Question 1

When a company uses a service organization to prepare its payroll,the company's auditors
A)have no obligation concerning the internal controls at the service organization.
B)need to understand the internal controls over the transaction regardless of the location of the control.
C)must audit the internal controls at the service organization.
D)should include the audit report of the service company's auditors with their auditors' report.

Accepted Answer

The company's auditors need to understand the internal controls over the transaction regardless of the location of the control. While the service organization's auditors may have already issued an audit report on their internal controls, the company's auditors still have a responsibility to assess and understand those controls as they relate to the company's financial statements. The auditors may also choose to rely on the service organization's internal controls as part of their own audit work, which further emphasizes the need to understand those controls. Therefore, choice B is the best answer.

Question 2

During a review engagement,which of the following is NOT a required inquiry of management?
A)The accounting principles and practices used
B)Significant transactions occurring near the end of the reporting period
C)Status of uncorrected misstatements identified in previous engagements
D)The changes made to internal controls during the period under review

Accepted Answer

All of the other options (A, B, and C) are required inquiries of management during a review engagement. Option D, however, is not required. While it may be relevant to the review engagement, it is not a required inquiry.

Question 3

Auditors can gain sufficient understanding of the internal controls at a service organization by
A)reviewing the contract with the service organization.
B)inquiry with management of the service organization.
C)reviewing a report on internal controls provided by the service organization's auditors.
D)sending a confirmation concerning internal controls to the service organization's auditors.

Accepted Answer

Reviewing a report on internal controls provided by the service organization's auditors (such as a SOC 1 report) gives auditors a comprehensive understanding of the internal controls in place at the service organization.

Question 4

During a review the auditor is required to obtain written representations from management.Which of the following is NOT one of the required elements of the representation?
A)Management's responsibility for the fair presentation of the financial statements
B)Management's belief that it has answered all inquiries fully and truthfully
C)Management has made all adjustments identified during the review
D)Management has disclosed information about subsequent events

Accepted Answer

The required elements of the representation include management's responsibility for the fair presentation of the financial statements, management's belief that it has answered all inquiries fully and truthfully, and management's disclosure of information about subsequent events. However, management is not required to state that it has made all adjustments identified during the review in the written representation.

Question 5

A preparation of financial statements engagement might include all of the following except
A)Preparation of financial statements prior to review by another accountant.
B)Preparation of financial statements to be presented alongside an entity’s tax return.
C)Preparation of financial statements solely for submission to a taxing authority.
D)Preparation of financial statements for presentation alongside a personal financial plan.

Accepted Answer

Preparation of financial statements solely for submission to a taxing authority is not typically included in a preparation engagement, as it is more related to tax preparation services.

Question 6

A report on an entity's internal control over financial reporting
A)is required for all companies whether they report to the SEC or not.
B)is optional for all companies whether they report to the SEC or not.
C)is required by the PCAOB for large public companies and may be performed by a CPA for nonpublic companies.
D)is limited to inquiry and analytical procedures for reports for non-SEC companies.

Accepted Answer

The PCAOB requires large public companies to provide a report on their internal control over financial reporting, while nonpublic companies may choose to have a CPA perform the report. It is not required for all companies and is not limited to inquiry and analytical procedures for non-SEC companies.

Question 7

AR-C 90 requires adequate documentation for a review engagement.Which items are required to be documented?
A)Analytical procedures: Yes; Management representations: No; Understanding of internal controls: No
B)Analytical procedures: No; Management representations: Yes; Understanding of internal controls: No
C)Analytical procedures: Yes; Management representations: Yes; Understanding of internal controls: No
D)Analytical procedures: Yes; Management representations: Yes; Understanding of internal controls: Yes

Accepted Answer

AR-C 90 requires documentation of analytical procedures and management representations, but not an understanding of internal controls for a review engagement.

Question 8

George Wilson is on the board of directors of a small manufacturing company,Smith Plastics Inc.George holds a CPA certificate and is a member of the AICPA.The president of the company,John Smith,has asked George to prepare financial statements for the company to be submitted to Sixth First Bank as part of a loan request.Mr.Smith tells George that the bank would like a review or an audit,but would settle for a compilation from a CPA.He would like George to do the compilation.
Required:
Under what conditions,if any,George Wilson would be allowed to prepare a compilation of the financial statements of Smith Plastics Inc.?

Accepted Answer

The answer of George Wilson is on the board of...

Question 9

An auditor that is requested to provide a report on application of requirements of an appropriate financial reporting framework may not
A)issue an opinion on the accounting treatment of a hypothetical transaction.
B)discuss the requirements with the client's current auditors.
C)limit the report to the sole use of specified parties.
D)state that differences in facts,circumstances or assumptions might change the conclusion.

Accepted Answer

An auditor cannot issue an opinion on hypothetical transactions because they are not actual events and do not provide a basis for a reasonable assurance engagement.

Question 10

Big Ben's Toy (BBT)Company has recently outsourced its payroll operation to Mary's Payroll Service (MPS).MPS receives the changes to the payroll data base (hirings,firings,rate increases,etc.)and the number of hours worked for all hourly employees.MPS calculates the payroll and sends BBT printed payroll checks,a payroll register,and a list of payments to be made to third parties (IRS,insurance,pension plan,etc.).BBT transfers an appropriate amount into its payroll bank account and distributes the checks.Accounts payable uses the list of third-party payments to make appropriate payments.
You have been hired to perform an audit of BBT Company.During your opening meeting with BBT management you state that your audit plan includes inquiries of Mary's Payroll Service and a review of the AT 801 report on internal controls at MPS.BBT's management is confused and states that BBT should not have to pay you to review controls at another organization.
Prepare a brief explanation to BBT's management as to why it is necessary to review the controls at MPS and the importance of this review to BBT Company.

Accepted Answer

The answer of Big Ben's Toy (BBT)Company has recently outsourced...

Question 11

At a minimum,in order to comply with PCAOB AS 2201,an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization
A)a description of its internal controls.
B)a type one service auditors' report.
C)a type two service auditors' report.
D)a Service Organization Control (SOC)3 report.

Accepted Answer

According to PCAOB AS 2201, an auditor of a public company that has material transactions processed by a service organization would have to request a type two service auditors' report. This report provides the auditor with information regarding the design and operating effectiveness of the service organization's controls relevant to the internal control over financial reporting of the audited company. It is more extensive than a type one report as it also covers the operating effectiveness of controls over a period of time.

Question 12

Donna Prima,CPA,was engaged to review the unaudited financial statements of Rooster Restaurants Inc.,a nonpublic company.During her review,Donna found that Rooster had not capitalized leases as required by GAAP.The result was so material,that Donna modified the standard review report to state that "the financial statements are not in conformity with GAAP."
Required:
Is Donna's report in accordance with professional standards? If not,what should she have done under the circumstances? Explain.

Accepted Answer

The answer of Donna Prima,CPA,was engaged to review the unaudited...

Question 13

Review work on unaudited financial statements consists primarily of conducting inquiries,performing analytical procedures,and obtaining a management representation letter.List the typical procedures accountants would perform on a review engagement.

Accepted Answer

The answer of Review work on unaudited financial statements consists...

Question 14

A report on sustainability,as defined by the AICPA,might include all of the following except
A)economic viability.
B)social responsibility.
C)environmental responsibility.
D)internal control over financial reporting.

Accepted Answer

Internal control over financial reporting is an important aspect of accounting and financial reporting but is not directly related to sustainability as defined by the AICPA, which focuses on economic, social, and environmental responsibility.

Quiz 13: Other Public Accounting Services

When a company uses a service organization to prepare its payroll,the company's auditors

During a review engagement,which of the following is NOT a required inquiry of management?

Auditors can gain sufficient understanding of the internal controls at a service organization by

During a review the auditor is required to obtain written representations from management.Which of the following is NOT one of the required elements of the representation?

A preparation of financial statements engagement might include all of the following except

A report on an entity's internal control over financial reporting

AR-C 90 requires adequate documentation for a review engagement.Which items are required to be documented?

An auditor that is requested to provide a report on application of requirements of an appropriate financial reporting framework may not

At a minimum,in order to comply with PCAOB AS 2201,an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization

Review work on unaudited financial statements consists primarily of conducting inquiries,performing analytical procedures,and obtaining a management representation letter.List the typical procedures accountants would perform on a review engagement.

A report on sustainability,as defined by the AICPA,might include all of the following except