Certified Public Accountant CPA Questions + Answers Part 26
Posted: Tue Feb 22, 2022 6:33 pm
QUESTION 278
An accountant's standard report on a compilation of a projection should not include a statement that:
A. Therewillusuallybedifferencesbetweentheforecastedandactualresults.
B. Thehypotheticalassumptionsusedintheprojectionarereasonableinthecircumstances.
C. The accountant has no responsibility to update the report for future events and circumstances. D. The compilation of a projection is limited in scope.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An accountant's standard report on a compilation of a projection does not include a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.
Choice "a" is incorrect. An accountant's standard report on a compilation of a projection does state that there will usually be differences between the forecasted and actual results. Choice "c" is incorrect. An accountant's standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances.
Choice "d" is incorrect. An accountant's standard report on a compilation of a projection does state that the compilation of a projection is limited in scope ("A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.")
QUESTION 279
A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:
A. Negativeassurancethattheproceduresdidnotnecessarilydiscloseallsignificantdeficienciesininternalcontrol. B. Anacknowledgmentofthepractitioner'sresponsibilityforthesufficiencyoftheprocedures.
C. A statement of restrictions on the use of the report.
D. A disclaimer of opinion on the entity's financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain a statement of restrictions on the use of the report. Choice "a" is incorrect. Agreed-upon procedures engagements do not provide assurance of any sort.
Choice "b" is incorrect. The responsible party (not the practitioner) is responsible for the sufficiency of the procedures.
Choice "d" is incorrect. The subject matter of an agreed-upon procedures engagement varies, and may be unrelated to the financial statements.
QUESTION 280
When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:
A. Explainsthedifferencebetweenacompilationandareview.
B. Documentstheassessmentoftheriskofmaterialmisstatementduetofraud.
C. Expresses limited assurance that the actual results may be within the projected range. D. Describes the limitations on the projection's usefulness.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The accountant's report on compiled projected financial statements should include a separate paragraph that describes the limitations on the projection's usefulness. For example, the paragraph states that there will usually be differences between projected and actual results, and indicates that the accountant has no responsibility to update the report for events occurring after the date of the report.
Choice "a" is incorrect. The accountant's report on compiled projected financial statements does not include an Explanation: of the difference between a compilation and a review. Choice "b" is incorrect. The accountant's report on compiled projected financial statements does not document the assessment of the risk of material misstatement due to fraud. Choice "c" is incorrect. The accountant's report on compiled projected financial statements does not express limited assurance that the actual results may be within the projected range. In fact, it specifically states that no opinion or any other form of assurance is expressed, and that there usually will be differences between projected and actual results.
QUESTION 281
A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:
A. StatementsonStandardsforAccountingandReviewServices(SSARS). B. StatementsonAuditingStandards(SAS).
C. Statements on Standards for Consulting Services (SSCS).
D. Statements on Standards for Attestation Engagements (SSAE).
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Statements on Standards for Attestation Engagements apply to engagements in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, which is the responsibility of another party. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria would fall within this scope.
Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply to engagements involving the unaudited financial statements of a nonissuer. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria does not fall within this scope. Choice "b" is incorrect. Statements on Auditing Standards apply to audits of financial statements. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria does not fall within this scope. Choice "c" is incorrect. Statements on Standards for Consulting Services apply to a broad range of consulting services. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria is not a consulting service.
QUESTION 282
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:
A. ProvisionsofStatementsonStandardsforAccountingandReviewServices(SSARS)arefollowed. B. Accountantalsoexaminestheprospectivefinancialstatements.
C. Distribution (use) of the report is restricted to the specified users.
D. The accountant takes responsibility for the adequacy of the procedures performed.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In an agreed-upon procedures engagement, use of the report is restricted to the specified users.
Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply to the unaudited financial statements of a nonissuer, not to engagements to apply agreed-upon procedures to prospective financial statements.
Choice "b" is incorrect. There is no requirement that the accountant also examine prospective financial statements in an agreed-upon procedures engagement. Choice "d" is incorrect. In an agreed-upon procedures engagement, the specified parties (and not the accountant) take responsibility for the sufficiency of the procedures for their purposes.
Supplemental Questions
QUESTION 283
Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to:
A. Abankwithwhichtheentityisnegotiatingforaloan.
B. Alaborunionwithwhichtheentityisnegotiatingacontract.
C. The principal stockholder, to the exclusion of the other stockholders. D. All stockholders of record as of the report date.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.
Choices "a", "b", and "c" are incorrect. Financial projections are for limited use, and may be used by the responsible party alone (choice "c" - the principal stockholder only), or by the responsible party and third parties with whom the responsible party is negotiating directly (choices "a" and "b"- a bank or a labor union with which the entity is negotiating).
QUESTION 284
When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:
A. Describesthedifferencesbetweenaprojectionandaforecast.
B. Identifiestheaccountingprinciplesusedbymanagement.
C. Expresses limited assurance that the actual results may be within the projection's range. D. Describes the limitations on the projection's usefulness.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The report on compiled projected financial statements should include a separate paragraph that describes the limitations on the usefulness of the presented statements. Choice "a" is incorrect. The accountant's report on a compilation of a forecast or a projection does not describe the differences between them.
Choice "b" is incorrect. The report would not identify the accounting principles used by management.
Choice "c" is incorrect. A report on compiled projected financial statements does not express any assurance regarding the achievability of results.
QUESTION 285
A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:
A. Evaluatingprospectiveandcontinuingclientrelationships.
B. Reviewingauditdocumentationandengagementreports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of personnel.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Procedures for reviewing audit documentation and engagement reports are established to ensure that the work performed meets the firm's quality standards. This relates to the quality control element of engagement performance. Choice "a" is incorrect. Evaluations of prospective and continuing client relationships are performed to minimize the likelihood of association with a client whose management lacks integrity. This relates to the quality control element of acceptance and continuance of clients and engagements. Such evaluations do not ensure that the work performed meets the firm's quality control standards Choice "c" is incorrect. Requiring personnel to adhere to the applicable independence rules relates to the quality control element of independence, integrity, and objectivity. Such requirements are established to provide independence, but they do not ensure that the work performed meets the firm's quality control standards. Choice "d" is incorrect. Maintaining personnel files and periodic evaluations of personnel are part of the quality control element of personnel management. Such policies are established to provide for appropriate hiring, assignment, development, and advancement of employees, but they would not ensure that the work performed meets the firm's quality control standards.
QUESTION 286
Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?
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. Quality control elements are:
(1) Independence, integrity, and objectivity,
(2) Personnel management,
(3) Acceptance and continuance of clients and engagements, (4) Engagement performance, and (5) Monitoring.
Choices "a", "c", and "d" are incorrect based on the above Explanation: .
QUESTION 287
A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:
A. Adheringtogenerallyacceptedauditingstandards.
B. Havinganappropriatesystemofqualitycontrol.
C. Joining professional societies that enforce ethical conduct. D. Maintaining an attitude of independence in its engagements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Quality control standards relate to the conduct of a firm's audit practice. They set forth standards for the establishment of policies and procedures to provide reasonable assurance of conforming with professional standards. Choice "a" is incorrect. GAAS relate to the conduct of individual audit engagements. Choice "c" is incorrect. Joining professional societies that enforce ethical conduct (e.g., the AICPA or state CPA society) will not assure the firm of meeting its responsibility to conform with GAAS. A system of policies and procedures (i.e., a system of quality control) must be established to provide this assurance.
Choice "d" is incorrect. Independence is part of the quality control element of independence, integrity, and objectivity, but maintaining independence alone will not help the firm meet its responsibility to conform with professional standards.
QUESTION 288
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:
A. Asystemofqualitycontrol.
B. Asystemofpeerreview.
C. Continuing professional education.
D. Compliance with generally accepted reporting standards.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A system of quality control establishes policies and procedures that provide reasonable assurance of conforming with professional standards. Choice "b" is incorrect. Peer review is a process whereby one CPA firm reviews another. It can be part of the monitoring element of quality control, but it does not (in and of itself) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "c" is incorrect. The objective of continuing professional education (CPE) is to increase the competency of auditors. Professional development activities such as this are part of the personnel management element of quality control, but they do not (in and of themselves) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "d" is incorrect. Compliance with the standards of reporting (part of the ten generally accepted auditing standards) helps ensure that audit results are appropriately communicated to the users of financial statements, but such compliance does not provide assurance regarding conformity with professional standards.
QUESTION 289
Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?
A. Cashreceiptsanddisbursementsbasisofaccounting.
B. Basisofaccountingusedbyanentitytofileitsincometaxreturn.
C. Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency. D. Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution is not a comprehensive basis because such a requirement, in itself, would not have substantial support. A comprehensive basis of accounting other than GAAP is one of the following:
1. Cash basis and modified cash basis
2. Tax basis
3. Prescribed regulatory basis
4. Other basis with substantial support (e.g., price-level basis). Choices "a", "b", and "c" are incorrect, as explained above.
QUESTION 290
Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?
A. Basisofaccountingusedbyanentitytofileitsincometaxreturn. II. Cash receipts and disbursements basis of accounting.
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. Both the basis of accounting used by an entity to file its income tax return and the cash receipts and disbursements basis of accounting are comprehensive bases of accounting other than GAAP.
OCBOAs also include:
* A basis prescribed by a regulatory agency
* A definite set of criteria having substantial support (e.g., price-level basis)
QUESTION 291
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:
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. A CPA is not required to comply with the provisions of Statements on Standards for Accounting and Review Services when proposing correcting journal entries or preparing standard monthly journal entries, since these activities do not constitute a "submission" of financial statements. Choices "a", "b", and "c" are incorrect, per above Explanation: .
QUESTION 292
An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that:
A. Justifiesthereasonsfordepartingfromgenerallyacceptedaccountingprinciples.
B. Stateswhetherthefinancialstatementsarefairlypresentedinconformitywithanothercomprehensivebasisofaccounting.
C. Refers to the note to the financial statements that describes the basis of accounting.
D. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that refers to the note to the financial statements that describes the basis of accounting.
Choice "a" is incorrect. The auditor should not include a separate explanatory paragraph that justifies the reasons for any departure from GAAP.
Choice "b" is incorrect. The opinion paragraph (not the preceding explanatory paragraph) states whether the financial statements are fairly presented in conformity with the other comprehensive basis of accounting.
Choice "d" is incorrect. The auditor's report does not explain the differences between GAAP and the OCBOA, but merely states that they are different.
QUESTION 293
The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that:
A. Areviewincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement.
B. Areviewincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements. C. The accountant is not aware of any material modifications that should be made to the financial statements.
D. The accountant does not express an opinion or any other form of assurance on the financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The standard report issued by an accountant after reviewing the FS of a nonissuer states that the accountant is not aware of any material modifications that should be made to the financial statements (see the third paragraph of the standard review report). This is a "negative assurance."
Choice "a" is incorrect. The standard audit report includes a statement regarding assessing the accounting principles used and significant estimates made by management. Choice "b" is incorrect. The standard audit report includes a statement regarding examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Choice "d" is incorrect. A compilation report states that the accountant does not express an opinion or any other form of assurance on the financial statements. A review report provides limited assurance.
QUESTION 294
Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?
A. Inquiringaboutactionstakenatmeetingsoftheboardofdirectorsthatmayaffectthefinancialstatements.
B. IssuingareportstatingthatthereviewwasperformedinaccordancewithstandardsestablishedbytheAICPA. C. Reading the financial statements to consider whether they conform with generally accepted accounting principles. D. Communicating any material weaknesses discovered during the consideration of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Since internal control inquiries are not part of a review, there is generally no consideration of internal control in a review engagement. Choice "a" is incorrect. Inquiries to be made during a review may relate to meetings of the board of directors.
Choice "b" is incorrect. A standard review report does state that the review was performed in accordance with SSARS, issued by the AICPA.
Choice "c" is incorrect. Analytical procedures to be performed during a review should include reading the financial statements.
QUESTION 295
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:
A. Statesthattheincometaxbasisofaccountingisacomprehensivebasisofaccountingotherthangenerallyacceptedaccountingprinciples. B. Justifiestheuseoftheincometaxbasisofaccounting.
C. Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards. D. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a comprehensive basis of accounting other than GAAP (included in the third paragraph of the special report). Choice "b" is incorrect. The special report does not justify the use of the income tax basis of accounting.
Choice "c" is incorrect. The financial statements are audited in accordance with GAAS (as stated in the first sentence in the second paragraph of the report). Choice "d" is incorrect. The report does not refer to the authoritative pronouncements that explain the income tax basis of accounting being used.
QUESTION 296
Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?
A. AstatementthatthecompilationwasperformedinaccordancewithStatementsonStandardsforAccountingandReviewServicesissuedbytheAmerican Institute of CPAs.
B. Astatementthattheaccountanthasnotauditedorreviewedthefinancialstatements.
C. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.
D. A statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant's standard compilation report of an entity's financial statements should not include a statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. An accountant should not express any level of assurance on compiled financial statements. Choice "a" is incorrect. An accountant's standard compilation report should include the statement that the compilation was performed in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.
Choice "b" is incorrect. An accountant's standard compilation report should include the statement that the accountant has not audited or reviewed the financial statements. Choice "d" is incorrect. An accountant's standard compilation report should include the statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.
QUESTION 297
The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:
A. Determiningwhethertheprospectivefinancialinformationisbasedonreasonableassumptions.
B. Expressingalimitedopinionthatthefinancialinformationispresentedinconformitywithgenerallyacceptedaccountingprinciples.
C. Deciding whether to perform substantive audit procedures prior to the balance sheet date.
D. Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for reporting whether material modifications should be made to conform with GAAP.
Choice "a" is incorrect. Prospective financial information (concerning future events) is not part of the interim financial information filed by a public company. Choice "b" is incorrect. No form of opinion is expressed based on a review; however, limited assurance is provided regarding the financial statements. Choice "c" is incorrect. The objective of an interim review is not to provide guidance regarding the timing of audit procedures.
QUESTION 298
How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer's financial statements?
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. Financial statements of a nonissuer that have been compiled should be accompanied by a report explicitly stating that the accountant has compiled the financial statements and stating that the accountant has not audited or reviewed the financial statements. Choices "a", "c", and "d" are incorrect, since these representations are made explicitly as per above.
QUESTION 299
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that:
A. Thescopeoftheinquiryandanalyticalproceduresperformedbytheaccountanthasnotbeenrestricted. B. Allinformationincludedinthefinancialstatementsistherepresentationofthemanagementoftheentity.
C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that all information included in the financial statements is the representation of the management of the entity (per the first paragraph of the review report).
Choice "a" is incorrect. The report does not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted. Choice "c" is incorrect. An audit (and not a review) includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Choice "d" is incorrect. The report does not state that a review is greater in scope than a compilation. In addition, presenting financial statements that are free of material misstatements is not the objective of a compilation.
QUESTION 300
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a:
A. ReportoncompliancewithrequirementsgoverningmajorfederalassistanceprogramsinaccordancewiththeSingleAuditAct.
B. Reviewreportonprospectivefinancialstatementsthatpresentanentity'sexpectedfinancialposition,givenoneormorehypotheticalassumptions. C. Management advisory report prepared at the request of a client's audit committee.
D. Review report on comparative financial statements for a nonissuer in its second year of operations.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Performing inquiry and analytical procedures is the primary basis for an accountant to issue a review report on comparative financial statements for a nonissuer in its second year of operations.
Choice "a" is incorrect. Reporting on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act is an attest engagement designed to provide a high level of assurance on an assertion (an "examination"). Inquiry and analytical procedures alone generally would be insufficient to support this level of assurance. Choice "b" is incorrect. Prospective financial statements that present an entity's expected financial position (given one or more hypothetical assumptions) may be subject to (1) an examination; (2) a compilation; or (3) agreed-upon procedures; but not to a review. Choice "c" is incorrect. Management advisory services (also known as consulting services) require the accountant to develop findings, conclusions, and recommendations. Generally this would require procedures beyond inquiry and analytical procedures.
QUESTION 301
An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:
A. Anopinionastowhetherthebasisofaccountingusedisappropriateunderthecircumstances.
B. Anopinionastowhetherthefinancialstatementsarepresentedfairlyinconformitywiththeothercomprehensivebasisofaccounting. C. Reference to the note to the financial statements that describes the basis of presentation.
D. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor would not indicate in his/her report an opinion as to whether the method of accounting used is appropriate.
Choice "b" is incorrect. The auditor would include in his report an opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting.
Choice "c" is incorrect. The auditor would include in his report reference to the note to the financial statements that describes the basis of presentation. Choice "d" is incorrect. The auditor would include in his report a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
QUESTION 302
When an independent accountant's report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant's involvement.
This statement should clarify that the:
A. Accountantisnotan"expert"withinthemeaningoftheSecuritiesActof1933.
B. Accountant'sreviewreportisnota"part"oftheregistrationstatementwithinthemeaningoftheSecuritiesActof1933. C. Accountant performed only limited auditing procedures on the interim financial statements.
D. Accountant's review was performed in accordance with standards established by the American Institute of CPAs.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When an independent accountant's report based on a review of interim financial information is presented in a registration statement, the prospectus should include a statement clarifying that the accountant's review report is not a "part" of the registration statement within the meaning of the Securities Act of 1933. Choice "a" is incorrect. The accountant is an "expert" within the meaning of the Securities Act of 1933.
Choice "c" is incorrect. The accountant generally does not perform any auditing procedures during a review.
Choice "d" is incorrect. The fact that the accountant's review is performed in accordance with standards established by the AICPA is not mentioned in the statement (about the accountant's involvement) in the prospectus.
QUESTION 303
Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:
A. Applyanalyticalprocedurestoselectedfinancialdatatodiscoveranymaterialmisstatements.
B. Corroborateatleastasampleoftheassertionsmanagementhasembodiedinthefinancialstatements.
C. Inquire of the client's personnel whether the financial statements omit substantially all disclosures.
D. Read the financial statements to consider whether the financial statements are free from obvious material errors.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should read the financial statements to consider whether the financial statements are free from obvious material errors.
Choice "a" is incorrect. Application of analytical procedures is a review procedure, and is not required in a compilation engagement.
Choice "b" is incorrect. Corroboration of a sample of management assertions is an audit procedure, and is not required in a compilation engagement. Choice "c" is incorrect. Inquiry is generally a review procedure; however, it should also be obvious to the accountant if substantially all disclosures are omitted.
QUESTION 304
During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should:
A. Issueanadverseopinion.
B. Issuean"exceptfor"qualifiedopinion.
C. Disclose this departure from generally accepted accounting principles in a separate paragraph of the report. D. Express only limited assurance on the financial statement presentations.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. If, during a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements, and management refuses to correct the financial statement presentations, the accountant should disclose this departure from GAAP in a separate paragraph of the report. Choices "a" and "b" are incorrect. Adverse opinions and "except for" qualified opinions pertain to audit reports. Opinions are not rendered based on review engagements. Choice "d" is incorrect. The accountant expresses only limited assurance on the financial statements as a result of a review even when there are no GAAP departures. GAAP departures require that a separate paragraph be added to the standard report, and that the limited assurance be modified to read, "...with the exception of the matter described in the following paragraph, I am not aware of any material modifications..."
QUESTION 305
Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and
A. Thereportonthepriorperiodshouldbereissuedtoaccompanythecurrentperiodreport.
II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period's financial statements.
B. Ionly.
C. II only.
D. Both I and II.
E. EitherIorII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Either I or II.
Unaudited FS for the prior year presented in comparative form with audited FS for the current year should be clearly marked to indicate their status ("unaudited"), and either the report on the prior period should be reissued or the report on the current period should include a separate explanatory paragraph describing the responsibility assumed for the prior period's financial statements.
QUESTION 306
Comfort letters ordinarily are addressed to:
A. TheSecuritiesandExchangeCommission.
B. Underwritersofsecurities. C. Creditor financial institutions. D. The client's audit committee.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Comfort letters (containing comments on data that have not been audited) ordinarily are addressed to underwriters of securities, and most likely convey negative assurance on financial information.
Choice "a" is incorrect. The SEC is not the addressee. Choice "c" is incorrect. Creditor financial institutions are not the addressees. Choice "d" is incorrect. While the client (or its audit committee) may receive a copy, ordinarily comfort letters are addressed to the underwriters.
QUESTION 307
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs
March 1, 20X3
Supervisor's Review Notes
There should be no reference to the prior year's audited financial statements in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. The auditors are issuing a review report this year and issued an audit opinion last year. A review report gives less assurance than an audit. The auditors should not make reference in the first paragraph to the fact that they audited last year's financial statements even though they are being comparatively shown, because it may mislead the reader of the financial statements as to the auditors' degree of assurance on this year's financial statements.
QUESTION 308
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
All the current-year basic financial statements are not properly identified in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The basic financial statements are properly identified in the introductory paragraph.
QUESTION 309
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for
updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be no reference to the American Institute of Certified Public Accountants in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. There is and should be a reference to the American Institute of Certified Public Accountants in the first paragraph because the auditors are performing a review this year and not an audit.
QUESTION 310
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed
Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
The accountant's review and audit responsibilities should follow management's responsibilities in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The accountant's review and audit responsibilities should not follow management's responsibilities in the introductory paragraph.
QUESTION 311
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for
updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
Negative assurance should be expressed on the current year's reviewed financial statements in the second (scope) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The auditors should not express negative assurance or any degree of assurance in the second (scope) paragraph.
An accountant's standard report on a compilation of a projection should not include a statement that:
A. Therewillusuallybedifferencesbetweentheforecastedandactualresults.
B. Thehypotheticalassumptionsusedintheprojectionarereasonableinthecircumstances.
C. The accountant has no responsibility to update the report for future events and circumstances. D. The compilation of a projection is limited in scope.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An accountant's standard report on a compilation of a projection does not include a statement that the hypothetical assumptions used in the projection are reasonable in the circumstances.
Choice "a" is incorrect. An accountant's standard report on a compilation of a projection does state that there will usually be differences between the forecasted and actual results. Choice "c" is incorrect. An accountant's standard report on a compilation of a projection does state that the accountant has no responsibility to update the report for future events and circumstances.
Choice "d" is incorrect. An accountant's standard report on a compilation of a projection does state that the compilation of a projection is limited in scope ("A compilation is limited to presenting in the form of a projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection.")
QUESTION 279
A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:
A. Negativeassurancethattheproceduresdidnotnecessarilydiscloseallsignificantdeficienciesininternalcontrol. B. Anacknowledgmentofthepractitioner'sresponsibilityforthesufficiencyoftheprocedures.
C. A statement of restrictions on the use of the report.
D. A disclaimer of opinion on the entity's financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain a statement of restrictions on the use of the report. Choice "a" is incorrect. Agreed-upon procedures engagements do not provide assurance of any sort.
Choice "b" is incorrect. The responsible party (not the practitioner) is responsible for the sufficiency of the procedures.
Choice "d" is incorrect. The subject matter of an agreed-upon procedures engagement varies, and may be unrelated to the financial statements.
QUESTION 280
When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:
A. Explainsthedifferencebetweenacompilationandareview.
B. Documentstheassessmentoftheriskofmaterialmisstatementduetofraud.
C. Expresses limited assurance that the actual results may be within the projected range. D. Describes the limitations on the projection's usefulness.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The accountant's report on compiled projected financial statements should include a separate paragraph that describes the limitations on the projection's usefulness. For example, the paragraph states that there will usually be differences between projected and actual results, and indicates that the accountant has no responsibility to update the report for events occurring after the date of the report.
Choice "a" is incorrect. The accountant's report on compiled projected financial statements does not include an Explanation: of the difference between a compilation and a review. Choice "b" is incorrect. The accountant's report on compiled projected financial statements does not document the assessment of the risk of material misstatement due to fraud. Choice "c" is incorrect. The accountant's report on compiled projected financial statements does not express limited assurance that the actual results may be within the projected range. In fact, it specifically states that no opinion or any other form of assurance is expressed, and that there usually will be differences between projected and actual results.
QUESTION 281
A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:
A. StatementsonStandardsforAccountingandReviewServices(SSARS). B. StatementsonAuditingStandards(SAS).
C. Statements on Standards for Consulting Services (SSCS).
D. Statements on Standards for Attestation Engagements (SSAE).
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Statements on Standards for Attestation Engagements apply to engagements in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, which is the responsibility of another party. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria would fall within this scope.
Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply to engagements involving the unaudited financial statements of a nonissuer. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria does not fall within this scope. Choice "b" is incorrect. Statements on Auditing Standards apply to audits of financial statements. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria does not fall within this scope. Choice "c" is incorrect. Statements on Standards for Consulting Services apply to a broad range of consulting services. An engagement to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria is not a consulting service.
QUESTION 282
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:
A. ProvisionsofStatementsonStandardsforAccountingandReviewServices(SSARS)arefollowed. B. Accountantalsoexaminestheprospectivefinancialstatements.
C. Distribution (use) of the report is restricted to the specified users.
D. The accountant takes responsibility for the adequacy of the procedures performed.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In an agreed-upon procedures engagement, use of the report is restricted to the specified users.
Choice "a" is incorrect. Statements on Standards for Accounting and Review Services apply to the unaudited financial statements of a nonissuer, not to engagements to apply agreed-upon procedures to prospective financial statements.
Choice "b" is incorrect. There is no requirement that the accountant also examine prospective financial statements in an agreed-upon procedures engagement. Choice "d" is incorrect. In an agreed-upon procedures engagement, the specified parties (and not the accountant) take responsibility for the sufficiency of the procedures for their purposes.
Supplemental Questions
QUESTION 283
Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to:
A. Abankwithwhichtheentityisnegotiatingforaloan.
B. Alaborunionwithwhichtheentityisnegotiatingacontract.
C. The principal stockholder, to the exclusion of the other stockholders. D. All stockholders of record as of the report date.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.
Choices "a", "b", and "c" are incorrect. Financial projections are for limited use, and may be used by the responsible party alone (choice "c" - the principal stockholder only), or by the responsible party and third parties with whom the responsible party is negotiating directly (choices "a" and "b"- a bank or a labor union with which the entity is negotiating).
QUESTION 284
When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:
A. Describesthedifferencesbetweenaprojectionandaforecast.
B. Identifiestheaccountingprinciplesusedbymanagement.
C. Expresses limited assurance that the actual results may be within the projection's range. D. Describes the limitations on the projection's usefulness.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The report on compiled projected financial statements should include a separate paragraph that describes the limitations on the usefulness of the presented statements. Choice "a" is incorrect. The accountant's report on a compilation of a forecast or a projection does not describe the differences between them.
Choice "b" is incorrect. The report would not identify the accounting principles used by management.
Choice "c" is incorrect. A report on compiled projected financial statements does not express any assurance regarding the achievability of results.
QUESTION 285
A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:
A. Evaluatingprospectiveandcontinuingclientrelationships.
B. Reviewingauditdocumentationandengagementreports.
C. Requiring personnel to adhere to the applicable independence rules.
D. Maintaining personnel files containing documentation related to the evaluation of personnel.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Procedures for reviewing audit documentation and engagement reports are established to ensure that the work performed meets the firm's quality standards. This relates to the quality control element of engagement performance. Choice "a" is incorrect. Evaluations of prospective and continuing client relationships are performed to minimize the likelihood of association with a client whose management lacks integrity. This relates to the quality control element of acceptance and continuance of clients and engagements. Such evaluations do not ensure that the work performed meets the firm's quality control standards Choice "c" is incorrect. Requiring personnel to adhere to the applicable independence rules relates to the quality control element of independence, integrity, and objectivity. Such requirements are established to provide independence, but they do not ensure that the work performed meets the firm's quality control standards. Choice "d" is incorrect. Maintaining personnel files and periodic evaluations of personnel are part of the quality control element of personnel management. Such policies are established to provide for appropriate hiring, assignment, development, and advancement of employees, but they would not ensure that the work performed meets the firm's quality control standards.
QUESTION 286
Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?
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. Quality control elements are:
(1) Independence, integrity, and objectivity,
(2) Personnel management,
(3) Acceptance and continuance of clients and engagements, (4) Engagement performance, and (5) Monitoring.
Choices "a", "c", and "d" are incorrect based on the above Explanation: .
QUESTION 287
A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:
A. Adheringtogenerallyacceptedauditingstandards.
B. Havinganappropriatesystemofqualitycontrol.
C. Joining professional societies that enforce ethical conduct. D. Maintaining an attitude of independence in its engagements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Quality control standards relate to the conduct of a firm's audit practice. They set forth standards for the establishment of policies and procedures to provide reasonable assurance of conforming with professional standards. Choice "a" is incorrect. GAAS relate to the conduct of individual audit engagements. Choice "c" is incorrect. Joining professional societies that enforce ethical conduct (e.g., the AICPA or state CPA society) will not assure the firm of meeting its responsibility to conform with GAAS. A system of policies and procedures (i.e., a system of quality control) must be established to provide this assurance.
Choice "d" is incorrect. Independence is part of the quality control element of independence, integrity, and objectivity, but maintaining independence alone will not help the firm meet its responsibility to conform with professional standards.
QUESTION 288
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:
A. Asystemofqualitycontrol.
B. Asystemofpeerreview.
C. Continuing professional education.
D. Compliance with generally accepted reporting standards.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A system of quality control establishes policies and procedures that provide reasonable assurance of conforming with professional standards. Choice "b" is incorrect. Peer review is a process whereby one CPA firm reviews another. It can be part of the monitoring element of quality control, but it does not (in and of itself) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "c" is incorrect. The objective of continuing professional education (CPE) is to increase the competency of auditors. Professional development activities such as this are part of the personnel management element of quality control, but they do not (in and of themselves) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "d" is incorrect. Compliance with the standards of reporting (part of the ten generally accepted auditing standards) helps ensure that audit results are appropriately communicated to the users of financial statements, but such compliance does not provide assurance regarding conformity with professional standards.
QUESTION 289
Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?
A. Cashreceiptsanddisbursementsbasisofaccounting.
B. Basisofaccountingusedbyanentitytofileitsincometaxreturn.
C. Basis of accounting used by an entity to comply with the financial reporting requirements of a government regulatory agency. D. Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution is not a comprehensive basis because such a requirement, in itself, would not have substantial support. A comprehensive basis of accounting other than GAAP is one of the following:
1. Cash basis and modified cash basis
2. Tax basis
3. Prescribed regulatory basis
4. Other basis with substantial support (e.g., price-level basis). Choices "a", "b", and "c" are incorrect, as explained above.
QUESTION 290
Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?
A. Basisofaccountingusedbyanentitytofileitsincometaxreturn. II. Cash receipts and disbursements basis of accounting.
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. Both the basis of accounting used by an entity to file its income tax return and the cash receipts and disbursements basis of accounting are comprehensive bases of accounting other than GAAP.
OCBOAs also include:
* A basis prescribed by a regulatory agency
* A definite set of criteria having substantial support (e.g., price-level basis)
QUESTION 291
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:
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. A CPA is not required to comply with the provisions of Statements on Standards for Accounting and Review Services when proposing correcting journal entries or preparing standard monthly journal entries, since these activities do not constitute a "submission" of financial statements. Choices "a", "b", and "c" are incorrect, per above Explanation: .
QUESTION 292
An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that:
A. Justifiesthereasonsfordepartingfromgenerallyacceptedaccountingprinciples.
B. Stateswhetherthefinancialstatementsarefairlypresentedinconformitywithanothercomprehensivebasisofaccounting.
C. Refers to the note to the financial statements that describes the basis of accounting.
D. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that refers to the note to the financial statements that describes the basis of accounting.
Choice "a" is incorrect. The auditor should not include a separate explanatory paragraph that justifies the reasons for any departure from GAAP.
Choice "b" is incorrect. The opinion paragraph (not the preceding explanatory paragraph) states whether the financial statements are fairly presented in conformity with the other comprehensive basis of accounting.
Choice "d" is incorrect. The auditor's report does not explain the differences between GAAP and the OCBOA, but merely states that they are different.
QUESTION 293
The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that:
A. Areviewincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement.
B. Areviewincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements. C. The accountant is not aware of any material modifications that should be made to the financial statements.
D. The accountant does not express an opinion or any other form of assurance on the financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The standard report issued by an accountant after reviewing the FS of a nonissuer states that the accountant is not aware of any material modifications that should be made to the financial statements (see the third paragraph of the standard review report). This is a "negative assurance."
Choice "a" is incorrect. The standard audit report includes a statement regarding assessing the accounting principles used and significant estimates made by management. Choice "b" is incorrect. The standard audit report includes a statement regarding examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Choice "d" is incorrect. A compilation report states that the accountant does not express an opinion or any other form of assurance on the financial statements. A review report provides limited assurance.
QUESTION 294
Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?
A. Inquiringaboutactionstakenatmeetingsoftheboardofdirectorsthatmayaffectthefinancialstatements.
B. IssuingareportstatingthatthereviewwasperformedinaccordancewithstandardsestablishedbytheAICPA. C. Reading the financial statements to consider whether they conform with generally accepted accounting principles. D. Communicating any material weaknesses discovered during the consideration of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Since internal control inquiries are not part of a review, there is generally no consideration of internal control in a review engagement. Choice "a" is incorrect. Inquiries to be made during a review may relate to meetings of the board of directors.
Choice "b" is incorrect. A standard review report does state that the review was performed in accordance with SSARS, issued by the AICPA.
Choice "c" is incorrect. Analytical procedures to be performed during a review should include reading the financial statements.
QUESTION 295
When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:
A. Statesthattheincometaxbasisofaccountingisacomprehensivebasisofaccountingotherthangenerallyacceptedaccountingprinciples. B. Justifiestheuseoftheincometaxbasisofaccounting.
C. Emphasizes that the financial statements are not intended to have been audited in accordance with generally accepted auditing standards. D. Refers to the authoritative pronouncements that explain the income tax basis of accounting being used.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a comprehensive basis of accounting other than GAAP (included in the third paragraph of the special report). Choice "b" is incorrect. The special report does not justify the use of the income tax basis of accounting.
Choice "c" is incorrect. The financial statements are audited in accordance with GAAS (as stated in the first sentence in the second paragraph of the report). Choice "d" is incorrect. The report does not refer to the authoritative pronouncements that explain the income tax basis of accounting being used.
QUESTION 296
Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?
A. AstatementthatthecompilationwasperformedinaccordancewithStatementsonStandardsforAccountingandReviewServicesissuedbytheAmerican Institute of CPAs.
B. Astatementthattheaccountanthasnotauditedorreviewedthefinancialstatements.
C. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.
D. A statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An accountant's standard compilation report of an entity's financial statements should not include a statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. An accountant should not express any level of assurance on compiled financial statements. Choice "a" is incorrect. An accountant's standard compilation report should include the statement that the compilation was performed in accordance with Statements on Standards for Accounting and Review Services issued by the AICPA.
Choice "b" is incorrect. An accountant's standard compilation report should include the statement that the accountant has not audited or reviewed the financial statements. Choice "d" is incorrect. An accountant's standard compilation report should include the statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.
QUESTION 297
The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:
A. Determiningwhethertheprospectivefinancialinformationisbasedonreasonableassumptions.
B. Expressingalimitedopinionthatthefinancialinformationispresentedinconformitywithgenerallyacceptedaccountingprinciples.
C. Deciding whether to perform substantive audit procedures prior to the balance sheet date.
D. Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for reporting whether material modifications should be made to conform with GAAP.
Choice "a" is incorrect. Prospective financial information (concerning future events) is not part of the interim financial information filed by a public company. Choice "b" is incorrect. No form of opinion is expressed based on a review; however, limited assurance is provided regarding the financial statements. Choice "c" is incorrect. The objective of an interim review is not to provide guidance regarding the timing of audit procedures.
QUESTION 298
How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer's financial statements?
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. Financial statements of a nonissuer that have been compiled should be accompanied by a report explicitly stating that the accountant has compiled the financial statements and stating that the accountant has not audited or reviewed the financial statements. Choices "a", "c", and "d" are incorrect, since these representations are made explicitly as per above.
QUESTION 299
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that:
A. Thescopeoftheinquiryandanalyticalproceduresperformedbytheaccountanthasnotbeenrestricted. B. Allinformationincludedinthefinancialstatementsistherepresentationofthemanagementoftheentity.
C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that all information included in the financial statements is the representation of the management of the entity (per the first paragraph of the review report).
Choice "a" is incorrect. The report does not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted. Choice "c" is incorrect. An audit (and not a review) includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Choice "d" is incorrect. The report does not state that a review is greater in scope than a compilation. In addition, presenting financial statements that are free of material misstatements is not the objective of a compilation.
QUESTION 300
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a:
A. ReportoncompliancewithrequirementsgoverningmajorfederalassistanceprogramsinaccordancewiththeSingleAuditAct.
B. Reviewreportonprospectivefinancialstatementsthatpresentanentity'sexpectedfinancialposition,givenoneormorehypotheticalassumptions. C. Management advisory report prepared at the request of a client's audit committee.
D. Review report on comparative financial statements for a nonissuer in its second year of operations.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Performing inquiry and analytical procedures is the primary basis for an accountant to issue a review report on comparative financial statements for a nonissuer in its second year of operations.
Choice "a" is incorrect. Reporting on compliance with requirements governing major federal assistance programs in accordance with the Single Audit Act is an attest engagement designed to provide a high level of assurance on an assertion (an "examination"). Inquiry and analytical procedures alone generally would be insufficient to support this level of assurance. Choice "b" is incorrect. Prospective financial statements that present an entity's expected financial position (given one or more hypothetical assumptions) may be subject to (1) an examination; (2) a compilation; or (3) agreed-upon procedures; but not to a review. Choice "c" is incorrect. Management advisory services (also known as consulting services) require the accountant to develop findings, conclusions, and recommendations. Generally this would require procedures beyond inquiry and analytical procedures.
QUESTION 301
An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:
A. Anopinionastowhetherthebasisofaccountingusedisappropriateunderthecircumstances.
B. Anopinionastowhetherthefinancialstatementsarepresentedfairlyinconformitywiththeothercomprehensivebasisofaccounting. C. Reference to the note to the financial statements that describes the basis of presentation.
D. A statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor would not indicate in his/her report an opinion as to whether the method of accounting used is appropriate.
Choice "b" is incorrect. The auditor would include in his report an opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting.
Choice "c" is incorrect. The auditor would include in his report reference to the note to the financial statements that describes the basis of presentation. Choice "d" is incorrect. The auditor would include in his report a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.
QUESTION 302
When an independent accountant's report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant's involvement.
This statement should clarify that the:
A. Accountantisnotan"expert"withinthemeaningoftheSecuritiesActof1933.
B. Accountant'sreviewreportisnota"part"oftheregistrationstatementwithinthemeaningoftheSecuritiesActof1933. C. Accountant performed only limited auditing procedures on the interim financial statements.
D. Accountant's review was performed in accordance with standards established by the American Institute of CPAs.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When an independent accountant's report based on a review of interim financial information is presented in a registration statement, the prospectus should include a statement clarifying that the accountant's review report is not a "part" of the registration statement within the meaning of the Securities Act of 1933. Choice "a" is incorrect. The accountant is an "expert" within the meaning of the Securities Act of 1933.
Choice "c" is incorrect. The accountant generally does not perform any auditing procedures during a review.
Choice "d" is incorrect. The fact that the accountant's review is performed in accordance with standards established by the AICPA is not mentioned in the statement (about the accountant's involvement) in the prospectus.
QUESTION 303
Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:
A. Applyanalyticalprocedurestoselectedfinancialdatatodiscoveranymaterialmisstatements.
B. Corroborateatleastasampleoftheassertionsmanagementhasembodiedinthefinancialstatements.
C. Inquire of the client's personnel whether the financial statements omit substantially all disclosures.
D. Read the financial statements to consider whether the financial statements are free from obvious material errors.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should read the financial statements to consider whether the financial statements are free from obvious material errors.
Choice "a" is incorrect. Application of analytical procedures is a review procedure, and is not required in a compilation engagement.
Choice "b" is incorrect. Corroboration of a sample of management assertions is an audit procedure, and is not required in a compilation engagement. Choice "c" is incorrect. Inquiry is generally a review procedure; however, it should also be obvious to the accountant if substantially all disclosures are omitted.
QUESTION 304
During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should:
A. Issueanadverseopinion.
B. Issuean"exceptfor"qualifiedopinion.
C. Disclose this departure from generally accepted accounting principles in a separate paragraph of the report. D. Express only limited assurance on the financial statement presentations.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. If, during a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements, and management refuses to correct the financial statement presentations, the accountant should disclose this departure from GAAP in a separate paragraph of the report. Choices "a" and "b" are incorrect. Adverse opinions and "except for" qualified opinions pertain to audit reports. Opinions are not rendered based on review engagements. Choice "d" is incorrect. The accountant expresses only limited assurance on the financial statements as a result of a review even when there are no GAAP departures. GAAP departures require that a separate paragraph be added to the standard report, and that the limited assurance be modified to read, "...with the exception of the matter described in the following paragraph, I am not aware of any material modifications..."
QUESTION 305
Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and
A. Thereportonthepriorperiodshouldbereissuedtoaccompanythecurrentperiodreport.
II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period's financial statements.
B. Ionly.
C. II only.
D. Both I and II.
E. EitherIorII.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Either I or II.
Unaudited FS for the prior year presented in comparative form with audited FS for the current year should be clearly marked to indicate their status ("unaudited"), and either the report on the prior period should be reissued or the report on the current period should include a separate explanatory paragraph describing the responsibility assumed for the prior period's financial statements.
QUESTION 306
Comfort letters ordinarily are addressed to:
A. TheSecuritiesandExchangeCommission.
B. Underwritersofsecurities. C. Creditor financial institutions. D. The client's audit committee.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Comfort letters (containing comments on data that have not been audited) ordinarily are addressed to underwriters of securities, and most likely convey negative assurance on financial information.
Choice "a" is incorrect. The SEC is not the addressee. Choice "c" is incorrect. Creditor financial institutions are not the addressees. Choice "d" is incorrect. While the client (or its audit committee) may receive a copy, ordinarily comfort letters are addressed to the underwriters.
QUESTION 307
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs
March 1, 20X3
Supervisor's Review Notes
There should be no reference to the prior year's audited financial statements in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Correct. The auditors are issuing a review report this year and issued an audit opinion last year. A review report gives less assurance than an audit. The auditors should not make reference in the first paragraph to the fact that they audited last year's financial statements even though they are being comparatively shown, because it may mislead the reader of the financial statements as to the auditors' degree of assurance on this year's financial statements.
QUESTION 308
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
All the current-year basic financial statements are not properly identified in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The basic financial statements are properly identified in the introductory paragraph.
QUESTION 309
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for
updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be no reference to the American Institute of Certified Public Accountants in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. There is and should be a reference to the American Institute of Certified Public Accountants in the first paragraph because the auditors are performing a review this year and not an audit.
QUESTION 310
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed
Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
The accountant's review and audit responsibilities should follow management's responsibilities in the first (introductory) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The accountant's review and audit responsibilities should not follow management's responsibilities in the introductory paragraph.
QUESTION 311
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for
updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
Negative assurance should be expressed on the current year's reviewed financial statements in the second (scope) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Incorrect. The auditors should not express negative assurance or any degree of assurance in the second (scope) paragraph.