Question 1

When performing an engagement to review a nonissuer's financial statements, an accountant most likely would:

Accepted Answer

Choice "B" is correct. As part of the inquiries made during a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements. Choice "A" is incorrect. Certain procedures, such as confirmation of receivables and observation of inventory, are customarily performed in an audit but not in compilation or review engagements. Choice "C" is incorrect. A review engagement does not include obtaining an understanding of the client's internal control. Choice "D" is incorrect. The accountant would not normally restrict the use of the review report.

Question 2

When an accountant is engaged to compile a nonissuer's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are:

Accepted Answer

Choice "A" is correct. If substantially all disclosures required by GAAP are omitted from compiled financial statements, the accountant's compilation report should state that the financial statements are not designed for those who are not informed about such matters. Choice "B" is incorrect. Omission of substantially all disclosures is not a comprehensive basis of accounting other than GAAP. Choice "C" is incorrect. If the disclosure is made, the compilation is prepared in accordance with SSARS. Choice "D" is incorrect. Omission of substantially all disclosures does not make these special-purpose financial statements.

Question 3

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when:

Accepted Answer

Choice "D" is correct. An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when submitting unaudited financial statements. Submission is defined as: presenting to a client or third parties financial statements the accountant has prepared. An accountant who reproduces client-prepared financial statements has not prepared those statements. Preparation of standard monthly journal entries is a bookkeeping service that also does not involve preparation of financial statements.

Question 4

An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may not do so:

Accepted Answer

Choice "D" 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. Compliance with this request would not violate any ethical standards of the profession. Choice "B" is incorrect. Compliance with this request would not necessarily result in an incomplete review. Choice "C" is incorrect. An accountant can still review only the balance sheet, even if the review discloses material departures from GAAP. However, these departures should be reflected in the accountant's report.

Question 5

Each page of a nonissuer's financial statements reviewed by an accountant should include the following reference:

Accepted Answer

Choice "C" is correct. Each page of the financial statements reviewed by the accountant should include a reference such as "See Accountant's Review Report." Choices "A", "B", and "D" are incorrect, based on the above Explanation.

Question 6

Compiled financial statements should be accompanied by a report stating that:

Accepted Answer

Choice "C" is correct. The accountant's report includes a statement that the compilation is limited to presenting in the form of financial statements information that is the representation of management. Choice "A" is incorrect. The report must state that the financial statements have not been audited or reviewed, but does not compare the scope of a compilation to the scope of a review or an audit. Choice "B" is incorrect. The accountant expresses no assurance in a compilation engagement; limited assurance is expressed in a review engagement. Choice "D" is incorrect. The financial statements are compiled in accordance with SSARS issued by the AICPA, rather than "standards established by the Auditing Standards Board."

Question 7

Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonissuer's financial statements?

Accepted Answer

Choice "A" is correct. If the accountant is not independent, he should specifically disclose the lack of independence. Otherwise, independence is implied. Choice "B" is incorrect. The report accompanying compiled financial statements explicitly states that the financial statements have not been audited. Choice "C" is incorrect. Inquiry and analytical procedures are not performed in a compilation engagement. Choice "D" is incorrect. The report accompanying compiled financial statements explicitly states that the accountant provides no assurance on the financial statements.

Question 8

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 9

An accountant's standard report on a review of the financial statements of a nonissuer should state that the accountant:

Accepted Answer

Choice "B" is correct. The accountant's report on a review engagement should state that the accountant is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP. Choice "A" is incorrect. An accountant expresses limited assurance in a review engagement. Choice "C" is incorrect. "Reasonable assurance about whether the financial statements are free of material misstatement" is required for audit engagements, but is not necessary for review engagements. Choice "D" is incorrect. Examining evidence on a test basis is required for an audit engagement; procedures for a review engagement are limited to inquiry and analytical procedures.

Question 10

An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). The financial statements are expected to be used by a third party. Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?

Accepted Answer

Choice "D" is correct. SSARS does not require that the compilation report be printed on the accountant's letterhead, nor does it require a manual signature. According to SSARS, a compilation report must state that a compilation has been performed, describe what a compilation is, and emphasize that since no audit or review was performed, no assurance is provided. Although a signature is required, it need not be manual. Choices "A", "B", and "C" are incorrect, per the above Explanation.

Question 11

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 12

Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services?

Accepted Answer

Choice "C" is correct. An accountant can prepare a working trial balance and prepare standard monthly journal entries without being required to issue a compilation or review report under the SSARS as long as the performance of these services does not carry forward into the submission of financial statements. Choice "A" is incorrect. Monthly journal entries can be prepared. Choice "B" is incorrect. A working trial balance can be prepared. Choice "D" is incorrect. Both of these services can be rendered as long as they do not carry forward into the preparation of financial statements.

Question 13

Statements on Standards for Accounting and Review Services (SSARS) require an accountant to report when the accountant has:

Accepted Answer

Choice "D" is correct. SSARS apply when an accountant "submits" financial statements. Submission is defined as presenting financial statements to a client or third party that the accountant has prepared, either manually or through use of computer software. Preparing financial statements that are in conformity with another comprehensive basis of accounting constitutes a submission of financial statements under SSARS. If the financial statements are expected to be used by a third party, SSARS would require the accountant to report. Choice "A" is incorrect. Typing or reproducing client-prepared financial statements, without modification, as an accommodation to a client does not constitute submission of financial statements because the accountant has not prepared those statements. Choice "B" is incorrect. Providing a client with a financial statement format does not constitute a submission of financial statements (the accountant is not preparing the financial statements) and therefore, this does not fall within the guidelines of SSARS. Choice "C" is incorrect. Proposing correcting journal entries does not constitute submission of financial statements because the client will be the one recording the entries.

Question 14

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the:

Accepted Answer

Choice "B" is correct. An accountant may issue a review report on one financial statement, such as a balance sheet, and not on other related financial statements, if the scope of the accountant's inquiry and analytical procedures has not been restricted. Choice "A" is incorrect. The balance sheet need not be presented in a prescribed form of an industry trade association. Choice "C" is incorrect. There is no limitation on the use of a reviewed financial statement. Choice "D" is incorrect. Specialized accounting principles should be considered by the accountant when performing the review, but need not be disclosed.

Question 15

Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer's financial statements?

Accepted Answer

Choice "B" is correct. When reviewing a nonissuer's financial statements, an accountant ordinarily makes inquiries concerning the entity's procedures for recording and summarizing transactions. Choices "A", "C", and "D" are incorrect. The following audit procedures generally are not performed in a review engagement: A. Tests of the accounting records. C. Tests of management's assertions regarding continued existence. D. Inquiries of the entity's attorney concerning contingent liabilities.

Question 16

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 17

An accountant has compiled the financial statements of a nonissuer but declines to issue a compilation report. This is an example of:

Accepted Answer

Choice "C" is correct. If the accountant has compiled the financial statements of a nonissuer, and the compiled financial statements are not expected to be used by a third party, the accountant may decline to issue a compilation report. Choice "A" is incorrect, since SSARS allow the accountant to decline to issue a compilation report when the compiled financial statements are not expected to be used by a third party. Choice "B" is incorrect, since there is no requirement that the accountant be independent when the accountant declines to issue a compilation report. Note that an accountant who lacks independence is still permitted to compile the financial statements of a nonissuer entity. Choice "D" is incorrect, since there is no requirement that the financial statements be prepared in conformity with GAAP when the accountant declines to issue a compilation report.

Question 18

During an engagement to review the financial statements of a nonissuer an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should:

Accepted Answer

Choice "B" is correct. If the accountant concludes that modification of the standard report is appropriate, the departure should be disclosed in a separate paragraph of the report. Choice "A" is incorrect. An accountant would not express negative assurance on the accounting principles that do not conform with GAAP in a review engagement. Choice "C" is incorrect. An accountant would not issue an opinion in a review engagement. Choice "D" is incorrect. An accountant would not express positive assurance (i.e., an opinion) on the accounting principles that conform with GAAP in a review engagement.

Question 19

Which of the following statements should be included in an accountant's standard report based on the compilation of a nonissuer's financial statements?

Accepted Answer

Choice "B" is correct. The accountant's compilation report should state that a compilation is limited to presenting in the form of financial statements information that is the representation of management. Choice "A" is incorrect. A review (not a compilation) consists principally of inquiries of management and analytical procedures applied to financial data. Choice "C" is incorrect. While a compilation is not designed to detect material misstatements in the financial statements, no mention of this limitation is made in the compilation report. Choice "D" is incorrect. The review report states that a review is substantially less in scope than an audit in accordance with GAAS.

Question 20

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer?

Accepted Answer

Choice "C" is correct. Ratio analysis is often used to examine relationships between balance sheet accounts. Choice "A" is incorrect. Trend analysis would be more appropriate for examining income statement accounts. Choice "B" is incorrect. Regression analysis would not likely be used since twenty to thirty past observations are generally required to reliably make estimates. Choice "D" is incorrect. Risk analysis would not be used to evaluate relationships between balance sheet accounts.

Exam 1: CPA Auditing and Attestation Exam