Chapter 25

Explain the purpose of an attestation engagement and provide an example of an assertion a CPA could attest to. A. The purpose of an attestation engagement is to provide an​ opinion, conclusion, or findings to users of information regarding the reliability of information or an assertion about a subject​ matter, measured against stated criteria. Examples of assertions that an auditor could attest to include a​ company's compliance with debt​ covenants, compliance with sustainability​ criteria, or the quantity of inventory held by a company at a warehouse. B. The purpose of an attestation engagement is 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. Examples of assertions that an auditor could attest to include the audit of a​ company's ending balance in inventory. C. The purpose of an attestation engagement is to apply accounting and financial reporting expertise to assist management in the preparation of financial statements and issue a report to a client or third party without providing any CPA assurance about those statements. Examples of assertions that an auditor could attest to include the accuracy of the financial statements and that they contain no material misstatements. D. The purpose of an attestation engagement is to express limited assurance that the financial statements are in accordance with applicable accounting​ standards, including appropriate informative​ disclosures, or other comprehensive basis of accounting​ (OCBOA), such as the cash basis of accounting. Examples of assertions that an auditor could attest to include reports on​ royalties, profit​ participation, and provision for income taxes.

A. The purpose of an attestation engagement is to provide an​ opinion, conclusion, or findings to users of information regarding the reliability of information or an assertion about a subject​ matter, measured against stated criteria. Examples of assertions that an auditor could attest to include a​ company's compliance with debt​ covenants, compliance with sustainability​ criteria, or the quantity of inventory held by a company at a warehouse.

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

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

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

2. Management is responsible for the financial statements.

What are the major differences between a compilation engagement and a preparation​ engagement? 1. 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. 2. 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. 3. 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. 4. 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 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.

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. Obtain a written representation from the chief financial officer that the disbursements are proper and should be included in the current financial statements. 3. Modify the review opinion or withdraw from the engagement unless the unsupported disbursements are satisfactorily explained. 4. Exclude the unsupported disbursements from the statements.

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

What is the major difference between a review and a compilation?

A review provides limited assurance on the financial statements whereas a compilation report provides no expressed assurance.

What is an attestation engagement?

A type of assurance service in which the CPA firm issues a report about the reliability of information, or an assertion made by another party.

What procedures should the auditor use to obtain the information necessary to give the level of assurance required of reviews of financial​ statements? ​(Select all that​ apply.) A. Obtain knowledge of the client. The information should be about the nature of the​ client's business​ transactions, its accounting records and​ employees, and the​ basis, form, and content of the financial statements. The level of knowledge should be higher than that for compilation. B. Obtain agreement on engagement terms with management or those charged with governance. This is generally in the form of an engagement letter or other suitable form of written agreement. C. Make inquiries of management. The objective of these inquiries is to determine whether the financial statements are fairly​ presented, assuming that management does not intend to deceive the accountant. D. Obtain knowledge of the accounting principles and practices of the​ client's industry. The level of knowledge for reviews should be somewhat higher than that for compilation. E. Assess the control risk at a level that reflects the relative effectiveness of those internal controls and obtain sufficient appropriate evidence to support that assessment by performing tests of controls. F. Perform substantive tests of transactions. The substantive tests of transactions are meant to determine whether all six​ transaction-related review objectives have been satisfied for each class of transactions. G. Perform analytical procedures. The analytical procedures are meant to identify relationships and individual items that appear to be unusual. H. Prepare documentation. The accountant should prepare documentation of procedures​ performed, sources of evidence​ obtained, and conclusions reached. I. Obtain a letter of representation. The accountant is required to obtain a letter of representation from members of management who are knowledgeable about financial matters. J. Sending confirmations to all banks doing business with the company. K. Read the financial statements. The accountant should read the financial statements to determine whether they conform with the financial reporting framework. L. Reconcile the financial statements to the underlying accounting records. The accountant should obtain evidence that the financial statements agree or reconcile with the accounting records.

A. Obtain knowledge of the client. The information should be about the nature of the​ client's business​ transactions, its accounting records and​ employees, and the​ basis, form, and content of the financial statements. The level of knowledge should be higher than that for compilation. B. Obtain agreement on engagement terms with management or those charged with governance. This is generally in the form of an engagement letter or other suitable form of written agreement. C. Make inquiries of management. The objective of these inquiries is to determine whether the financial statements are fairly​ presented, assuming that management does not intend to deceive the accountant. D. Obtain knowledge of the accounting principles and practices of the​ client's industry. The level of knowledge for reviews should be somewhat higher than that for compilation. G. Perform analytical procedures. The analytical procedures are meant to identify relationships and individual items that appear to be unusual. H. Prepare documentation. The accountant should prepare documentation of procedures​ performed, sources of evidence​ obtained, and conclusions reached. I. Obtain a letter of representation. The accountant is required to obtain a letter of representation from members of management who are knowledgeable about financial matters. K. Read the financial statements. The accountant should read the financial statements to determine whether they conform with the financial reporting framework. L. Reconcile the financial statements to the underlying accounting records. The accountant should obtain evidence that the financial statements agree or reconcile with the accounting records.

What types of tests are not completed in a review that are usually completed in an audit?

Accountants do not do test controls, substantive tests of transactions, or tests of balances.

What is negative​ assurance? A. A negative assurances provides reasonable assurance that a​ company's computer system complies with Trust Services principles and criteria. B. 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. 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 provides a direct statement as to whether the presentation of the financial statements are prepared in accordance with accounting standards.

B. 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.

Select the answer that defines a review of financial statements. A. A review is defined as a method to obtain reasonable assurance about whether the financial statements as a whole are free from material​ misstatement, whether due to fraud or​ error, enabling the accountant to express an opinion in a written report on whether the financial statements are presented​ fairly, in all material​ respects, in accordance with the applicable financial reporting framework. B. A review is defined as a​ service, the objective of which is to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. In a review​ engagement, the accountant should accumulate review evidence to obtain a limited level of assurance. C. A review is defined as an independent professional service that improves the quality of information for decision makers. The objective of the accountant is to include attestation​ services, which are any services in which the CPA firm issues a report that expresses a conclusion about the reliability of an assertion that is the responsibility of another party. D. A review is defined as a​ service, the objective of which is to assist management in presenting the financial statements in accordance with the applicable financial reporting framework. In a​ review, the accountant does not obtain or provide any assurance that there are no material modifications that should be made to the financials or disclose these items in the report.

B. A review is defined as a​ service, the objective of which is to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. In a review​ engagement, the accountant should accumulate review evidence to obtain a limited level of assurance.

Select the best definition for attestation standards. A. Attestation standards provide guidance for the preparation of unaudited financial statements of nonpublic companies. B. Attestation standards provide a general framework for and set reasonable boundaries around the attestation function. They provide guidance to AICPA​ standard-setting bodies for establishing detailed standards and interpretations of standards for specific types of services. They also provide practitioners useful guidance in performing new and evolving attestation services where no specific guidance exists. C. An engagement in which the procedures to be performed are agreed upon by the attestation​ standards; the​ CPA's report is presented in the form of a negative assurance. D. Attestation standards provide an engagement in which the accountant undertakes to​ present, in the form of financial​ statements, information that is the representation of​ management, without undertaking to express any assurance on the statements.

B. Attestation standards provide a general framework for and set reasonable boundaries around the attestation function. They provide guidance to AICPA​ standard-setting bodies for establishing detailed standards and interpretations of standards for specific types of services. They also provide practitioners useful guidance in performing new and evolving attestation services where no specific guidance exists.

Select the answer that defines a preparation of financial statements. A. A preparation is defined as a method to obtain reasonable assurance about whether the financial statements as a whole are free from material​ misstatement, whether due to fraud or​ error, enabling the CPA to express an opinion in a written report on whether the financial statements are presented​ fairly, in all material​ respects, in accordance with the applicable financial reporting framework. B. Preparation is defined in SSARS as a service where 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. C. A preparation is defined as a​ service, the objective of which is to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. In a review​ engagement, the accountant should accumulate review evidence to obtain a limited level of assurance. D. A preparation is defined as a​ service, the objective of which 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 in order for the statements to be in conformity with the applicable financial reporting framework

B. Preparation is defined in SSARS as a service where 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.

What is the level of assurance for a​ preparation, a compilation or a​ review? A. There is no level of assurance provided by a​ preparation, a compilation or a review since they are considerably less than an audit. B. There is no level of assurance provided by a preparation or compilation. Reviews provide limited​ assurance, but considerably less than a typical audit. C. There is no level of assurance provided by a preparation. There is limited assurance provided by a compilation and a review since the reports are prepared in accordance with the Statements on Standards for Accounting and Review Services. D. There is limited assurance of financial statements provided by a preparation or a compilation. Reviews provide reasonable assurance that the financial statements are free from material misstatement.

B. There is no level of assurance provided by a preparation or compilation. Reviews provide limited​ assurance, but considerably less than a typical audit.

Do CPAs need to be independent for preparations?

Because preparation services is a nonattest service, the CPA does not need to determine whether he or she is independent

What is the benefit of having a preparation, compilation, or review engagement?

Because the assurance provided in a preparation, compilation, or review engagement is considerably below that of audits, less evidence is required for these services, and they can be provided at a lower fee than an audit

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

C. Know the​ client, the nature of its business​ transactions, accounting records and​ employees, and the​ basis, form, and content of the financial statements. D. Possess knowledge of the accounting principles and practices of the​ client's industry. F. Read the compiled financial statements and be alert for any obvious omissions or errors in arithmetic and generally accepted accounting principles. G. 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. H. Establish an understanding with the client in a written engagement letter about the objectives of the nature of the engagement.

What is meant by the term level of​ assurance? A. 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. B. 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. C. 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 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.

C. 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.

Do CPAs need to be independent for compilations?

CPA is not required to be independent to perform a compilation

Select the answer that defines a compilation of financial statements. A. A compilation is defined as a method to obtain reasonable assurance about whether the financial statements as a whole are free from material​ misstatement, whether due to fraud or​ error, enabling the CPA to express an opinion in a written report on whether the financial statements are presented​ fairly, in all material​ respects, in accordance with the applicable financial reporting framework. B. A compilation is defined as an​ agreed-upon procedures between the CPA firm and the client. The objective is to express a positive conclusion that the financial statements are accurate in all material aspects. The financial statements are prepared by the CPA firm and management to ensure the statements are in conformity with the applicable financial reporting framework. C. A compilation is defined as a service that provides limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework. In a compilation​ engagement, the accountant should ensure the report states if the financial statements are presented​ fairly, in all material​ respects, in accordance with the applicable financial reporting framework. D. A compilation is defined as a​ service, the objective of which 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 in order for the statements to be in conformity with the applicable financial reporting framework.

D. A compilation is defined as a​ service, the objective of which 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 in order for the statements to be in conformity with the applicable financial reporting framework.

Why is negative assurance 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 no level of assurance. B. with a high level of assurance. C. with financial statements that are the representation of​ management, without expressing any assurance on the statements. 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.

What type of evidence is obtained in a review?

Evidence consists primarily of inquiries of management and analytical procedures

What steps should auditors take if during a compilation engagement they become aware that the financial statements are​ misleading?

For a​ compilation, the accountant does not have to make inquiries or perform other procedures to verify information supplied by the entity beyond the procedures required of an auditor by SSARS for a compilation. If the accountant becomes aware that the statements are not fairly​ presented, he or she should obtain additional information. If the client refuses to provide the​ information, the accountant should withdraw from the compilation engagement.

What is the major difference between a compilation and a preparation?

The CPA does not issue a report and the CPA does not need to assess the independence in a preparation

What is the level of assurance provided by a review, compilation, and preparation?

The amount of evidence and assurance needed for each engagement is not defined by the profession and therefore depends on the accountant's judgement

Distinguish between attestation standards and auditing standards.

The attestation standards provide a conceptual framework for various types of services. Auditing standards provide a conceptual framework for the ordinary audit of financial statements prepared in accordance with accounting standards.

Do CPAs need to be independent for reviews?

Yes CPA's must be independent of the client for review service engagements

What is unique about the reporting for compilations?

The use of each type of compilation report depends on whether management elects to include all the required disclosures with the financial statements and whether the accountant is independent

What are the three major types of attest engagements? Give a brief explanation of each

· Examinations: an attest engagement that results in positive assurance expressed as an opinion as to whether or not the assertions under the examination conform with the applicable criteria · Reviews: an attestation engagement that provides limited assurance expressed in the form of negative assurance as to the CPA's awareness of any information indicating that the assertions are not presented in conformity with the applicable criteria · Agreed-Upon Procedures: an engagement in which the procedures to be performed are agreed upon by the CPA, the responsible party making the assertions, and the intended users of the CPAs report, the degree of assurance provided by the CPA will vary based on procedures agreed to and performed