Deck 19: Additional Assurance Services: Historical Financial Information

Question 1

An audit opinion on cash basis financial statements is an example of an opinion on financial statements that follow a special purpose financial reporting framework.

Answer 1

True

Question 2

It is the end of the client's first quarter and Bill Smith, CPA has been engaged to perform a compilation and to issue a compilation report on the financial statements. The client does not wish to present notes to the financial statements. The appropriate report includes:

A) Qualified opinion ("subject to" the omission of the notes).
B) Compilation report with an adverse opinion due to inadequate disclosure.
C) Standard compilation report.
D) Compilation report with an indication that all required disclosures under GAAP may not be presented with the statements.

Answer 2

D

Question 3

A compilation of financial statement provides limited assurance regarding the financial statements.

Answer 3

False

Question 4

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

A) The accountant is not aware of any material modifications that should be made to the accompanying financial statements.
B) A compilation consists principally of inquiries of company personnel and analytical procedures.
C) A compilation provides no form of assurance on the financial statements.
D) A compilation is greater in scope than a financial statement preparation form of association, but lesser than an audit.

Question 5

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

A) Make preliminary judgments about risk and materiality to determine the scope and nature of the procedures to be performed.
B) Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.
C) Assess the risk of material misstatement arising from fraudulent financial reporting and the misappropriation of assets.
D) Perform a preliminary assessment of the operating efficiency of the entity's internal control activities.

Question 6

When a U.S.-based organization prepares financial statements which are for use in another country, a U.S. report, modified to reflect the accounting principles of the other country, may be issued.

Question 7

Which of the following is correct concerning a CPA firm's preparation of financial statements engagement?

A) The statements must only be used by management and not third parties.
B) A written engagement letter or oral agreement is required.
C) No accountant's report ordinarily accompanies the financial statements.
D) At a minimum, the accountant preparing the financial statements must comply with the compilation standards.

Question 8

The auditors should not accept an engagement to issue a compilation report on financial information presented in a prescribed form.

Question 9

Accountant prepared or compiled financial statements may omit note disclosures.

Question 10

Which of the following is correct concerning financial statements prepared in the United States for use in another country?

A) The auditor must follow GAAP of both the United States and of the other country.
B) The type of audit report issued depends upon whether it is for use primarily outside the United States.
C) The audit must only follow US GAAP.
D) Auditors from the other country must be involved with the audit to assure adequate performance of that country's standards.

Question 11

Personal financial statements may be compiled or reviewed, but they should not be audited.

Question 12

Interim information of public companies:

A) Must be as comprehensive as that filed annually with the Securities and Exchange Commission.
B) Must be reviewed by CPAs before it is filed with the Securities and Exchange Commission.
C) Must be reviewed continuously by CPAs using continuous auditing techniques.
D) Requires no accountant association until it becomes a part of the companies' annual financial information.

Question 13

Which of the following is correct relating to compiled financial statements?

A) A compilation report must be issued.
B) Omission of note disclosures is unacceptable.
C) A written agreement with the client (ordinarily, an engagement letter) is not required.
D) Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only".

Question 14

Letters to underwriters should not contain negative assurances.

Question 15

Accountants must issue a compilation report at the conclusion of a compilation unless they have withdrawn from the engagement.

Question 16

The balance sheet for an individual may be titled a Statement of Financial Condition.

Question 17

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

A) Examination of board minutes.
B) Confirmation of cash and accounts receivable.
C) Comparison of current year to prior year account balances.
D) Recalculation of depreciation expense.

Question 18

The auditors should take exception to assets presented at their estimated current values in personal financial statements.

Question 19

For a CPA, a client imposed scope limitation during a review of financial statements is most likely to result in:

A) Resignation from the engagement.
B) Issuance of a disclaimer of opinion.
C) Issuance of an adverse opinion.
D) Only an explanatory paragraph added to report, with no change in the assurance provided.

Question 20

Is independence required when an accountant is engaged to either prepare or compile a client's financial statements? $$\begin{array} { | l | c | c | } \hline & \text { Prepare } & \text { Compile } \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 21

Which of the following types of services is most likely to result in a report that is restricted to specified parties?

A) Compilations.
B) Reviews.
C) Agreed-upon procedures.
D) Audits.

Question 22

Which of the following statements is correct with respect to an audit report issued for financial statements to be used primarily outside of the United States?

A) The report should follow the U.S. format, modified as appropriate.
B) The report should follow the format of the other country.
C) The report may follow either the U.S. format, modified as appropriate, or may follow the format of the other country.
D) The report should follow the attestation examination report format.

Question 23

In which of the following types of reports do the auditors express negative assurance?

A) Letters for underwriters.
B) Reports on audits of financial statements on a basis other than generally accepted accounting principles.
C) Reports on audits of specified accounts.
D) Reports on summary financial statements.

Question 24

A "comfort letter" to an investment banking firm will normally not:

A) Express negative assurance.
B) Be included with the registration statement for the securities.
C) Include the CPA's opinion as to whether the audited financial statements comply in all material respects with applicable requirements of the related securities acts.
D) Include a statement as to the auditors' independence.

Question 25

A CPA should not normally refer to which one of the following subjects in a "comfort letter" to underwriters?

A) The independence of the CPA.
B) Changes in financial-statement items during a period subsequent to the date and period of the latest financial statements in the registration statement.
C) Unaudited financial statements and schedules in the registration statement.
D) Management's determination of line of business classifications.

Question 26

Which of the following is correct when a company is issuing summary financial statements developed from audited financial statements?

A) Such summary statements should always have a CPA's report associated with them when audited financial statements exist.
B) The CPA may issue a report on whether the summary information is fairly stated in all material respects in relation to the basic financial statements.
C) The CPA should perform a compilation and review of the summary financial statements.
D) The CPA who has audited the financial statements who is asked to report on the summary statements should decline the engagement because the summary statements do not include all disclosures necessary under generally accepted accounting principles.

Question 27

Whenever a report filed on a printed form designed by authorities, call upon the independent auditors to make an assertion that the auditors believe is not justified, the auditors should:

A) Submit a short-form report with explanations.
B) Reword the form or attach a separate report.
C) Submit the form with questionable items clearly omitted.
D) Withdraw from the engagement.

Question 28

Financial statements that are developed from and summarize the overall information presented in audited financial statements are referred to as:

A) Agreed-upon procedure financial statements.
B) Compiled financial statements.
C) Summary financial statements.
D) Reviewed financial statements.

Question 29

Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's financial statements include:

A) Analytical procedures designed to identify reportable conditions related to internal control.
B) Inquiries concerning actions taken at meetings of the stockholders and the board of directors.
C) Analytical procedures designed to test the accounting records by obtaining corroborating evidential matter.
D) Inquiries of knowledgeable outside parties such as the client's attorneys and bankers.

Question 30

An assertion that is particularly difficult to audit with respect to personal financial statements is:

A) Existence.
B) Rights.
C) Completeness.
D) Legality.

Question 31

Which of the following requires modification of a review report?

A) A change in accounting principles.
B) A substantial doubt about a company's ability to continue as a going concern.
C) A departure from generally accepted accounting principles.
D) A change in an accounting estimate.

Question 32

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should:

A) Disclose the departure in a separate paragraph of the report.
B) Issue an adverse opinion.
C) Attach a note explaining the effects of the departure.
D) Issue a compilation report.

Question 33

When the auditors have performed an audit and are asked to report on the client's compliance with aspects of contractual agreements, which of the following is correct?

A) They may do so and provide reasonable assurance as to compliance.
B) They may do so and provide negative assurance as to compliance.
C) They only may do so when details of the contracts have been audited.
D) They may not do so.

Question 34

Which of the following does not result in a modification of a compilation report?

A) A lack of independence on the part of the auditors.
B) A departure from generally accepted accounting principles.
C) A lack of adequate disclosure in the financial statements.
D) A lack of consistent application of generally accepted accounting principles.

Question 35

Which of the following is accurate relating to audit reports on tax basis financial statements?

A) No emphasis-of-matter paragraph is included in the audit report.
B) Use of the report need not be restricted.
C) The purpose of the financial statements should be described in the audit report.
D) Only reports with modified opinions are appropriate.

Question 36

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:

A) Negative assurance that the procedures did not necessarily disclose all reportable conditions.
B) An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures.
C) A statement of restrictions on the use of the report.
D) A disclaimer of opinion on the entity's financial statements.

Question 37

Which of the following is not an example of financial statements that use a special purpose financial reporting framework?

A) Of a partnership which follows accounting practices used to file its tax return.
B) Prepared for limited purposes such as relating to contract a company has entered into.
C) Of an organization that has limited the scope of the auditor's examination.
D) Of an organization that follows procedures of a regulatory agency that oversees the company and its operations.

Question 38

Which of the following types of association requires that accountants provide a report with no explicit assurance?

A) Compilations.
B) Reviews.
C) Financial statement preparation.
D) Audits.

Question 39

The accountants' compilation report should be dated as of the date of:

A) Completion of fieldwork.
B) Completion of compilation procedures.
C) Transmittal of the compilation report.
D) The latest subsequent event referred to in the notes to the financial statements.

Question 40

A modification of the CPA's report on a review of the interim financial statements of a publicly held company would be necessitated by which of the following?

A) An uncertainty.
B) Lack of consistency.
C) Reference to another accountant.
D) Inadequate disclosure.

Question 41

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

A) A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.
B) Material modifications should be made to conform with generally accepted accounting principles.
C) The financial statements are presented fairly in accordance with standards of interim reporting.
D) The financial statements are presented fairly in accordance with generally accepted accounting principles.

Question 42

The underwriter of a securities offering may request that an auditor perform specified procedures and supply certain assurances concerning unaudited information contained in a registration statement. The auditor's response to such a request is commonly called a:

A) Report under federal security statutes.
B) Comfort letter.
C) Review of interim financial information.
D) Compilation report for underwriters.

Question 43

Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of publicly held entity? $$\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Inconsistent } \\\text { Accounting } \\\text { Principle } \\\text { Application }\end{array} & \begin{array} { c } \text { Inadequate } \\\text { Disclosure }\end{array} \\\hline \text { A. } & \text { Yes } & \text { Yes } \\\hline \text { B. } & \text { Yes } & \text { No } \\\hline \text { C. } & \text { No } & \text { Yes } \\\hline \text { D. } & \text { No } & \text { No } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 44

One may envision a continuum of assurance ranging from absolute assurance to no assurance. In between may be reasonable assurance, limited assurance, and a summary of findings with no other assurance.
a. What level of assurance is provided in the CPA's report by each of the following types of engagements?
• Examinations
• Audits
• Review
• Agreed-upon procedures
• Compilations and financial statement preparation
b. What type of assurance is provided on financial statements prepared following a special purpose basis of accounting other than generally accepted accounting principles?

Question 45

When performing a review of a nonpublic company, the auditors must obtain in a representation letter acknowledgement of management for its responsibility for each of the following except:

A) Responsibility for identifying illegal acts committed by employees.
B) Responsibility for the financial statements conforming with generally accepted accounting principles.
C) Responsibility to prevent and detect fraud.
D) Knowledge of any actual or suspected fraud that is material.

Question 46

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

A) Disclose that the income tax basis is a basis of accounting other than generally accepted accounting principles.
B) Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards.
C) Not express an opinion on whether the statements are presented in conformity with the basis of accounting used.
D) Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

Question 47

An accountant has been engaged to prepare a nonpublic client's financial statements. While preparing the financial statements, the accountant finds a number of material misstatements related to journal entries. The client refuses to correct the misstatements. Which of the following is correct?

A) A report with an adverse opinion should be issued.
B) All regulatory agencies should immediately be notified.
C) The accountant should prepare the financial statements and present them using the misstated journal entries.
D) The accountant should withdraw from the engagement.

Question 48

Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity?

A) A statement that the review was in accordance with generally accepted auditing standards.
B) A statement that all information included in the financial statements are the representations of management.
C) A statement describing the nature of the procedures performed.
D) A statement describing the auditor's conclusions based upon the results of the review.

Question 49

During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA should:

A) Disclose the departure in a separate paragraph of the report.
B) Issue an adverse opinion.
C) Attach a note explaining the effects of the departure.
D) Issue a compilation report.

Question 50

An auditor is reporting on cash basis financial statements. These statements are best referred to in his opinion by which of the following descriptions?

A) Financial position and results of operation arising from cash transactions.
B) Assets and liabilities arising from cash transactions, and revenue collected and expenses paid.
C) Balance sheet and income statement resulting from cash transactions.
D) Cash balance sheet and the source and application of funds.

Question 51

An auditor's report on financial statements prepared in accordance with a special purpose financial reporting framework of accounting other than generally accepted accounting principles should include all of the following except:

A) Reference to the note to the financial statements that describes the basis of preparation of the financial statements.
B) Disclosure that the audit was performed in accordance with generally accepted auditing standards.
C) An opinion as to whether the basis of accounting used is appropriate under the circumstances.
D) An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described.

Question 52

Which of the following types of association with financial statements is least likely to result in a report by the CPAs?

A) Compilation.
B) Review.
C) Preparation.
D) Audit.

Question 53

Comfort letters are ordinarily signed by the:

A) Client.
B) Client's lawyer.
C) Independent auditor.
D) Internal auditor.

Question 54

If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled, the auditor should:

A) Issue a disclaimer of opinion.
B) Explain in the notes to the financial statements the terminology used.
C) Issue a compilation report.
D) Modify the auditor's report to disclose any reservations.

Question 55

If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do not disclose the basis of accounting used, the accountant should:

A) Disclose the basis in the notes to the financial statements.
B) Clearly label each page "Unaudited."
C) Disclose the basis of accounting in the accountant's report.
D) Recompile the financial statements using generally accepted accounting principles.

Question 56

Items a through j present various phrases or characteristics that may apply to audits, reviews, and compilations. Place an X in the cell if the phrase or characteristic applies to the listed service:

Question 57

Each page of the financial statements compiled by an accountant may include a reference such as:

A) See accompanying accountant's notes.
B) Unaudited, see accountant's opinion.
C) See accountant's compilation report.
D) Subject to compilation restrictions.

Question 58

An auditor's report would be designated as a report on financial statements following a special purpose financial reporting framework for financial statements when they are:

A) For an interim period and are subjected to a review.
B) Unaudited and are prepared from a client's accounting records.
C) Prepared in accordance with a regulatory basis of accounting other than generally accepted accounting principles.
D) Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the statement of cash flows.

Question 59

Which of the following is an auditor least likely to inquire about when performing a review of a nonpublic company?

A) Significant transactions near the end of the period.
B) Communications with regulatory agencies.
C) That financial statements are prepared in conformity with a special basis of auditing.
D) Questions that have arisen in applying review procedures.

Question 60

The financial statements of nonpublic companies may be prepared, compiled, or reviewed by the CPAs.
a. Describe preparation of financial statements.
b. Describe a compilation of financial statements.
c. Describe a review of financial statements.
d. Describe three procedures that are performed in the review of a nonpublic company's financial statements.