Question 1

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?

Accepted Answer

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 2

Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?

Accepted Answer

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 3

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:

Accepted Answer

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 4

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

Accepted Answer

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 5

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 comparison of the scope of a review to an audit in the second (scope) paragraph.

Accepted Answer

Incorrect. There is and should be a comparison between a review and an audit in the scope paragraph.

Question 6

The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that:

Accepted Answer

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 7

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 a reference to "conformity with generally accepted accounting principles" in the third paragraph.

Accepted Answer

Correct. There should be reference to conformity with generally accepted accounting principles in the third paragraph.

Question 8

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.

Accepted Answer

Incorrect. The basic financial statements are properly identified in the introductory paragraph.

Question 9

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:

Accepted Answer

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 10

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?

Accepted Answer

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 11

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 "material modifications" in the third paragraph.

Accepted Answer

Incorrect. There should be a reference to the fact that the auditors are not aware of any material modifications that should be made (limited assurance).

Question 12

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.

Accepted Answer

Incorrect. The auditors should not express negative assurance or any degree of assurance in the second (scope) paragraph.

Question 13

How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer's financial statements?

Accepted Answer

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 14

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:

Accepted Answer

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 15

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

Accepted Answer

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 16

Performing inquiry and analytical procedures is the primary basis for an accountant to issue a:

Accepted Answer

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 17

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.

Accepted Answer

Incorrect. The accountant's review and audit responsibilities should not follow management's responsibilities in the introductory paragraph.

Question 18

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?

Accepted Answer

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 19

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that:

Accepted Answer

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 20

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:

Accepted Answer

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.

Exam 1: CPA Auditing and Attestation Exam