1. An accountant’s compilation report should be dated as of the date of a) Completion of fieldwork. b) Completion of the compilation. c) Transmittal of the compilation report. d) The latest subsequent event referred to in the notes to the financial statements. Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct because AR 100 requires that the date of completion of the compilation be used as the appropriate date for an auditor's compilation report. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 2. 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) A bank with which the entity is negotiating for a loan. b) A labor union with which the entity is negotiating a contract. c) The principal stockholder, to the exclusion of the other stockholders. d) All stockholders of records as of the report date. Answer A is incorrect. The bank is a party with which the company is negotiating directly, and therefore distribution is appropriate. Answer B is incorrect. The labor union is a party with which the company is negotiating directly, and therefore distribution is appropriate. Answer C is incorrect. The principal stockholder is a party with which the company may be negotiating directly, and therefore distribution may be appropriate. Answer D is correct because projections are limited use, not general use statements, and accordingly should only be distributed to the company and third parties with whom the company is negotiating directly. 3. When an accountant is engaged to report on a nonpublic entity’s compiled financial statements that omit substantially all disclosures required by generally accepted accounting principles, the accountant should indicate in the compilation report that the financial statements are a) Restricted for internal use only by the entity’s management. b) Not to be given to financial institution for the purpose of obtaining credit. c) Complied in conformity with a comprehensive basis of accounting other than accepted accounting principles. d) Not designed for those who are uninformed about the omitted disclosures. Answer A is incorrect because an internal use only restriction is not required. Answer B is incorrect. This restriction is not required. Answer C is incorrect because the lack of such disclosures is not considered a comprehensive basis of accounting other than GAAP. See the outline of AU 623 for information on comprehensive basis financial statements. Answer D is correct because AR 100 requires that the report indicate that the financial statements are not designed for those who are uninformed about the omitted disclosures. 4. When an accountant is not independent of a client and is requested to perform a compilation of its financial statements, the accountant a) Is precluded from accepting the engagement. b) May accept the engagement and need not disclose the lack of independence. c) May accept the engagement and should disclose the lack of independence, but not the reason for the lack of independence. d) May accept the engagement and should disclose both the lack of independence and the reason for the lack of independence. Answer A is incorrect because an accountant may accept the engagement. Answer B is incorrect because the lack of independence must be disclosed. Answer C is correct because AR 100 states that an accountant may accept such an engagement and that the compilation report should disclose the lack of independence, but not the reason for the lack of independence. Answer D is incorrect because the reason for the lack of independence is not to be disclosed. 5. How does an accountant make the following representations when issuing the standard report for the compilation of a nonpublic entity’s financial statements?
Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct. The report explicitly states that the financial statements have not been audited and that the accountant has compiled them. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 6. When reporting on compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting that do not disclose the basis of accounting used, the accountant should a) Disclose the basis in the notes to the financial statements. b) Clearly label each page “unaudited” c) Disclose the basis of accounting in the accountant’s report. d) Recompile the financial statements using generally accepted accounting principles. Answer A is incorrect because it is the responsibility of management, and not that of the accountant, to disclose the basis in the notes. Answer B is incorrect because each page should be marked with a reference such as "See Accountant's Compilation Report" also, as indicated, the basis should be included in the accountant's report. Answer C is correct because AR 100 requires that when financial statements compiled in conformity with a comprehensive basis of accounting other than generally accepted accounting principles do not include disclosure of that basis, it should be disclosed in the accountant's report. Answer D is incorrect because there is no requirement to recompile the financial statements using generally accepted accounting principles. 7. In performing a compilation of financial statements of a nonpublic entity, the accountant decides that modification of the standard report is not adequate to indicate deficiencies in the financial statements taken as a whole, and the client is not willing to correct the deficiencies. The accountant should therefore a) Perform a review of the financial statements. b) Issue a special report. c) Withdraw from the engagement. d) Express an adverse audit opinion. Answer A is incorrect because a review is a form of association in which the client's refusal to correct the deficiencies will cause the same problems as their refusal in a compilation. Answer B is incorrect because this is not a circumstance in which a special report is to be issued. Answer C is correct because when an auditor performing a compilation believes that modification of the standard compilation report is not adequate to indicate the financial statements' deficiencies, the auditor should withdraw from the compilation and provide no further services with respect to the financial statements. Answer D is incorrect because an audit has not been performed, and therefore, the auditor may not express an adverse opinion. 8. If an accountant submits compiled financial statements to a client that are reasonably expected to be used by a third party, which of the following is correct? a) A compilation report is required. b) No compilation report is required, but an engagement letter must indicate that the financial statements are to be used by a third party. c) Notes describing the compilation must be included with the financial statements. d) Compilations are not allowable under such a circumstance. Answer A is correct because when third party reliance on the compiled financial statements is expected, a compilation report must be included. Answer B is incorrect because a compilation report is required, and an engagement letter, while desirable is not required. Answer C is incorrect because no such notes describing a compilation are ever included in the financial statements. Also, notes may be relating to the financial statements may be omitted if their omission is so indicated in the compilation report. Answer D is incorrect because compilations are allowable. 9. Which of the following is correct relating to an accountant’s responsibility when submitting compiled financial statements to the management of a client that has informed the auditor that the financial statements are for management use only? a) The accountant must perform substantive tests of control to obtain assurance that use of the financial statements will be so restricted. b) A restricted use compilation report must be included with the financial statements. c) The accountant must document this restriction in an engagement letter. d) Each page of the financial statements should have a restriction such as “Restricted for Management’s Use Only”. Answer A is incorrect because an accountant may rely on management's representation without further inquiry, unless information contradicting management's representation comes to the accountant's attention. Answer B is incorrect because no such restricted use compilation reports must be included with the financial statements. Answer C is incorrect because the restriction may either be documented in an engagement letter or through issuance of a compilation report. Answer D is correct because the restriction must be indicated on each page of the financial statements. 10. A CPA has audited financial statements and issued an unqualified opinion on them. Subsequently the CPA was requested to compile financial statements for the same period that omit substantially all disclosures and are to be used for comparative purposes. In these circumstances the CPA may report on comparative compiled financial statements that omit such disclosures provided the a) Missing disclosures are immaterial in amount. b) Financial statements and notes appended thereto are not misleading. c) Accountant’s report indicates the previous audit and the date of the previous report. d) Previous auditor’s report accompanies the comparative financial statements. Answer A is incorrect because there is no requirement that allows missing disclosures if they are immaterial. Answer B is incorrect. In circumstances where the auditor has been requested to compile financial statements which omit substantially all disclosures and are not to be used for comparative purposes, the only requirement is that the financial statements and notes are not to be misleading. Answer C is correct because a CPA may report on comparative compiled statements which omit substantially all disclosures to financial statements which were previously audited if an additional paragraph indicates the previous audit and the date of the previous report. Answer D is incorrect because there is no requirement that the previous auditor's report accompany the comparative statements. 11. Which of the following statements should not be included in an accountant’s standard report based on the compilation of an entity’s financial statements? a) A statement that the compilation was performed in accordance with standards established by the PICPA. b) A statement that the accountant has not audited or reviewed the financial statements. c) A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. d) A statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management. Answer A is incorrect. This statement would be included in a compilation report. Answer B is incorrect. This statement would be included in a compilation report. Answer C is correct. A compilation report provides no assurance on the financial statements. Answer D is incorrect. This statement would be included in a compilation report. 12. Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonpublic entity, for the year ended March 31, 2000. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 2001, and to include all GAAP disclosures for the 2001 statements only, but otherwise present both years’ financial statements in comparative form. What is Clark’s responsibility concerning the proposed engagement? a) Clark may not report on the comparative financial statements because the 2000 statements are not comparable to the 2001 statements. b) Clark may report on the comparative financial statements provided the 2000 statements do not contain any obvious material misstatements. c) Clark may report on the comparative financial statements provided an explanatory paragraph is added. d) Clark may report on the comparative financial statements provided Clark updates the report on the 2000 statements. Answer A is correct. The CPA may not report on the comparative financial statements because of a lack of comparability. Answer B is incorrect. Refer to the correct answer explanation. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 13. When compiled financial statements are accompanied by a report, that report should state all of the following except a) The accountant does not express an opinion or any other form of assurance on them. b) A compilation has been performed. c) A compilation is limited to presenting in the form of financial statements information that is the representation of management. d) A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data. Answer A is incorrect because AR 100 requires that a compilation report express no opinion or any other form of assurance. Answer B is incorrect because AR 100 requires that a compilation report disclose that a compilation has been performed. Answer C is incorrect because AR 100 requires that a compilation report disclose that a compilation is limited to presenting in the form of financial statements information that is the representation of management. Answer D is correct because a review report, not a compilation report, states that a review consists primarily of inquiries and analytical procedures. 14. When a compilation report is being issued, each page of the financial statements should include a reference such as a) See accompanying accountant’s footnotes. b) Unaudited, see accountant’s disclaimer. c) See accountant’s compilation report. d) Subject to compilation restrictions. Answer A is incorrect. Refer to the correct answer explanation. Answer B is incorrect. Refer to the correct answer explanation. Answer C is correct. Each page of compiled financial statements should include the reference "see accountant's compilation report." Answer D is incorrect. Refer to the correct answer explanation. 15. A CPA who is not independent may issue a a) Compilation report. b) Review report. c) Comfort letter. d) Qualified opinion. Answer A is correct since AR 100 allows a compilation to be performed by a CPA who is not independent. Answer B is incorrect because an accountant is precluded from issuing a review report on the financial statements of an entity with respect to which the CPA is not independent. Answer C is incorrect because independence is necessary for an auditor to issue letters to underwriters, or "comfort letters." Answer D is incorrect because a qualified opinion presupposes the performance of an audit; audits must be performed by independent auditors. 16. Which of the following should be included in an accountant’s standard report based upon the review of a nonpublic entity’s financial statements? a) A statement that the review was performed in accordance with generally accepted review standards. b) A statement that a review consists principally of inquiries and analytical procedures. c) A statement that the accountant is independent with respect to the entity. d) A statement that a review is substantially greater in scope that a compilation. Answer A is incorrect because the term "generally accepted review standards" is not used in the report. Answer B is correct because a statement is included that a review consists principally of inquiries and analytical procedures. Answer C is incorrect because the accountant does not state that s/he is independent. Answer D is incorrect because no comparison to a compilation is made in the report. 17. When third-party use of prospective financial statements is expected, an accountant may not accept an engagement to a) Perform a review. b) Perform a compilation. c) Perform an examination. d) Apply agreed-upon procedures. Answer A is correct. The professional standards which presents the standards with respect to the accountant's obligations for prospective financial statements (forecasts and projections), does not allow for the review form of association under any circumstance. Answer B is incorrect. The professional standards allows the results of prospective financial statement compilation engagements to be provided to third parties. Answer C is incorrect. The professional standards allows the results of prospective financial statement examinations to be provided to third parties. Answer D is incorrect. An accountant may accept an engagement to apply agreed-upon procedures when third-party use of prospective financial statements is restricted to specified third-party users who have participated in establishing the nature and scope of the engagement and who take responsibility for the adequacy of the procedures. 18. An auditor who was engaged to perform an audit of the financial statements of a nonpublic entity has been asked by the client to refrain from performing various audit procedures and change the nature of the engagement to a review of the financial statements in accordance with standards established by the AICPA. The client’s request was made because the cost to complete the audit was significant. Under the circumstances the auditor would most likely a) Qualify the auditor’s report and refer to the scope limitation. b) View the request as an indication of a possible irregularity. c) Complete the examination which was in progress. d) Honor the client’s request. Answer A is incorrect. Refer to the correct answer explanation. Answer B is incorrect. Refer to the correct answer explanation. Answer C is incorrect. Refer to the correct answer explanation. Answer D is correct because the auditor is to consider the reasonableness of the request and, when reasonable justification exists (e.g., significant cost savings), the client's request may be honored. 19. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should a) Disclose the departure in a separate paragraph of the report. b) Issue an adverse opinion. c) Attach a footnote explaining the effects of the departure. d) Issue a compilation report. Answer A is correct because the departure should be disclosed in a separate paragraph of the report if the accountant concludes that modification is appropriate. Answer B is incorrect because adverse opinions are only appropriate for audits, not reviews. Answer C is incorrect because it is not the role of a CPA to attach footnotes to a client's reports. Answer D is incorrect because a review has been performed, not a compilation. 20. Which of the following would not be included in a CPA’s report based upon a review of the financial statements of a nonpublic entity? a) A statement that the review was in accordance with generally accepted auditing standards. b) Statements that all information included in the financial statements are the representations of management. c) A statement describing the principal procedures performed. d) A statement describing the auditor’s conclusion based upon the results of the review. Answer A is correct because reviews, in contrast to audits of financial statements, are not made in accordance with GAAS. Reviews are made in accordance with standards established by the AICPA which are Statements on Standards for Accounting and Review Services. AR 100, Compilation and Review of Financial Statements, provides standards for performing reviews and compilations and issuing reports thereon. Answer B is incorrect because reports on reviews do state that the financial statements are representations of management. Answer C is incorrect because a report on a review does indicate that the review consists principally of inquiries of company personnel and analytical procedures applied to the financial data. Answer D is incorrect because a report on a review does describe the accountant's conclusions based upon the results of the review. 21. An accountant who had begun an audit of the financial statements of a nonpublic entity was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant’s review report should include reference to the
Answer A is incorrect. Refer to the correct answer explanation. Answer B is incorrect. Refer to the correct answer explanation. Answer C is incorrect. Refer to the correct answer explanation. Answer D is correct. In such circumstances the CPA should neither include reference to the original engagement or to the scope limitation. 22. A modification of the CPA’s report on a review of the interim financial statements of a publicly held company would be necessitated by which of the following? a) An uncertainty. b) Lack of consistency. c) Reference to another accountant. d) Inadequate disclosure. Answer A is incorrect because an uncertainty affecting interim financial information would not cause the accountant to modify the review report. Answer B is incorrect because AU 722 states that a lack of consistency in the application of accounting principles affecting interim financial information will not cause the accountant to modify the review report. Answer C is incorrect because reference to another accountant is not considered a modification of the report. Answer D is correct because departures from generally accepted accounting principles, which include adequate disclosure, require modification of the accountant's report. 23. The objective of a review of interim financial information is to provide the CPA with a basis for a) Expressing a limited opinion that the financial information is presented in conformity with generally accepted accounting principles. b) Expressing a compilation opinion on the financial information. c) Reporting whether material modification should be made to such information to make it conform with generally accepted accounting principles. d) Reporting limited assurance to the board of directors. Answer A is incorrect because while "limited assurance" is provided in a review, a review report is not referred to as a "limited opinion." Answer B is incorrect because a compilation is an alternate form of accounting service in which the accountant provides no express assurance on the statements. Answer C is correct because AU 722 states that the objective is to provide the accountant with a basis for reporting whether material modification should be made for such information to conform with generally accepted accounting principles. Answer D is incorrect because a review report need not be restricted to use only by the board of directors. 24. Each page of a nonpublic entity’s financial statements reviewed by an accountant should include the following reference: a) See Accountant’s Review Report. b) Reviewed, No Accountant’s Assurance Expressed. c) See Accompanying Accountant’s Footnotes. d) Reviewed, No Material Modification Required. Answer A is correct because AR 100 indicates that each page should include a reference such as, "See Accountant's Review Report." Answer B is incorrect because it suggests that no accountant's assurance is expressed, when review reports do provide limited assurance. Answer C is incorrect because the footnotes are those of management, not the accountant. Answer D is incorrect because no indication as to the need for material modifications is to accompany each page of the financial statements. 25. The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether a) A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited. b) Material modification should be made to conform with generally accepted accounting principles. c) The financial statements are presented fairly in accordance with standards of interim reporting. d) The financial statements are presented fairly in accordance with generally accepted accounting principles. Answer A is incorrect because no updated opinion is being issued. Answer B is correct because AU 722 states that the objective of a review of interim financial information is to provide a basis for reporting on whether material modification should be made for such information to conform with generally accepted accounting principles. Answer C is incorrect because the CPA does not report on whether the statements are presented fairly in accordance with standards for interim reporting. Answer D is incorrect because the report issued does not indicate whether the financial statements are presented fairly in accordance with generally accepted accounting principles. 26. An auditor may report on condensed financial statements that are derived from complete audited financial statements if the a) Auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects. b) Condensed financial statements are presented in comparative form with the prior year’s condensed financial statements. c) Auditor describes the additional review procedures performed on the condensed financial statements. d) Condensed financial statements are distributed only to management and the board of directors. Answer A is correct. A report may be issued when the information in the condensed financial statements is fairly stated in all material respects. Answer B is incorrect. Prior year condensed financial information is not necessary. Answer C is incorrect. The report need not indicate the nature of any additional procedures. Answer D is incorrect. Condensed financial statements may be distributed publicly. 27. One example of a “special report,” as defined by Statements on Auditing Standards, is a report issued in connection with a) A feasibility study. b) A review of interim financial information. c) Price-level basis financial statements. d) Compliance with a contractual agreement not related to the financial statements. Answer A is incorrect because AU 623 specifically excludes reports issued in connection with feasibility studies from the definition of special reports. Answer B is incorrect because the report on a review of interim financial information is specifically excluded from qualifying as a special report. Answer C is correct because a report issued in connection with price-level basis financial statements (a comprehensive basis of accounting other than GAAP) is considered a special report. Answer D is incorrect because the report issued in connection with compliance with a contractual agreement unrelated to the financial statements is specifically excluded from qualifying as a special report. 28. An auditor’s report would be designated as a special report when it is issued in connection with which of the following? a) Financial statements for an interim period which are subjected to a review. b) Financial statements which are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles. c) Financial statements which purport to be in accordance with generally accepted accounting principles but do not include a presentation of the statements of cash flows. d) Financial statements which are unaudited and are prepared from a client’s accounting records. Answer A is incorrect because a report issued in connection with a review of interim financial statements is not considered a special report. Answer B is correct because a report on financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP is considered a special report. Answer C is incorrect because financial statements which purport to be in accordance with GAAP but do not include the statement of cash flows must normally be accompanied by a qualified opinion. Answer D is incorrect because financial statements which are unaudited but have been compiled by the auditor from the client's accounting records should be accompanied by a compilation report. This report is not considered a special report per AU 623. 29. When there has been a change in accounting principles, but the effect of the change on the comparability of the financial statements is not material, the auditor should a) Refer to the change in an explanatory paragraph. b) Explicitly concur that the change is preferred. c) Not refer to consistency in the auditor’s report. d) Refer to the change in the opinion paragraph. Answer A is incorrect. Refer to the correct answer explanation. Answer B is incorrect. Refer to the correct answer explanation. Answer C is correct because AU 420 states that in such circumstances a standard unqualified audit report should be issued. Answer D is incorrect. Refer to the correct answer explanation. 30. An auditor is reporting on cash basis financial statements. These statements are best referred to in his opinion by which of the following descriptions? a) Financial position and results of operations arising from cash transactions. b) Assets and liabilities arising from cash transactions, and revenue collected and expensed paid. c) Balance sheet and income statement resulting from cash transactions. d) Cash balance sheet and the source and application of funds. Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct because the preferable titles when reporting on cash basis financial statements are assets and liabilities arising from cash transactions, and revenue collected and expenses paid. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 31. When an auditor conducts an examination in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a comprehensive basis of accounting other than generally accepted accounting principles such as the cash basis of accounting, the auditor should issue a a) Disclaimer of opinion. b) Review report. c) Qualified opinion. d) Special report. Answer A is incorrect. A disclaimer of opinion is not necessary. Answer B is incorrect because an audit, not a review, has been performed. Answer C is incorrect. A qualified opinion is not necessary. Answer D is correct because such comprehensive basis reports are considered "special reports"; the opinion would be unqualified. 32. If the auditor believes that financial statements which are prepared on a comprehensive basis of accounting other than generally accepted accounting principles are not suitably titled, the auditor should a) Modify the auditor’s report to disclose any reservations. b) Consider the effects of the titles on the financial statements taken as a whole. c) Issue a disclaimer of opinion. d) Add a footnote to the financial statements which explains alternative terminology. Answer A is correct because if the auditor believes that financial statements prepared per a comprehensive basis other than GAAP are not suitably titled, he should modify his report to disclose any reservations. Titles such as balance sheet, income statement, etc., generally only apply to financial statements per GAAP. Financial statements per the cash basis or income tax basis should be suitably described. Answer B is incorrect because the auditor has already determined the effects of the titles as being not suitable. Answer C is incorrect because a disclaimer should only be issued when the auditor is not expressing an opinion on the financial statements. Here, the titles were found to be not suitable, and thus the CPA must express his reservations in a qualified or adverse opinion. Answer D is incorrect because the financial statements and related footnotes are the representations of management rather than the auditor. Thus, the auditor's reservations belong in the audit report rather than in the statements. 33. An auditor’s report on financial statements that are prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles should preferably include all of the following, except a) Disclosure of the fact that the financial statements are not intended to be presented in conformity with generally accepted accounting principles. b) An opinion as to whether the use of the disclosure method is appropriate. c) An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described. d) An opinion as to whether the disclosed basis of accounting has been applied in a manner consistent with the preceding period. Answer A is incorrect because AU 623 states that the disclosure of the fact that statements are not intended to be presented in conformity with GAAP is required. Answer B is correct because no comment need be made concerning the appropriateness of the disclosed method. Answer C is incorrect because AU 623 states that the auditor's report should include an opinion as to whether the statements are presented fairly in conformity with the basis of accounting described. Answer D is incorrect because AU 623 states that the auditor's report includes an opinion as to whether the disclosed basis of accounting has been applied consistently. 34. When asked to perform an examination in order to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor a) May not described auditing procedures applied. b) Should advise the client that the opinion will result in a piecemeal opinion. c) May assume that the first standard of reporting with respect to generally accepted accounting principles does not apply. d) Should comply with the request only if they constitute a major portion of the financial statements on which an auditor has disclaimed an opinion based on an audit. Answer A is incorrect because the special report on specified elements may describe the results of applying agreed-upon procedures to one or more elements. Answer B is incorrect because piecemeal opinions are inappropriate and should not be issued in any situation. A piecemeal opinion is a positive expression of opinion on certain identified items in the financial statements for a client for which the auditor either disclaimed an opinion or expressed an adverse opinion on the financial statements taken as a whole. Answer C is correct because reports on specified elements or accounts of a financial statement are special reports. The standards for special reports are outlined in AU 623. The general standards, the standards of fieldwork, and the third and fourth standards of reporting are applicable. Since specified elements are not statements, the first standard of reporting regarding GAAP is not applicable. Answer D is incorrect because reporting on an element which constitutes a major portion of the financial statements on which an auditor has disclaimed an opinion based on an audit is a piecemeal opinion which is prohibited. 35. Which of the following statements with respect to an auditor’s report expressing an opinion on a specific item on a financial statement is correct? a) Materiality must be related to the specified item rather than to the financial statements taken as a whole. b) Such a report can only be expressed if the auditor is also engaged to audit the entire set of financial statements. c) The attention devoted to the specified item is usually less than it would be if the financial statements taken as a whole were being audited. d) The auditor who has issued an adverse opinion on the financial statements taken as a whole can never express an opinion on a specified item in these financial statements. Answer A is correct. When issuing a special report on a specific financial statement item, the measurement of materiality must be related to that item. Answer B is incorrect since an auditor may report on a single item without performing a complete financial statement audit. Answer C is incorrect; the materiality threshold is lower for a single item than it would be for an overall audit causing the examination for a single item to be more extensive. Answer D is correct only in cases in which such reporting would be tantamount to expressing a piecemeal opinion. 36. Reports are considered special reports when issued in connection with a) Compliance with aspects of regulatory requirements related to audited financial statements. b) Pro forma financial presentations designed to demonstrate the effect of hypothetical transactions. c) Feasibility studies presented to illustrate an entity’s results of operations. d) Interim financial information reviewed to determine whether material modifications should be made to conform with generally accepted accounting principles. Answer A is correct because reports based on compliance with aspects of regulatory requirements related to audited financial statements are considered to be special reports. Answer B is incorrect. It is an example of a report that is not classified as a special report. Answer C is incorrect. It is an example of a report that is not classified as a special report. Answer D is incorrect. It is an example of a report that is not classified as a special report. 37. Kramer, CPA is auditing the financial statements of Jeffersonville in accordance with Government Auditing Standards. Kramer’s report on compliance with laws and regulations should contain a statement of
Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct. The auditor's report should contain a statement of positive assurance on those items which were tested for compliance and negative assurance on those items not tested. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 38. Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditor to make an assertion that the auditor believes is not justified, the auditor should a) Submit a short-form report with explanations. b) Reword the form or attaché a separate report. c) Submit the form with questionable items clearly omitted. d) Withdraw from the engagement. Answer A is incorrect because a short-form report is not required and may not be appropriate (e.g., a report on a comprehensive basis of accounting other than GAAP). Answer B is correct because when a printed report form calls upon an independent auditor to make an assertion that s/he believes is not justified in making, the form should be reworded or attached to a separate report. Answer C is incorrect because the form must conform to the applicable reporting standards. The omission of questionable items will not relieve the auditor of reporting responsibilities. Answer D is incorrect because the auditor would only withdraw from the engagement if the rewording or separate report is unacceptable to the client. 39. An accountant has been asked to compile the financial statements of a nonpublic company on a prescribed form that omits substantially all the disclosures required by generally accepted accounting principles. If the prescribed form is a standard preprinted form adopted by the company’s industry trade association, and is to be transmitted only to such association, the accountant a) Need not advice the industry trade association of the omission of all disclosures. b) Should disclose the details of the omission in separate paragraphs of the compilation report. c) Is precluded from issuing a compilation report when all disclosures are omitted. d) Should express limited assurance that the financial statements are free of material misstatements. Answer A is correct because AR 300 states that there is a presumption that the information required by a prescribed form is sufficient to meet the needs of the body that designed or adopted it; accordingly, there is no need for that body to be advised of departures from GAAP. Answer B is incorrect because details of the omissions need not be provided. Answer C is incorrect because a compilation report may be issued in such circumstances. Answer D is incorrect because compilation reports provide no assurance that the financial statements are free of material misstatement. 40. The term “special reports” may include all of the following, except reports on financial statements a) Of an organization that has limited the scope of the auditor’s examination. b) Prepared for limited purposes such as a report that relates to only certain aspects of financial statements. c) Of a not-for-profit organization which follows accounting by business enterprises organized for profit. d) Prepared in accordance with historical cost/constant dollar accounting. Answer A is correct because a scope limitation does not require a special report. Special reports are appropriate for financial information based on (1) a comprehensive basis of accounting other than GAAP, (2) specified elements, (3) compliance with various agreements, and (4) prescribed forms. Answer B is incorrect because such limited purpose reports are included under the "specified elements" category of special reports. Answer C is incorrect because not-for-profit statements are based on a comprehensive basis of accounting other than GAAP, and are thus considered a special report. Answer D is incorrect because historical cost/constant dollar reports are based on a comprehensive basis of accounting other than GAAP, and are thus considered a special report. 41. Auditors’ reports issued in connection with which of the following are generally not considered to be special reports or special purpose reports? a) Specified elements, accounts, or items of a financial statement. b) Compliance with aspects of contractual agreements related to audited financial statements. c) Financial statements prepared in conformity with the price-level basis of accounting. d) Compiled financial statements prepared in accordance with appraised liquidation values. Answer A is incorrect because AU 623 states that auditors' reports issued in connection with specified elements, accounts, or items of a financial statement qualify as special reports. Answer B is incorrect because AU 623 states that auditors' reports issued in compliance with aspects of contractual agreements related to audited financial statements qualify as special reports. Answer C is incorrect because AU 623 states that reports on audited financial statements which have been prepared following alternative bases of accounting such as price-level basis qualify as special reports. Answer D is correct because compiled statements, even those prepared in accordance with appraised liquidation values, are considered compilations. 42. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as a) Pro forma financial statements. b) Financial projections. c) Partial presentations. d) Financial forecasts. Answer A is incorrect. Pro forma financial presentations are designed to demonstrate the effect of a future or hypothetical transaction by showing how it might have affected the historical financial statements if it had been consummated during the period covered by those statements. Answer B is correct. Financial projections are prospective financial statements that include one or more hypothetical assumptions. Answer C is incorrect. Partial presentations are presentations that do not meet the minimum presentation guidelines. Answer D is incorrect. Financial forecasts are prospective financial statements based on the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take. 43. A CPA’s report on an examination of a forecast should include all of the following except a) A description of what the forecast information is intended to represent. b) A caveat as to the ultimate attainment of the forecasted results. c) A statement that the CPA assumes no responsibility to update the report for events occurring after the date of the report. d) An opinion as to whether the forecast is fairly presented. Answer A is incorrect because a forecast review report must describe the forecast information. Answer B is incorrect because a forecast report does indicate that actual results achieved during the forecast period may vary from the forecast and that such variations may be material. Answer C is incorrect because the forecast report explicitly states that the CPA bears no responsibility to update the report. Answer D is correct because a forecast examination report presents an opinion concluding whether the forecast meets AICPA guidelines, not on whether the forecast is fairly presented. 44. When a CPA is associated with the preparation of forecasts, all of the following should be disclosed except the a) Sources of information. b) Character of the work performed by the CPA. c) Major assumptions in the preparation of the forecasts. d) Probability of achieving estimates. Answer A is incorrect because Ethics Rule 201 requires the disclosure of sources of information included in the forecasts. Answer B is incorrect because Ethics Rule 201 requires the disclosure of the character of work performed by the CPA. Answer C is incorrect because Ethics Rule 201 requires the disclosure of major assumptions used in preparing the forecasts. Answer D is correct because Ethics Rule 201 indicates that a CPA should not vouch for the achievability of forecasts. 45. The party responsible for assumptions identified in the preparation of prospective financial statements is usually a) A third-party lending institution. b) A client’s management. c) The reporting accountant. d) The client’s independent auditor. Answer A is incorrect. A third-party lending institution is not considered a party normally responsible for the assumptions identified in prospective financial statements. Answer B is correct. The professional standards state that the party normally responsible for assumptions identified in prospective financial statements is management. However, in limited circumstances, a responsible party can be persons outside of the entity, such as a party considering acquiring the entity. Answer C is incorrect. Reporting accountants are not considered parties normally responsible for the assumptions identified in prospective financial statements. Answer D is incorrect. The client's independent auditor is not considered a party normally responsible for the assumptions identified in prospective financial statements. 46. Green, CPA, is requested to render an opinion on the application of accounting principles by an entity that is audited by another CPA. Green may a) Not accept such an engagement because to do so would be considered unethical. b) Not accept such an engagement because Green would lack the necessary information on which to base an opinion without conducting an audit. c) Accept the engagement but should form an independent opinion without consulting with the continuing CPA. d) Accept the engagement but should consult with the continuing CPA to ascertain all the available facts relevant to forming a professional judgment. Answer A is incorrect because the CPA can accept such an engagement. Answer B is incorrect because Green will have access to necessary information. Answer C is incorrect because the CPA should consult with the continuing CPA. Answer D is correct because AU 625 allows the CPA to accept such an engagement, but states that the CPA should consult with the continuing auditor to make certain that he or she has all of the relevant available facts to form a professional judgment. 47. Which of the following is correct concerning an engagement to apply agreed-upon procedures? a) A clear understanding of the terms of the engagement must be established through use an engagement letter. b) Independence of the CPA is not required. c) The procedures maybe as limited or as extensive as the CPAs desire ranging from a mere reading of the information to performing search and verification procedures. d) Use of the report is restricted to the specified users. Answer A is incorrect because the engagement letter is not required for agreed-upon procedures of special elements, accounts, or items of financial statements. Answer B is incorrect because agreed-upon procedure engagements require that the CPA be independent. Answer C is incorrect because the specified users, not the CPA, must take responsibility for the sufficiency of the agreed-upon procedures for their purposes. Answer D is correct because use of the report is restricted to the specified users. A statement of restriction on the use of the report should be provided if the report is intended to be used solely by the specified users. 48. Which of the following procedures is most likely to be an appropriate procedure when performed as an agreed-upon procedures engagement under the attestation standards? a) Evaluation of the competence or objectivity of another party. b) Interpreting documents outside the scope of the practitioner’s professional expertise. c) Obtaining an understanding about a particular subject. d) Performance of mathematical computations. Answer A is incorrect because an agreed-upon procedures engagement is to present specific findings to assist users in evaluating management's assertions about an entity's compliance with specified requirements, not to evaluate the competence or objectivity. Answer B is incorrect because a CPA should not interpret any documents, rather, only use specific findings. Answer C is incorrect because an accountant may (1) compare procedures to written requirements, (2) discuss procedures to be applied with specified users, and/or (3) review relevant contracts or communication from specified users to report on management's assertions. In reporting to users, only specific information will be presented. Answer D is correct because an accountant will perform mathematical computation in an agreed-upon procedures engagement. 49. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that a) Use of the report is to be limited to the specified users involved. b) The prospective financial statements are also examined. c) Responsibility for the adequacy of the procedures performed is taken by the accountant. d) Negative assurance is expressed on the prospective financial statements take as a whole. Answer A is correct because the application of agreed-upon procedures results in a limited use report. Answer B is incorrect because the auditor is not required to examine the prospective financial statements. Answer C is incorrect because the specified users, not the accountant, must take responsibility for the adequacy of the procedures. Answer D is incorrect because the accountant will not provide negative assurance on the prospective financial statements taken as a whole. 50. Which of the following forms of auditor association are possible relating to management’s discussion and analysis (MD&A)?
Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct because SSAE 8 (AT 700) provides for both review and examinations of MD&A. Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 51. Which of the following is not an assertion embodied in management’s discussion and analysis (MD&A)? a) Completeness. b) Consistency. c) Occurrence. d) Rights and obligations. Answer A is incorrect. Refer to the correct answer explanation. Answer B is incorrect. Refer to the correct answer explanation. Answer C is incorrect. Refer to the correct answer explanation. Answer D is correct because the attestation standards on MD&A do not include an assertion for rights and obligations. Those standards indicate that the four standards are completeness, consistency with the financial statements, occurrence, and presentation and disclosure. 52. Governmental auditing often extends beyond examinations leading to the expression of opinion on the fairness of financial presentation and includes audits of efficiency, economy, effectiveness, and also a) Accuracy. b) Evaluation. c) Compliance. d) Internal control. Answer A is incorrect because audits generally do not report on accuracy. Answer B is incorrect because it is impossible for the auditor to audit subjective evaluations. Answer C is correct because governmental audits often require a determination of compliance with prescribed regulations. Answer D is incorrect because internal control is encompassed by an audit leading to expression of an opinion only on the fairness of the financial presentation. 53. An auditor notes reportable conditions in a financial statement audit conducted in accordance with Government Auditing Standards. In reporting on internal control, the auditor should state that a) Expressing an opinion on the entity’s financial statements provides no assurance on internal control. b) The auditor obtained an understanding of the design of relevant controls and determined whether they have been placed in operation. c) The specified government funding or legislative body is responsible for reviewing internal control as a condition of continued funding. d) The auditor has not determined whether any of the reportable conditions described in the report are so severe as to be material weakness. Answer A is incorrect because while the report states that the purpose of the audit was not to provide assurance on internal control, the report does not state that no assurance is provided. Answer B is correct because AU 801 requires a description of the scope of the auditor's work, stating that the auditor obtained an understanding of the design of relevant controls, determined whether those controls have been placed in operation, and assessed control risk. AU 801 provides guidance on the required contents of reports on internal control. Answer C is incorrect because the specified government funding or legislative body is not generally expected to be responsible for reviewing internal control as a condition of continued funding. Answer D is incorrect because the report must include a statement about whether the auditor believes any of the reportable conditions described in the report are material weaknesses, and if they are, it must identify the material weaknesses noted. 54. Which of the following professional services would be considered an attest engagement? a) A management consulting engagement to provide accounting information system advice to a client. b) An engagement to report on compliance with statutory requirements. c) An income tax engagement to prepare tax returns. d) The compliance of financial statements from client’s accounting records. Answer A is incorrect. Refer to the correct answer explanation. Answer B is correct because a report on compliance with statutory requirements might be structured as an attest engagement in which the required "written assertion" relates to such compliance (AT 101). Answer C is incorrect. Refer to the correct answer explanation. Answer D is incorrect. Refer to the correct answer explanation. 55. When engaged to audit a not-for-profit organization in accordance with Government Auditing Standards, an auditor is required to prepare a written report on compliance with laws and regulations that includes a) All material and immaterial instances of noncompliance with laws and regulations. b) All instances or indications of illegal acts that could result in criminal prosecution. c) A description of all material weakness noted during the engagement. d) An explanation of the inherent limitations of internal control. Answer A is incorrect. Immaterial instances of noncriminal acts need not be included in a report on compliance with laws and regulations. Answer B is correct. AU 801 requires that the report on compliance with laws and regulations include all material instances of noncompliance, and all instances or indications of illegal acts which could result in criminal prosecution. Answer C is incorrect. Material weaknesses are included in the report on internal control, not in the compliance report. Answer D is incorrect. An explanation of inherent limitations is included in the report on internal control, not in the compliance report. 56. An auditor notes reportable conditions in a financial statement audit conducted in accordance with Government Auditing Standards. In reporting on the internal control structure, the auditor should state that a) Expressing an opinion on the entity’s financial statements provides no assurance on internal control structure. b) The auditor obtained an understanding of the design of relevant policies and procedures, and determined whether they have been placed in operation. c) The specified government funding or legislative body is responsible for reviewing internal control as a condition of continued funding. d) The auditor has not determined whether any of the reportable conditions described in the report are so severe as to be material weaknesses. Answer A is incorrect because while the report states that the purpose of the audit was not to provide assurance on the internal control structure, the report does not state that no assurance is provided (AU 801). Answer B is correct because AU 801 requires a description of the scope of the auditor's work, stating that the auditor obtained an understanding of the design of relevant policies and procedures, determined whether those policies and procedures have been placed in operation, and assessed control risk. AU 801 provides guidance on the required contents of reports on the internal control structure. Answer C is incorrect because the specified government funding or legislative body is not generally expected to be responsible for reviewing the internal control structure as a condition of continued funding. Answer D is incorrect because the report must include a statement about whether the auditor believes any of the reportable conditions described in the report are material weaknesses, and if they are, it must identify the material weaknesses noted (AU 801). 57. In an audit in accordance with Government Auditing Standards an auditor is required to report on the auditor’s tests of the entity’s compliance with applicable laws and regulations. This requirement is satisfied by designing the audit to provide a) Positive assurance that internal control tested by the auditor is operating as prescribed. b) Reasonable assurance of detecting misstatements that are material to the financial statements. c) Negative assurance that reportable conditions communicated during the audit do not prevent the auditor from expressing an opinion. d) Limited assurance that internal control designed by management will prevent or detect errors, irregularities, and illegal acts. Answer A is incorrect. Assurance on internal control is provided in the internal control report, not the compliance report. Answer B is correct. The audit must be designed to provide reasonable assurance that the financial statements are free of material misstatements resulting from violations of laws and regulations that have a direct and material effect on the determination of financial statement amounts. Answer C is incorrect. Assurance on internal control is provided in the internal control report, not the compliance report. Answer D is incorrect. Assurance on internal control is provided in the internal control report, not the compliance report. 58. Jones, CPA, is auditing an entity’s financial statements in accordance with Government Auditing Standards. Jones should prepare a written report which describes a) The specific plan for obtaining audit evidence from all the applicable governmental agencies. b) The scope of the auditor’s testing of compliance with laws and regulations and of internal controls. c) The auditor’s independence and lack of any personal biases or external influences regarding the client. d) The list of internal controls tested and the results of the testing. Answer A is incorrect because the auditor is not required to report how the audit evidence is to be obtained. Answer B is correct because Government Auditing Standards requires that auditors report on the scope of their testing of compliance with laws and regulations and of internal controls. Answer C is incorrect because, although the auditor must maintain the appearance and the mental attitude of independence, there is no specific requirement to issue a separate report. Answer D is incorrect because the auditor does not separately report the internal controls tested and the outcome of the tests. |
When a cpa is associated with a forecast, all of the following should be disclosed except the:
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