Question 1

An accountant should perform analytical procedures during an engagement to:

Accepted Answer

Choice "D" is correct. Analytical procedures are part of a review engagement, but not necessary for a compilation engagement. Choices "A", "B", and "C" are incorrect, per above Explanation.

Question 2

Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the:

Accepted Answer

Choice "D" is correct. An accountant may compile FS that omit substantially all disclosures required by GAAP provided the omission is not undertaken to mislead the users of the FS and is properly disclosed in the accountant's report as an additional third paragraph. Choice "A" is incorrect. There is no requirement that the reason for omitting the disclosures be explained in an engagement letter or acknowledged in the management representation letter (which, by the way, is not required for compilation engagements). Choice "B" is incorrect. Financial statements compiled in accordance with GAAP may omit substantially all required disclosures. Choice "C" is incorrect. Substantially all disclosures required by GAAP may be omitted in a compilation without restricting use to internal parties

Question 3

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if:

Accepted Answer

Choice "C" is correct. An accountant may issue a review report on one financial statement, such as a balance sheet, as long as the scope of the inquiry and analytical procedures has not been restricted. Choice "A" is incorrect. There is no requirement that Smith compile the other financial statements. Choice "B" is incorrect. An accountant can still review only the balance sheet, even if the review discloses material departures from GAAP. These departures should be reflected in the accountant's report, however. Choice "D " is incorrect. Smith may audit only the balance sheet even if Cone is a continuing client.

Question 4

Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

Accepted Answer

Choice "C" is correct. A review report is issued when inquiry and analytical procedures provide a reasonable basis for the expression of limited assurance on the financial statements. Choice "A" is incorrect. While the accountant is required to establish an understanding with the client, preferably in writing, an engagement letter is not required. Choice "B" is incorrect. When performing a review under SSARS, the accountant is not required to obtain an understanding of the client's internal control. Choice "D" is incorrect. A review results in the expression of limited assurance that no material modifications are necessary for the financial statements to be in conformity with generally accepted accounting principles. The limited nature of the work performed during a review does not provide sufficient evidence for an opinion on the financial statements taken as a whole.

Question 5

Which of the following should be the first step in reviewing the financial statements of a nonissuer?

Accepted Answer

Choice "C" is correct. In reviewing the financial statements of a nonissuer, the accountant's first step would be to obtain a general understanding of the entity's organization, its operating characteristics, and its products or services. Choices "A", "B", and "D" are incorrect. Inquiry and analytical review procedures would be performed after a general understanding of the client is obtained. This understanding will help the accountant more appropriately tailor the inquiry and analytical review procedures to the specific client engagement.

Question 6

Which of the following procedures is more likely to be performed in a review engagement of a nonissuer than in a compilation engagement?

Accepted Answer

Choice "C" is correct. Obtaining a representation letter from the CEO is more likely to be performed in a review engagement of a nonissuer (where obtaining the letter is required) than in a compilation engagement. Choice "A" is incorrect. Gaining an understanding of the entity's business transactions would be performed in both a compilation and a review engagement. Choice "B" is incorrect. Making a preliminary assessment of control risk would only be performed in an audit, not in a compilation or review. Choice "D" is incorrect. Assisting the entity in adjusting (compiling) the accounting records is more likely to be performed in a compilation engagement than in a review.

Question 7

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?

Accepted Answer

Choice "d" is correct. Knowledge of the accounting principles and practices of the industry is required in order to perform a compilation or review engagement; however, there is no requirement that such knowledge be obtained prior to accepting such an engagement. Choices "A", "B", and "C" are incorrect, per above.

Question 8

Which of the following procedures most likely would not be included in a review engagement of a nonissuer?

Accepted Answer

Choice "C" is correct. An accountant is not required to assess control risk as part of a review engagement. Assessment of control risk would be appropriate for an audit engagement. Choice "A" is incorrect. Obtaining a management representation letter is an appropriate review procedure. Choice "B" is incorrect. Considering whether the financial statements are in accordance with GAAP is an appropriate review procedure. Choice "D" is incorrect. Inquiring of management regarding subsequent events is an appropriate review procedure.

Question 9

An accountant performing a compilation or review of the financial statements of a nonissuer should:

Accepted Answer

Choice "A" is correct. An accountant should be able to justify departures from SSARS. Choice "B" is incorrect. An accountant may occasionally depart from SSARS guidelines, but should be prepared to justify such departures. Choice "C" is incorrect. While it is true that an accountant should exercise professional judgment in applying SSARS, it is not true that SSARS are considered recommendations. SSARS are professional standards, which the accountant should generally follow. Choice "D" is incorrect. Statements on Auditing Standards do not apply to compilations or reviews of the financial statements of a nonissuer.

Question 10

When compiling the financial statements of a nonissuer, an accountant should:

Accepted Answer

Choice "B" is correct. When compiling the financial statements of a nonissuer, an accountant should understand the accounting principles and practices of the entity's industry. Choice "A" is incorrect. Reviewing agreements with financial institutions for restrictions is generally performed during an audit. Choice "C" is incorrect. Inquiring of key personnel concerning related parties and subsequent events is not required in a compilation. Choice "D" is incorrect. Performing ratio analyses of the financial data of comparable prior periods is generally performed for review engagements and audits, not compilations.

Question 11

An accountant may compile a nonissuer's financial statements that omit all of the disclosures required by GAAP only if the omission is:

Accepted Answer

Choice "C" is correct. An accountant may issue a compilation report for a client's financial statements that omit all required GAAP disclosures, provided the omission is not intended to mislead financial statement users and the omission is clearly indicated in the accountant's report. Choices "A", "B", and "D" are incorrect, per above Explanation.

Question 12

Which of the following procedures is usually performed by the accountant in a review engagement of a nonissuer?

Accepted Answer

Choice "b" is correct. Comparing the financial statements with statements for comparable prior periods (analytical procedures) is a procedure that is usually performed by the accountant in a review engagement of a nonissuer. Choice "a" is incorrect. Sending a letter of inquiry to the entity's lawyer is a procedure generally performed only in an audit of an entity's financial statements. Choice "c" is incorrect. Confirming a significant percentage of receivables by direct communication with debtors is a procedure generally performed only in an audit of an entity's financial statements. Choice "d" is incorrect. Communicating significant deficiencies discovered during the study of the internal control structure is a procedure generally performed only in an audit of an entity's financial statements. (The internal control structure is generally not evaluated in a review engagement.)

Question 13

Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?

Accepted Answer

Choice "D" is correct. Statements on Standards for Accounting and Review Services (SSARS) establish standards and procedures for an engagement to compile an individual's personal financial statements to be used to obtain a mortgage. Choice "A" is incorrect. Proposing adjustments to the books of account for a partnership is an engagement that does not pertain to SSARS, as it falls short of submitting financial statements. Choice "B" is incorrect. Reviewing interim financial data required to be filed with the SEC is covered under PCAOB standards. SSARS only applies to nonissuers. Choice "C" is incorrect. Preparing standard monthly journal entries is not covered by SSARS, as it falls short of submitting financial statements.

Question 14

Before performing a review of a nonissuer's financial statements, an accountant should:

Accepted Answer

Choice "C" is correct. Before performing a review of a nonissuer's financial statements, an accountant should obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates. Choices "A", "B", and "D" are incorrect. These are appropriate steps performed during the review, not prior to it.

Question 15

Which of the following procedures would most likely be included in a review engagement of a nonissuer?

Accepted Answer

Choice "B" is correct. A review engagement is based on inquiry and analytical procedures. Inquiring about related party transactions is a procedure which would most likely be included in a review engagement of a nonpublic entity. Choice "A" is incorrect. Preparing a bank transfer schedule pertains to an audit engagement. Choice "C" is incorrect. Assessing the internal control structure pertains to an audit engagement. Choice "D" is incorrect. Performing cutoff tests on sales and purchases transactions pertains to an audit engagement.

Question 16

Which of the following is not true about documentation requirements related to a review of a nonissuer's financial statements?

Accepted Answer

Choice "C" is correct. The accountant is not required to evaluate control risk or test the operating effectiveness of controls in a review of a nonpublic entity's financial statements. Choice "A" is incorrect. Written documentation from other types of engagements may be used to provide support for the review report. Choice "B" is incorrect. A management representation letter should be obtained in review engagements, and a copy should be included in the documentation files. Choice "D" is incorrect. Documentation should include the results of analytical procedures (i.e., procedures performed, expectations and how they were developed, results of comparison to recorded amounts, and procedures performed with respect to significant differences).

Question 17

An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if:

Accepted Answer

Choice "D" is correct. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. Choice "A" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There are no requirements regarding the use of the balance sheet. Choice "B" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that the balance sheet be part of a comprehensive personal financial plan. Choice "C" is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that accounting principles remain consistent during the year.

Question 18

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

Accepted Answer

Choice "B" is correct. The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that a review consists of inquiries of company personnel and analytical procedures applied to financial data. Choice "A" is incorrect. A compilation report uses language similar to this, stating that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management. Choice "C" is incorrect. A compilation report uses language similar to this, stating that the accountant does not express an opinion or any other form of assurance on the financial statements. A review provides negative assurance. Choice "D" is incorrect. While it is true that a review of the financial statements of a nonpublic entity does not require the accountant to obtain an understanding of the entity's internal control or assess control risk, the report does not explicitly state this.

Question 19

Which of the following would be used on a review engagement?

Accepted Answer

Choice "C" is correct. A review consists of inquiries and analytical procedures. Comparison of current year and prior year account balances is an analytical procedure that would often be performed as part of a review. Choice "A" is incorrect. Examining board minutes is an audit procedure that would not typically be performed in a review. Choice "B" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not typically be performed in a review. Choice "D" is incorrect. Recalculation of expenses is an audit procedure that would not typically be performed in a review.

Question 20

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:

Accepted Answer

Choice "C" is correct. The accounting and review services committee is the authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of a nonissuer (i.e., an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities). Choice "A" is incorrect. The Financial Accounting Standards Board (FASB) is responsible for GAAP standards. Choice "B" is incorrect. The General Accounting Office (GAO) is responsible for audit standards under the federal "Single Audit Act." Choice "D" is incorrect. The Auditing Standards Board (ASB) is responsible for auditing standards under GAAS.

Exam 1: CPA Auditing and Attestation Exam