEC prohibits a member of an issuer's audit engagement team from working for the registrant (the issuer) in a key position within 1 year of participating in the audit of that issuer.

Which of the following is prohibited by the AICPA Code of Professional Conduct? a. Practice of public accounting in the form of a professional corporation that uses a firm name indicating specialization. b. Prematurely expressing an opinion based on an audit because of time pressures from the client. c. Failing to provide working papers to the client after a request has been made. d. Use of the partnership name for a limited period by one of the partners in a public accounting firm after the death or withdrawal of all other partners.

b. Prematurely expressing an opinion based on an audit because of time pressures from the client. The Integrity and Objectivity Rule prohibits a member from subordinating his or her judgment to others. The auditor must complete the audit prior to signing the report.

Which of the following presents what the effects on historical financial data might have been if a consummated transaction had occurred at an earlier date? a.Interim financial information. b. Pro forma financial information. c. Prospective financial statements. d. A financial projection.

b. Pro forma financial information. PFFI shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization.

Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should a. Inquire of the client's personnel whether the financial statements include all assets and liabilities. b. Read the financial statements to consider whether the financial statements are free from obvious material errors. c. Corroborate at least a sample of the assertions management has embodied in the financial statements. d. Apply analytical procedures to selected financial data to discover any material misstatements.

b. Read the financial statements to consider whether the financial statements are free from obvious material errors. Before issuing the report, the accountant should read the compiled financial statements and consider whether they appear to be appropriate in form and free from obvious material errors. For example, arithmetic or clerical mistakes or mistakes in the application of accounting principles (AR-C 80).

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer? a. Making inquiries of management about actions taken at meetings of the shareholders and the board of directors. b. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles. c. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components. d. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.

b. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles. In a compilation, the accountant should read the compiled financial statements and consider whether the statements appear to be in appropriate form and free from obvious material errors. Examples are arithmetic or clerical mistakes or mistakes in the application of accounting principles (AR-C 80).

In a financial statement audit in accordance with Government Auditing Standards, an auditor should report on the auditor's tests of the entity's compliance with applicable laws and regulations. Thus, the audit should be designed to provide a. Limited assurance that internal control designed by management will prevent or detect errors, fraud, and noncompliance. b. Reasonable assurance of detecting misstatements that are material to the financial statements. c. Prevent the auditor from expressing an opinion. d. Positive assurance that the internal controls tested by the auditor are operating as prescribed.

b. Reasonable assurance of detecting misstatements that are material to the financial statements. According to Government Auditing Standards for financial audits, the auditor should test compliance with applicable laws and regulations. As part of the process, the auditor should design the audit to provide reasonable assurance of detecting errors, fraud, and noncompliance that could have a material effect on the financial statements.

According to the ethical standards of the profession, which of the following acts generally is prohibited? a. Revealing client tax returns to a prospective purchaser of the CPA's practice. b. Retaining client-provided records after the client has demanded their return. c. Accepting a contingent fee for representing a client in connection with obtaining a private letter from the Internal Revenue Service. d. Issuing a modified report explaining the CPA's failure to follow a governmental regulatory agency's standards when conducting an attest service for a client.

b. Retaining client-provided records after the client has demanded their return. Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records, the ethical standard still applies.

The AICPA Code of Professional Conduct requires compliance with accounting principles promulgated by the bodies designated by the AICPA Council to establish such principles. The literature considered officially established accounting principles includes a. CPA firm position papers. b. The FASB Accounting Standards Codification. c. Statements on Auditing Standards. d. Accounting textbooks.

b. The FASB Accounting Standards Codification. The FASB Accounting Standards Codification is the source of authoritative guidance for all public and nonpublic nongovernmental entities.

Which of the following circumstances would generally require an accountant to decline to perform a compilation of financial statements under Statements on Standards for Accounting and Review Services? a. There was a lack of independence between the accountant and client. b. The accountant was not able to come to an understanding with representatives of the organization for services to be performed. c. The accountant had no prior experience with similar organizations within the industry. d. A substantial portion of generally accepted accounting principles disclosures was omitted.

b. The accountant was not able to come to an understanding with representatives of the organization for services to be performed. The accountant should establish an understanding with management about the services to be performed for compilation engagements and should document the understanding through a written communication with management (e.g., an engagement letter). The understanding reduces the risk that the accountant or management might misinterpret the other party's expectations.

An accounting firm's independence is most likely to be impaired when a. The firm has a material financial interest in a nonclient but does not know of the client's material financial interest in the investee. b. The firm and the client have a material cooperative arrangement. c. In an agreed-upon procedures engagement, the firm is independent of the responsible party but not the party that engaged the firm. d. An immediate family member is employed by the client in other than a key position.

b. The firm and the client have a material cooperative arrangement. Independence is impaired if, during the engagement or at the time of expressing an opinion, a member's firm had any material cooperative arrangement with the client. A cooperative arrangement involves joint participation in a business activity. However, joint participation in a business activity is not a cooperative arrangement when the participants (1) do not have a common understanding, arrangement, or agreement; (2) are not responsible for the other's activities or results; and (3) are not agents for each other.

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when I. Compiling financial statements generated through the use of computer software II. Reproducing client-prepared financial statements, without modification, for the client a. No; Yes b. Yes; No c. No; No d. Yes; Yes

b. Yes; No A compilation is a service that assists management to present financial information in the form of financial statements without undertaking to provide any assurance. When the accountant is engaged to compile the statements, they should be accompanied by a written report. Thus, producing financial statements generated through the use of computer software is a compilation. Reproducing client-prepared financial statements, without modification, for the client is not.

For financial audits, generally accepted government auditing standards (GAGAS) incorporate AICPA standards. GAGAS prescribe additional requirements for reporting on I. Laws, Regulations, Contracts, and Grants II. Reporting on Internal Control a. Yes; No b. Yes; Yes c. No; No d. No; Yes

b. Yes; Yes The report on financial statements (or separate reports) should describe the scope of the auditor's testing of internal control over financial reporting and compliance with laws and regulations and grant or contract provisions. Auditors also should state whether their tests provided sufficient appropriate evidence for opinions on the effectiveness of internal control and compliance.

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(n) a. Pro forma opinion. b. Qualified opinion. c. Adverse opinion. d. Unmodified opinion with an explanatory paragraph.

c. Adverse opinion. An examination results in issuance of a report stating the practitioner's opinion on whether (1) the presentation conforms with AICPA guidelines and (2) the underlying assumptions are suitably supported and provide a reasonable basis for the forecast. If significant assumptions are not disclosed in the presentation, including the summary of assumptions, the practitioner must express an adverse opinion. Moreover, a practitioner should not examine a presentation that omits all such disclosures.

Which of the following is a prospective financial statement for general use upon which a practitioner may appropriately report? a. Pro forma financial statement. b. Financial projection. c. Financial forecast. d. Partial presentation.

c. Financial forecast. Prospective financial statements are for general use if they are for use by persons with whom the responsible party is not negotiating directly, e.g., in an offering statement of the party's securities. Only a report based on a financial forecast is appropriate for general use

Which of the following bodies issues standards for audits of recipients of federal awards? a. Financial Accounting Standards Board. b. Governmental Accounting Standards Board. c. Government Accountability Office. d. Governmental Auditing Standards Board.

c. Government Accountability Office. The federal agency that establishes accounting and auditing standards for U.S. government programs and services is the Government Accountability Office. The GAO issues generally accepted government auditing standards.

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization a. Performs auditing procedures that are consistent with generally accepted accounting principles. b. Is not accountable to those charged with governance. c. Is sufficiently removed from political pressures to conduct audits objectively, without fear of political reprisal. d. Is a line-manager of the unit under audit.

c. Is sufficiently removed from political pressures to conduct audits objectively, without fear of political reprisal. A government audit organization is presumed to be free from organizational impairments to independence when reporting internally if its head (1) is accountable to the head or deputy head of the government entity or to those charged with governance; (2) reports the audit results both to the head or deputy head of the government entity and to those charged with governance; (3) is located outside the staff or line-management function of the unit under audit; (4) has access to those charged with governance; and (5) is sufficiently removed from political pressures to conduct audits and report findings, opinions, and conclusions objectively, without fear of political reprisal.

Tell, CPA, is auditing the financial statements of Youth Services Co. (YSC), a not-for-profit organization, in accordance with GAGAS as promulgated in Government Auditing Standards. Tell's report on YSC's compliance with laws and regulations is required to contain statements of I. Positive Assurance II. Negative Assurance a. Yes; No b. Yes; Yes c. No; No d. No; Yes

c. No; No An additional GAGAS requirement for reporting on financial audits states, in part, that the report should either (1) describe the scope of the auditors' testing of internal control over financial reporting and of compliance with laws and regulations and present the results of those tests or (2) refer to a separate report containing that information. No statement of assurance is required. However, the auditor should report whether tests provide sufficient appropriate evidence to support an opinion on internal control and on compliance, etc.

If requested to perform a review engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is a. Independent because the financial interest is immaterial and therefore may issue a review report. b. Not independent and therefore may not be associated with the financial statements. c. Not independent and therefore may not issue a review report. d. Not independent and therefore may issue a review report but may not express an auditor's opinion.

c. Not independent and therefore may not issue a review report. Any attest service, including audits and reviews, requires the accountant to be independent in mind and appearance. Under the Code of Professional Conduct, the accountant may not have a direct financial interest or a material indirect financial interest in an attest client.

Attestation engagements under Government Auditing Standards include a. Reporting on interim financial information. b. Opinions on specified elements of a financial statement. c. Reporting on the reliability of performance measures. d. Reporting on program effectiveness.

c. Reporting on the reliability of performance measures. Attestation engagements involve examining, reviewing, or performing agreed-upon procedures on a subject matter or an assertion about a subject matter that is the responsibility of another party. Examples include reporting on (1) an entity's internal control over financial reporting; (2) an entity's compliance with requirements of specified laws, regulations, policies, contracts, or grants; (3) management discussion and analysis (MD&A); (4) prospective financial or performance information; (5) the accuracy or reliability of performance measures; (6) allowable, reasonable, or final contract cost; or (7) the quantity, condition, or valuation of inventory or assets.

Financial audits of certain governmental entities are required to be performed in accordance with generally accepted government auditing standards (GAGAS) as issued in Government Auditing Standards. These standards do not require, as part of an auditor's report, the inclusion of a. The significant deficiencies, with identification of material weaknesses. b. A description of the scope of testing of internal control over financial reporting. c. Sampling methods used to test the controls designed to detect fraud whether or not material fraud is found. d. A statement as to whether the tests performed provide sufficient appropriate evidence to support an opinion on internal control over financial reporting.

c. Sampling methods used to test the controls designed to detect fraud whether or not material fraud is found. The Government Accountability Office (GAO) issues Government Auditing Standards (the Yellow Book). GAGAS apply to financial audits, attestation engagements, and performance audits. GAGAS for financial audits incorporate by reference the AICPA's Statements on Auditing Standards (SAS) and also state requirements. However, they do not require that the report identify specific sampling methods used to test the controls. Nevertheless, when presenting material fraud, auditors might consider the report content standards for performance audits that pertain to, among other things, methodology. Thus, if sampling significantly supports the findings, the auditor might describe the sample design and state why it was chosen.

When is the independence of the CPA auditor of a client company's financial statements most likely to be impaired because of involvement in litigation? a. An underwriter of securities is a co-defendant with the client and the CPA. It files a cross-claim against the CPA, but the client does not. b. A creditor of the client sues the CPA alleging reliance on materially misstated financial statements. c. Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud. d. A director of another client is a co-defendant with the client and the CPA. This person files a cross-claim against the CPA.

c. Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud. Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants against each other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client's management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired.

Which of the following situations precludes an accountant from preparing financial statements that omit substantially all disclosures required by the selected financial reporting framework? a. The entity's management has given the accountant permission to disclose the omission in the financial statements. b. The accountant is not independent. c. The accountant becomes aware that the omission was undertaken with the intention of misleading users of the financial statements. d. The entity's management has directed the accountant to omit the accountant's name from each page of the financial statements.

c. The accountant becomes aware that the omission was undertaken with the intention of misleading users of the financial statements. Statements may be prepared that omit substantially all disclosures required by the framework unless the intent is to mislead users. The accountant should disclose the omission on the face of the statements or in a note. If some disclosures are omitted, the statements should include a heading such as "Selected Information-Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included."

The scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies. Which of the following elements do these audits have in common? a. The materiality levels are higher and are determined by the government entities that provide the federal financial assistance to the recipients. b. The auditor is required to disclose all situations and transactions that could be indicative of fraud, abuse, and noncompliance with laws and regulations to the federal inspector general. c. The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations. d. The accounts should be 100% verified by substantive tests because certain statistical sampling applications are not permitted.

c. The auditor is required to document an understanding of internal control established to ensure compliance with the applicable laws and regulations. The auditor's consideration of internal control includes obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance. In some instances, federal audit regulations require tests of controls to evaluate the effectiveness of the design and operation of the policies and procedures in preventing or detecting material noncompliance.

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 auditor was prohibited by the client from corresponding with the client's legal counsel. b. Management refused to sign the client representation letter. c. The client's bank required an audit before committing to a loan, but the client subsequently acquired alternative financing. d. The auditing procedures were substantially complete and the auditor determined that an unmodified opinion was warranted, but there was a disagreement concerning the audit fee.

c. 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).

A firm performed an attest engagement to apply agreed-upon procedures to help KIG Co. determine whether it should acquire FTBL Co. FTBL is responsible for the information to which procedures were applied. Who most likely is not required to be independent of the responsible party? a. Anyone who consulted with the engagement team about technical matters specific to the engagement. b. Anyone on the engagement team. c. The firm, if it designed the responsible party's information system. d. The supervisor of an engagement partner.

c. The firm, if it designed the responsible party's information system. The following covered members and their immediate families must be independent in relation to the responsible party: (1) an individual on the attest engagement team; (2) an individual who directly supervises or manages the attest engagement partner; and (3) individuals who consult with the attest engagement team about technical or industry-related matters specific to the engagement. Independence also is impaired if the firm had a material relationship with the responsible party prohibited under the Independence Rule. Moreover, a firm may provide nonattest services to the responsible party that normally are prohibited, e.g., designing the financial information system. However, if the nonattest services do not relate directly to the subject matter of the attest engagement, independence is not impaired.

A practitioner may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that a. Responsibility for the sufficiency of the procedures performed is taken by the practitioner. b. The prospective financial statements also are examined. c. Use of the report is restricted to the specified parties. d. Limited assurance is expressed on the prospective financial statements taken as a whole.

c. Use of the report is restricted to the specified parties. The following conditions should be met to accept an engagement: (1) The specified parties have participated in determining its nature and scope, and they take responsibility for the adequacy of the procedures; (2) report use is restricted to those parties; and (3) the statements include a summary of significant assumptions.

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from U.S. GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should a. Express a disclaimer of opinion on the financial statements and advise the board of directors that the financial statements should not be relied on. b. Determine the effects of the departures from U.S. GAAP and issue a report on special purpose financial statements. c. Withdraw from the engagement and provide no further services concerning these financial statements. d. Inform management that a review of the financial statements cannot be completed and request a change from a review to a compilation engagement.

c. Withdraw from the engagement and provide no further services concerning these financial statements. The statements may contain a material departure from the applicable reporting framework. If the statements are not revised, the accountant considers whether modification of the report is adequate to disclose the departure. If the accountant believes that modification of the report is not adequate, (s)he should withdraw from the engagement and provide no further services with respect to the statements. The accountant may wish to consult legal counsel in such circumstances (AR-C 90).

Government Auditing Standards relates to which of the services provided to government entities, programs, activities, and functions? I. Financial Audits II. Nonaudit Services III. Performance Audits a. Yes; Yes; No b. Yes; Yes; Yes c. Yes; No; Yes d. No; No; Yes

c. Yes; No; Yes Government Auditing Standards relates to financial audits and attestation engagements. Moreover, it relates to performance audits of (1) government entities, programs, activities, and functions and (2) government assistance administered by contractors, not-for-profit entities, and other nongovernmental activities. Although GAGAS are not applicable to nonaudit services, they state independence standards and describe the effects of nonaudit services on auditor independence.

A member of the AICPA may render which service under a contingent fee arrangement? a. A CPA audits the financial statements of a company that intends to issue securities for sale to the public, with the fee contingent upon the proceeds from the sale of the securities. b. A CPA compiles financial statements for a client seeking a loan, with the fee contingent upon the amount the client is able to borrow. c. The report does not disclose lack of independence. d. A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio.

d. A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio. The member is not in violation of the Code if (1) the fee is based on a specified percentage of the portfolio, (2) the dollar amount of the portfolio on which the fee is based is determined at the beginning of each quarter (or longer period, if agreed) and is adjusted only for client additions or withdrawals, and (3) the fee arrangement is not renewed more often than quarterly. A CPA examines prospective financial statements for a client who intends to sell limited partnerships, with the CPA's fee contingent upon the proceeds.

All of the following are correct statements regarding compliance attestation engagements except a. A practitioner may be asked to provide assurance about the entity's compliance with specified requirements (laws, regulations, rules, contracts, or grants). b. A practitioner obtains an understanding of the relevant portions of internal control over compliance. c. A practitioner performs procedures to provide reasonable assurance of detecting material noncompliance. d. A compliance attestation provides a legal determination of an entity's compliance.

d. A compliance attestation provides a legal determination of an entity's compliance. A compliance attestation engagement includes but is not limited to providing assurance about the entity's (1) compliance with specified financial or nonfinancial requirements (laws, regulations, rules, contracts, or grants) and (2) effectiveness of internal control over compliance with specified requirements (only in an agreed-upon procedures engagement). A compliance attestation engagement does not provide a legal determination of an entity's compliance.

Which of the following would not be included in an accountant's documentation of a compilation of a client's financial statements? a. A memo to the CFO about a potentially significant fraud revealed during compilation procedures. b. An engagement letter. c. Discussion with the client regarding the proper presentation of gross cash flows for investment purchases. d. A review of the segregation of duties in the cash disbursement process.

d. A review of the segregation of duties in the cash disbursement process. The accountant should prepare documentation (working papers) in connection with each compilation engagement to provide a clear understanding of the work performed. A compilation does not involve obtaining an understanding of internal control or assessing fraud risk. Thus, the documentation does not include a review of the segregation of duties in the cash disbursement process.

Which of the following would not be included in an accountant's report based upon a review of the financial statements of a nonissuer? a. A statement describing the primary procedures performed. b. A statement that management is responsible for the financial statements. c. A statement describing the results of the review. d. A statement that the review was in accordance with GAAS.

d. A statement that the review was in accordance with GAAS. The report should include a statement that the review is substantially less in scope than an audit. GAAS apply to audits, not reviews. A review is in accordance with SSARSs issued by the AICPA. It consists primarily of inquiries of entity personnel (including requests to management for written representations) and analytical procedures applied to financial data (AR-C 90).

SSARSs may be applied to other historical or prospective financial information if they are a. Applied without modification. b. Approved by management. c. Considered along with appropriate auditing standards. d. Adapted as necessary in the circumstances.

d. Adapted as necessary in the circumstances. SSARSs describe responsibilities of the accountant for engagements to (1) prepare, (2) compile, and (3) review financial statements. They are to be adapted as necessary in the circumstances for services on other historical or prospective financial information. But prospective financial information may be prepared or compiled but not reviewed.

All attestation engagements require the practitioner to a. Express a conclusion. b. Consider financial information. c. Collect audit evidence. d. Be independent.

d. Be independent. All attestation engagements require the practitioner to be independent.

In accordance with Office of Management and Budget audit requirements for audits of non-federal entities expending federal awards, which of the following statements is accurate regarding federal awards expended? a. Food stamps cannot be valued at fair market value at the time of receipt. b. Donated surplus property cannot be valued at the assessed value provided by the federal agency. c. Government loans are classified as noncash assistance programs. d. Free rents received as part of an award to carry out a federal program are treated as federal funds expended.

d. Free rents received as part of an award to carry out a federal program are treated as federal funds expended. Free rent received as part of an award to carry out a federal program must be included in determining federal awards expended and is subject to audit. But free rent by itself is not considered a federal award expended.

In an audit of compliance, an auditor would be expected to follow which of the following auditing standards? a. Only the Generally Accepted Auditing Standards (GAAS) requested by management. b. Generally Accepted Compliance Auditing Standards (GACAS) specifically issued for compliance audits. c. Generally Accepted Auditing Standards (GAAS) applied without alteration. d. Generally Accepted Auditing Standards (GAAS) adapted to meet the circumstances of a compliance audit.

d. Generally Accepted Auditing Standards (GAAS) adapted to meet the circumstances of a compliance audit. The auditor should use judgment in adapting and applying GAAS for financial statement audits to compliance audits.

A CPA is permitted to disclose confidential client information without the consent of the client to I. Another CPA firm if the information concerns suspected tax return irregularities II. A state CPA society voluntary peer review board a. Neither I nor II. b. I only. c. Both I and II. d. II only.

d. II only. Under the Confidential Client Information Rule, a CPA may reveal confidential information without the client's permission for a state board- or state society-sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the client's permission or unless pursuant to a valid subpoena.

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAEs) when 1. Testifying as an expert witness in accounting and auditing matters given stipulated facts 2. Examining a client's financial projection that presents a hypothetical course of action a. Yes; No b. No; No c. Yes; Yes d. No; Yes

d. No; Yes The SSAEs apply to an examination or an agreed-upon procedures engagement performed on prospective financial statements (a forecast or a projection). A projection is sometimes prepared to present one or more hypothetical courses of action for evaluation, as in response to a question such as "What would happen if . . .?" Litigation support services are transaction services, a category of consulting services.

Which of the following statements best serves as management's assertion of consistency in an MD&A presentation? a. Descriptions of transactions are included to understand financial condition. b. Reported transactions took place during a given period. c. Information included in the presentation is properly classified and described. d. Nonfinancial data have been accurately derived from related records.

d. Nonfinancial data have been accurately derived from related records. Assertions are management representations in the MD&A presentation. They relate to (1) occurrence, (2) consistency with the financial statements, (3) completeness, and (4) presentation and disclosure. Assertions about consistency are whether (1) reported transactions, events, and explanations are consistent with the statements; (2) historical financial amounts are accurately derived from the statements and related records; and (3) nonfinancial data have been accurately derived from related records.

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

d. Not independent and, therefore, may issue a compilation report, but may not issue a review report. If a member of the AICPA has an immaterial direct financial interest in the client, (s)he is not independent. When the accountant issues a report on a compilation for an entity from which (s)he is not independent, the accountant's report should be modified. The accountant should indicate his or her lack of independence in a final paragraph of the report and is permitted but not required to disclose the reasons (AR-C 80). An accountant must not perform a review if his or her independence is impaired for any reason (AR-C 90).

According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services? a. Reviewing a client's financial statements. b. Examining a client's prospective financial information. c. Preparing a client's federal income tax return. d. Representing a client in an IRS examination of the client's federal income tax return.

d. Representing a client in an IRS examination of the client's federal income tax return. A contingent fee is permitted for representing a client in an IRS examination by a revenue agent of the client's federal (or state) income tax return. A contingent fee also is permitted for representing a client who is (1) seeking a private letter ruling from the IRS or (2) lobbying with regard to the drafting of a statute or regulation.

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAEs) when engaged to a. Audit financial statements that the client prepared for use in another country. b. Report on financial statements that the CPA generated through the use of computer software. c. Provide the client with a financial statement format that does not include dollar amounts. d. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

d. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC. An attestation engagement is one in which the practitioner is engaged to issue or does issue an examination, review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. The guidance in the SSAEs applies to (1) all attestation engagements (AT-C 105), (2) examinations (AT-C 205), (3) reviews (AT-C 210), (4) agreed-upon procedures engagements (AT-C 215), (5) prospective financial information (AT-C 305), (6) pro forma information (AT-C 310), (7) compliance attestation (AT-C 315), (8) reporting on controls at a service organization (AT-C 320), and (9) management's discussion and analysis (AT-C 395). But a review report cannot be filed with the SEC.

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith's independence would be impaired under which of the following circumstances? a. Smith and a Hometown Bank board member belong to the same church. b. Smith has a collateralized automobile loan with Hometown Bank. c. Smith had an account with Hometown Bank 2 years ago. d. Smith is a director of Hometown Bank.

d. Smith is a director of Hometown Bank. Independence is impaired if a firm or one of its partners is associated with the client as an officer, director, manager, employee, etc.

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 withdraw from the engagement. b. The accountant should discuss the lack of independence with legal counsel to determine whether it is appropriate to accept the engagement. c. The accountant should compile the pro forma financial statements but should not provide a compilation report. d. The accountant should disclose the lack of independence in the accountant's compilation report.

d. 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).

According to the profession's ethical standards, an auditor would be considered independent in which of the following instances? a. The client owes the auditor fees for two consecutive annual audits. b. The auditor is also an attorney who advises the client as its general counsel. c. A member donates service as CFO of a charitable organization that is a client during the period covered by the financial statements. d. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.

d. The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution. The independence of a member or a member's firm is not impaired if the member's depository relationship (checking, savings, certificates of deposit, money market accounts) is fully insured by a state or federal deposit insurance agency. Moreover, uninsured amounts do not impair independence if they are immaterial.

What information should a practitioner include in the standard report on an examination of prospective financial statements? a. There are no known material modifications that should be made as a result of applying the procedure. b. The projection should be read only in conjunction with the audited historical financial statements. c. The practitioner assumes the responsibility to update the report for events and circumstances occurring after the date of the report. d. The prospective results might not be achieved.

d. The prospective results might not be achieved. Prospective financial statements (PFSs) consist of financial forecasts or projections, including summaries of significant assumptions and accounting policies. A practitioner may examine or apply agreed-upon procedures to PFSs. An examination report should state that the prospective results may not be achieved.

A practitioner who performs an examination attestation engagement should document a. An affirmation that the person who performed the work performed the review. b. The reasons a review of the work was not performed. c. Why a review of the work was necessary. d. Who reviewed the work.

d. Who reviewed the work. For an examination service, attestation documentation should suffice, among other things, to (1) describe the nature, timing, and extent of the procedures performed and (2) identify the specific items or matters tested. It also should state (1) who performed the work, (2) the date such work was completed, (3) who reviewed the work, and (4) the date and extent of such review.

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. Perform a review of the financial statements. b. Express an adverse audit opinion. c. Issue a special purpose report. d. Withdraw from the engagement.

d. 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.