Question 1

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 an indication of the type of opinion expressed on the prior year's audited financial statements in the fourth (separate) paragraph.

Accepted Answer

Correct. An example of such a separate paragraph is the following: "The financial statements for the year ended December 31, 20X1 were audited by us and we expressed an unqualified opinion on them in our report dated March 1, 20X2 but we have not performed any auditing procedures since that date."

Question 2

This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below. Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure. Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft. Accountant's Review Report We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co. A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose. The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date. Jordan and Stone, CPAs March 1, 20X3 Supervisor's Review Notes There should be no reference to the American Institute of Certified Public Accountants in the first (introductory) paragraph.

Accepted Answer

Incorrect. There is and should be a reference to the American Institute of Certified Public Accountants in the first paragraph because the auditors are performing a review this year and not an audit.

Question 3

When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:

Accepted Answer

Choice "A" is correct. When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that states that the income tax basis of accounting is a comprehensive basis of accounting other than GAAP (included in the third paragraph of the special report). Choice "B" is incorrect. The special report does not justify the use of the income tax basis of accounting. Choice "C" is incorrect. The financial statements are audited in accordance with GAAS (as stated in the first sentence in the second paragraph of the report). Choice "D" is incorrect. The report does not refer to the authoritative pronouncements that explain the income tax basis of accounting being used.

Question 4

An auditor's report on financial statements prepared in accordance with another comprehensive basis of accounting should include all of the following, except:

Accepted Answer

Choice "A" is correct. The auditor would not indicate in his/her report an opinion as to whether the method of accounting used is appropriate. Choice "B" is incorrect. The auditor would include in his report an opinion as to whether the financial statements are presented fairly in conformity with the other comprehensive basis of accounting. Choice "C" is incorrect. The auditor would include in his report reference to the note to the financial statements that describes the basis of presentation. Choice "D" is incorrect. The auditor would include in his report a statement that the basis of presentation is a comprehensive basis of accounting other than generally accepted accounting principles.

Question 5

Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:

Accepted Answer

Choice "D" is correct. Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should read the financial statements to consider whether the financial statements are free from obvious material errors. Choice "A" is incorrect. Application of analytical procedures is a review procedure, and is not required in a compilation engagement. Choice "B" is incorrect. Corroboration of a sample of management assertions is an audit procedure, and is not required in a compilation engagement. Choice "C" is incorrect. Inquiry is generally a review procedure; however, it should also be obvious to the accountant if substantially all disclosures are omitted.

Question 6

When an independent accountant's report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant's involvement. This statement should clarify that the:

Accepted Answer

Choice "B" is correct. When an independent accountant's report based on a review of interim financial information is presented in a registration statement, the prospectus should include a statement clarifying that the accountant's review report is not a "part" of the registration statement within the meaning of the Securities Act of 1933. Choice "A" is incorrect. The accountant is an "expert" within the meaning of the Securities Act of 1933. Choice "C" is incorrect. The accountant generally does not perform any auditing procedures during a review. Choice "D" is incorrect. The fact that the accountant's review is performed in accordance with standards established by the AICPA is not mentioned in the statement (about the accountant's involvement) in the prospectus.

Question 7

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that:

Accepted Answer

Choice "C" is correct. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that refers to the note to the financial statements that describes the basis of accounting. Choice "A" is incorrect. The auditor should not include a separate explanatory paragraph that justifies the reasons for any departure from GAAP. Choice "B" is incorrect. The opinion paragraph (not the preceding explanatory paragraph) states whether the financial statements are fairly presented in conformity with the other comprehensive basis of accounting. Choice "D" is incorrect. The auditor's report does not explain the differences between GAAP and the OCBOA, but merely states that they are different.

Question 8

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 9

A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:

Accepted Answer

Choice "B" is correct. Quality control standards relate to the conduct of a firm's audit practice. They set forth standards for the establishment of policies and procedures to provide reasonable assurance of conforming with professional standards. Choice "A" is incorrect. GAAS relate to the conduct of individual audit engagements. Choice "C" is incorrect. Joining professional societies that enforce ethical conduct (e.g., the AICPA or state CPA society) will not assure the firm of meeting its responsibility to conform with GAAS. A system of policies and procedures (i.e., a system of quality control) must be established to provide this assurance. Choice "D" is incorrect. Independence is part of the quality control element of independence, integrity, and objectivity, but maintaining independence alone will not help the firm meet its responsibility to conform with professional standards.

Question 10

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 11

Comfort letters ordinarily are addressed to:

Accepted Answer

Choice "B" is correct. Comfort letters (containing comments on data that have not been audited) ordinarily are addressed to underwriters of securities, and most likely convey negative assurance on financial information. Choice "A" is incorrect. The SEC is not the addressee. Choice "C" is incorrect. Creditor financial institutions are not the addressees. Choice "D" is incorrect. While the client (or its audit committee) may receive a copy, ordinarily comfort letters are addressed to the underwriters.

Question 12

During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should:

Accepted Answer

Choice "C" is correct. If, during a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements, and management refuses to correct the financial statement presentations, the accountant should disclose this departure from GAAP in a separate paragraph of the report. Choices "A" and "B" are incorrect. Adverse opinions and "except for" qualified opinions pertain to audit reports. Opinions are not rendered based on review engagements. Choice "D" is incorrect. The accountant expresses only limited assurance on the financial statements as a result of a review even when there are no GAAP departures. GAAP departures require that a separate paragraph be added to the standard report, and that the limited assurance be modified to read, "…with the exception of the matter described in the following paragraph, I am not aware of any material modifications…"

Question 13

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 "updating the prior year's auditor's report for events and circumstances occurring after that date" in the fourth (separate) paragraph.

Accepted Answer

Correct. The report should not state that the auditors have no responsibility for updating the prior year's audit report for events and circumstances that occurred after that date. This type of comment is included in a report on prospective financial statements, not in a report on the financial statements of a nonissuer. Planning and Supervision

Question 14

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 restriction on the use of the accountant's review report in the third paragraph.

Accepted Answer

Correct. There should be no restriction on use in a review report.

Question 15

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:

Accepted Answer

Choice "A" is correct. A system of quality control establishes policies and procedures that provide reasonable assurance of conforming with professional standards. Choice "B" is incorrect. Peer review is a process whereby one CPA firm reviews another. It can be part of the monitoring element of quality control, but it does not (in and of itself) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "C" is incorrect. The objective of continuing professional education (CPE) is to increase the competency of auditors. Professional development activities such as this are part of the personnel management element of quality control, but they do not (in and of themselves) provide reasonable assurance that a CPA firm will comply with professional standards. Choice "D" is incorrect. Compliance with the standards of reporting (part of the ten generally accepted auditing standards) helps ensure that audit results are appropriately communicated to the users of financial statements, but such compliance does not provide assurance regarding conformity with professional standards.

Question 16

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 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 There should be no reference to the prior year's audited financial statements in the first (introductory) paragraph.

Accepted Answer

Correct. The auditors are issuing a review report this year and issued an audit opinion last year. A review report gives less assurance than an audit. The auditors should not make reference in the first paragraph to the fact that they audited last year's financial statements even though they are being comparatively shown, because it may mislead the reader of the financial statements as to the auditors' degree of assurance on this year's financial statements.

Question 18

Which of the following is true about the term "likely misstatement?"

Accepted Answer

Choice "A" is correct. A "likely misstatement" is one that has not been specifically identified, but which is likely to exist based on the auditor's judgment. Choice "B" is incorrect. "Likely misstatement" does not refer to the cumulative effect of prior year errors. It is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified. Choice "C" is incorrect. "Likely misstatement" is a measure of misstatements the auditor considers likely to exist, that have not been specifically identified. Choice "D" is incorrect. The term "likely misstatement" includes only an estimate of potential errors. It does not include specific misstatements identified during the audit.

Question 19

Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?

Accepted Answer

Choice "C" is correct. Both the basis of accounting used by an entity to file its income tax return and the cash receipts and disbursements basis of accounting are comprehensive bases of accounting other than GAAP. OCBOAs also include: * A basis prescribed by a regulatory agency * A definite set of criteria having substantial support (e.g., price-level basis)

Question 20

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 statement that no opinion is expressed on the current year's financial statements in the second (scope) paragraph.

Accepted Answer

Correct. Because the auditors do substantially less work in a review than in an audit, the auditors should state that they do not express an opinion.

Exam 1: CPA Auditing and Attestation Exam