AUD - CPA Exam - Accounting and Review Services
Which of the following procedures is not usually performed by the accountant in a review engagement of a nonpublic entity? A) Communicating any material weaknesses discovered during the consideration of internal control. B) Reading the financial statements to consider whether they conform with generally accepted accounting principles. C) Writing an engagement letter to establish an understanding regarding the services to be performed. D) Issuing a report stating that the review was performed in accordance with standards established by the AICPA.
A) Communicating any material weaknesses discovered during the consideration of internal control.
Which of the following is least likely to be included in an engagement letter for a financial statement preparation engagement? A) The accountant has a responsibility to verify only material information included in the financial statements. B) The accountant's objective is to prepare financial statements in accordance with accounting principles generally accepted in the United States of America. C) Management has a responsibility to provide the accountant with accurate and complete records, documents, explanations and other information. D) Fees for the service.
A) The accountant has a responsibility to verify only material information included in the financial statements.
Which of the following situations would preclude an accountant from issuing a review report on a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A) The owner of a company is the accountant's father. B) The accountant was engaged to review only the balance sheet. C) Land has been recorded at appraisal value instead of historical cost. D) Finished-goods inventory does not include any overhead amounts.
A) The owner of a company is the accountant's father.
The standard report issued by an accountant after reviewing the financial statements of a nonpublic entity should state that A) A review is limited to presenting in the form of financial statements information that is the representation of management. B) A review consists of inquiries of company personnel and analytical procedures applied to financial data. C) The accountant does not express an opinion or any other form of assurance on the financial statements. D) The accountant did not obtain an understanding of the entity's internal control or assess control risk.
B) A review consists of inquiries of company personnel and analytical procedures applied to financial data.
Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A) Apply year-end cutoff tests for the sales and purchasing functions. B) Compare the financial statements with budgets or forecasts. C) Obtain an understanding of the entity's internal control components. D) Document whether control risk is assessed at or below the maximum level.
B) Compare the financial statements with budgets or forecasts.
An accountant's compilation report should be dated as of the date of A) Completion of fieldwork. B) Completion of the required compilation procedures. C) Transmittal of the compilation report. D) The latest subsequent event referred to in the notes to the financial statements.
B) Completion of the required compilation procedures.
An accountant's standard report issued after compiling the financial statements of a nonpublic entity should indicate that: A) The accountant is not aware of any material modifications that should be made to the accompanying financial statements. B) A compilation consists principally of inquiries of company personnel and analytical procedures. C) A compilation does not provide any assurance on the financial statements. D) A compilation is greater in scope than a financial statement review, but lesser than an audit.
C) A compilation does not provide any assurance on the financial statements.
A compilation report should state all of the following except A) The accountant does not express an opinion or any other form of assurance on them. B) A compilation has been performed. C) The city and state where the accountant practices. D) A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.
D) A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.
To perform a compilation of financial statements of a nonpublic entity, the accountant should A) Perform analytical procedures sufficient to determine whether fluctuations among account balances appear reasonable. B) Complete the preliminary phase of the consideration of the entity's internal control. C) Verify that the financial information supplied by the entity agrees with the books of original entry. D) Acquire a knowledge of any specialized accounting principles and practices used in the entity's industry.
D) Acquire a knowledge of any specialized accounting principles and practices used in the entity's industry.
Which of the following statements is true regarding analytical procedures in a review engagement? A) Analytical procedures are not required to be used as a substantive test. B) Analytical procedures do not involve comparisons of recorded amounts to expected amounts. C) Analytical procedures are required to be used in the final review stage. D) Analytical procedures involve the use of both financial and nonfinancial data.
D) Analytical procedures involve the use of both financial and nonfinancial data.
A CPA in public practice is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when A) Advising a client regarding the selection of computer software B) Advocating a client's position before the IRS C) Both D) Neither
D) Neither
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARS) when A) Drafting financial statement notes B) Reproducing client-prepared financial statements, without modification, for client C) Both D) Neither
D) Neither
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. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses. A) I only. B) II only. C) Both I and II. D) Neither I nor II.
D) Neither I nor II.
While auditing the financial statements of a nonissuer (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. A) I only. B) II only. C) Both I and II. D) Neither I nor II.
D) Neither I nor II.
When an accountant is engaged to report on a nonpublic entity's compiled financial statements that omit substantially all disclosures required by generally accepted accounting principles, the accountant should indicate in the compilation report that the financial statements are A) Restricted for internal use only by the entity's management. B) Not to be given to financial institutions for the purpose of obtaining credit. C) Compiled in conformity with a comprehensive basis of accounting other than generally accepted accounting principles. D) Not designed for those who are uninformed about the omitted disclosures.
D) Not designed for those who are uninformed about the omitted disclosures.
General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the A) Distribution of the financial statements and Ford's report is restricted to internal use only. B) Reason for omitting the disclosures is acknowledged in the notes to the financial statements. C) Omitted disclosures would not influence any potential creditor's conclusions about General's financial position. D) Omission is not undertaken with the intention of misleading the users of General's financial statements.
D) Omission is not undertaken with the intention of misleading the users of General's financial statements.
Which of the following are required for a compilation? A) Compilation report B) Written engagement letter C) Both D) Neither
C) Both
Which of the following services, if any, may an accountant who is not independent provide? A) Compilations, but not preparation. B) Preparation, but not compilations. C) Both compilations and preparation. D) No services.
C) Both compilations and preparation.
When performing a review of a nonpublic company, which is least likely to be included in accountant inquiries of management members with responsibility for financial and accounting matters? A) Subsequent events. B) Significant journal entries and other adjustments. C) Communications with related parties. D) Unusual or complex situations affecting the financial statements.
C) Communications with related parties.
Which of the following procedures regarding accounts payable would an accountant most likely perform during a nonissuer's review engagement? A) Obtaining an understanding of the entity's internal control over accounts payable. B) Assessing fraud risk within the accounts payable function. C) Comparing ratios developed from recorded amounts to expectations developed by the accountant. D) Obtaining confirmations of the year-end accounts payable amounts from the client's five largest vendors
C) Comparing ratios developed from recorded amounts to expectations developed by the accountant.
Which of the following would be used on a review engagement? A) Examination of board minutes. B) Confirmation of cash and accounts receivable. C) Comparison of current year to prior year account balances. D) Recalculation of depreciation expense.
C) Comparison of current year to prior year account balances.
Which of the following is not typically performed when the auditors perform a review of financial statements? A) Analytical procedures applied to financial data. B) Inquiries about significant subsequent events. C) Confirmation of accounts receivable. D) Obtaining an understanding of accounting principles followed in the client's industry.
C) Confirmation of accounts receivable
Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services? A) Performing basic analytical procedures. B) Remaining independent. C) Developing an understanding of internal control. D) Providing any form of assurance.
C) Developing an understanding of internal control.
Which of the following describes a manner in which a review of financial statements differs from the objective of a compilation engagement? A) The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness. B) The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance. C) In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance. D) In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.
C) In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.
An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances? A) Review report on the one statement. B) Qualified review report. C) Issue no report. D) Compilation report with the client's consent.
C) Issue no report.
When making a review of interim financial information the auditor's work consists primarily of A) Studying and evaluating limited amounts of documentation supporting the interim financial information. B) Scanning and reviewing client-prepared, internal financial statements. C) Making inquiries and performing analytical procedures concerning significant accounting matters. D) Confirming and verifying significant account balances at the interim date.
C) Making inquiries and performing analytical procedures concerning significant accounting matters.
An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that A) I am not aware of any material modifications that should be made to the accompanying financial statements. B) A compilation consists principally of inquiries of company personnel and analytical procedures. C) Management is responsible for the financial statements. D) A compilation is substantially less in scope than a general attestation or assurance engagement.
C) Management is responsible for the financial statements.
When an accountant is not independent of a client and is requested to prepare the client's financial statements, the accountant A) Is precluded from accepting the engagement. B) May accept the engagement and must disclose the lack of independence in a financial statement preparation report. C) May accept the engagement and need not disclose the lack of independence. D) May accept the engagement and must disclose both the lack of independence and the reason for the lack of independence.
C) May accept the engagement and need not disclose the lack of independence.
Which of the following is correct concerning a CPA firm's preparation of financial statements engagement? A) The statements must only be used by management and not third parties. B) A written engagement letter or oral agreement is required. C) No accountant's report ordinarily accompanies the financial statements. D) At a minimum, the accountant preparing the financial statements must comply with the compilation standards.
C) No accountant's report ordinarily accompanies the financial statements.
Which of the following is correct concerning a CPA firm's preparation of financial statements engagement? A) The statements should only be used by management and not third parties. B) A written engagement letter or oral agreement is required. C) No accountant's report ordinarily accompanies the financial statements. D) At a minimum, the accountant preparing the financial statements must comply with the compilation standards.
C) No accountant's report ordinarily accompanies the financial statements.
Which of the following is correct relating to compiled financial statements? A) A compilation report should be issued. B) Omission of note disclosures ordinarily results in withdrawal from the engagement. C) A written agreement with the client (ordinarily, an engagement letter) is not required. D) Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only."
A) A compilation report should be issued.
Which of the following is most likely to result in modification of a compilation report? A) A departure from generally accepted accounting principles. B) A lack of consistency in application of generally accepted accounting principles. C) A question concerning an entity's ability to continue as a going concern. D) A major uncertainty facing the financial statements.
A) A departure from generally accepted accounting principles.
Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity? A) A statement that the review was in accordance with generally accepted auditing standards. B) A statement that all information included in the financial statements are the representations of management. C) A statement describing the principal procedures performed. D) A statement describing the auditor's conclusions based upon the results of the review.
A) A statement that the review was in accordance with generally accepted auditing standards.
Which of the following procedures most likely would be performed in an engagement to review financial statements of a nonissuer? A) Analytical review of payroll tax expense. B) Testing of internal controls over cash receipts. C) Testing the aging of accounts payable. D) Confirmation of notes receivable.
A) Analytical review of payroll tax expense.
Which of the following procedures would an accountant most likely perform when reviewing the financial statements of a nonissuer? A) Ask management about the entity's procedures for recording transactions. B) Obtain an understanding of the entity's internal control components. C) Send a letter of inquiry to the entity's attorney regarding pending litigation. D) Assess the risk of material misstatement arising from fraudulent financial reporting.
A) Ask management about the entity's procedures for recording transactions.
Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, year 1. 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, year 2, and to include all GAAP disclosures for the year 2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement? A) Clark may not report on the comparative financial statements because the year 1 statements are not comparable to the year 2 statements. B) Clark may report on the comparative financial statements provided the year 1 statements do not contain any obvious material misstatements. C) Clark may report on the comparative financial statements provided an explanatory paragraph is added. D) Clark may report on the comparative financial statements provided Clark updates the report on the year 1 statements.
A) Clark may not report on the comparative financial statements because the year 1 statements are not comparable to the year 2 statements.
A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating the professional standards? A) Compilations. B) Reviews. C) Audits. D) Agreed-upon procedures.
A) Compilations.
Documentation of a financial statement preparation engagement performed under SSARS is most likely to include a(n): A) Copy of the financial statements. B) Representations letter. C) Internal control assessment. D) Listing of all professional judgments made throughout the engagement
A) Copy of the financial statements.
During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should A) Disclose the departure in a separate paragraph of the report. B) Issue an adverse opinion. C) Attach a footnote explaining the effects of the departure. D) Issue a compilation report.
A) Disclose the departure in a separate paragraph of the report.
If, after discussions with management, an accountant who has prepared financial statements knows that the financial statements include a material departure from GAAP that management will not allow correction of, the accountant should A) Disclose the material misstatement on the face of the financial statements or in a note to the financial statements. B) Require that management change the financial statements to eliminate the departure from GAAP. C) In all circumstances, resign the engagement. D) Issue an adverse opinion on the financial statements.
A) Disclose the material misstatement on the face of the financial statements or in a note to the financial statements.
Under the Statements on Standards for Accounting and Review Services, which of the following is required when an accountant prepares a client's financial statements? A) Engagement letter B) Representation Letter C) Both D) Neither
A) Engagement letter
Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A) Inquiry regarding the client's principles and practices and the method of applying them. B) Inquiry concerning the effectiveness of the client's system of internal control. C) Inquiry to identify transactions between related parties and management. D) Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.
A) Inquiry regarding the client's principles and practices and the method of applying them.
A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client's management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except A) Issue an accountant's review report with a separate paragraph discussing the change in engagement scope. B) Consider the additional audit effort and cost required to complete the audit. C) Evaluate the possibility that financial statement information affected by the limitation on work to be performed may be incorrect or incomplete. D) Consider the reason given for the client's request and assess whether the request is reasonable.
A) Issue an accountant's review report with a separate paragraph discussing the change in engagement scope.
Which of the following statements is correct concerning materiality for the purpose of a review of a nonpublic company's financial statements? A) It is an amount that could reasonably be expected to influence user economic decisions. B) It ordinarily is an amount smaller than that used in an audit of nonpublic company financial statements. C) It will in almost all situations be less than the tolerable misstatement amount for tests of an individual account. D) It should be considered for individual misstatements, and not in the aggregate sense for the overall financial statements.
A) It is an amount that could reasonably be expected to influence user economic decisions.
An accountant has been asked to compile the financial statements of a nonpublic company on a prescribed form that omits substantially all the disclosures required by generally accepted accounting principles. If the prescribed form is a standard preprinted form adopted by the company's industry trade association, and is to be transmitted only to such association, the accountant A) Need not advise the industry trade association of the omission of all disclosures. B) Should disclose the details of the omissions in separate paragraphs of the compilation report. C) Is precluded from issuing a compilation report when all disclosures are omitted. D) Should express limited assurance that the financial statement are free of material misstatements.
A) Need not advise the industry trade association of the omission of all disclosures.
An accountant agrees to the client's request to change an engagement from a review to a compilation of financial statements. The compilation report should include A) No reference to the original engagement. B) Reference to a departure from GAAS. C) Scope limitations that may have resulted in the change of engagement. D) Information about review procedures already performed.
A) No reference to the original engagement.
In an engagement to review the financial statements of a nonissuer, the accountant most likely would perform which of the following procedures? A) Physical inspection of inventory. B) Vouching of inventory purchase transactions. C) Analysis of inventory turnover. D) Evaluation of internal control over inventory.
C) Analysis of inventory turnover.
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? A) Perform a reasonableness test of the balance by computing days' sales in receivables. B) Vouch a sample of subsequent cash receipts from customers. C) Confirm individually significant receivable balances with customers. D) Review subsequent bank statements for evidence of cash deposits.
A) Perform a reasonableness test of the balance by computing days' sales in receivables.
When compiling a nonpublic entity's financial statements, an accountant would be least likely to A) Perform analytical procedures designed to identify relationships that appear to be unusual. B) Read the compiled financial statements and consider whether they appear to include adequate disclosure. C) Omit substantially all of the disclosures required by generally accepted accounting principles. D) Issue a compilation report on one or more, but not all, of the basic financial statements.
A) Perform analytical procedures designed to identify relationships that appear to be unusual.
A CPA who is not independent may A) Prepare financial statements. B) Review financial statements. C) Issue a comfort letter. D) Issue a qualified opinion.
A) Prepare financial statements.
When performing a review of a nonpublic company, the auditors should obtain in a representation letter acknowledgement of management for its responsibility for each of the following except: A) Responsibility for identifying all illegal acts committed by employees. B) Responsibility for the financial statements conforming with generally accepted accounting principles. C) Responsibility to prevent and detect fraud. D) Knowledge of any actual or suspected fraud that is material.
A) Responsibility for identifying all illegal acts committed by employees.
A CPA should not perform a financial statement compilation engagement of a nonpublic company unless, as a minimum, he or she complies with the provisions applicable to A) Statements on Standards for Accounting and Review Services. B) Statements on Compilation Standards. C) Statements on Auditing Standards. D) Statements on Standards for Attestation Engagements.
A) Statements on Standards for Accounting and Review Services.
Hart, CPA, is engaged to review the year-2 financial statements of Kell Co., a nonissuer. Previously, Hart audited Kell's year-1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include a separate paragraph in the year-2 review report because comparative financial statements are being presented for year 2 and year 1. This separate paragraph should indicate the A) Substantive reasons for the prior year's qualified opinion. B) Reason for changing the level of service from an audit to a review. C) Consistency of application of accounting principles between year 2 and year 1. D) Restriction on the distribution of the report for internal use only.
A) Substantive reasons for the prior year's qualified opinion.
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year's audited financial statements. This separate paragraph should indicate A) The type of opinion expressed previously. B) That the CPA did not update the assessment of control risk. C) The reasons for the change from an audit to a review. D) That the audit report should no longer be relied on.
A) The type of opinion expressed previously.
Which of the following should be included in an accountant's standard report based upon the review of a nonpublic entity's financial statements? A) A statement that the review was performed in accordance with generally accepted review standards. B) A statement that a review consists principally of inquiries and analytical procedures. C) A statement that the accountant is responsible for issuing an opinion on the financial statements. D) A statement that a review is substantially greater in scope than a compilation
B) A statement that a review consists principally of inquiries and analytical procedures.
An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take? A) Request that management engage an independent industry expert to consult with the accountant. B) Accept the engagement and obtain an adequate level of knowledge about the industry. C) Decline the engagement. D) Postpone accepting the engagement until the accountant has obtained an adequate level of knowledge about the industry.
B) Accept the engagement and obtain an adequate level of knowledge about the industry.
A review engagement relationship for a nonpublic company ordinarily involves an accountant and A) A responsible party B) Intended users C) Both D) Neither
C) Both
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to A) Obtain an updated management representation letter from the entity's management. B) Compare the prior year's financial statements with those of the current year. C) Review the successor accountant's working papers for matters affecting the prior year. D) Make inquiries of the entity's lawyers concerning continuing litigation
B) Compare the prior year's financial statements with those of the current year.
Which of the following procedures is usually performed by the accountant in a review engagement of a nonpublic entity? A) Sending a letter of inquiry to the entity's lawyer. B) Comparing the financial statements with statements for comparable prior periods. C) Confirming a significant percentage of receivables by direct communication with debtors. D) Communicating significant deficiencies discovered during the study of the internal control.
B) Comparing the financial statements with statements for comparable prior periods.
Which of the following statements is true with regard to review services performed under Statements on Standards for Accounting and Review Services? A) To perform a review, an accountant need not be independent but should disclose that fact. B) In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements. C) An accountant should have extensive knowledge of the client's business, industry, and the economy to perform a review. D) In a review, an accountant gives no assurance as to generally accepted accounting principles on the financial statements.
B) In a review, an accountant will express limited assurance as to generally accepted accounting principles on the financial statements.
Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of a publicly held entity? A) Inconsistent accounting principles B) Inadequate disclosure C) Both D) Neither
B) Inadequate disclosure
Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer? A) Review the predecessor accountant's working papers. B) Inquire of management about related-party transactions. C) Corroborate litigation information with the entity's attorney. D) Communicate internal control deficiencies to senior management.
B) Inquire of management about related-party transactions.
An accountant's objective of a review of the financial statements of a nonissuer (nonpublic company) is to provide what type of assurance? A) Absolute assurance. B) Limited assurance. C) No assurance. D) Reasonable assurance.
B) Limited assurance.
Is independence required when an accountant is engaged to either prepare or compile a client's financial statements? A) Yes for both B) No to both C) To prepare D) To compile
B) No to both
Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A) Assess control risk. B) Obtain a management representation letter. C) Confirm account balances. D) Perform a physical inventory observation.
B) Obtain a management representation letter.
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? A) Performing tests of details of major account balances. B) Performing inquiries and analytical procedures. C) Obtaining an understanding of internal control to assess control risk. D) Having previous experience in the client's industry.
B) Performing inquiries and analytical procedures.
When AICPA professional standards relating to a review of a nonissuer's (nonpublic entity's) financial statements uses the term "should" to indicate the accountant's responsibility to perform a procedure, performance of that procedure is considered: A) Unconditionally required—The accountant is required to comply with it. B) Presumptively mandatory—The accountant is required to comply with it except in rare circumstances. C) Advisory—The accountant should consider this is as general advice and determine whether to follow the procedure. D) Optional—There is no requirement under any circumstance that the accountant perform the procedure.
B) Presumptively mandatory—The accountant is required to comply with it except in rare circumstances.
When an accountant is not independent, that accountant is precluded from issuing a A) Compilation report. B) Review report. C) Management advisory report. D) Tax planning report.
B) Review report.
Blue Co., a privately held entity, asked its tax accountant, Cook, a CPA in public practice, to prepare its financial statements in conjunction with preparation of Blue's tax return. These financial statements will be presented alongside the entity's tax return for various purposes (e.g., they will be provided to a bank from which Blue Co. has an outstanding loan). The standards that apply in this situation are: A) Statements on Standards for Tax Services. B) Statements on Standards for Accounting and Review Services. C) Statements on Responsibilities in Unaudited Financial Services. D) Statements on Standards for Attestation Engagements.
B) Statements on Standards for Accounting and Review Services.
Which of the following is correct concerning an accountant's preparation of financial statements? A) The AICPA compilation standards provide requirements. B) The accountant need not determine whether he or she is independent. C) A written representation letter should be obtained from management. D) An accountant's report should be issued summarizing findings.
B) The accountant need not determine whether he or she is independent.
Which statement is most accurate concerning an accountant's responsibility when evaluating management's responses to inquiries when performing a review? A) The accountant is not required to evaluate the reasonableness and consistency of management's responses. B) The accountant ordinarily is not required to corroborate management's responses with other information; however, the accountant should consider the reasonableness and consistency of management's responses. C) The accountant is ordinarily required to corroborate with additional evidence only significant management responses. D) The accountant should corroborate all management responses.
B) The accountant ordinarily is not required to corroborate management's responses with other information; however, the accountant should consider the reasonableness and consistency of management's responses.
An accountant's standard report on a compilation of a projection should not include a statement that A) There will usually be differences between the forecasted and actual results. B) The hypothetical assumptions used in the projection are reasonable in the circumstances. C) The accountant has no responsibility to update the report for future events and circumstances. D) The compilation of a projection is limited in scope.
B) The hypothetical assumptions used in the projection are reasonable in the circumstances.
While performing a review, information indicating that the entity being reviewed may lack the ability to continue as a going concern has come to the accountant's attention. The client agrees that such a situation does exist, but refuses to add disclosures relating to it. What effect is this most likely to have the accountant's review report? A) No effect, a standard unmodified (unqualified) report is appropriate. B) The report should indicate a departure from generally accepted accounting principles. C) An adverse opinion should be issued, with modification of the opinion paragraph and addition of an explanatory paragraph. D) A qualified opinion should be issued, with modification of the opinion paragraph and addition of an explanatory paragraph.
B) The report should indicate a departure from generally accepted accounting principles.
West, CPA, is engaged to compile the financial statements of Lake Co., a nonissuer. Lake's financial statements are prepared in conformity with the cash basis of accounting. If Lake's financial statements do not disclose the basis of accounting used, which of the following statements best describes West's reporting responsibility concerning this matter? A) West should disclose the basis of accounting used in the notes to Lake's financial statements. B) West should disclose the basis of accounting used in West's compilation report. C) West should quantify the effects of the differences between GAAP and the cash basis and disclose them in West's compilation report. D) West should quantify the effects of the differences between GAAP and the cash basis and disclose them in the notes to Lake's financial statements.
B) West should disclose the basis of accounting used in West's compilation report.
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 A) Inform management that the engagement can proceed only if distribution of the accountant's report is restricted to internal use. B) Withdraw from the engagement and provide no further service concerning these financial statements. C) Quantify the effects of the departures from GAAP and describe the departures from GAAP in a special report. D) Obtain written representations from management that the financial statements will not be used to obtain credit from financial institutions.
B) Withdraw from the engagement and provide no further service concerning these financial statements.
When an accountant is not independent with respect to an entity, which of the following types of compilation reports may be issued? A) The standard compilation report may be issued, regardless of independence. B) A compilation report with negative assurance may be issued. C) A compilation report with wording that indicates the accountant's lack of independence may be issued. D) A compilation report may be issued if the engagement is upgraded to a review.
C) A compilation report with wording that indicates the accountant's lack of independence may be issued.
Which of the following statements is correct regarding a review engagement of a nonpublic company's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)? A) An accountant should establish an understanding with the client regarding services to be performed in an engagement using a client representations letter. B) An accountant must obtain an understanding of the client's internal control when performing a review. C) A review provides an accountant with a basis for expressing limited assurance on the financial statements. D) A review report contains an accountant's opinion of the financial statements taken as a whole.
C) A review provides an accountant with a basis for expressing limited assurance on the financial statements.
An accountant should follow the financial statement preparation requirements of the Statements on Standards for Accounting and Review Services when he or she prepares A) Financial statements when also engaged to perform a review. B) Personal financial statements for inclusion in written personal financial plans prepared by the accountant. C) A single financial statement that omits substantially all disclosures required by GAAP. D) General ledger transactions in an accounting software system.
C) A single financial statement that omits substantially all disclosures required by GAAP.
Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements? A) A statement that the compilation was performed in accordance with standards promulgated by the Accounting and Review Services Committee of the AICPA. B) A statement that the accountant has not audited or reviewed the financial statements. C) A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. D) A statement that management is responsible for the financial statements.
C) A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.
A review of a nonpublic company's financial statements is considered A) An assurance engagement B) An attest engagement C) Both D) Neither
C) Both
If requested to perform a review engagement for a nonpublic entity 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 issue an auditor's opinion.
C) Not independent and, therefore, may not issue a review report.
Which of the following is included in compilation performance requirements? A) Obtain a knowledge of the client through performance of tests of controls. B) Read the financial statements and perform analytical procedures as considered necessary. C) Obtain an understanding of the client's industry (e.g., through AICPA guides, industry publications). D) Perform tests of details of transactions only for current assets and liabilities.
C) Obtain an understanding of the client's industry (e.g., through AICPA guides, industry publications).
Which of the following should be the first step in reviewing the financial statements of a nonpublic entity? A) Comparing the financial statements with statements for comparable prior periods and with anticipated results. B) Completing a series of inquiries concerning the entity's procedures for recording, classifying, and summarizing transactions. C) Obtaining a general understanding of the entity's organization, its operating characteristics, and its products or services. D) Applying analytical procedures designed to identify relationships and individual items that appear to be unusual
C) Obtaining a general understanding of the entity's organization, its operating characteristics, and its products or services.
A nonissuer has asked an accountant to compile its financial statements that omit substantially all disclosures required by generally accepted accounting principles (GAAP). The accountant may comply with the entity's request provided that the A) Financial statements are compiled in conformity with a comprehensive basis of accounting other than GAAP. B) Financial statements will not be used to obtain credit from a third-party financial institution. C) Omission is not employed in order to mislead the users of the financial statements and is properly disclosed in the accountant's report. D) Omission is acknowledged in the notes to the financial statements and is consistent with the prior-year's financial statements.
C) Omission is not employed in order to mislead the users of the financial statements and is properly disclosed in the accountant's report.
Which of the following types of association with financial statements is least likely to result in a report by the CPAs? A) Compilation. B) Review. C) Preparation. D) Audit.
C) Preparation.
An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services (SSARS) when performing which of the following tasks? A) Preparing monthly journal entries. B) Providing the client with software to generate financial statements. C) Preparing financial statements of a nonissuer. D) Providing a blank financial statement format or template.
C) Preparing financial statements of a nonissuer.
An accountant had begun to audit the financial statements of a nonpublic entity. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation? A) The entity's management does not provide the accountant with a signed representation letter. B) The accountant is prohibited from corresponding with the entity's legal counsel. C) The entity's principal creditors no longer require the entity to furnish audited financial statements. D) The accountant is prevented from examining the minutes of the board of director's meetings.
C) The entity's principal creditors no longer require the entity to furnish audited financial statements.
When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with GAAP, the accountant should A) Assess the risk of material misstatement in the financial statements due to fraud. B) Perform tests of controls to evaluate the effectiveness of the controls. C) Understand the accounting principles of the industry in which the entity operates. D) Communicate with the audit committee regarding material weaknesses in internal control.
C) Understand the accounting principles of the industry in which the entity operates.
In performing a compilation of financial statements of a nonpublic entity, the accountant decides that modification of the standard report is not adequate to indicate deficiencies in the financial statements taken 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) Issue a special compilation report. C) Withdraw from the engagement. D) Express an adverse audit opinion.
C) Withdraw from the engagement.
Reviews of annual information of nonpublic companies A) Are identical in procedures included to those in interim reviews of public companies. B) Are only required to be performed of nonpublic companies with assets in excess of 1,000,000. C) Include a more detailed analysis of internal control than do interim reviews of public companies. D) Are designed to obtain evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications needed.
D) Are designed to obtain evidence to provide a reasonable basis for obtaining limited assurance that there are no material modifications needed.
When performing an engagement to review a nonpublic entity's financial statements, an accountant most likely would A) Obtain an understanding of the entity's internal control. B) Limit the distribution of the accountant's report. C) Confirm a sample of significant accounts receivable balances. D) Ask about actions taken at board of directors' meetings.
D) Ask about actions taken at board of directors' meetings.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to A) Make inquiries about actions taken at meetings of the board of directors during the current year. B) Verify that the reissued report will not be used to obtain credit from a financial institution. C) Review the successor accountant's working papers for matters affecting the prior year. D) Compare the prior year's financial statements with those of the current year.
D) Compare the prior year's financial statements with those of the current year.
Statements on Standards for Accounting and Review Services (SSARS) establish standards and procedures for which of the following engagements? A) Assisting in adjusting the books of account for partnership. B) Reviewing interim financial data required to be filed with the SEC. C) Processing financial data for clients of other accounting firms. D) Compiling an individual's personal financial statement to be used to obtain a mortgage.
D) Compiling an individual's personal financial statement to be used to obtain a mortgage.
Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer? A) Make inquiries of the employees and senior management regarding transactions with related parties. B) Determine whether there is substantial doubt about the entity's ability to continue as a going concern. C) Scan the entity's records for the period just after the balance sheet date to identify subsequent events requiring disclosure. D) Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.
D) Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.
Which of the following is correct relating to an accountant's responsibility when performing a financial statement preparation engagement? A) The accountant should perform substantive tests of balances when the financial statements will be distributed to third parties. B) An accountant's preparation report should be included with the financial statements. C The accountant should obtain a representation letter from management. D) Each page of the financial statements should have a restriction such as "No assurance is provided on these financial statements."
D) Each page of the financial statements should have a restriction such as "No assurance is provided on these financial statements."
An auditor who was engaged to perform an audit of the financial statements of a nonpublic entity has been asked by the client to refrain from performing various audit procedures and change the nature of the engagement to a review of the financial statements in accordance with standards established by the AICPA. The client's request was made because the cost to complete the audit was significant. Under the circumstances the auditor would most likely A) Qualify the auditor's report and refer to the scope limitation. B) View the request as an indication of likely fraud. C) Complete the examination which was in progress. D) Honor the client's request.
D) Honor the client's request.
Which of the following procedures would a CPA most likely perform when reviewing the financial statements of a nonissuer? A) Verify that the accounting estimates that could be material to the financial statements have been developed. B) Obtain an understanding of the entity's internal control components. C) Assess the entity's ability to continue as a going concern for a reasonable period of time. D) Make inquiries about actions taken at the board of directors meetings.
D) Make inquiries about actions taken at the board of directors meetings.
A CPA in public practice must be independent in fact and appearance when providing which of the following services? A) Compilation of a financial forecast B) Compilation of personal financial statements C) Both D) Neither
D) Neither
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARS) when A) Performing general bookkeeping for a client B) Consulting on accounting matters C) Both D) Neither
D) Neither
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 A) Original engagement that was agreed to B) Scope limitation that caused the change engagement C) Both D) Neither
D) Neither
In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters? A) Inability to assess the risk of material misstatement due to fraud B) Discovery of significant deficiencies in the design of the entity's internal control C) Both D) Neither
D) Neither
Which of the following actions should an accountant take when engaged to prepare a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)? A) Perform analytical procedures. B) Express negative assurance on the financial statements. C) Make management inquiries and examine internal controls. D) Perform the engagement even though independence is impaired.
D) Perform the engagement even though independence is impaired.
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a A) Report on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act. B) Review report on prospective financial statements that present an entity's expected financial position, given one or more hypothetical assumptions. C) Management advisory report prepared at the request of a client's audit committee. D) Review report on comparative financial statements for a nonpublic entity in its second year of operations.
D) Review report on comparative financial statements for a nonpublic entity in its second year of operations.
An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct? A) The accountant should refuse the compilation engagement. B) A report need not be issued for a compilation of a nonissuer. C) The accountant should include the disclaimer "Although I am not independent with respect to the entity, I have objectively compiled the financial statements" in the compilation report. D) The accountant should include the statement "I am not independent with respect to the entity" in the compilation report.
D) The accountant should include the statement "I am not independent with respect to the entity" in the compilation report.
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) A substantial portion of generally accepted accounting principles disclosures was omitted. B) There was a lack of independence between the accountant and client. C) The accountant had no prior experience with similar organizations within the industry. D) The accountant was not able to come to an understanding with representatives of the organization for services to be performed.
D) The accountant was not able to come to an understanding with representatives of the organization for services to be performed.
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)? A) The report should not be issued if the accountant is not independent from the entity. B) The report should include a statement indicating that the information is the representation of the accountant. C) The report should include a description of all procedures performed during the compilation. D) The date on the report should be the date of completion of compilation procedures.
D) The date on the report should be the date of completion of compilation procedures.
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 A) The balance sheet is not to be used to obtain credit or distributed to the entity's creditors. B) The balance sheet is part of a comprehensive personal financial plan developed to assist the entity. C) There have been no material changes during the year in the entity's accounting principles. D) The scope of the accountant's inquiry and analytical procedures has not been restricted.
D) The scope of the accountant's inquiry and analytical procedures has not been restricted.
An accountant's compilation report on a financial forecast should include a statement that A) The hypothetical assumptions used in the forecast are reasonable in the circumstances. B) The forecast should be read only in conjunction with the audited historical financial statements. C) The accountant expresses only limited assurance on the forecasted statements and their assumptions. D) There will usually be differences between the forecasted and actual results.
D) There will usually be differences between the forecasted and actual results.
