Question 1

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:

Accepted Answer

Choice "D" is correct. A "special report" (unqualified) would be issued in an audit of financial statements prepared on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Special reports are also issued for: 1. Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP. 2. Specified elements, accounts or items of a financial statement. 3. Compliance with contractual or regulatory requirements related to audited financial statements. 4. Financial information presented in prescribed forms, or schedules that require a prescribed form of auditor's report. Choices "A" and "C" are incorrect. The special report would be unqualified since Green concluded that the financial statements were fairly presented on the prescribed basis. Choice "B" is incorrect. The wording of the special report varies slightly from the auditor's standard three paragraph report, and includes an additional explanatory paragraph.

Question 2

Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement's sole purpose is to assist Kell in developing a personal financial plan. For March to be exempt from complying with the requirements of SSARS 1, Compilation and Review of Financial Statements, Kell is required to agree that the:

Accepted Answer

Choice "D" is correct. An accountant may submit a written personal financial plan containing unaudited personal financial statements to a client without complying with requirements of SSARS 1 when both of the following conditions exist: 1) The accountant establishes an understanding with the client that the financial statements will be used solely to assist the client in developing a financial plan and will not be used to obtain credit, and 2) Nothing comes to the accountant's attention during the engagement indicating that the financial statements will be used to obtain credit. Choice "A" is incorrect. Comparative balance sheets may be presented. Choice "B" is incorrect. It does not matter whether the omitted disclosures required by GAAP are material. Choice "C" is incorrect. The client is not required to agree that the financial statements will not be disclosed to a non-CPA financial planner.

Question 3

North Co., a privately-held entity, asked its tax accountant, King, a CPA in public practice, to prepare North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

Accepted Answer

Choice "A" is correct. An accountant should not submit unaudited financial statements unless the auditor complies with the provisions applicable to a compilation engagement (under SSARS). Choices "B", "C", and "D" are incorrect, per above Explanation.

Question 4

Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field's profit participation in Gold's net income. Hardy may accept this engagement only if:

Accepted Answer

Choice "A" is correct. The engagement described is one to express an opinion on a specified element, account, or item of the financial statements. Since Field's profit participation is based on Gold's net income or stockholders' equity, Hardy can accept the engagement only if Hardy also audited the complete financial statements. Choice "B" is incorrect. If the auditor can express an opinion that the specified elements, accounts, or items are presented fairly on a basis of accounting other than GAAP, then the auditor can accept the engagement. Choice "C" is incorrect. Hardy's report need not be available for distribution to Gold's other employees. Usually the distribution of this type of report is restricted to those within the entity and the parties to the contract or agreement. This is necessary because the basis of presentation is determined by reference to a document that would not generally be available to other third parties. Mandatory distribution of an audit report is never required. Choice "D" is incorrect. Field does not need to own a controlling interest in Gold.

Question 5

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?

Accepted Answer

Choice "D" is correct. Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer. Choices "A", "B", and "C" are incorrect, based on the above Explanation.

Question 6

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the:

Accepted Answer

Choice "B" is correct. When an auditor is requested to change the engagement from an audit to a compilation, the auditor must consider the effort needed to complete the audit, the cost of completing the audit, and the reasons for the client's request. If the audit is substantially complete or an insignificant effort is needed to complete the audit, the auditor should consider the propriety of agreeing to the request. In addition, if the reason for the request is to limit the scope of the auditor's examination, the auditor must consider whether the information affected by the scope limitation is incorrect, incomplete, or otherwise unsatisfactory. A change in circumstance (e.g., an audit is no longer necessary) or a misunderstanding as to the nature of an audit would, on the other hand, be considered a reasonable basis for the change. Choices "A", "C", and "D" are incorrect, based on the above Explanation.

Question 7

Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts and fraud that materially affect Hall's financial statements. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements, Baker should:

Accepted Answer

Choice "C" is correct. If the accountant believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements taken as a whole, the accountant should withdraw from the review engagement and provide no further services with respect to those financial statements. Note that the accountant should also request that management consider the effect of the scheme on the financial statements. Choice "A" is incorrect. Since Baker believes modification of the standard report is not adequate, a disclaimer is inappropriate. Baker should withdraw from the engagement. Choices "B" and "D" are incorrect. No opinion may be given based on a review engagement

Question 8

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals meeting stated criteria are assigned increased degrees of responsibility. This is evidence of the firm's adherence to which of the following prescribed standards:

Accepted Answer

Choice "D" is correct. The AICPA's Statements on Quality Control Standards assert that professional development policies and procedures should be established by the firm in order to provide reasonable assurance that personnel will have the knowledge required to perform their work and progress within the firm. Choice "A" is incorrect. The auditors' responsibility is to the public and is defined in the "AICPA Code of Professional Conduct," which includes a set of mandatory rules and which derives its authority from the bylaws of the AICPA. Choice "B" is incorrect. Supervision and review are part of GAAS fieldwork standards. Choice "C" is incorrect. Accounting and review services pertain to the unaudited financial statements of a nonpublic company.

Question 9

Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer, in conformity with the income tax basis of accounting. If Web's financial statements do not disclose the basis of accounting used, Miller should:

Accepted Answer

Choice "A" is correct. If financial statements have been compiled on a basis other than GAAP, and the client makes no disclosures in the financial statements to that effect, the accountant should disclose the basis of accounting in the accountant's compilation report. Choice "B" is incorrect. Under the circumstances, the accountant need only make reference to the other basis of accounting used to compile the financial statements; special labeling of the financial statements is not required. Choice "C" is incorrect. A special report is not warranted in the circumstances. Choice "D" is incorrect. It is not necessary to withdraw from the engagement.

Question 10

An accountant who had begun an audit of the financial statements of a nonissuer 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:

Accepted Answer

Choice "C" is correct. If the accountant concludes that there is reasonable justification to change the engagement, the accountant's review report should not include reference to the original engagement, to any auditing procedures that may have been performed, or to the scope limitation that resulted in the changed engagement. Choices "A", "B", and "D" are incorrect, per above Explanation.

Question 11

If requested to perform a review engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is:

Accepted Answer

Choice "B" is correct. An accountant with an immaterial direct financial interest in a client is no longer independent with respect to that client. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. If the accountant is not independent, he may issue a compilation report provided he complies with the compilation standards. Choice "A" is incorrect. An accountant who is not independent may still be associated with the financial statements; for example, by performing a compilation engagement. Choice "C" is incorrect. The accountant is precluded from issuing a review report on the financial statements of an entity with respect to which he is not independent. Choice "D" is incorrect. An accountant with any direct financial interest in a client (even an immaterial interest) is no longer independent with respect to that client.

Question 12

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

Accepted Answer

Choice "B" is correct. An accountant performing a review should obtain a client representation letter from the owner, manager, or chief executive officer, and, if appropriate, the chief financial officer. Choice "A" is incorrect. A review does not contemplate obtaining an understanding of internal control or assessing control risk. Choice "C" is incorrect. Confirmation is a substantive audit procedure that is not appropriate for a review engagement. Choice "D" is incorrect. A search for unrecorded liabilities is an audit procedure that is not appropriate for a review engagement.

Question 13

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:

Accepted Answer

Choice "A" is correct. An independent auditor may express an opinion on one or more specified elements, accounts, or items of a financial statement as a special engagement, not in conjunction with an audit. Choices "B", "C", and "D" are incorrect, per above Explanation.

Question 14

Which option best describes the level of assurance provided in the following special reports?

Accepted Answer

Choice "A" is correct. Positive assurance is provided in all of the listed reports except compliance with contractual or regulatory requirements related to audited financial statements." Negative assurance is provided in this report. Choices "B", "C", and "D" are incorrect, based on the above Explanation.

Question 15

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant should:

Accepted Answer

Choice "A" is correct. If an auditor believes that modification of the standard report is not adequate to indicate the deficiencies in the financial statements, he should withdraw from the review engagement and provide no additional services with respect to the financial statements. Choice "B" is incorrect. Limiting the use of the report is not an acceptable option for financial statements under review that contain several departures from GAAP. Choice "C" is incorrect. Issuing a special report is inappropriate for financial statements under review that contain several departures from GAAP. Choice "D" is incorrect. If modification of the standard review report is not adequate to indicate departures from GAAP, a modified report should not be issued. Use of the financial statements is irrelevant.

Question 16

An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:

Accepted Answer

Choice "B" is correct. The accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Choice "A" is incorrect, since a written engagement letter is required to document the understanding with the client, and since representation letters are not required in compilation engagements. Choice "C" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Representation letters are not required in compilation engagements. Choice "D" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use (and a written engagement letter is used to document the understanding with the client)

Question 17

Compiled financial statements should be accompanied by an accountant's report stating that:

Accepted Answer

Choice "B" is correct. Compiled financial statements should be accompanied by a report stating that the financial statements were compiled in accordance with SSARS issued by the AICPA. Choice "A" is incorrect. An audit, not a compilation, includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation. Choice "C" is incorrect. A review report, not a compilation report, includes the phrase, "is substantially less in scope than an audit." Choice "D" is incorrect. The accountant expresses no such assurance in a compilation engagement; limited assurance (i.e., "…accountant is not aware of…") is expressed in a review engagement.

Question 18

When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with generally accepted accounting principles, the accountant should:

Accepted Answer

Choice "C" is correct. In a review engagement, the auditor should possess a level of knowledge of the accounting principles and practices of the industry in which the entity operates. This will provide, through the performance of inquiry and analytical procedures, a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the financial statements to be in conformity with generally accepted accounting principles. Choice "A" is incorrect. Assessing the risk that a material misstatement could occur in a financial statement assertion is an audit procedure, not a review procedure. Choice "B" is incorrect. Confirmation with the entity's attorney is an audit procedure, not a review procedure. Choice "D" is incorrect. Development of audit programs are part of an audit engagement, not a review procedure.

Question 19

Financial information is presented in a printed form that prescribes the wording of the independent auditor's report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor's responsibility. Under these circumstances, the auditor most likely would:

Accepted Answer

Choice "B" is correct. An auditor should not sign a preprinted report form that includes statements that are inconsistent with the auditor's responsibility. Instead, the form should be revised or a separate, more accurate report should be attached. Choice "A" is incorrect. Provided the form can be revised or a separate report can be attached, there is no need to withdraw from the engagement. Choice "C" is incorrect. Qualified opinions relate to departures from GAAP and/or scope limitations, neither of which is the case here. Choice "D" is incorrect. Even if the use of the report is restricted, an auditor should never sign a report including statements that are inconsistent with the auditor's responsibility.

Question 20

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

Accepted Answer

Choice "D," is correct. W,hen reporting on financial statements prepared in conformity with a basis of accounting other than G,A,A,P,, the auditor should identify in a separate paragraph the basis as a comprehensive basis other than G,A,A,P,. C,hoice "A," is incorrect. T,he statements would be examined in accordance with G,A,A,S,; however, no opinion (or disclaimer) is given regarding this fact. C,hoice "B," is incorrect. T,he auditor should express an opinion on the financial statements' conformity with the comprehensive basis other than G,A,A,P,. C,hoice "C," is incorrect. T,he auditor would include a statement indicating that the basis differs from G,A,A,P,, but need not quantify the differences among various bases of accounting.

Exam 1: CPA Auditing and Attestation Exam