Question 1

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review:

Accepted Answer

Choice "A" is correct. An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review is substantially less in scope than an audit. (This is why you have to "memorize" the key phrases in the review and compilation reports.) Choice "B" is incorrect. Internal control inquiries are not part of a review, and therefore assurances related to internal control are inappropriate. Choice "C" is incorrect. A review does provide limited assurance as to GAAP, but this is not the appropriate wording for the report. Choice "D" is incorrect. Review report language compares a review with an audit, not with a compilation.

Question 2

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for:

Accepted Answer

Choice "B" is correct. When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for the highest level of service rendered. Choices "A", "C", and "D" are incorrect. The report should be appropriate for the highest level of service rendered.

Question 3

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?

Accepted Answer

Choice "C" is correct. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, whereas a compilation provides no assurance. Choice "A" is incorrect. A review does not test for completeness, nor does a compilation test for reasonableness. A review provides limited assurance about the financial statements based on inquiry and analytical review procedures, while a compilation provides no assurance and includes no testing for reasonableness. Choice "B" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. Choice "D" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonable assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. A compilation provides no assurance at all.

Question 4

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

Accepted Answer

Choice "D" is correct. A review is based on inquiry and analytical procedures. The accountant should inquire about actions authorized by the stockholders, the board of directors, or other management groups. Choice "A" is incorrect. The accountant is not required to obtain an understanding of internal control in a review engagement under SSARS. An understanding would be required in an audit or in a review of the interim financial statements of a public entity, conducted under auditing (PCAOB) standards. Choice "B" is incorrect. Distribution of a review report is not limited; however, each page of the financial statements should be marked, "See Accountant's Review Report." Choice "C" is incorrect. Confirmation is an auditing procedure used to corroborate stated account balances. A review is based on inquiry and analytical procedures, and would not include confirmation of balances.

Question 5

The annual financial statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

Accepted Answer

Choice "A" is correct. A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards, and it is these standards which should be referenced in the auditor's review report. (Note, however, that the PCAOB has adopted, at least initially, generally accepted auditing standards in this area.) Choices "B" and "C" are incorrect. Statements on Standards for Accounting and Review Services apply to reviews of the financial statements of nonissuers. Choice "D" is incorrect. A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards.

Question 6

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 7

The quarterly data required by SEC Regulation S-K have been omitted. Which of the following statements must be included in the auditor's report?

Accepted Answer

Choice "C" is correct. If the quarterly data required by SEC Regulation S-K have been omitted, the auditor's report must include a statement indicating that the company has not presented such data. Choice "A" is incorrect. The auditor's report should only state that the auditor was unable to review quarterly data required by SEC Regulation S-K when the data have been included, but the auditor has not reviewed such data. Choice "B" is incorrect. Generally, the auditor's report does not make reference to a review of interim financial information, since such information is not a required part of GAAP financial statements. (Note, however, that the auditor's report might be modified to indicate that the company's internal control was not sufficient to provide an adequate basis for a review of such information, in situations where quarterly data is included but not reviewed). Choice "D" is incorrect. If an entity is required to file quarterly reports, a review of this quarterly data is also required. Such review should be completed before the quarterly report is filed, not postponed to a subsequent quarter.

Question 8

When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:

Accepted Answer

Choice "A" is correct. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive negative assurance on capsule information. Choice "B" is incorrect. Positive assurance cannot be given if the information was not audited. Choices "C" and "D" are incorrect. A comfort letter generally covers the period from the date of the last auditor's report to the effective date of the registration. It does not cover "pro forma" or prospective financial statements.

Question 9

Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?

Accepted Answer

Choice "B" is correct. In reviewing the financial statements of a nonpublic entity, one of the first steps would be to obtain sufficient knowledge of the entity's business, including its organization, operating characteristics, and products or services. Choice "A" is incorrect. In an audit, preliminary judgments about risk and materiality are used to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. Choice "C" is incorrect. In an audit, the risk of material misstatement arising from fraud must be assessed in order to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. While inquiries would be made about fraud, a formal fraud risk assessment is not required. Choice "D" is incorrect. In a review of a nonissuer's financial statements, no assessment or testing of internal control is required.

Question 10

When compiling a nonissuer's financial statements, an accountant would be least likely to:

Accepted Answer

Choice "A" is correct. During a compilation of a nonissuer's financial statements, an accountant generally would not perform analytical procedures (Analytical procedures are required in a review.). Choice "B" is incorrect. The accountant compiling financial statements generally would read those statements to consider whether they appear to include adequate disclosure. Choice "C" is incorrect. The accountant compiling financial statements might omit substantially all of the disclosures required by GAAP. Choice "D" is incorrect. The accountant compiling financial statements might issue a compilation report on one or more, but not all, of the basic financial statements.

Question 11

Baker, CPA, was engaged to review the financial statements of Hall Company, a nonissuer. Evidence came to Baker's attention that indicated substantial doubt as to Hall's ability to continue as a going concern. The principal conditions and events that caused the substantial doubt have been fully disclosed in the notes to Hall's financial statements. Which of the following statements best describes Baker's reporting responsibility concerning this matter?

Accepted Answer

Choice "A" is correct. Since the principal conditions and events that caused the substantial doubt as to the company's ability to continue as a going concern have been fully disclosed in the notes to Hall's financial statements, Baker is not required to modify the accountant's review report. Baker may, however, choose to emphasize this issue in the report. Choice "B" is incorrect. The auditor is permitted to modify his review report as he/she feels appropriate in the circumstances. Choice "C" is incorrect. Baker did not perform a compilation; therefore, a compilation report would not be appropriate. Choice "D" is incorrect. Since the facts have been fully disclosed in the notes to the financial statements, no modification to the review report is required. Also, an opinion is never expressed based on a review engagement.

Question 12

An accountant's standard report issued after compiling the financial statements of a nonissuer should state that:

Accepted Answer

Choice "C" is correct. An accountant's standard report issued after compiling the financial statements of a nonissuer 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 report (and not a compilation report) states that, "I am not aware of any material modifications that should be made to the accompanying financial statements." Choice "B" is incorrect. A review report (and not a compilation report) states that a review "consists principally of inquiries of company personnel and analytical procedures." Choice "D" is incorrect. A review report (and not a compilation report) states that a review "is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion."

Question 13

An accountant is asked to issue a review report on the balance sheet, but not on other related statements. The scope of the inquiry and analytical procedures has not been restricted, but the client failed to provide a representation letter. Which of the following should the accountant issue under these circumstances?

Accepted Answer

Choice "D" is correct. A management representation letter is required for a review engagement. If no representation letter is provided, the review is incomplete and a no review report may be issued. Since there is no requirement for a representation letter in relation to a compilation engagement, the engagement may be changed to a compilation engagement (with the client's consent). Choices "A", "B", and "C" are incorrect. Incomplete reviews do not result in any sort of modification to the review report; rather, no review report may be issued.

Question 14

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should:

Accepted Answer

Choice "D" is correct. If the CPA believes the client's request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation. Choices "A", "B", and "C" are incorrect, based on the above Explanation. Reporting on Comparative Financial Statements

Question 15

An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

Accepted Answer

Choice "A" is correct. If a report on a review of interim financial information is presented in a registration statement, the prospectus should include a statement that the report is not a "report" or "part" of the registration statement. The accountant should also read the other portions of the registration statement to ensure that his or her name is not used in a way that indicates greater responsibility than s/he intends. Choice "B" is incorrect. The auditor is responsible to update the report for events occurring after the date of the report but prior to filing. Choice "C" is incorrect. The accountant's review of interim financial information is performed in accordance with PCAOB standards, as approved (not established) by the SEC. Choice "D" is incorrect. Obtaining corroborating evidence is an audit procedure, not a review procedure.

Question 16

When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

Accepted Answer

Choice "D" is correct. When audited financial statements are presented in comparative form with unaudited financial statements from a prior year, the auditor should either reissue his or her report on the unaudited statements or include a separate paragraph in the current year report describing the responsibility assumed for the unaudited statements. Choices "A", "B", and "C" are incorrect, per above Explanation.

Question 17

Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Accepted Answer

Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountant should inquire of management regarding the accounting principles and practices used, and the method of applying them. Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to make inquiries concerning the client's system of internal control. Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, but would likely make a more basic inquiry, about the client's accounting principles and practices, first. Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountant generally directs his/her inquiries to members of management, not to external parties.

Question 18

Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

Accepted Answer

Choice "A" is correct. The accountant is not required to specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or illegal acts. Choice "B" is incorrect. Inconsequential instance of fraud or illegal acts need not be reported to management. Choice "C" is incorrect. The accountant should report to an appropriate level of management any evidence or information that comes to his or her attention indicating that fraud or an illegal act may have occurred. Choice "D" is incorrect. Information indicating that fraud or an illegal act may have occurred should be reported to an appropriate level of management, but it need not be in writing. Oral communication to management should be documented.

Question 19

In which case would the accountant be least likely to perform a review of interim financial information under PCAOB (auditing) standards?

Accepted Answer

Choice "C" is correct. A review of data included in financial statements of a nonissuer is performed under Statements on Standards for Accounting and Review Services, not under PCAOB (auditing) standards. A review of interim financial information under PCAOB (auditing) standards is only conducted for public companies (or companies anticipating going public). Choice "A" is incorrect. When an entity is required by the SEC to file a quarterly report, the SEC also requires that an independent accountant perform a review (of the interim financial information) in accordance with PCAOB (auditing) standards before the report is filed. Choice "B" is incorrect. When a company is required by the SEC to include selected quarterly financial data in its annual report or in other SEC filings, a review (of the interim financial information) in accordance with PCAOB (auditing) standards is required. Choice "D" is incorrect. An accountant performing an initial audit of financial statements that include selected quarterly data should also perform a review (of the interim financial information) in accordance with PCAOB (auditing) standards as part of the overall audit.

Question 20

An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

Accepted Answer

Choice "C" is correct. An audit may be changed to a compilation or review due to a change in client requirements. Since the creditors no longer require audited financial statements, this is a valid reason for requesting a change. Choices "A", "B", and "D" are incorrect. Client-imposed scope limitations, such as refusing to provide a signed representation letter, prohibiting correspondence with legal counsel, or refusing to allow examination of board minutes, are indicative of a lack of cooperation by management. Such limitations would not be a valid basis for changing an engagement from an audit to a compilation.

Exam 1: CPA Auditing and Attestation Exam