Answer Happy

ks integrity.
D. Anticipate before performing any fieldwork whether an unqualified opinion can be expressed.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with a client whose management lacks integrity.
Choice "a" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm vouches for the integrity or reliability of a client. Choice "b" is incorrect. Suggesting that there should be procedures to decide whether to accept a client does not imply that a firm has a duty to anyone but itself with respect to the acceptance, rejection, or retention of clients.
Choice "d" is incorrect. The decision to express an unqualified opinion should be made after the completion of the audit, not upon client acceptance.

QUESTION 162
A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards:
A. Professionalethics.
B. Supervisionandreview.
C. Accountingandreviewservices. D. Qualitycontrol.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The AICPA's Statements on Quality Control Standards assert that professional development policies and procedures should be established by the firm in order to provide reasonable assurance that personnel will have the knowledge required to perform their work and progress within the firm.
Choice "a" is incorrect. The auditors' responsibility is to the public and is defined in the "AICPA Code of Professional Conduct," which includes a set of mandatory rules and which derives its authority from the bylaws of the AICPA.
Choice "b" is incorrect. Supervision and review are part of GAAS fieldwork standards. Choice "c" is incorrect. Accounting and review services pertain to the unaudited financial statements of a nonpublic company.
QUESTION 163
The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to:
A. Minimizethelikelihoodofassociationwithclientswhosemanagementlacksintegrity.
B. Monitorsignificantdeficienciesinthedesignandoperationoftheclient'sinternalcontrol.
C. Identify noncompliance with aspects of contractual agreements that affect the financial statements.
D. Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Policies and procedures should be established for deciding whether to accept a new client in order to minimize the likelihood of association

with a client whose management lacks integrity.
Choice "b" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in monitoring internal control deficiencies. A review of internal control would not occur until after a new client was accepted. Choice "c" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in identifying noncompliance with contractual agreements. Reviewing the terms of contractual agreements would not occur until after a new client was accepted. Choice "d" is incorrect. Policies and procedures established for deciding whether to accept a new client would not aid in the adequate training of personnel. Personnel management policies would be used to ensure that training needs are met.
QUESTION 164
Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002. Which of the following situations would impair Jackson's independence?
A. ProvisionofpersonaltaxservicestoJohnson,theaccountspayablemanagerofPerigee.
B. PreparationofPerigee'sroutineannualtaxreturn,whereJackson'sfeewillbecalculatedasapercentageofthetaxrefundobtained.
C. AnauditofPerigee'sinternalcontrolisperformedcontemporaneouslywiththeannualfinancialstatementaudit.
D. Discovering that Lowe, the chief financial officer of Perigee, started his accounting career ten years earlier as a staff accountant for Jackson & Company, and continues to maintain ties with current partners at the firm.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The provision of services involving contingent fee arrangements impairs the auditor's independence.
Choice "a" is incorrect. Personal tax services provided to employees do not impair the auditor's independence; however, personal tax services provided to corporate officers or their families would impair independence.
Choice "c" is incorrect. Independence is not impaired by the performance of an audit of Perigee's internal control; in fact, such services are required by PCAOB Auditing Standard No. 5 (covered in a later class).
Choice "d" is incorrect. The prohibition against auditing companies whose corporate officers worked for the auditing firm only applies if those officers worked on the audit during the preceding year.
QUESTION 165
Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002?
A. Theauditormustcommunicatetotheauditcommittee,inwriting,regardingtheproposedtaxservicesandrelatedfees.
II. The auditor must communicate to the audit committee, in writing, when the proposed tax services involve contingent fee arrangements. III. The auditor must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence.
B. IandIIonly.

C. I, II, and III. D. I and III only. E. IIandIIIonly.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees, and must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence. Tax services related to contingent fee arrangements, confidential tax transactions, and certain aggressive tax transactions are expressly prohibited.
Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
Other Engagements, Reports, and Accounting Services
QUESTION 166
Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would:
A. Withdrawfromtheengagement.
B. Rewordtheformorattachaseparatereport.
C. Express a qualified opinion with an Explanation: .
D. Restrict use of the report to the party who designed the form.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An auditor should not sign a preprinted report form that includes statements that are inconsistent with the auditor's responsibility. Instead, the form should be revised or a separate, more accurate report should be attached. Choice "a" is incorrect. Provided the form can be revised or a separate report can be attached, there is no need to withdraw from the engagement.
Choice "c" is incorrect. Qualified opinions relate to departures from GAAP and/or scope limitations, neither of which is the case here.
Choice "d" is incorrect. Even if the use of the report is restricted, an auditor should never sign a report including statements that are inconsistent with the auditor's responsibility.
QUESTION 167

Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field's profit participation in Gold's net income. Hardy may accept this engagement only if:
A. HardyalsoauditsGold'scompletefinancialstatements.
B. Gold'sfinancialstatementsarepreparedinconformitywithGAAP. C. Hardy's report is available for distribution to Gold's other employees. D. Field owns controlling interest in Gold.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The engagement described is one to express an opinion on a specified element, account, or item of the financial statements. Since Field's profit participation is based on Gold's net income or stockholders' equity, Hardy can accept the engagement only if Hardy also audited the complete financial statements.
Choice "b" is incorrect. If the auditor can express an opinion that the specified elements, accounts, or items are presented fairly on a basis of accounting other than GAAP, then the auditor can accept the engagement.
Choice "c" is incorrect. Hardy's report need not be available for distribution to Gold's other employees.
Usually the distribution of this type of report is restricted to those within the entity and the parties to the contract or agreement. This is necessary because the basis of presentation is determined by reference to a document that would not generally be available to other third parties. Mandatory distribution of an audit report is never required. Choice "d" is incorrect. Field does not need to own a controlling interest in Gold.
QUESTION 168
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor's report included a statement that the current asset portion of the entity's balance sheet was fairly stated. The inclusion of this statement is:
A. Notappropriatebecauseitmaytendtoovershadowtheauditor'sdisclaimerofopinion.
B. Notappropriatebecausetheauditorisprohibitedfromreportingononlyonebasicfinancialstatement.
C. Appropriateprovidedtheauditor'sscopeparagraphadequatelydescribesthescopelimitation.
D. Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion paragraph.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. Piecemeal opinions (opinions on parts of the financial statements, when those parts constitute a major portion of the financial statements) are not appropriate if the auditor has disclaimed an opinion or issued an adverse opinion, because they may overshadow the auditor's opinion on the financial statements taken as a whole. An opinion on specified elements that does not constitute a piecemeal opinion may be expressed, but should not accompany the disclaimer of opinion or the adverse opinion. Choice "b" is incorrect. The auditor may express an opinion on one financial statement, even if the auditor must issue a disclaimer on the financial statements taken as a whole. Choice "c" is incorrect. Even with adequate description in the scope paragraph, an opinion on the current asset portion of the balance sheet cannot be included in a disclaimer of opinion, as it might overshadow the disclaimer.
Choice "d" is incorrect. It is not appropriate to include an opinion on the current asset portion of the balance sheet in a disclaimer of opinion, as it might overshadow the disclaimer.
QUESTION 169
When an auditor reports on financial statements prepared on an entity's income tax basis, the auditor's report should:
A. Disclaimanopiniononwhetherthestatementswereexaminedinaccordancewithgenerallyacceptedauditingstandards.
B. Notexpressanopiniononwhetherthestatementsarepresentedinconformitywiththecomprehensivebasisofaccountingused. C. Include an Explanation: of how the results of operations differ from the cash receipts and disbursements basis of accounting.
D. State that the basis of presentation is a comprehensive basis of accounting other than GAAP.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When reporting on financial statements prepared in conformity with a basis of accounting other than GAAP, the auditor should identify in a separate paragraph the basis as a comprehensive basis other than GAAP.
Choice "a" is incorrect. The statements would be examined in accordance with GAAS; however, no opinion (or disclaimer) is given regarding this fact. Choice "b" is incorrect. The auditor should express an opinion on the financial statements' conformity with the comprehensive basis other than GAAP. Choice "c" is incorrect. The auditor would include a statement indicating that the basis differs from GAAP, but need not quantify the differences among various bases of accounting.
QUESTION 170
A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

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. An independent auditor may express an opinion on one or more specified elements, accounts, or items of a financial statement as a special engagement, not in conjunction with an audit.
Choices "b", "c", and "d" are incorrect, per above Explanation: .
QUESTION 171
Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. If Wall, CPA, Delta's auditor, discovers that the statements are not suitably titled, Wall should:
A. Discloseanyreservationsinanexplanatoryparagraphandqualifytheopinion. B. Applytothestateinsurancecommissionforanadvisoryopinion.
C. Issue a special statutory basis report that clearly disclaims any opinion.
D. Explain in the notes to the financial statements the terminology used.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:

Explanation:
Choice "a" is correct. Financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP that are not suitably titled require a qualified opinion with an explanatory paragraph.
Choice "b" is incorrect. The financial statements are not suitably titleD. The auditor does not need any advice from the insurance commission as to how the statements should be titled or as to how to handle the situation.
Choice "c" is incorrect. The auditor would not disclaim an opinion unless there is a scope limitation or independence problem. Choice "d" is incorrect. The notes to the financial statements are communications from management, not from the auditor.
QUESTION 172
Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:
A. Qualifiedopinion.
B. Standardthreeparagraphreportwithreferencetofootnotedisclosure. C. Disclaimer of opinion.
D. Special report.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A "special report" (unqualified) would be issued in an audit of financial statements prepared on an accounting basis prescribed by a regulatory agency solely for filing with that agency.
Special reports are also issued for:
1. Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP. 2. Specified elements, accounts or items of a financial statement.
3. Compliance with contractual or regulatory requirements related to audited financial statements.
4. Financial information presented in prescribed forms, or schedules that require a prescribed form of auditor's report.
Choices "a" and "c" are incorrect. The special report would be unqualified since Green concluded that the financial statements were fairly presented on the prescribed basis. Choice "b" is incorrect. The wording of the special report varies slightly from the auditor's standard three paragraph report, and includes an additional explanatory paragraph.
QUESTION 173

An auditor's report would be designated a special report when it is issued in connection with:
A. Interimfinancialinformationofapubliclyheldcompanythatissubjecttoalimitedreview. B. Compliancewithaspectsofregulatoryrequirementsrelatedtoauditedfinancialstatements. C. Application of accounting principles to specified transactions.
D. Limited use prospective financial statements such as a financial projection.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An auditor's report would be designated a special report when it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements.
Choice "a" is incorrect. A "review report" (not a "special report") should be issued in connection with a limited review of interim financial information of a publicly held company. Choice "c" is incorrect. Special reports are not issued in connection with the application of accounting principles to specified transactions. Choice "d" is incorrect. An auditor may compile, examine, or apply agreed-upon procedures to limited use prospective financial statements (PFS) such as a financial projection, but this would not constitute a special report.
QUESTION 174
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:
A. Explainwhythisbasisofaccountingismoreusefulforthereadersofthisentity'sfinancialstatementsthanGAAP.
B. Refertothenoteinthefinancialstatementsthatdescribesmanagement'sresponsibilityforthefinancialstatements.
C. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
D. Include a separate explanatory paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an explanatory paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis. Choice "a" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting. Choice "b" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis,

not to a note describing management's responsibility. Choice "d" is incorrect. The separate explanatory paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.
QUESTION 175
Which option best describes the level of assurance provided in the following special reports?
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. Positive assurance is provided in all of the listed reports except "compliance with contractual or regulatory requirements related to audited financial statements." Negative assurance is provided in this report.
Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 176

Which of the following situations would not result in restricted use language being included in an auditor's special report?
A. Areportonaspecifiedelementinafinancialstatement,wherethatelementispreparedinaccordancewiththetermsspecifiedinarelatedcontract.
B. Areportonaclient'scompliancewitharegulatoryrequirement,assumingthereportispreparedbasedonafinancialstatementauditofthecompletefinancial statements.
C. An"OCBOA"reportonfinancialstatementspreparedinconformitywithrequirementsestablishedbyaregulatoryagency,assumingthattheauditor'sreportisa matter of public record.
D. A report on an incomplete financial presentation that is prepared in conformity with GAAP, assuming that the presentation and report will be filed with a regulatory agency and included in a document distributed to the general public.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A report on an incomplete financial presentation that is otherwise prepared in conformity with GAAP generally would contain restricted use language; however, an exception occurs when the presentation and the report are filed with a regulatory agency and included in a document distributed to the general public. Choice "a" is incorrect. A report on a specified element in a financial statement, where that element is prepared in accordance with the terms specified in a related contract, would contain restricted use language.
Choice "b" is incorrect. A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language.
Choice "c" is incorrect. An "OCBOA" report on financial statements prepared in conformity with requirements established by a regulatory agency should contain restrictive use language. This is appropriate even though law or regulation may make the auditor's report is a matter of public record.
Compilation and Review of Financial Statements
QUESTION 177
Which of the following is true about management representations obtained during an engagement to review the financial statements of a nonissuer?
A. Writtenrepresentationsfromthecurrentmanagementarerequiredforallperiodsbeingreportedon.
B. Writtenrepresentationswithrespecttopriorperiodsshouldnotbeprovidedbythecurrentmanagementiftheywerenotpresentduringthoseperiods.
C. Written representations should be addressed to members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter.
D. Written representations need not include information concerning subsequent events.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation

Explanation/Reference:
Explanation:
Choice "a" is correct. Written representations from the current management are required for all periods being reported on.
Choice "b" is incorrect. Written representations from the current management are required for all periods being reported on, even if the current management was not present during all such periods.
Choice "c" is incorrect. Written representations should be addressed to the accountant. The letter should be signed by members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter. Choice "d" is incorrect. Written representations should include information concerning subsequent events.
QUESTION 178
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. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer. Choices "a", "b", and "c" are incorrect, based on the above Explanation: .

QUESTION 179
An accountant has compiled the financial statements of a nonissuer but declines to issue a compilation report. This is an example of:
A. Aninappropriatereportingdecision,becauseSSARSrequirethatareportbeissuedwheneveranaccountantisassociatedwithfinancialstatements. B. Aninappropriatereportingdecision,iftheaccountantisnotindependentwithrespecttothenonpublicentity.
C. Anappropriatereportingdecision,ifthecompiledfinancialstatementsarenotexpectedtobeusedbyathirdparty.
D. Anappropriatereportingdecision,aslongasthefinancialstatementsarepreparedinconformitywithGAAP.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the accountant has compiled the financial statements of a nonissuer, and the compiled financial statements are not expected to be used by a third party, the accountant may decline to issue a compilation report.
Choice "a" is incorrect, since SSARS allow the accountant to decline to issue a compilation report when the compiled financial statements are not expected to be used by a third party. Choice "b" is incorrect, since there is no requirement that the accountant be independent when the accountant declines to issue a compilation report. Note that an accountant who lacks independence is still permitted to compile the financial statements of a nonissuer entity. Choice "d" is incorrect, since there is no requirement that the financial statements be prepared in conformity with GAAP when the accountant declines to issue a compilation report.
QUESTION 180
An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:
A. Eachpageofthefinancialstatementsisclearlymarkedtorestrictitsuse.
II. A written engagement letter is used to document the understanding with the client. III. A written representation letter is obtained from the client's management.
B. Option A
C. Option B

D. Option C E. OptionD
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Choice "a" is incorrect, since a written engagement letter is required to document the understanding with the client, and since representation letters are not required in compilation engagements.
Choice "c" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Representation letters are not required in compilation engagements.
Choice "d" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use (and a written engagement letter is used to document the understanding with the client).
QUESTION 181
An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). The financial statements are expected to be used by a third party. Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D

Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. SSARS does not require that the compilation report be printed on the accountant's letterhead, nor does it require a manual signature. According to SSARS, a compilation report must state that a compilation has been performed, describe what a compilation is, and emphasize that since no audit or review was performed, no assurance is provided. Although a signature is required, it need not be manual. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 182
An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:
A. Reproducingclient-preparedfinancialstatementswithoutmodification,asanaccommodationtoaclient. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when submitting unaudited financial statements. Submission is defined as: presenting to a client or third parties financial statements the accountant has prepared. An accountant who reproduces client-prepared financial statements has not prepared those statements. Preparation of standard monthly journal entries is a bookkeeping service that also does not involve preparation of financial statements.
QUESTION 183
If requested to perform a review engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is:
A. Notindependentand,therefore,maynotbeassociatedwiththefinancialstatements.
B. Notindependentand,therefore,maynotissueareviewreport.
C. Not independent and, therefore, may issue a review report, but may not issue an auditor's opinion. D. Independent because the financial interest is immaterial and, therefore, may issue a review report.

Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An accountant with an immaterial direct financial interest in a client is no longer independent with respect to that client. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. If the accountant is not independent, he may issue a compilation report provided he complies with the compilation standards.
Choice "a" is incorrect. An accountant who is not independent may still be associated with the financial statements; for example, by performing a compilation engagement. Choice "c" is incorrect. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. Choice "d" is incorrect. An accountant with any direct financial interest in a client (even an immaterial interest) is no longer independent with respect to that client.
QUESTION 184
Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement's sole purpose is to assist Kell in developing a personal financial plan. For March to be exempt from complying with the requirements of SSARS 1, Compilation and Review of Financial Statements, Kell is required to agree that the:
A. Financialstatementswillnotbepresentedincomparativeformwiththoseofthepriorperiod. B. OmitteddisclosuresrequiredbyGAAParenotmaterial.
C. Financial statements will not be disclosed to a non-CPA financial planner.
D. Financial statements will not be used to obtain credit.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with requirements of SSARS 1 when both of the following conditions exist:
1) The accountant establishes an understanding with the client that the financial statements will be used solely to assist the client in developing a financial plan and will not be used to obtain credit, and
2) Nothing comes to the accountant's attention during the engagement indicating that the financial statements will be used to obtain credit.
Choice "a" is incorrect. Comparative balance sheets may be presented. Choice "b" is incorrect. It does not matter whether the omitted disclosures required by GAAP are material.

Choice "c" is incorrect. The client is not required to agree that the financial statements will not be disclosed to a non-CPA financial planner.
QUESTION 185
When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with generally accepted accounting principles, the accountant should:
A. Assesstheriskthatamaterialmisstatementcouldoccurinafinancialstatementassertion.
B. Confirmwiththeentity'slawyerthatmateriallosscontingenciesaredisclosed.
C. Understand the accounting principles of the industry in which the entity operates.
D. Develop audit programs to determine whether the entity's financial statements are fairly presented.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In a review engagement, the auditor should possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates. This will provide, through the performance of inquiry and analytical procedures, a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements to be in conformity with generally accepted accounting principles. Choice "a" is incorrect. Assessing the risk that a material misstatement could occur in a financial statement assertion is an audit procedure, not a review procedure. Choice "b" is incorrect. Confirmation with the entity's attorney is an audit procedure, not a review procedure.
Choice "d" is incorrect. Development of audit programs are part of an audit engagement, not a review procedure.
QUESTION 186
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?
A. Trendanalysis.
B. Regressionanalysis. C. Ratio analysis.
D. Risk analysis.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:

Choice "c" is correct. Ratio analysis is often used to examine relationships between balance sheet accounts.
Choice "a" is incorrect. Trend analysis would be more appropriate for examining income statement accounts.
Choice "b" is incorrect. Regression analysis would not likely be used since twenty to thirty past observations are generally required to reliably make estimates. Choice "d" is incorrect. Risk analysis would not be used to evaluate relationships between balance sheet accounts.
QUESTION 187
Compiled financial statements should be accompanied by an accountant's report stating that:
A. Acompilationincludesassessingtheaccountingprinciplesusedandsignificantmanagementestimates,aswellasevaluatingtheoverallfinancialstatement presentation.
B. TheaccountantcompiledthefinancialstatementsinaccordancewithStatementsonStandardsforAccountingandReviewServices.
C. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.
D. The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Compiled financial statements should be accompanied by a report stating that the financial statements were compiled in accordance with SSARS issued by the AICPA. Choice "a" is incorrect. An audit, not a compilation, includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation.
Choice "c" is incorrect. A review report, not a compilation report, includes the phrase, "is substantially less in scope than an audit."
Choice "d" is incorrect. The accountant expresses no such assurance in a compilation engagement; limited assurance (i.e., "...accountant is not aware of...") is expressed in a review engagement.
QUESTION 188
Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the:
A. Balancesheetispresentedinaprescribedformofanindustrytradeassociation. B. Scopeoftheinquiryandanalyticalprocedureshasnotbeenrestricted.
C. Balance sheet is not to be used to obtain credit or distributed to creditors.
D. Specialized accounting principles and practices of Dover's industry are disclosed.
Correct Answer: B

Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An accountant may issue a review report on one financial statement, such as a balance sheet, and not on other related financial statements, if the scope of the accountant's inquiry and analytical procedures has not been restricted. Choice "a" is incorrect. The balance sheet need not be presented in a prescribed form of an industry trade association.
Choice "c" is incorrect. There is no limitation on the use of a reviewed financial statement. Choice "d" is incorrect. Specialized accounting principles should be considered by the accountant when performing the review, but need not be disclosed.
QUESTION 189
Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts and fraud that materially affect Hall's financial statements. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements, Baker should:
A. Disclaimanopinion.
B. Issueanadverseopinion.
C. Withdraw from the engagement. D. Issue a qualified opinion.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. If the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements taken as a whole, the accountant should withdraw from the review engagement and provide no further services with respect to those financial statements.
Note that the accountant should also request that management consider the effect of the scheme on the financial statements.
Choice "a" is incorrect. Since Baker believes modification of the standard report is not adequate, a disclaimer is inappropriate. Baker should withdraw from the engagement. Choices "b" and "d" are incorrect. No opinion may be given based on a review engagement.
QUESTION 190
Each page of a nonissuer's financial statements reviewed by an accountant should include the following reference:
A. See Accompanying Accountant's Footnotes. B. Reviewed,NoMaterialModificationsRequired.

C. See Accountant's Review Report.
D. Reviewed, No Accountant's Assurance Expressed.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Each page of the financial statements reviewed by the accountant should include a reference such as "See Accountant's Review Report." Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
QUESTION 191
Statements on Standards for Accounting and Review Services (SSARS) require an accountant to report when the accountant has:
A. Typedclient-preparedfinancialstatements,withoutmodification,asanaccommodationtotheclient.
B. Providedaclientwithafinancialstatementformatthatdoesnotincludedollaramounts,tobeusedbytheclientinpreparingfinancialstatements.
C. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.
D. Prepared, through the use of computer software, financial statements that are in conformity with a comprehensive basis of accounting other than GAAP, and which are expected to be used by a third party.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. SSARS apply when an accountant "submits" financial statements. Submission is defined as presenting financial statements to a client or third party that the accountant has prepared, either manually or through use of computer software. Preparing financial statements that are in conformity with another comprehensive basis of accounting constitutes a submission of financial statements under SSARS. If the financial statements are expected to be used by a third party, SSARS would require the accountant to report. Choice "a" is incorrect. Typing or reproducing client-prepared financial statements, without modification, as an accommodation to a client does not constitute submission of financial statements because the accountant has not prepared those statements. Choice "b" is incorrect. Providing a client with a financial statement format does not constitute a submission of financial statements (the accountant is not preparing the financial statements) and therefore, this does not fall within the guidelines of SSARS. Choice "c" is incorrect. Proposing correcting journal entries does not constitute submission of financial statements because the client will be the one recording the entries.
QUESTION 192
Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

A. Communicatingsignificantdeficienciesdiscoveredduringtheassessmentofcontrolrisk. B. Obtainingaclientrepresentationletterfrommembersofmanagement.
C. Sending bank confirmation letters to the entity's financial institutions.
D. Examining cash disbursements in the subsequent period for unrecorded liabilities.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An accountant performing a review should obtain a client representation letter from the owner, manager, or chief executive officer, and, if appropriate, the chief financial officer.
Choice "a" is incorrect. A review does not contemplate obtaining an understanding of internal control or assessing control risk.
Choice "c" is incorrect. Confirmation is a substantive audit procedure that is not appropriate for a review engagement.
Choice "d" is incorrect. A search for unrecorded liabilities is an audit procedure that is not appropriate for a review engagement.
QUESTION 193
An accountant who had begun an audit of the financial statements of a nonissuer 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. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B)

Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. If the accountant concludes that there is reasonable justification to change the engagement, the accountant's review report should not include reference to the original engagement, to any auditing procedures that may have been performed, or to the scope limitation that resulted in the changed engagement.
Choices "a", "b", and "d" are incorrect, per above Explanation: .
QUESTION 194
Which of the following statements should be included in an accountant's standard report based on the compilation of a nonissuer's financial statements?
A. Acompilationconsistsprincipallyofinquiriesofcompanypersonnelandanalyticalproceduresappliedtofinancialdata.
B. Acompilationislimitedtopresentingintheformoffinancialstatementsinformationthatistherepresentationofmanagement. C. A compilation is not designed to detect material modifications that should be made to the financial statements.
D. Acompilationissubstantiallylessinscopethananauditinaccordancewithgenerallyacceptedauditingstandards.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The accountant's compilation report 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 (not a compilation) consists principally of inquiries of management and analytical procedures applied to financial data. Choice "c" is incorrect. While a compilation is not designed to detect material misstatements in the financial statements, no mention of this limitation is made in the compilation report. Choice "d" is incorrect. The review report states that a review is substantially less in scope than an audit in accordance with GAAS.
QUESTION 195
Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web's financial statements do not disclose the basis of accounting used, Miller should:
A. Disclosethebasisofaccountingintheaccountant'scompilationreport.
B. Clearlylabeleachpage"DistributionRestricted-MaterialModificationsRequired." C. Issue a special report describing the effect of the incomplete presentation.
D. Withdraw from the engagement and provide no further services to Web.

Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If financial statements have been compiled on a basis other than GAAP, and the client makes no disclosures in the financial statements to that effect, the accountant should disclose the basis of accounting in the accountant's compilation report. Choice "b" is incorrect. Under the circumstances, the accountant need only make reference to the other basis of accounting used to compile the financial statements; special labeling of the financial statements is not required.
Choice "c" is incorrect. A special report is not warranted in the circumstances. Choice "d" is incorrect. It is not necessary to withdraw from the engagement.
QUESTION 196
When an accountant is engaged to compile a nonissuer's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are:
A. Notdesignedforthosewhoareuninformedabouttheomitteddisclosures.
B. PreparedinconformitywithacomprehensivebasisofaccountingotherthanGAAP.
C. Not compiled in accordance with Statements on Standards for Accounting and Review Services. D. Special-purpose financial statements that are not comparable to those of prior periods.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. If substantially all disclosures required by GAAP are omitted from compiled financial statements, the accountant's compilation report should state that the financial statements are not designed for those who are not informed about such matters. Choice "b" is incorrect. Omission of substantially all disclosures is not a comprehensive basis of accounting other than GAAP.
Choice "c" is incorrect. If the disclosure is made, the compilation is prepared in accordance with SSARS.
Choice "d" is incorrect. Omission of substantially all disclosures does not make these special- purpose financial statements.
QUESTION 197
North Co., a privately-held entity, asked its tax accountant, King, a CPA in public practice, to prepare North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

A. StatementsonStandardsforAccountingandReviewServices. B. StatementsonStandardsforUnauditedFinancialServices.
C. Statements on Standards for Consulting Services.
D. Statements on Standards for Attestation Engagements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An accountant should not submit unaudited financial statements unless the auditor complies with the provisions applicable to a compilation engagement (under SSARS). Choices "b", "c", and "d" are incorrect, per above Explanation: .
QUESTION 198
Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:

Choice "b" is correct. When an auditor is requested to change the engagement from an audit to a compilation, the auditor must consider the effort needed to complete the audit, the cost of completing the audit, and the reasons for the client's request. If the audit is substantially complete or an insignificant effort is needed to complete the audit, the auditor should consider the propriety of agreeing to the request.
In addition, if the reason for the request is to limit the scope of the auditor's examination, the auditor must consider whether the information affected by the scope limitation is incorrect, incomplete, or otherwise unsatisfactory.
A change in circumstance (e.g., an audit is no longer necessary) or a misunderstanding as to the nature of an audit would, on the other hand, be considered a reasonable basis for the change. Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 199
Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if:
A. Smithcompilesandreportsontherelatedstatementsofincome,retainedearnings,andcashflows. B. SmithisnotawareofanymaterialmodificationsneededforthebalancesheettoconformwithGAAP. C. The scope of Smith's inquiry and analytical procedures is not restricted.
D. Cone is a new client and Smith accepts the engagement after the end of Cone's fiscal year.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" 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. There is no requirement that Smith compile the other financial statements.
Choice "b" is incorrect. An accountant can still review only the balance sheet, even if the review discloses material departures from GAAP. These departures should be reflected in the accountant's report, however.
Choice "d" is incorrect. Smith may audit only the balance sheet even if Cone is a continuing client.
QUESTION 200
May an accountant accept an engagement to compile or review the financial statements of a not- for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?

A. Option A B. OptionB C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Knowledge of the accounting principles and practices of the industry is required in order to perform a compilation or review engagement; however, there is no requirement that such knowledge be obtained prior to accepting such an engagement.
Choices "a", "b", and "c" are incorrect, per above.
QUESTION 201
An accountant should perform analytical procedures during an engagement to:
A. Option A B. OptionB

C. Option C D. Option D
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Analytical procedures are part of a review engagement, but not necessary for a compilation engagement. Choices "a", "b", and "c" are incorrect, per above Explanation: s.
QUESTION 202
Which of the following procedures most likely would not be included in a review engagement of a nonissuer?
A. Obtainingamanagementrepresentationletter.
B. ConsideringwhetherthefinancialstatementsconformwithGAAP. C. Assessingcontrolrisk.
D. Inquiring about subsequent events.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant is not required to assess control risk as part of a review engagement. Assessment of control risk would be appropriate for an audit engagement. Choice "a" is incorrect. Obtaining a management representation letter is an appropriate review procedure.
Choice "b" is incorrect. Considering whether the financial statements are in accordance with GAAP is an appropriate review procedure.
Choice "d" is incorrect. Inquiring of management regarding subsequent events is an appropriate review procedure.
QUESTION 203
Compiled financial statements should be accompanied by a report stating that:
A. Acompilationissubstantiallylessinscopethanarevieworanauditinaccordancewithgenerallyacceptedauditingstandards. B. Theaccountantdoesnotexpressanopinionbutexpressesonlylimitedassuranceonthecompiledfinancialstatements.
C. A compilation is limited to presenting in the form of financial statements information that is the representation of management.

D. The accountant has compiled the financial statements in accordance with standards established by the Auditing Standards Board.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The accountant's report includes a statement that the compilation is limited to presenting in the form of financial statements information that is the representation of management.
Choice "a" is incorrect. The report must state that the financial statements have not been audited or reviewed, but does not compare the scope of a compilation to the scope of a review or an audit.
Choice "b" is incorrect. The accountant expresses no assurance in a compilation engagement; limited assurance is expressed in a review engagement. Choice "d" is incorrect. The financial statements are compiled in accordance with SSARS issued by the AICPA, rather than "standards established by the Auditing Standards Board."
QUESTION 204
An accountant may compile a nonissuer's financial statements that omit all of the disclosures required by GAAP only if the omission is:
A. Clearlyindicatedintheaccountant'sreport.
II. Not undertaken with the intention of misleading the financial statement users.
B. Ionly.
C. II only.
D. Both I and II.
E. EitherIorII.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant may issue a compilation report for a client's financial statements that omit all required GAAP disclosures, provided the omission is not intended to mislead financial statement users and the omission is clearly indicated in the accountant's report. Choices "a", "b", and "d" are incorrect, per above Explanation: .