Certified Public Accountant CPA Questions + Answers Part 24

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QUESTION 158
The nature and extent of a CPA firm's quality control policies and procedures depend on:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "a" is correct. The nature and extent of a CPA firm's quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations.
Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 159
Would the following factors ordinarily be considered in planning an audit engagement's personnel requirements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When assigning personnel to an engagement, the firm should consider the following factors in achieving a balance of engagement manpower requirements, personnel skills, and individual development and utilization: 1) engagement size and complexity, 2) personnel availability, 3) special expertise required, 4) timing of the work to be performed, 5) continuity and periodic rotation of personnel, and 6) opportunities for on-the-job training. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 160
After fieldwork audit procedures are completed, a partner of the CPA firm who has not been involved in the audit performs a second or wrap-up review of the audit

documentation. This second review usually focuses on:
A. ThefairpresentationofthefinancialstatementsinconformitywithGAAP.
B. Fraudinvolvingtheclient'smanagementanditsemployees.
C. The materiality of the adjusting entries proposed by the audit staff.
D. The communication of internal control weaknesses to those charged with governance.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The primary purpose of a second partner review is to ensure that the financial statements are presented in accordance with GAAP. Choice "b" is incorrect. A search for fraud is typically not part of a second partner review. Choice "c" is incorrect. The materiality of adjusting entries proposed by the audit staff may be reviewed by a second partner, but they are not the primary focus of such a review. Choice "d" is incorrect. The communication of internal control weaknesses to those charged with governance is not a primary focus of a second partner review.
QUESTION 161
The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to:
A. EnabletheCPAfirmtoattesttothereliabilityoftheclient.
B. SatisfytheCPAfirm'sdutytothepublicconcerningtheacceptanceofnewclients.
C. Minimize the likelihood of association with clients whose management lac
QUESTION 205
An accountant's standard report on a review of the financial statements of a nonissuer should state that the accountant:

A. Doesnotexpressanopinionoranyformoflimitedassuranceonthefinancialstatements.
B. IsnotawareofanymaterialmodificationsthatshouldbemadetothefinancialstatementsforthemtoconformwithGAAP. C. Obtained reasonable assurance about whether the financial statements are free of material misstatement.
D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The accountant's report on a review engagement should state that the accountant is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP.
Choice "a" is incorrect. An accountant expresses limited assurance in a review engagement. Choice "c" is incorrect. "Reasonable assurance about whether the financial statements are free of material misstatement" is required for audit engagements, but is not necessary for review engagements.
Choice "d" is incorrect. Examining evidence on a test basis is required for an audit engagement; procedures for a review engagement are limited to inquiry and analytical procedures.
QUESTION 206
An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may not do so:
A. Becausecompliancewiththisrequestwouldresultinaviolationoftheethicalstandardsoftheprofession. B. Becausecompliancewiththisrequestwouldresultinanincompletereview.
C. If the review of the balance sheet discloses material departures from GAAP.
D. If the scope of the inquiry and analytical procedures has been restricted.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An accountant may issue a review report on one financial statement, such as a balance sheet, as long as the scope of the inquiry and analytical procedures has not been restricted.
Choice "a" is incorrect. Compliance with this request would not violate any ethical standards of the profession.
Choice "b" is incorrect. Compliance with this request would not necessarily result in an incomplete review.

Choice "c" is incorrect. An accountant can still review only the balance sheet, even if the review discloses material departures from GAAP. However, these departures should be reflected in the accountant's report.
QUESTION 207
When performing an engagement to review a nonissuer's financial statements, an accountant most likely would:
A. Confirmasampleofsignificantaccountsreceivablebalances. B. Askaboutactionstakenatboardofdirectors'meetings.
C. Obtain an understanding of internal control.
D. Restrict the use of the accountant's report.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. As part of the inquiries made during a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements. Choice "a" is incorrect. Certain procedures, such as confirmation of receivables and observation of inventory, are customarily performed in an audit but not in compilation or review engagements.
Choice "c" is incorrect. A review engagement does not include obtaining an understanding of the client's internal control.
Choice "d" is incorrect. The accountant would not normally restrict the use of the review report.
QUESTION 208
During an engagement to review the financial statements of a nonissuer an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should:
A. ExpressnegativeassuranceontheaccountingprinciplesthatdonotconformwithGAAP. B. DisclosethedeparturefromGAAPinaseparateparagraphofthereport.
C. Issue an adverse or an "except for" qualified opinion, depending on materiality.
D. Express positive assurance on the accounting principles that conform with GAAP.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. If the accountant concludes that modification of the standard report is appropriate, the departure should be disclosed in a separate paragraph of the report. Choice "a" is incorrect. An accountant would not express negative assurance on the accounting principles that do not conform with GAAP in a review engagement. Choice "c" is incorrect. An accountant would not issue an opinion in a review engagement. Choice "d" is incorrect. An accountant would not express positive assurance (i.e., an opinion) on the accounting principles that conform with GAAP in a review engagement.
QUESTION 209
Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer's financial statements?
A. Theaccountantisindependentwithrespecttotheentity.
B. Thefinancialstatementshavenotbeenaudited.
C. A compilation consists principally of inquiries and analytical procedures.
D. The accountant does not express any assurance on the financial statements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If the accountant is not independent, he should specifically disclose the lack of independence. Otherwise, independence is implied. Choice "b" is incorrect. The report accompanying compiled financial statements explicitly states that the financial statements have not been audited. Choice "c" is incorrect. Inquiry and analytical procedures are not performed in a compilation engagement.
Choice "d" is incorrect. The report accompanying compiled financial statements explicitly states that the accountant provides no assurance on the financial statements.
QUESTION 210
Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services?
A. Preparingaworkingtrialbalance.
II. Preparing standard monthly journal entries.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B)

Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant can prepare a working trial balance and prepare standard monthly journal entries without being required to issue a compilation or review report under the SSARS as long as the performance of these services does not carry forward into the submission of financial statements.
Choice "a" is incorrect. Monthly journal entries can be prepared. Choice "b" is incorrect. A working trial balance can be prepared. Choice "d" is incorrect. Both of these services can be rendered as long as they do not carry forward into the preparation of financial statements.
QUESTION 211
Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer's financial statements?
A. Analyticalproceduresdesignedtotesttheaccountingrecordsbyobtainingcorroboratingevidentialmatter. B. Inquiriesconcerningtheentity'sproceduresforrecordingandsummarizingtransactions.
C. Analytical procedures designed to test management's assertions regarding continued existence.
D. Inquiries of the entity's attorney concerning contingent liabilities.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When reviewing a nonissuer's financial statements, an accountant ordinarily makes inquiries concerning the entity's procedures for recording and summarizing transactions.
Choices "a", "c", and "d" are incorrect. The following audit procedures generally are not performed in a review engagement:
A. Tests of the accounting records.
C. Tests of management's assertions regarding continued existence. D. Inquiries of the entity's attorney concerning contingent liabilities.
QUESTION 212
When compiling the financial statements of a nonissuer, an accountant should:
A. Reviewagreementswithfinancialinstitutionsforrestrictionsoncashbalances. B. Understandtheaccountingprinciplesandpracticesoftheentity'sindustry.
C. Inquire of key personnel concerning related parties and subsequent events.
D. Perform ratio analyses of the financial data of comparable prior periods.
Correct Answer: B

Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When compiling the financial statements of a nonissuer, an accountant should understand the accounting principles and practices of the entity's industry. Choice "a" is incorrect. Reviewing agreements with financial institutions for restrictions is generally performed during an audit.
Choice "c" is incorrect. Inquiring of key personnel concerning related parties and subsequent events is not required in a compilation.
Choice "d" is incorrect. Performing ratio analyses of the financial data of comparable prior periods is generally performed for review engagements and audits, not compilations.
QUESTION 213
Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the:
A. Reasonforomittingthedisclosuresisexplainedintheengagementletterandacknowledgedinthemanagementrepresentationletter. B. Financialstatementsarepreparedonacomprehensivebasisofaccountingotherthangenerallyacceptedaccountingprinciples.
C. Use of the financial statements is restricted to internal use only.
D. Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant's report.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An accountant may compile FS that omit substantially all disclosures required by GAAP provided the omission is not undertaken to mislead the users of the FS and is properly disclosed in the accountant's report as an additional third paragraph. Choice "a" is incorrect. There is no requirement that the reason for omitting the disclosures be explained in an engagement letter or acknowledged in the management representation letter (which, by the way, is not required for compilation engagements). Choice "b" is incorrect. Financial statements compiled in accordance with GAAP may omit substantially all required disclosures.
Choice "c" is incorrect. Substantially all disclosures required by GAAP may be omitted in a compilation without restricting use to internal parties.
QUESTION 214
Which of the following procedures is usually performed by the accountant in a review engagement of a nonissuer?
A. Sendingaletterofinquirytotheentity'slawyer.
B. Comparingthefinancialstatementswithstatementsforcomparablepriorperiods.

C. Confirming a significant percentage of receivables by direct communication with debtors.
D. Communicating significant deficiencies discovered during the study of the internal control structure.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Comparing the financial statements with statements for comparable prior periods (analytical procedures) is a procedure that is usually performed by the accountant in a review engagement of a nonissuer.
Choice "a" is incorrect. Sending a letter of inquiry to the entity's lawyer is a procedure generally performed only in an audit of an entity's financial statements. Choice "c" is incorrect. Confirming a significant percentage of receivables by direct communication with debtors is a procedure generally performed only in an audit of an entity's financial statements.
Choice "d" is incorrect. Communicating significant deficiencies discovered during the study of the internal control structure is a procedure generally performed only in an audit of an entity's financial statements.
(The internal control structure is generally not evaluated in a review engagement.)
QUESTION 215
Which of the following procedures is more likely to be performed in a review engagement of a nonissuer than in a compilation engagement?
A. Gaininganunderstandingoftheentity'sbusinesstransactions. B. Makingapreliminaryassessmentofcontrolrisk.
C. Obtaining a representation letter from the chief executive officer. D. Assistingtheentityinadjustingtheaccountingrecords.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Obtaining a representation letter from the CEO is more likely to be performed in a review engagement of a nonissuer (where obtaining the letter is required) than in a compilation engagement.
Choice "a" is incorrect. Gaining an understanding of the entity's business transactions would be performed in both a compilation and a review engagement. Choice "b" is incorrect. Making a preliminary assessment of control risk would only be performed in an audit, not in a compilation or review. Choice "d" is incorrect. Assisting the entity in adjusting (compiling) the accounting records is more likely to be performed in a compilation engagement than in a review.

QUESTION 216
Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?
A. Proposingadjustmentstothebooksofaccountforapartnership.
B. ReviewinginterimfinancialdatarequiredtobefiledwiththeSEC.
C. Preparing standard monthly journal entries.
D. Compiling an individual's personal financial statement to be used to obtain a mortgage.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Statements on Standards for Accounting and Review Services (SSARS) establish standards and procedures for an engagement to compile an individual's personal financial statements to be used to obtain a mortgage. Choice "a" is incorrect. Proposing adjustments to the books of account for a partnership is an engagement that does not pertain to SSARS, as it falls short of submitting financial statements. Choice "b" is incorrect. Reviewing interim financial data required to be filed with the SEC is covered under PCAOB standards. SSARS only applies to nonissuers. Choice "c" is incorrect. Preparing standard monthly journal entries is not covered by SSARS, as it falls short of submitting financial statements.
QUESTION 217
When compiling a nonissuer's financial statements, an accountant would be least likely to:
A. Performanalyticalproceduresdesignedtoidentifyrelationshipsthatappeartobeunusual.
B. Readthecompiledfinancialstatementsandconsiderwhethertheyappeartoincludeadequatedisclosure. 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.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. During a compilation of a nonissuer's financial statements, an accountant generally would not perform analytical procedures. (Analytical procedures are required in a review.)
Choice "b" is incorrect. The accountant compiling financial statements generally would read those statements to consider whether they appear to include adequate disclosure. Choice "c" is incorrect. The accountant compiling financial statements might omit substantially all of the disclosures required by GAAP.

Choice "d" is incorrect. The accountant compiling financial statements might issue a compilation report on one or more, but not all, of the basic financial statements.
QUESTION 218
Which of the following procedures would most likely be included in a review engagement of a nonissuer?
A. Preparingabanktransferschedule.
B. Inquiringaboutrelatedpartytransactions.
C. Assessingtheinternalcontrolstructure.
D. Performing cutoff tests on sales and purchases transactions.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A review engagement is based on inquiry and analytical procedures. Inquiring about related party transactions is a procedure which would most likely be included in a review engagement of a nonpublic entity.
Choice "a" is incorrect. Preparing a bank transfer schedule pertains to an audit engagement. Choice "c" is incorrect. Assessing the internal control structure pertains to an audit engagement. Choice "d" is incorrect. Performing cutoff tests on sales and purchases transactions pertains to an audit engagement.
QUESTION 219
Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker's attention that indicated substantial doubt as to Hall's ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall's financial statements. Which of the following statements best describes Baker's reporting responsibility concerning this matter?
A. Bakerisnotrequiredtomodifytheaccountant'sreviewreport.
B. Bakerisnotpermittedtomodifytheaccountant'sreviewreport.
C. Baker should issue an accountant's compilation report instead of a review report. D. Baker should express a qualified opinion in the accountant's review report.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. Since the principal conditions and events that caused the substantial doubt as to the company's ability to continue as a going concern have been fully disclosed in the notes to Hall's financial statements, Baker is not required to modify the accountant's review report. Baker may, however, choose to emphasize this issue in the report. Choice "b" is incorrect. The auditor is permitted to modify his review report as he/she feels appropriate in the circumstances. Choice "c" is incorrect. Baker did not perform a compilation; therefore, a compilation report would not be appropriate.
Choice "d" is incorrect. Since the facts have been fully disclosed in the notes to the financial statements, no modification to the review report is required. Also, an opinion is never expressed based on a review engagement.
QUESTION 220
The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:
A. FinancialAccountingStandardsBoard.
B. GeneralAccountingOffice.
C. AccountingandReviewServicesCommittee. D. Auditing Standards Board.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The accounting and review services committee is the authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer (i.e., an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities). Choice "a" is incorrect. The Financial Accounting Standards Board (FASB) is responsible for GAAP standards.
Choice "b" is incorrect. The General Accounting Office (GAO) is responsible for audit standards under the federal "Single Audit Act."
Choice "d" is incorrect. The Auditing Standards Board (ASB) is responsible for auditing standards under GAAS.
QUESTION 221
When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for:
A. Thelowestlevelofservicerendered. B. Thehighestlevelofservicerendered. C. A compilation engagement.
D. A review engagement.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B)

Explanation Explanation/Reference:
Explanation:
Choice "b" is correct. When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for the highest level of service rendered. Choices "a", "c", and "d" are incorrect. The report should be appropriate for the highest level of service rendered.
QUESTION 222
An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review:
A. Issubstantiallylessinscopethananaudit.
B. Providesnegativeassurancethattheinternalcontrolstructureisfunctioningasdesigned. C. Provides only limited assurance that the financial statements are fairly presented.
D. Is substantially more in scope than a compilation.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review is substantially less in scope than an audit. (This is why you have to "memorize" the key phrases in the review and compilation reports.) Choice "b" is incorrect. Internal control inquiries are not part of a review, and therefore assurances related to internal control are inappropriate. Choice "c" is incorrect. A review does provide limited assurance as to GAAP, but this is not the appropriate wording for the report.
Choice "d" is incorrect. Review report language compares a review with an audit, not with a compilation.
QUESTION 223
Before performing a review of a nonissuer's financial statements, an accountant should:
A. Completeaseriesofinquiriesconcerningtheentity'sproceduresforrecording,classifying,andsummarizingtransactions.
B. Applyanalyticalprocedurestoprovidelimitedassurancethatnomaterialmodificationsshouldbemadetothefinancialstatements. C. Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
D. Inquire whether management has omitted substantially all of the disclosures required by generally accepted accounting principles.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. Before performing a review of a nonissuer's financial statements, an accountant should obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates. Choices "a", "b", and "d" are incorrect. These are appropriate steps performed during the review, not prior to it.
QUESTION 224
Which of the following is not true about documentation requirements related to a review of a nonissuer's financial statements?
A. Writtendocumentationfromacompilationengagementmaybeusedtoprovidesupportforthereviewreport. B. Amanagementrepresentationlettershouldbeincludedinthedocumentationfiles.
C. The auditor must document evidence obtained about the operating effectiveness of controls.
D. Documentation should include the results of analytical procedures.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The accountant is not required to evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity's financial statements. Choice "a" is incorrect. Written documentation from other types of engagements may be used to provide support for the review report. Choice "b" is incorrect. A management representation letter should be obtained in review engagements, and a copy should be included in the documentation files. Choice "d" is incorrect. Documentation should include the results of analytical procedures (i.e., procedures performed, expectations and how they were developed, results of comparison to recorded amounts, and procedures performed with respect to significant differences).
QUESTION 225
An accountant performing a compilation or review of the financial statements of a nonissuer should:
A. BeabletojustifydeparturesfromSSARS.
B. NeverdepartfromSSARSguidelines.
C. Exercise professional judgment in applying SSARS, since they are considered recommendations as opposed to standards. D. Not depart from Statements on Auditing Standards.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Choice "a" is correct. An accountant should be able to justify departures from SSARS. Choice "b" is incorrect. An accountant may occasionally depart from SSARS guidelines, but should be prepared to justify such departures.
Choice "c" is incorrect. While it is true that an accountant should exercise professional judgment in applying SSARS, it is not true that SSARS are considered recommendations. SSARS are professional standards, which the accountant should generally follow. Choice "d" is incorrect. Statements on Auditing Standards do not apply to compilations or reviews of the financial statements of a nonissuer.
QUESTION 226
When performing an engagement to review a nonissuer's financial statements, an accountant most likely would:
A. Obtainanunderstandingoftheentity'sinternalcontrol.
B. Limitthedistributionoftheaccountant'sreport.
C. Confirm a sample of significant accounts receivable balances. D. Ask about actions taken at board of directors' meetings.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A review is based on inquiry and analytical procedures. The accountant should inquire about actions authorized by the stockholders, the board of directors, or other management groups.
Choice "a" is incorrect. The accountant is not required to obtain an understanding of internal control in a review engagement under SSARS. An understanding would be required in an audit or in a review of the interim financial statements of a public entity, conducted under auditing (PCAOB) standards.
Choice "b" is incorrect. Distribution of a review report is not limited; however, each page of the financial statements should be marked, "See Accountant's Review Report." Choice "c" is incorrect. Confirmation is an auditing procedure used to corroborate stated account balances. A review is based on inquiry and analytical procedures, and would not include confirmation of balances.
QUESTION 227
Which of the following should be the first step in reviewing the financial statements of a nonissuer?
A. Comparingthefinancialstatementswithstatementsforcomparablepriorperiodsandwithanticipatedresults.
B. Completingaseriesofinquiriesconcerningtheentity'sproceduresforrecording,classifying,andsummarizingtransactions. 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.

Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In reviewing the financial statements of a nonissuer, the accountant's first step would be to obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.
Choices "a", "b", and "d" are incorrect. Inquiry and analytical review procedures would be performed after a general understanding of the client is obtained. This understanding will help the accountant more appropriately tailor the inquiry and analytical review procedures to the specific client engagement.
QUESTION 228
An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if:
A. Thebalancesheetisnottobeusedtoobtaincreditordistributedtotheentity'screditors.
B. Thebalancesheetispartofacomprehensivepersonalfinancialplandevelopedtoassisttheentity. 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.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. Choice "a" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There are no requirements regarding the use of the balance sheet.
Choice "b" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that the balance sheet be part of a comprehensive personal financial plan. Choice "c" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that accounting principles remain consistent during the year.
QUESTION 229
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. Reviewreportwithaqualification.
B. Reviewreportwithadisclaimer.
C. Review report and footnote exceptions.
D. Compilation report with the client's consent.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A management representation letter is required for a review engagement. If no representation letter is provided, the review is incomplete and a no review report may be issued. Since there is no requirement for a representation letter in relation to a compilation engagement, the engagement may be changed to a compilation engagement (with the client's consent).
Choices "a", "b", and "c" are incorrect. Incomplete reviews do not result in any sort of modification to the review report; rather, no review report may be issued.
QUESTION 230
Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?
A. Makepreliminaryjudgmentsaboutriskandmaterialitytodeterminethescopeandnatureoftheprocedurestobeperformed. B. Obtainageneralunderstandingoftheentity'sorganization,itsoperatingcharacteristics,anditsproductsorservices.
C. Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets.
D. Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. In reviewing the financial statements of a nonpublic entity, one of the first steps would be to obtain sufficient knowledge of the entity's business, including its organization, operating characteristics, and products or services. Choice "a" is incorrect. In an audit, preliminary judgments about risk and materiality are used to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. Choice "c" is incorrect. In an audit, the risk of material misstatement arising from fraud must be assessed in order to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. While inquiries would be made about fraud, a formal fraud risk assessment is not required.
Choice "d" is incorrect. In a review of a nonissuer's financial statements, no assessment or testing of internal control is required.

QUESTION 231
An accountant's standard report issued after compiling the financial statements of a nonissuer should state that:
A. Iamnotawareofanymaterialmodificationsthatshouldbemadetotheaccompanyingfinancialstatements.
B. Acompilationconsistsprincipallyofinquiriesofcompanypersonnelandanalyticalprocedures.
C. A compilation is limited to presenting in the form of financial statements information that is the representation of management.
D. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant's standard report issued after compiling the financial statements of a nonissuer should state that "a compilation is limited to presenting in the form of financial statements information that is the representation of management." Choice "a" is incorrect. A review report (and not a compilation report) states that, "I am not aware of any material modifications that should be made to the accompanying financial statements."
Choice "b" is incorrect. A review report (and not a compilation report) states that a review "consists principally of inquiries of company personnel and analytical procedures." Choice "d" is incorrect. A review report (and not a compilation report) states that a review "is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion."
QUESTION 232
Which of the following would be used on a review engagement?
A. Examinationofboardminutes.
B. Confirmationofcashandaccountsreceivable.
C. Comparison of current-year to prior-year account balances. D. Recalculation of depreciation expense.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A review consists of inquiries and analytical procedures. Comparison of current year and prior year account balances is an analytical procedure that would often be performed as part of a review.
Choice "a" is incorrect. Examining board minutes is an audit procedure that would not typically be performed in a review.

Choice "b" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not typically be performed in a review. Choice "d" is incorrect. Recalculation of expenses is an audit procedure that would not typically be performed in a review.
QUESTION 233
Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?
A. Theaccountantisnotrequiredtoperformproceduresdesignedtodetectmaterialmisstatementsduetofraudorillegalacts.
B. Theaccountantmustinformanappropriatelevelofmanagementofallinstancesoffraudorillegalacts.
C. The accountant must report only definite instances of fraud or an illegal act, but need not report information indicating that fraud or an illegal act may have occurred.
D. Information indicating that fraud or an illegal act may have occurred should be reported in writing to an appropriate level of management.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The accountant is not required to specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or illegal acts. Choice "b" is incorrect. Inconsequential instance of fraud or illegal acts need not be reported to management.
Choice "c" is incorrect. The accountant should report to an appropriate level of management any evidence or information that comes to his or her attention indicating that fraud or an illegal act may have occurred.
Choice "d" is incorrect. Information indicating that fraud or an illegal act may have occurred should be reported to an appropriate level of management, but it need not be in writing. Oral communication to management should be documented.
QUESTION 234
An accountant had begun to audit the financial statements of a nonissuer. 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. Theentity'smanagementdoesnotprovidetheaccountantwithasignedrepresentationletter.
B. Theaccountantisprohibitedfromcorrespondingwiththeentity'slegalcounsel.
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 directors' meetings.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:

Explanation:
Choice "c" is correct. An audit may be changed to a compilation or review due to a change in client requirements. Since the creditors no longer require audited financial statements, this is a valid reason for requesting a change.
Choices "a", "b", and "d" are incorrect. Client-imposed scope limitations, such as refusing to provide a signed representation letter, prohibiting correspondence with legal counsel, or refusing to allow examination of board minutes, are indicative of a lack of cooperation by management. Such limitations would not be a valid basis for changing an engagement from an audit to a compilation.
QUESTION 235
Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?
A. Anaccountantmustestablishanunderstandingwiththeclientinanengagementletter.
B. Anaccountantmustobtainanunderstandingoftheclient'sinternalcontrolwhenperformingareview.
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.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A review report is issued when inquiry and analytical procedures provide a reasonable basis for the expression of limited assurance on the financial statements. Choice "a" is incorrect. While the accountant is required to establish an understanding with the client, preferably in writing, an engagement letter is not required. Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to obtain an understanding of the client's internal control. Choice "d" is incorrect. A review results in the expression of limited assurance that no material modifications are necessary for the financial statements to be in conformity with generally accepted accounting principles. The limited nature of the work performed during a review does not provide sufficient evidence for an opinion on the financial statements taken as a whole.
QUESTION 236
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. Inquiryregardingtheclient'sprinciplesandpracticesandthemethodofapplyingthem.
B. Inquiryconcerningtheeffectivenessoftheclient'ssystemofinternalcontrol.
C. Inquiry to identify transactions between related parties and management.
D. Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.

Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountant should inquire of management regarding the accounting principles and practices used, and the method of applying them.
Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to make inquiries concerning the client's system of internal control. Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, but would likely make a more basic inquiry, about the client's accounting principles and practices, first.
Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountant generally directs his/her inquiries to members of management, not to external parties.
QUESTION 237
Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
A. Theprimaryobjectiveofareviewengagementistotestthecompletenessofthefinancialstatementsprepared,butacompilationtestsforreasonableness.
B. Theprimaryobjectiveofareviewengagementistoprovidepositiveassurancethatthefinancialstatementsarefairlypresented,butacompilationprovidesno 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.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance.
Choice "a" is incorrect. A review does not test for completeness, nor does a compilation test for reasonableness. A review provides limited assurance about the financial statements based on inquiry and analytical review procedures, while a compilation provides no assurance and includes no testing for reasonableness. Choice "b" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive assurance (such as an audit opinion) is only provided when more extensive procedures have been performed.
Choice "d" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonable

assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. A compilation provides no assurance at all.
QUESTION 238
The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:
A. Areviewislimitedtopresentingintheformoffinancialstatementsinformationthatistherepresentationofmanagement. B. Areviewconsistsofinquiriesofcompanypersonnelandanalyticalproceduresappliedtofinancialdata.
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.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that a review consists of inquiries of company personnel and analytical procedures applied to financial data.
Choice "a" is incorrect. A compilation report uses language similar to this, stating that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.
Choice "c" is incorrect. A compilation report uses language similar to this, stating that the accountant does not express an opinion or any other form of assurance on the financial statements. A review provides negative assurance.
Choice "d" is incorrect. While it is true that a review of the financial statements of a nonpublic entity does not require the accountant to obtain an understanding of the entity's internal control or assess control risk, the report does not explicitly state this.
QUESTION 239
While auditing the financial statements of a nonissuer, 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:
A. Refertothescopelimitationthatcausedthechange.
II. Describe the auditing procedures that have already been applied.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation

Explanation/Reference:
Explanation:
Choice "d" is correct. If the CPA believes the client's request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation. Choices "a", "b", and "c" are incorrect, based on the above Explanation: .
Reporting on Comparative Financial Statements