Chapter 25 - MAL

The standard compilation report includes which statement or​ phrase? 1. Management is responsible for the financial statements. 2. The accountant does not express an opinion but expresses only limited assurance on the compiled financial statements. 3. The objective of a compilation is to assist management in presenting financial information in the form of financial statements. 4. The accountant has compiled the financial statements in accordance with standards established by the Auditing Standards Board.

1. Management is responsible for the financial statements.

they may also be for

monthly, quarterly, or annual statements

The wording on a review report for a nonpublic company and a public company review report are

substantively the same

Under what circumstances will procedures beyond those illustrated likely be​ performed? Be specific. Additional procedures should be performed when the accountant​ believes, based on the information obtained through normal review​ procedures, that

the financial statements have been materially misstated

What are the major differences between a compilation engagement and a preparation​ engagement? 1. In a compilation the CPA must issue a compilation report and each page of the financial statements state​ "See accountant's compilation​ report." In a preparation​ service, the CPA does not issue a​ report, but the CPA includes a statement on each page of the financial statements that​ indicates, at a​ minimum, "no assurance is​ provided" on the financial statements. 2. A compilation can only be performed for public companies for which an audit has been performed. A preparation service can only be performed for nonpublic companies for which an audit has not been performed. 3. In a compilation the CPA must make inquiries and perform other procedures to verify information supplied by the entity. In a preparation​ service, the CPA does not have to make inquiries or perform other procedures. 4. In a preparation service the CPA must issue a preparation report and each page of the financial statements state​ "See accountant's preparation​ report." In a​ compilation, the CPA does not issue a​ report, but the CPA includes a statement on each page of the financial statements that​ indicates, at a​ minimum, "no assurance is​ provided" on the financial statements.

1. In a compilation the CPA must issue a compilation report and each page of the financial statements state​ "See accountant's compilation​ report." In a preparation​ service, the CPA does not issue a​ report, but the CPA includes a statement on each page of the financial statements that​ indicates, at a​ minimum, "no assurance is​ provided" on the financial statements.

Which of the following procedures would most likely be performed during an engagement to compile the financial statements of a​ nonissuer? 1. Read the financial statements and consider whether they are appropriate in form and free from obvious material errors 2. Perform inquiry and analytical procedures 3. Obtain a representation letter from management 4. Send accounts receivable confirmations

1. Read the financial statements and consider whether they are appropriate in form and free from obvious material errors

A Type 1 service​ auditor's report on internal controls at a service organization 1. includes an opinion about the suitability of the design of controls at the service organization. 2. is based on the performance of tests of controls and substantive tests of transactions at the service organization. 3. contains an opinion about the operating effectiveness of internal controls at the service organization. 4. provides an opinion about the fair presentation of the service​ organization's financial statements in accordance with accounting standards.

1. includes an opinion about the suitability of the design of controls at the service organization.

1. Repairs and maintenance expense has increased significantly compared to the preceding year. The president states that this seems to have been a year with a lot of​ repairs, in part because their equipment is getting older. 2. Property tax expense is the same as last year even though Murphy purchased a new​ building, including the land. The president states that there are no real estate taxes on the new building and land until next year. 3. Based on your knowledge of the construction industry you know that the pipes Murphy uses in construction have had a decrease in selling price to construction companies near the end of the current year. The president states that even though they have a large pipe inventory it will all be used in the next year or​ two, so the current price​ doesn't matter because they​ won't need to buy any. 4. Accounts receivable has increased almost​ 25% compared to the previous​ year, but the allowance for uncollectible accounts has stayed the same. The president states that even though receivables have​ increased, they still expect uncollectible accounts to be less than the stated allowance. 5. In discussions with the president you determine that there is a material uninsured lawsuit against the company from a former customer. The president believes it is a frivolous lawsuit and will not permit a footnote about it for fear that it will result in similar lawsuits from other customers. Describe what you should do in each of the preceding​ situations, assuming each one is material. a. Inquire about whether management has documentation in the contract of the real estate taxes not being the responsibility of the client until next year and ask to review that contract. Perhaps examine any public records of tax obligations for the county or municipality to determine the status of outstanding taxes due. b. Make a recommendation to the client to capitalize all repairs and maintenance invoices larger than​ $5,000. c. Ask management to provide invoices from most recent purchases of pipes for construction and estimate the inventory values based on the most recent prices to determine the impact of changes in market conditions on the ending inventory balance. d. Make inquiries of the​ client's legal counsel to obtain their views of the likely outcome of the lawsuit. e. Analyze the aging categories of accounts receivable and recommend that all invoices more than 60 days be written off. f. Inquire about the nature of repairs made to determine if any represent expenses that should be capitalized. Ask about whether any of the related​ property, plant, and equipment should be adjusted to reflect permanent impairment and inquire if any equipment that is currently included in the financial statements has been disposed of during the year. g. Recommend that the client make an accrual for the lawsuit because the client does not want a footnote describing the lawsuit. h. Calculate accounts receivable turnover and days to collect receivables and compare trends to prior years to determine whether collections are slowing. Analyze aging categories of accounts receivable relative to prior years to evaluate whether receivables are older.

1. f 2. a 3. c 4. h 5. d

Required for a: A. compilation engagement B. review engagement 1. Obtain a written engagement letter. 2. Understand the client's industry and the nature of the client's business. 3. Read the financial statements. 4. Design and perform analytical procedures. 5. Make inquiries of client management. 6. Perform tests of controls. 7. Assess fraud risk. 8. Obtain a letter of representation from management. 9. Prepare documentation in sufficient detail to provide a clear understanding of the work performed. 10. Issue a report that contains limited assurance about whether the accountant is aware of the need for material modification to the financial statements.

1. yes, yes 2. yes, yes 3. yes, yes 4. no, yes 5. yes, yes 6. no, no 7. no, no 8. no, yes 9. yes, yes 10. no, yes

A CPA is performing review services for a​ small, closely held manufacturing company. As a part of the​ follow-up of a significant decrease in the gross margin for the current​ year, the CPA discovers that there are no supporting documents for​ $40,000 of disbursements. The chief financial officer assures her that the disbursements are proper. What should the CPA​ do? 1. Include the unsupported disbursements without further work in the statements on the grounds that she is not doing an audit. 2. Modify the review opinion or withdraw from the engagement unless the unsupported disbursements are satisfactorily explained. 3. Exclude the unsupported disbursements from the statements. 4. Obtain a written representation from the chief financial officer that the disbursements are proper and should be included in the current financial statements.

2. Modify the review opinion or withdraw from the engagement unless the unsupported disbursements are satisfactorily explained.

Which of the following best describes the responsibility of the CPA in performing compilation services for a​ company? 1. The CPA has to satisfy only himself or herself that the financial statements were prepared in conformity with accounting standards. 2. The CPA must understand the​ client's business and accounting methods and read the financial statements for reasonableness. 3. The CPA should obtain an understanding of internal control and perform tests of controls. 4. The CPA is relieved of any responsibility to third parties.

2. The CPA must understand the​ client's business and accounting methods and read the financial statements for reasonableness.

Which of the following procedures would most likely be performed during the engagement to review the annual financial statements of a​ nonissuer? 1. Observation of inventory 2. Confirmation of notes receivable 3. Communication with the predecessor accountant 4. Comparison of the current financial statements with prior period financial statements

4. Comparison of the current financial statements with prior period financial statements

Which of the following is a prospective financial statement for general use upon which an accountant may appropriately​ report? 1. Financial projection 2. Partial presentation 3. Pro forma financial statement 4. Financial forecast

4. Financial forecast

Which of the following professional services would be considered an attestation​ engagement? 1. Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service. 2. Providing financial​ analysis, planning, and capital acquisition services as a​ part-time, in-house controller. 3. Advising management in the selection of a computer system to meet business needs. 4. Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions.

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

List five things that are required of an auditor by SSARS for a compilation. The preparer of the statements​ must: ​(Select five that​ apply.) A. Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles. B. Disclose in the report any omissions or departures from accounting standards of which the accountant is aware. This requirement does not apply to a compilation that omits substantially all disclosures. C. Perform analytical procedures. The procedures are meant to identify relationships and individual items that appear to be unusual. D. Establish an understanding with the client in a written engagement letter about the objectives of the nature of the engagement. E. Know the​ client, the nature of its business​ transactions, accounting records and​ employees, and the​ basis, form, and content of the financial statements. F. Possess knowledge of the accounting principles and practices of the​ client's industry. G. Make inquiries of management to determine whether the financial statements are fairly​ presented, assuming that management does not intend to deceive the accountant. H. Obtain a letter of representation from members of management who are knowledgeable about financial matters.

A. Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles. B. Disclose in the report any omissions or departures from accounting standards of which the accountant is aware. This requirement does not apply to a compilation that omits substantially all disclosures. D. Establish an understanding with the client in a written engagement letter about the objectives of the nature of the engagement. E. Know the​ client, the nature of its business​ transactions, accounting records and​ employees, and the​ basis, form, and content of the financial statements. F. Possess knowledge of the accounting principles and practices of the​ client's industry.

An audit client has engaged a third party service organization to host its payroll software package on servers located at the service organization. What options do you have to obtain assurance about the controls embedded in the payroll​ application? ​(Select all that​ apply.) A. You can visit the service organization to obtain evidence about the design and operating effectiveness of internal controls at the service organization. B. The service organization can engage its auditor to provide a Type 1 report that provides an opinion about the fairness of the description of the service​ organization's system and opinion about the suitability of the design of the controls in that system. C. The service organization may engage its auditor to provide a Type 2 report that provides the opinions contained in a Type 1​ report, plus an opinion on the operating effectiveness of controls at the service organization. D. None of the above are suitable options to obtain assurance about the controls embedded in the payroll application.

A. You can visit the service organization to obtain evidence about the design and operating effectiveness of internal controls at the service organization. B. The service organization can engage its auditor to provide a Type 1 report that provides an opinion about the fairness of the description of the service​ organization's system and opinion about the suitability of the design of the controls in that system. C. The service organization may engage its auditor to provide a Type 2 report that provides the opinions contained in a Type 1​ report, plus an opinion on the operating effectiveness of controls at the service organization.

A prospective financial statement A. is a predicted or expected financial statement in some future period or at some future date. B. reports historical financial data. C. reports the results of​ agreed-upon procedures. D. reports in the form of financial​ statements, information that is the representation of management without undertaking to express any assurance on the statements.

A. is a predicted or expected financial statement in some future period or at some future date.

Distinguish the three forms of compilation reports that a CPA can provide to clients. ​(Select all that​ apply.) A. Compilation with full report A CPA firm issue a report with an opinion expressing that the financial statements are in accordance with applicable accounting standards. B. Compilation With Full Disclosure Compilation of this type requires disclosures in accordance with accounting​ standards, the same as for audited statements. C. Compilation Without Independence A CPA firm can issue a compilation report even if it is not independent with respect to the​ client, as defined by the Code of Professional Conduct.​ However, the CPA firm must state its lack of independence in the report. D. Compilation That Omits Substantially All Disclosures This type of compilation is acceptable if the report indicates the lack of disclosures and the absence of disclosures is​ not, to the​ CPA's knowledge, undertaken with the intent to mislead users. E. Compilation Limited A CPA firm issue a compilation report expressing limited assurance that the financial statements are in accordance with applicable accounting standards.

B, C, D

Select examples of circumstances where procedures beyond those illustrated are likely to be performed by an accountant. ​(Select all that​ apply.) A. An error in the previous year tax return B. A statement by a bookkeeper that leads the accountant to believe the​ client's personnel do not fully understand correct sales cutoff procedures C. Presence of notes payable D. A material decrease in allowance for uncollectible accounts divided by accounts receivable E. A material increase in the gross margin percent F. First year engagement G. A small decrease in sales revenue

B. A statement by a bookkeeper that leads the accountant to believe the​ client's personnel do not fully understand correct sales cutoff procedures D. A material decrease in allowance for uncollectible accounts divided by accounts receivable E. A material increase in the gross margin percent

In an engagement to review the financial statements of a nonpublic​ company, SSARS require the accountant to obtain review evidence that is primarily based on inquiries and analytical procedures. The nature of the​ accountant's inquiries is a matter of judgment. For​ example, the accountant may consider the nature and materiality of the​ items, likelihood of​ misstatement, how the items may be affected by​ management's judgment, qualifications of client​ personnel, among other matters. Below are several inquiry procedures for the sales and collection​ cycle: What other information about accounts receivable and​ revenue, besides the items​ listed, will the accountant have to​ obtain? ​(Select all that​ apply.) A. Obtain direct confirmation of accounts receivable and perform alternative procedures for nonresponses. B. Perform analytical procedures C. Inquiry about whether the accounts receivable control account has been reconciled with the master file records. D. Obtain an analysis of the allowance for doubtful accounts and bad debt​ expense: test​ accuracy, examine authorization for​ write-offs, and trace to general ledger. E. Understand the​ client's business F. Obtain an aged list of​ receivables: trace accounts to the master​ file, foot​ schedule, and trace to general ledger. G. Inquiry about the possibility of unbilled sales H. Inquiry about the possible inclusion of consignment shipments as sales. I. Inquiry about the authorization procedures for sales J. Perform tests to determine that proper cutoff procedures were applied at the balance sheet date to ensure that​ sales, cash​ receipts, and credit memos have been recorded in the correct period.

B. Perform analytical procedures C. Inquiry about whether the accounts receivable control account has been reconciled with the master file records. E. Understand the​ client's business F. Obtain an aged list of​ receivables: trace accounts to the master​ file, foot​ schedule, and trace to general ledger. G. Inquiry about the possibility of unbilled sales H. Inquiry about the possible inclusion of consignment shipments as sales. I. Inquiry about the authorization procedures for sales

Beyond inquiries and analytical​ procedures, what are the​ accountant's responsibilities in performing review service​ engagements? The primary procedures performed in a review engagement consist of performing analytical procedures and inquiries of management.​ But, in addition to those​ procedures, the accountant should also perform the​ following: ​(Select all that​ apply.) A. Obtain a knowledge of and test the internal controls of the company. B. Prepare documentation of procedures​ performed, evidence​ examined, and conclusions reached. Your answer is correct.C. Read the financial statements. This is the correct answer.D. Issue the review report. This is the correct answer.E. Obtain knowledge of the accounting principles and practices of the​ client's industry. Your answer is correct.F. Observe​ control-related activities. Your answer is not correct.G. Obtain knowledge of the​ client's business Your answer is correct.H. Obtain a letter of representation. Your answer is correct.I. Perform tests of details of balance on the ending general ledger balances for both balance sheet and income statement accounts. J. Perform additional procedures if the accountant becomes concerned that information is​ incorrect, incomplete or otherwise unsatisfactory.

B. Prepare documentation of procedures​ performed, evidence​ examined, and conclusions reached. C. Read the financial statements. D. Issue the review report. E. Obtain knowledge of the accounting principles and practices of the​ client's industry. G. Obtain knowledge of the​ client's business H. Obtain a letter of representation. J. Perform additional procedures if the accountant becomes concerned that information is​ incorrect, incomplete or otherwise unsatisfactory.

What four things are involved in an examination of prospective financial​ statements? A. Issuing an audit report. B. Performing substantive tests of transactions. C. Evaluating the preparation of the prospective financial statements. D. Issuing an examination report. E. Performing tests of details of balances. F. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines. G. Evaluating the support underlying assumptions.

C. Evaluating the preparation of the prospective financial statements. D. Issuing an examination report. F. Evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines. G. Evaluating the support underlying assumptions.

A forecast is a prospective financial statement that A. presents an​ entity's audited expected financial​ position, results of​ operations, and cash flows for future​ periods, to the best of the responsible​ party's knowledge and belief. B. presents an​ entity's financial​ position, results of​ operations, and cash​ flows, to the best of the responsible​ party's knowledge and​ belief, given one or more hypothetical assumptions. C. presents an​ entity's expected financial​ position, results of​ operations, and cash flows for future​ periods, to the best of the responsible​ party's knowledge and belief. D. reports the results of​ agreed-upon procedures.

C. presents an​ entity's expected financial​ position, results of​ operations, and cash flows for future​ periods, to the best of the responsible​ party's knowledge and belief.

A projection is a prospective financial statement that A. reports in the form of financial​ statements, information that is the representation of management without undertaking to express any assurance on the statements. B. presents an​ entity's expected financial​ position, results of​ operations, and cash flows for future​ periods, to the best of the responsible​ party's knowledge and belief. C. presents an​ entity's financial​ position, results of​ operations, and cash​ flows, to the best of the responsible​ party's knowledge and​ belief, given one or more hypothetical assumptions. D. presents an​ entity's audited financial​ position, results of​ operations, and cash​ flows, to the best of the responsible​ party's knowledge and​ belief, given one or more hypothetical assumptions.

C. presents an​ entity's financial​ position, results of​ operations, and cash​ flows, to the best of the responsible​ party's knowledge and​ belief, given one or more hypothetical assumptions.

Of whom should the accountant make inquiries in a​ small, closely-held​ company? Inquiries would ordinarily be made of the ______ in a small or large business. Ordinarily in a small business, this position is assumed by the _____ but it may also be _______

CFO owner a controller or VP

What is negative​ assurance? A. A negative assurance provides a direct statement as to whether the presentation of the financial statements are prepared in accordance with accounting standards. B. A negative assurances provides reasonable assurance that a​ company's computer system complies with Trust Services principles and criteria. C. A negative assurance provides reasonable assurance that a​ company's Web site complies with Trust Services principles and criteria for​ business-to-consumer electronic commerce. D. A negative assurance​ states, along with factual​ statements, that nothing came to the​ accountant's attention that would lead the accountant to believe that the financial statements were not prepared in accordance with accounting standards.

D. A negative assurance​ states, along with factual​ statements, that nothing came to the​ accountant's attention that would lead the accountant to believe that the financial statements were not prepared in accordance with accounting standards.

What is meant by the term level of​ assurance? A. Levels of assurance represent an attestation service designed to provide reasonable assurance that a​ company's computer system complies with Trust Services principles and criteria. B. Levels of assurance represent a type of assurance service in which the CPA firm issues a report about the reliability of subject matter or of an assertion that is the responsibility of another party. C. Levels of assurance represent a review of unaudited financial statements designed to provide limited assurance that no material modifications need be made to the statements in order for them to be in conformity with accounting standards​ or, if​ applicable, with another comprehensive basis of accounting. D. Levels of assurance represent the degree of certainty the practitioner has​ attained, and wishes to​ convey, that the conclusions stated in his or her report are correct.

D. Levels of assurance represent the degree of certainty the practitioner has​ attained, and wishes to​ convey, that the conclusions stated in his or her report are correct.

Why is it used in a review engagement​ report? The reason for including such a statement in a review report is to provide financial statement users A. with financial statements that are the representation of​ management, without expressing any assurance on the statements. B. with no level of assurance. C. with a high level of assurance. D. with some level of assurance that the financial statements are fairly stated.

D. with some level of assurance that the financial statements are fairly stated.

The Absco Corporation has requested that Herb​ Germany, CPA, provide a report to the Northern State Bank as to the existence or nonexistence of certain loan conditions. The conditions to be reported on are the working capital​ ratio, dividends paid on preferred​ stock, aging of accounts​ receivable, and competence of management. This is​ Herb's first experience with Absco. Should Herb accept this​ engagement? Substantiate your answer. It would be appropriate for Germany to provide a report to Northern State Bank on _____ Reporting on it is _______ and should not ordinarily be in a debt compliance letter. All the other conditions ________

all the conditions except the competency of management highly subjective are factual matters with a normal auditor's competence

Select the level of assurance for an audit of historical financial​ statements, a​ review, a​ compilation, and a preparation engagement. a. The practitioner provides a conclusion in the form of a negative assurance. In this​ form, the​ practitioner's report states whether any information came to the​ practitioner's attention to indicate that the assertions are not presented in all material respects in conformity with the applicable criteria. The level of assurance is limited. b. An engagement in which the procedures to be performed are agreed upon by the​ practitioner, the responsible party making the​ assertions, and the intended users of the​ practitioner's report; the​ practitioner's report is presented in the form of a negative assurance. c. Prospective financial statements that present an​ entity's financial position and results of operations and cash flows for future​ periods, to the best of the responsible​ party's knowledge and​ belief, given one or more hypothetical assumptions. d. The CPA is engaged by the client to prepare or assist in preparing financial​ statements, but the CPA does not provide any assurance on the financial statements or issue a​ report, even if the financial statements are expected to be used​ by, or provided​ to, a third party. e. The practitioner provides a conclusion in a positive form. In this type of​ report, the practitioner makes a direct statement as to whether the presentation of the​ assertions, taken as a​ whole, conforms to the applicable criteria. The level of assurance is high. f. An attestation service designed to provide reasonable assurance that a​ company's Web site complies with Trust Services principles and criteria for​ business-to-consumer electronic commerce. g. The practitioner presents in the form of financial​ statements, information that is the representation of management without undertaking to express any assurance on the statements. Audit Review Compilation Preparation

e a g d

Compare the levels of achieved assurance for review services and audits. Is the achieved level much higher for​ audits, somewhat​ higher, or approximately the​ same? Give reasons for your answer. The achieved level of assurance for audits is ordinarily ______ for reviews. The differences in the review procedures identified in this problem and the procedures for audit are _______ and result in ______ differences in the achieved levels of assurance.

much higher significant large

Compilations and reviews under SSARS can only be issued for _____

nonpublic companies for which an audit has not been performed

Reviews are issued on ________ information of publicly held companies as a part of the​ client's reporting requirements to the SEC and are subject to PCAOB standards.

quarterly

Compare the illustrative procedures for review services and those commonly performed for audits. What are the major​ differences? In​ reviews, no procedures such as _____ are done. The only things that are done are inquiries ____

tests of controls, substantive tests of transactions, cutoff tests, or confirmation requests and analytical tests