Audit 7 - Compilation and Reviews - Part 1
Which of the following would not be found in an engagement letter for a financial statement preparation engagement performed in accordance with SSARS?
A statement indicating that management will designate someone, preferably from senior management, to oversee and take responsibility for the accountant's services. In any SSARS engagement, an engagement letter documenting the understanding with management will indicate management's acknowledge of its responsibilities, including its responsibility for internal control; will identify the financial reporting framework that will be applied to the financial statements; and the limitations of the engagement. When an accountant prepares financial statements in anticipation of performing an engagement requiring independence, management is required that someone will be designated to oversee the preparation, which is not an engagement performed in accordance with SSARS.
Which of the following statements is true regarding analytical procedures in a review engagement?
Analytical procedures involve the use of both financial and nonfinancial data. Analytical procedures involve comparing client data to the accountant's expectations and may be applied to financial and nonfinancial data. A review does require the use of analytical procedures, which involve comparing recorded amounts to expected amounts. A review does not entail a final review stage.
Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer?
Ask management about the entity's procedures for recording transactions. A review consists primarily of inquiries and analytical procedures. Inquiries will be designed to enable the accountant to determine if the client's accounting can be relied upon, which will include understanding the client's procedures for recording transactions.
A CPA is performing a review of the interim financial statements of a publicly-held company. The CPA performed the annual audit for the most recent fiscal year and has already been engaged to perform the audit of the current fiscal year's financial statements. Which standards should the CPA follow in performing the engagement?
Auditing standards issued by the Public Company Accounting Oversight Board (PCAOB). Audits and reviews of the financial statements of publicly-held companies are regulated by the Public Company Accounting Oversight Board and their auditing standards are followed in performing a review of a publicly-held company's interim financial statements.
An accountant may compile a nonpublic entity's financial statements that omit all of the disclosures required by GAAP only if the omission is I. Clearly indicated in the accountant's report. II. Not undertaken with the intention of misleading the financial statement users.
Both I and II An accountant may compile financial statements that omit all disclosures as long as the omissions were not intended to mislead users and the accountant modifies the compilation report by adding an explanatory paragraph that indicates the omission of disclosures, expresses that their inclusion might influence the decisions of users, and that the financial statements are not designed for those who are uninformed about the omitted disclosures.
Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services?
Both I and II SSARS establish the standards for the performance of reviews, compilations, and financial statement preparation engagements. Preparing a trial balance and preparing monthly journal entries are nonattest services that are not subject to the requirements of SSARS, unless they are conducted as part of a financial statement preparation engagement, and require no compilation or review report.
Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?
Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures. A CPA cannot report on comparative financial statements if in fact they are not comparable. Since the 20X1 financial statements exclude disclosures and the 20X2 statements include disclosures, these statements are not comparable and the CPA may not report on them.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to
Compare the prior year's financial statements with those of the current year. When reissuing a compilation or review report, a predecessor will consider if the report is still appropriate and will read the current period's financial statements and related report, compare the prior period's financial statements with those previously issued and the current statements, and obtain a letter of assurance from the successor indicating whether or not the successor is aware of matters that would affect the financial statements. An accountant is not required to obtain a letter of representation from the client in a compilation, including when the accountant is reissuing a previously issued report. The predecessor would not review the successor's papers, although the successor would provide information to the predecessor about matters affecting the prior year. Nor would the accountant make inquiries of the entity's lawyers, either in the original compilation or in order to reissue the compilation report.
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?
Compilation (Yes) Review (Yes) While a CPA is required to have a certain level of knowledge about a client and the industry in which it operates in order to perform a compilation or review, an accountant without such knowledge may accept a compilation or review engagement provided the accountant has the ability to obtain the required level of knowledge prior to performing the work. This is also true for other types of engagements in addition to compilations and reviews.
Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?
Compiling an individual's personal financial statement to be used to obtain a mortgage. SSARS establish the standards for financial statement preparation engagements, reviews, and compilations, which include the compilation of personal financial statements. Reviews of the interim financial statements whose annual financial statements are audited are conducted in accordance with Statements on Auditing Standards (SAS), and the review of the interim financial statements of an entity that reports to the SEC is governed by standards established by the PCAOB, which has adopted the requirements for reviews of interim financial statements included in SAS. Assisting in adjusting the books of account for a partnership and processing financial data for clients of other accounting firms are nonattest services; nonattest services are not subject to SSARS with the exception of financial statement preparation engagements.
When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?
Consider the results of audit procedures performed with respect to the current-year's financial statements. To obtain, or update, an understanding of the entity and its environment, the accountant will read available documentation; read the most recent annual and comparable interim period financial statements; consider the results of any audit procedures performed with respect to the current period's financial statements; and make inquiries of management about changes in the entity's business activities; transactions with related parties; and significant changes in internal control. The information will be used to select the inquiries and analytical procedures that will be performed to enable the auditor to determine if there are material modifications to the financial statements required. Inquiries of outside counsel would only be appropriate if the accountant believes the attorney has relevant information. Examining support of revenue transactions is not a procedure that would be performed in a review of interim information.
Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer?
Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles. A compilation requires the accountant to read the financial statements and, using that knowledge, evaluate whether there are obvious mistakes in the application of accounting principles. Inquiries are made in audits and reviews, not compilations. The accountant is not required to determine if there is substantial doubt about an entity's ability to continue as a going concern but should be alert to indications that it might be an issue. A compilation does not require the accountant to scan the accounting records to identify subsequent events.
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, according to PCAOB requirements, the appropriate form of report to be issued must include a (an)
Disclaimer of opinion. When a CPA is associated with the financial statements of a public entity without auditing or reviewing the information, the PCAOB requires a disclaimer of opinion to be issued.
An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when performing which of the following tasks?
Generating financial statements of a nonissuer. An engagement to generate financial statements for a nonissuer is an engagement to assist management in presenting financial information in the form of financial statements, which is a financial statement preparation engagement subject to SSARS. Preparing monthly journal entries is a nonattest service that is not subject to SSARS. Providing the client with software to generate financial statements and providing the client with a blank financial statement template are not professional financial statement services that are subject to SSARS.
Which of the following is a nonattest engagement? 1)An engagement to prepare financial statements. 2)The work of preparing unprepared client financial statements prior to an engagement to perform a compilation of the statements. 3)A compilation engagement.
I and II only. A preparation engagement is a nonattest engagement, whether it is the highest level of service performed by the accountant for the client, or if the financial statements will subsequently be compiled. A compilation engagement is an attest engagement, although it is a nonassurance engagement.
Which of the following is an attest engagement? 1)A review. 2)An engagement to prepare financial statements. 3) A compilation.
I and III only. Both compilations and reviews are considered attest engagements, although a review is also an assurance engagement and a compilation is not. A preparation engagement is neither an attest engagement nor an assurance engagement.
According to Statements on Standards for Accounting and Review Engagements, in which of the following situations would the accountant be required to issue a report? 1)A compilation engagement where the accountant is independent of the client. 2)A review engagement from which the accountant withdrew after completing substantially all of the required work. 3)An engagement to prepare financial statements.
I only. A report is required in a compilation engagement, regardless of whether or not the accountant is independent. Although a review report is required when the accountant reviews a client's financial statements, no report is issued when an accountant withdraws from an engagement. A preparation engagement does not require the issuance of a report.
Statements on Standards for Accounting and Review Services (SSARS) would govern the conduct of which of the following? 1)Beck, CPA, prepares financial statements as a necessary step prior to Beck's engagement to compile the financial statements. 2)Preparation of financial statements that will not be compiled, reviewed or audited. 3)Gumpert, CPA, prepares financial statements that will be compiled by Martinez, CPA.
II and III only When the preparation of financial statements is the highest level of service an accountant will be performing, the preparation engagement is a nonattest engagement that is subject to the requirements of SSARS. This will still be the case if the financial statements are complied, reviewed, or audited, as long as that engagement is performed by another accountant. When the accountant prepares financial statements in anticipation of compiling, auditing, or reviewing them, the engagement is a nonattest engagement that is not subject to the requirements of SSARS. For the subsequent engagement to compile, review or audit the statements, however, the accountant will need to determine if independence is impaired.
Which of the following inquiries or analytical procedures ordinarily is performed in an engagement to review a nonpublic entity's financial statements?
Inquiries concerning the entity's procedures for recording and summarizing transactions. In a review, the accountant will make inquiries relating to the entity's procedures for recording and summarizing transactions. The accountant is not required in a review to obtain corroborating evidence or assess management's assertions relating to continued existence. An inquiry of the entity's attorney is a substantive test used in an audit not a review.
Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?
Make inquiries about the accounting principles used in the preparation of the prospective financial statements. In a compilation of prospective financial statements, the accountant establishes an understanding with the client, inquires about the principles used in preparing the prospective financial statements, obtains information about key assumptions and considers the appearance of obvious inconsistencies, and reads the financial statements to determine if they appear to be appropriately presented and free of obvious errors. The accountant tests internal controls in an audit but not in a compilation of prospective financial statements. The accountant is not required to make inquiries about future transactions that may impact the forecast or compare the prospective financial statements to the entity's historical information.
The objective of a review of interim financial information of an issuer (public entity) is to provide an accountant with a basis for reporting whether
Material modifications should be made to conform to generally accepted accounting principles. A review, whether performed in relation to interim information of an issuer, or the interim or annual financial statements of a nonissuer, is designed to provide the accountant with limited assurance that the financial statements are not in need of material modifications to be in conformity with GAAP. Expressing an updated opinion regarding previously audited financial statements would require the application of audit procedures. A review does not provide information that is helpful in determining that condensed financial statements or pro forma financial information should be included in a registration statement. An audit, not a review, would provide an accountant with a basis for indicating that the financial statements are presented fairly in accordance with GAAP.
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when I) Reproducing client-prepared financial statements, without modification, as an accommodation to a client. 2) Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.
Neither I nor II. Reproducing client prepared financial statements without modification as an accommodation is not an accounting service and is not subject to professional standards. Preparing monthly journal entries for a client is a nonattest service that is not subject to SSARS, which are standards for financial statement preparation engagements, compilations and reviews.
While auditing the financial statements of a nonpublic entity, 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 I. Refer to the scope limitation that caused the change. II. Describe the auditing procedures that have already been applied.
Neither I nor II. If an accountant accepts an engagement that is downgraded from an audit to a review, the accountant will issued a report that is unmodified as to the change in engagement. It would not refer to reasons for the change or refer to audit procedures already performed.
An accountant who had begun an audit of the financial statements of a nonpublic entity 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
Original Engagement that was agreed to (No) Scope limitation that cause the change engagement (No) If there is justification for downgrading an engagement, the auditor would not need to modify the report. In this case, a standard review report would be issued.
Gole, CPA, is engaged to review the 20X4 financial statements of North Co., a nonpublic entity. Previously, Gole audited North's 20X3 financial statements and expressed an unqualified opinion. Gole decides to include a separate paragraph in the 20X4 review report because North plans to present comparative financial statement for 20X4 and 20X3. This separate paragraph should indicate that
No auditing procedures were performed after the date of the 20X3 auditor's report. In order to minimize a user's misunderstanding of Gole's responsibilities, a separate paragraph should be added to the report to indicate that Gole did not perform any audit procedures after the date of the last audit report, which is also the last day of fieldwork. The paragraph should also include the type of opinion expressed previously (with reasons why if other than unmodified). A review report is ordinarily a general use report. The 20X3 audit report can still be relied on. The review report need not state the reasons for the change in level of service.
When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are
Not designed for those who are uninformed about the omitted disclosures. If the financial statements omit substantially all disclosures, the CPA may perform the engagement in accordance with SSARS, but will modify the compilation report by adding an explanatory paragraph which states that the financial statements are not designed for those who are uninformed about the omitted disclosures. Omission of disclosures is not considered a comprehensive basis of accounting other than GAAP. Whether or not the financial statements are comparable to those of a prior period will depend on whether the prior period's financial statements also omitted substantially all disclosures.
Which of the following procedures is more likely to be performed in a review engagement of a nonpublic entity than in a compilation engagement?
Obtaining a representation letter from the chief executive officer. In any engagement where an opinion or any other form of assurance is given, the CPA must obtain a representation letter from the client. The CPA is required to understand the entity's significant accounting policies for both compilations and reviews. The CPA is not, however, required to assess control risk in either a compilation or review. The accountant is just as likely to assist the entity in adjusting the accounting records in a review as in a compilation.
Jones Retailing, a nonpublic entity, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the
Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant's report. If financial statements omit substantially all disclosures, the CPA may perform a compilation engagement as long as the omissions were not meant to mislead the users and the CPA modifies the compilation report by indicating that the disclosures have been omitted, that their inclusion may influence the decisions made by users, and that the financial statements are not designed for those who are uninformed about the omitted disclosures. The engagement letter need not indicate the reasons for omitting disclosures and a representation letter is not generally obtained in a compilation. Whether prepared under GAAP or a comprehensive basis of accounting other than GAAP, financial statements may be compiled without disclosures as long as the above requirements are met. The distribution of the report does not have to be limited to internal use only.
Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with Statements on Standards for Accounting and Review Services?
Perform a reasonableness test of the balance by computing days' sales in receivables. A review consists of making inquiries and performing analytical procedures, one of which might be to compare the number of days' sales in accounts receivable and compare the result to the accountant's perception of what it should be to determine if it seems reasonable and, if not, to make additional inquiries to explain any discrepancies. A sample of subsequent cash receipts would be vouched in an audit not in a review. The same is true of confirming balances with customers and reviewing subsequent bank statements to obtain evidence of cash deposits, which are also performed in an audit but not in a review.
The inability to complete which of the following activities most likely would prevent an accountant from accepting and completing an engagement for a review of financial statements performed in accordance with Statements on Standards for Accounting and Review Services?
Performing inquiries and analytical procedures. A review consists of performing analytical procedures and making inquiries of management. An accountant would not be able to perform an engagement without the ability to perform those procedures. Tests of details and obtaining an understanding of internal control are audit procedures but are not performed in a review. It is helpful for an accountant to have previous experience in a client's industry but it is not essential if the accountant has the ability to learn about the industry on a timely basis.
An accountant has compiled the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?
Printed on the Accountant's the letterhead (No) Manually signed by Accountant(NO) A compilation report is not required to be printed on the accountant's letterhead. Nor is there a requirement that the accountant manually sign the report.
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a
Review report on comparative financial statements for a nonpublic entity in its second year of operations. A review of historical financial statements consists principally of inquiry and analytics. Major financial assistance programs must be audited and reviews are not performed on prospective financial statements. Management advisory services do not require the use of inquiry and analytical procedures.
Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonpublic entity. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the :
Scope of the inquiry and analytical procedures has not been restricted. An accountant is permitted to report on one financial statement so long as the scope of the work is not limited.
When engaged to review the financial statements of a nonpublic entity, an accountant is required to possess a level of knowledge of the entity's accounting principles and practices. This requirement most likely will include obtaining a general understanding of the
Stated qualifications of the entity's accounting personnel. Before performing a review engagement, the accountant is required to have a general understanding of the nature of the entity's business, including the nature of the entity's transactions, the form of its accounting records, and the stated qualifications of its accounting personnel. Obtaining an understanding of an entity's internal control, including management's internal control awareness is required in an audit but is beyond the scope of a compilation or a review, as is obtaining an understanding of risk factors relating to misstatements arising from illegal acts.
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. If an accountant accepts a downgrade in an engagement from an audit to a review, the accountant will issue a standard review report, modified only for the same reasons any review report would be modified. It would, as do all review reports, indicate that a review is less in scope than an audit. It would not refer to the change in the engagement, including either the scope limitation caused by it or the justification for agreeing to it. An accountant's report would not generally describe procedures performed.
A CPA was engaged to compile pro forma financial information that will be presented in a document that also contains historical financial information.
The CPA may accept the engagement if the historical financial statements have been compiled, reviewed, or audited. A CPA may accept an engagement to compile pro forma financial information provided it is in a document that also contains or refers to the historical financial statements on which the pro forma information is based, which were compiled, reviewed, or audited. There are several differences between a compilation report related to pro forma financial information and an unmodified report in addition to the inclusion of a paragraph explaining the objectives and limitations of the pro forma information.
Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonpublic entity's financial statements?
The accountant is independent with respect to the entity. Independence is the one implicit factor in the compilation report. When a user reads the compilation report and doesn't see any statement indicating there is an impairment of independence, the user may infer that the CPA is independent. The report explicitly states that the financial statements have not been audited and the accountant does not express any assurance on the financial statements. A compilation does not consist of inquiry and analytical procedures, and there is no implication to that effect in the compilation report.
Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)?
The date on the report should be the date of completion of the compilation. A compilation report is dated as of the date on which the accountant completes the compilation. A compilation report may be issued when the accountant is not independent provided the lack of independence is clearly indicated in the report. The information is the representation of the client, not the accountant. A report does not generally include a description of procedures performed.
An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that
The objective of a compilation is assist management in presenting financial information in the form of financial statements. A standard compilation report states that the accountant or firm did not audit or review the financial statements nor was the accountant or firm required to perform any procedures to verify the accuracy or the completeness of the information provided by management. A compilation provides no assurance and an indication that the accountant is not aware of necessary material modifications is a form of limited assurance. Inquiries and analytical procedures are performed in a review but not in a compilation. Although a compilation is substantially less in scope than an audit, a standard compilation report does not explicitly state so.
Compiled financial statements should be accompanied by a report stating that
The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements. The Accountant's Responsibilities paragraph of the compilation report includes the sentence, "The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements." Standards for compilation engagements are established by the Accounting and Review Services Committee of the AICPA, in the form of SSARS, not by the Auditing Standards Board. Although a compilation is less in scope than an audit or a review, that is not explicitly expressed in the compilation report. In addition, the compilation report explicitly states that no assurance is given on the financial statements, not even limited assurance.
An accountant has been asked to issue a review report on the balance sheet of a nonpublic entity without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if
The scope of the accountant's inquiry and analytical procedures has not been restricted. An accountant may accept an engagement to review or compile a single financial statement as long as the client has not imposed scope limitations on the accountant. There is no restriction on the use of the balance sheet and it does not have to be part of a comprehensive financial plan in order for the accountant to be associated. A lack of material change in accounting principles is not a prerequisite to performance of the engagement but may require a modification to the report.
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior-year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior-year's audited financial statements. This separate paragraph should indicate
The type of opinion expressed previously When reviewed financial statements are presented in comparative form with the prior year's audited financial statements, the review report will indicate that the firm audited the prior year's statements, the date of the report, the type of report issued, and the substantive reasons for any report modifications. The auditor does not address the assessment of control risk in the report at all, including whether or not the assessment was updated. The report would not indicate the reasons for the change. The prior period's financial statements, and the report thereon, can still be relied upon and the report would not indicate otherwise.
Which of the following statements would not normally be included in a representation letter for a review of interim financial information?
We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information. The client does not have to represent that they understand what a review consists of. The understanding that the accountant is required to obtain and document in the form of an engagement letter describes what a review is and its limitations. Management would represent regarding subsequent events as it is their responsibility to evaluate them and the accountant will want to ascertain if the financial statements are in need of modification. Management acknowledges its responsibility for the prevention and detection of fraud, largely as a reminder that it is their responsibility, not the accountants'. The client also represents that they have made all financial records and data available to the accountant as not doing so would represent a scope limitation that would preclude providing assurance.
An accountant has been engaged to compile the financial statements of a nonpublic entity. 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
Withdraw from the engagement and provide no further service concerning these financial statements. When an accountant compiling financial statements becomes aware of one or more material GAAP departures, the accountant should request that the client modify the financial statements. Upon failure to do so, the accountant would determine if it is sufficient to modify the report. If not, the accountant will withdraw from the engagement and will not provide any future services in relation to those financial statements. A GAAP departure is not a basis for restricting the use of a compilation report. The accountant may issue a modified report but does not issue a special report for a GAAP departure. The accountant may not be associated with the financial statements, even if the client represents that they will not be used to obtain credit.
