Question 1

Each page of the financial statements compiled by an accountant may include a reference such as:

Accepted Answer

The reference "See accountant's compilation report" indicates that the accountant has compiled the financial statements and issued a report providing assurance on the compilation process. This is the most appropriate reference to include in the financial statements.

Option A, "See accompanying accountant's notes" may be included if the accountant has provided additional information or disclosures as part of their work, but it does not indicate whether the accountant has issued a report or provided any assurance.

Option B, "Unaudited, see accountant's opinion" is contradictory because an opinion can only be issued for an audit, review, or compilation engagement. If the financial statements are unaudited, a compilation report would be provided instead.

Option D, "Subject to compilation restrictions" is not a commonly used reference and may not provide a clear indication of the nature of the accountant's work or any associated limitations.

Question 2

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:

Accepted Answer

The answer of During a review of the financial statements...

Question 3

An accountant has been engaged to prepare a nonpublic client's financial statements.While preparing the financial statements,the accountant finds a number of material misstatements related to journal entries.The client refuses to correct the misstatements.Which of the following is correct?

Accepted Answer

According to the AICPA's Code of Professional Conduct, if a client refuses to correct material misstatements, the accountant should withdraw from the engagement. Issuing an adverse opinion (choice A) would be appropriate if the misstatements are material and pervasive, but should only be done if the client refuses to correct them. Notifying regulatory agencies (choice B) is not necessary in this situation, as it is not a regulatory matter. Presenting the financial statements with the misstated journal entries (choice C) would be unethical and violate the accountant's responsibility to provide accurate and reliable financial information.

Question 4

When performing a review of a nonpublic company,the auditors must obtain in a representation letter acknowledgement of management for its responsibility for each of the following except:

Accepted Answer

The responsibility for identifying illegal acts committed by employees falls under the responsibility of the company's legal counsel, not management. Therefore, the auditors would not need to obtain representation from management for this responsibility.

Question 5

An auditor's report on financial statements prepared in accordance with a special purpose financial reporting framework of accounting other than generally accepted accounting principles should include all of the following except:

Accepted Answer

An auditor's report on financial statements prepared according to a special purpose framework does not typically include an opinion on whether the basis of accounting used is appropriate under the circumstances. The auditor's role is to report on the fair presentation of the financial statements based on the applied basis of accounting, not to evaluate the appropriateness of the chosen accounting framework.

Question 6

The underwriter of a securities offering may request that an auditor perform specified procedures and supply certain assurances concerning unaudited information contained in a registration statement.The auditor's response to such a request is commonly called a:

Accepted Answer

The auditor's response to the underwriter's request for specified procedures and assurances on unaudited information is commonly referred to as a comfort letter. This letter is intended to provide limited assurance to the underwriter that the unaudited information is reliable and accurate. It is not a formal audit report or a review of interim financial information, and it is not a compilation report.

Question 7

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

Accepted Answer

The objective of a review of interim financial information is to determine whether material modifications should be made for the financial statements to conform with generally accepted accounting principles (GAAP). This ensures that the interim financial reports provide accurate and reliable information to users.

Question 8

Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of publicly held entity?  
$\begin{array} { c c c } 
& \text {Inconsistent Accounting } &  \
& \text { Principle Application}&\text { Inadequate Disclosure}\\end{array}$ 
A- $\begin{array} { c c c }  \quad\quad\quad\text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text { Yes } \\end{array}$ 
B-  $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad \text {  No } \\end{array}$
C-  $\begin{array} { c c c } \quad\quad\quad\text {  No } & \quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\text {Yes } \\end{array}$
D-   $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad \quad\quad\quad\quad\quad\quad\text {  No }
\end{array}$

Accepted Answer

According to the International Standards on Review Engagements (ISRE), if the interim financial information includes a material misstatement, the accountant should modify the review report to include a paragraph stating that the review does not provide a basis for the auditor to obtain reasonable assurance about whether the interim financial information is free from material misstatement. Therefore, option C requires modification of the accountant's report. Options A, B, and D do not require modification of the report.

Question 9

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?

Accepted Answer

A CPA's report based upon a review of the financial statements of a nonpublic entity will state that the review was conducted in accordance with generally accepted review standards, not auditing standards. The review report will also include statements indicating that the financial statements are the representations of management, a description of the nature and extent of the review procedures, and the CPA's conclusion based on the review results.

Question 10

A "comfort letter" is ordinarily addressed to:

Accepted Answer

A "comfort letter" is a document issued by an auditor to provide assurance to underwriters of securities that there are no material misstatements or omissions in the financial statements included in a securities offering. Therefore, a comfort letter is addressed to underwriters of securities.

Question 11

Analytical procedures are an essential part of CPA engagements on financial statement:  
$\begin{array} { c c c } 
&\quad\text { Compilation }&\text { Preparation }\\end{array}$ 
A. $\begin{array} { c c c }  \quad\quad\quad\text { Yes } &\quad\quad\quad\quad \text { Yes } \\end{array}$ 
B.  $\begin{array} { c c c }\quad\quad\quad \text { Yes } &\quad\quad\quad\quad \text {  No } \\end{array}$
C.  $\begin{array} { c c c } \quad\quad\quad\text {  No } & \quad\quad\quad\quad\text {Yes } \\end{array}$
D.   $\begin{array} { c c c }\quad\quad\quad \text { No } &\quad\quad\quad\quad \text {  No }
\end{array}$

Accepted Answer

Analytical procedures are not a required part of either compilation or preparation engagements. These engagements do not require the CPA to perform procedures to obtain assurance about the accuracy or completeness of the financial statements.

Question 12

Which of the following is an auditor least likely to inquire about when performing a review of a nonpublic company?

Accepted Answer

Auditors typically inquire about transactions, regulatory communications, and issues arising from review procedures. They are less concerned with whether financial statements are prepared in conformity with a "special basis of auditing" since their focus is on whether the statements conform to the applicable financial reporting framework (e.g., GAAP, IFRS). The term "special basis of auditing" is not standard; auditors are concerned with the basis of accounting rather than auditing in this context.

Question 13

An auditor's report would be designated as a report on financial statements following a special purpose financial reporting framework for financial statements when they are:

Accepted Answer

A report on financial statements following a special purpose financial reporting framework is issued when the financial statements are prepared in accordance with a regulatory basis of accounting other than generally accepted accounting principles. Option A relates to a review report, Option B to an unaudited financial statements report, and Option D to a report on financial statements based on financial reporting framework for small- and medium-sized entities (FRF for SMEs).

Question 14

Which of the following types of association with financial statements is least likely to result in a report by the CPAs?

Accepted Answer

Preparation of financial statements involves simply creating the financial statements on behalf of the client without any assurance or evaluation of the accuracy or completeness of the information provided. As a result, a report by CPAs is not required or typical for preparation engagements. Compilation, review, and audit engagements involve varying degrees of assurance by CPAs regarding the financial statements and therefore require reports.

Question 15

Comfort letters are ordinarily signed by the:

Accepted Answer

Comfort letters are typically signed by the independent auditor. They are used to provide assurance to third parties regarding financial information or the application of certain accounting principles.

Question 16

If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used,the accountant should:

Accepted Answer

The accountant should disclose the basis of accounting in the accountant's report to ensure that users of the financial statements are aware of the basis on which the financial statements have been prepared. This is important for proper understanding and interpretation of the financial information presented.

Question 17

When an auditor reports on financial statements prepared on an entity's income tax basis,the auditor's report should:

Accepted Answer

When financial statements are prepared on an entity's income tax basis, the auditor's report should disclose that the income tax basis is a basis of accounting other than generally accepted accounting principles. This is because income tax basis may differ from GAAP in significant respects.

Question 18

A comfort letter will ordinarily include:

Accepted Answer

A comfort letter typically includes an opinion on whether the audited financial statements comply in form with SEC accounting requirements, providing assurance to underwriters or other parties involved in securities offerings.

Question 19

If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled,the auditor should:

Accepted Answer

The auditor should modify the auditor's report to disclose any reservations regarding the suitability of the title of the financial statements. This allows the auditor to communicate their concerns while still providing an opinion on the financial statements.

Question 20

An auditor is reporting on cash basis financial statements.These statements are best referred to in his opinion by which of the following descriptions?

Accepted Answer

Choice B is correct because it accurately describes the elements of financial statements prepared on a cash basis. In cash basis accounting, the focus is on tracking the cash that comes into and goes out of the business. Therefore, the financial statements would reflect assets and liabilities that arise directly from cash transactions, as well as revenue collected (cash inflows) and expenses paid (cash outflows). Choices A, C, and D do not fully capture the essence of cash basis financial statements as described in B.

Quiz 19: Additional Assurance Services: Historical Financial Information