Question 1

An accountant's compilation report on a financial forecast should include a statement that:

Accepted Answer

Choice "C" is correct. The accountant's compilation report on a client's financial forecast should include a caveat that the prospective results may not be achieved. Choice "A" is incorrect. The historical financial statements upon which the forecast is based need not be audited, nor must they accompany the forecast compilation. Choice "B" is incorrect. The accountant expresses no assurance in the compilation report on forecasted statements. Choice "D" is incorrect. A compilation of a financial forecast would not include evaluation of the support for the assumptions underlying the forecast.

Question 2

An accountant's report on a review of pro forma financial information should include a:

Accepted Answer

Choice "D" is correct. The accountant's report on a review of pro forma financial information should include a reference to the financial statements from which the historical information is derived and a statement as to whether such financial statements were audited or reviewed. Choice "A" is incorrect. No statement on the entity's internal control is necessary. Choice "B" is incorrect. If the auditor has audited the financial statements from which the pro forma financial information is derived, an opinion on those statements may be expressed. Choice "C" is incorrect. The report on a review of pro forma financial information would include an of the objective and limitations of the information, but would not discuss the uncertainty surrounding occurrence of the transaction or event.

Question 3

Which of the following is not a required procedure in an engagement to review the interim financial information of a publicly held entity?

Accepted Answer

Choice "A" is correct. A review of interim financial information is not designed to provide information regarding an entity's ability to continue as a going concern. Even if such information comes to the accountant's attention, the accountant is not required to corroborate it. Choice "B" is incorrect. As part of a review, the accountant is required to compare disaggregated revenue data for the current interim period with that of comparable prior periods. Choice "C" is incorrect. As part of a review, the accountant is required to obtain evidence that the interim financial information reconciles with the accounting records. Choice "D" is incorrect. As part of a review, the accountant is required to inquire of management about their knowledge of fraud, suspected fraud, or allegations of fraud.

Question 4

A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain:

Accepted Answer

Choice "A" is correct. The practitioner's report on agreed-upon procedures related to management's assertion about the entity's compliance with specified requirements is intended solely for the use of specified parties. Thus, the report should include a statement of limitations on the use of the report. Choice "B" is incorrect. The report is in the form of procedures and findings. Since the work performed is less in scope than an examination, the accountant disclaims any opinion. Choice "C" is incorrect. The auditor does not provide any negative assurance relative to assessment of control risk or to compliance with the specified requirements. Choice "D" is incorrect. The report contains a statement that the sufficiency of the procedures is solely the responsibility of the parties specifying the procedures and a disclaimer of responsibility on the part of the accountant.

Question 5

Comfort letters ordinarily are signed by the client's:

Accepted Answer

Choice "A" is correct. A comfort letter is a letter containing a negative assurance from the CPA to the underwriter or certain other requesting parties just before the registration of the client's securities. Choice "B" is incorrect. The comfort letter is sent to the underwriter. Choice "C" is incorrect. The audit committee does not sign a comfort letter. Choice "D" is incorrect. Senior management may sign a client representation letter, not a comfort letter.

Question 6

Which of the following professional services would be considered an attest engagement?

Accepted Answer

Choice "B" is correct. An engagement to report on management's discussion and analysis (MD&A) would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party's assertion. Choice "A" is incorrect. A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party's assertion. Choice "C" is incorrect. An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement. Choice "D" is incorrect. The compilation of financial statements from a client's accounting records (a compilation engagement) is not considered to be an attest engagement. (Note that although a compilation of prospective financial statements is covered under Statements on Standards for Attestation Engagements, the question does not indicate that prospective financial statements are involved).

Question 7

In an attest engagement, use of the accountant's report should be restricted to specified parties in all of the following situations, except:

Accepted Answer

Choice "B" is correct. There is no requirement that the accountant's report be restricted to specified parties when reporting on an assertion about the subject matter instead of reporting directly on the subject matter. Choice "A" is incorrect, since use of the accountant's report should be restricted to specified parties when the criteria used to evaluate the subject matter are appropriate for only a limited number of parties. Choice "C" is incorrect, since use of the accountant's report should be restricted to specified parties when reporting directly on the subject matter and a written assertion has not been provided. Choice "D" is incorrect, since use of the accountant's report should be restricted to specified parties when reporting on an agreed-upon procedures engagement.

Question 8

Comfort letters ordinarily are:

Accepted Answer

Choice "D" is correct. A comfort letter is a letter from the independent auditor to the named underwriter just before the registration of the client's securities. Choices "A", "B", and "C" are incorrect, based on the above Explanation.

Question 9

Which of the following is not an attestation standard?

Accepted Answer

Choice "D" is correct. A sufficient understanding of internal control is not required to be obtained in an attestation engagement. Choice "A" is incorrect. In an attestation engagement, sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report. Choice "B" is incorrect. An attestation report should identify the assertion being reported on and state the character of the engagement. Choice "C" is incorrect. In an attestation engagement, the work should be adequately planned and assistants, if any, should be properly supervised.

Question 10

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:

Accepted Answer

Choice "C" is correct. In an agreed-upon procedures engagement, use of the report is restricted to the specified users. Choice "A" is incorrect. Statements on Standards for Accounting and Review Services apply to the unaudited financial statements of a nonissuer, not to engagements to apply agreed-upon procedures to prospective financial statements. Choice "B" is incorrect. There is no requirement that the accountant also examine prospective financial statements in an agreed-upon procedures engagement. Choice "D" is incorrect. In an agreed-upon procedures engagement, the specified parties (and not the accountant) take responsibility for the sufficiency of the procedures for their purposes.

Question 11

Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

Accepted Answer

Choice "D" is correct. A WebTrust engagement is an attestation engagement designed to measure transaction integrity, information protection, and disclosure of business practices. When an unqualified report is issued, the client may add the CPA WebTrust Seal to its Web site, indicating that its site is a reasonably safe and private place for e-commerce. Choice "A" is incorrect. ElectroNet is an Internet service provider. Choice "B" is incorrect. EDIFACT refers to standards developed by the United Nations for Electronic Data Interchange for Administration, Commerce, and Transport. These standards facilitate information flow among trading partners in many industries. The scope and format of these standards is similar, but not identical, to those developed in the United States. Choice "C" is incorrect. TechSafe is a distracter.

Question 12

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be:

Accepted Answer

Choice "A" is correct. When unaudited financial statements (generally the first quarter of the following year in an annual report) are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be clearly marked as "unaudited," but should not be referred to in the auditor's report. The statements need not be withheld until audited. Choices "B", "C", and "D" are incorrect, based on above.

Question 13

Davidson, CPA, is performing a review under auditing standards of Gold's interim financial information. As part of planning, Davidson reads the audit documentation from the preceding year's annual audit. Which of the following is least likely to affect Davidson's review?

Accepted Answer

Choice "D" is correct. Scope limitations relate to problems in performing the audit, and, especially since they were overcome, they would bear little relationship to procedures performed in a review. Choice "A" is incorrect. The nature of corrected misstatements should be considered, as they may be indicative of an ongoing problem. Uncorrected misstatements must also be considered as misstatements in one period often affect subsequent periods. Choice "B" is incorrect. Identified risks of material misstatement due to fraud help the accountant to identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence. Choice "C" is incorrect. Consideration of significant weaknesses in internal control helps the accountant identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence.

Question 14

Silver, CPA, has been hired by Andrews Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of Andrew's branch locations. Which of the following might Silver consider performing in response to this situation?

Accepted Answer

Choice "A" is correct. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in further inquiry of management. Choice "B" is incorrect. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in the accountant employing analytical procedures with a more precise expectation, since more precise expectations are more effective at detecting misstatements. Choices "C" and "D" are incorrect. Only choice "A" is correct, as explained above.

Question 15

An accountant's standard report on a compilation of a projection should not include a:

Accepted Answer

Choice "C" is correct. A compilation of prospective financial statements is not intended to provide assurance on the prospective financial statements or the assumptions underlying such statements. Choice "A" is incorrect. The report on a compilation should include a statement that a compilation is limited in scope. Choice "B" is incorrect. The report on a compilation should include a statement that the accountant assumes no responsibility to update the report for events subsequent to the report date. Choice "D" is incorrect. The report on a compilation should include a separate paragraph that describes the limitations on the presentation's usefulness.

Question 16

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?

Accepted Answer

Choice "A" is correct. Compiled financial statements that omit substantially all the disclosures required by GAAP are not comparable to financial statements that do include required GAAP disclosures. Accordingly, the 20X1 statements are not comparable to the 20X2 statements and Clark cannot report on them. Choice "B" is incorrect. The lack of material misstatements does not alter the fact that the statements are not comparable and therefore Clark may not report on them. Choice "C" is incorrect. Compiled financial statements that omit substantially all of the disclosures required by GAAP are not comparable to financial statements that include such disclosures. Accordingly, Clark may not report on the comparative financial statements, even if an explanatory paragraph is added. Choice "D" is incorrect. Updating the auditor's report does not change the fact that the financial statements for the two periods are not comparable.

Question 17

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

Accepted Answer

Choice "B" is correct. The objective of a review is to provide the accountant with a reasonable basis for expressing limited assurance that there are no material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. Choice "A" is incorrect. When performing a review, the accountant does not gather enough evidence to update an audit opinion. Choice "C" is incorrect. There are no "standards of interim reporting." Choice "D" is incorrect. Expressing an opinion as to whether the financial statements are presented fairly in accordance with GAAP is the result of an audit, not a review.

Question 18

Which of the following matters is covered in a typical comfort letter?

Accepted Answer

Choice "D" is correct. In a typical comfort letter, the accountants express an opinion (i.e., positive assurance) concerning the financial statements' compliance (as to form) with the pertinent accounting requirements of the SEC. Choice "A" is incorrect. No assurance is generally provided in a comfort letter regarding the operation of an entity's internal control. Choice "B" is incorrect. A typical comfort letter is addressed to the underwriters of the securities. Government Auditing Standards and the Single Audit Act are not applicable to a comfort letter related to the issuance of securities. Choice "C" is incorrect. Negative assurance (not positive) is typically provided regarding unaudited condensed financial information.

Question 19

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

Accepted Answer

Choice "A" is correct. Attestation standards provide a framework for the attest function beyond historical financial statements. Choice "B" is incorrect. The independence standard is almost the same for both attest engagements and audits. Choice "C" is incorrect. An attest engagement may be part of a larger engagement (such as a business acquisition study or a feasibility study). Choice "D" is incorrect. Attestation standards include two of the three GAAS fieldwork standards: planning/supervision and evidence. They do not include the internal control standard.

Question 20

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when:

Accepted Answer

Choice "C" is correct. Statements on Standards for Attestation Engagements provide guidance with respect to compilation of a financial projection, but they do not address services involving advocating for a client, such as testifying as an expert witness. Choices "A", "B", and "D" are incorrect, per above Explanation.

Exam 1: CPA Auditing and Attestation Exam