cpa audit review ch 19 review 5

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cpa audit review ch 19 review 5
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2014-11-10 03:12:51
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cpa audit review ch 19 review 5
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  1. Which of the following statements should be included in an accountant’s standard report based on the compilation of a nonissuer’s financial statements?

    A.A compilation is designed to detect material modifications that should be made to the financial statements.

    B.A compilation consists principally of inquiries of company personnel and analytical procedures applied to financial data.

    C.A compilation’s objective is to present in the form of financial statements information that is the representation of management.

    D.A compilation is substantially less in scope than an audit in accordance with generally accepted auditing standards.
    C.A compilation’s objective is to present in the form of financial statements information that is the representation of management.



    The standard compilation report contains three paragraphs. The first paragraph identifies the financial statements and presents a disclaimer of assurance. The second paragraph states that management is responsible for the preparation and fair presentation of the statements. The third paragraph explains the accountant’s responsibility to follow SSARS and the objective of a compilation.
  2. Which of the following would be used on a review engagement?

    A.Examination of board minutes.

    B.Comparison of current-year to prior-year account balances.

    C.Recalculation of depreciation expense.

    D.Confirmation of cash and accounts receivable.
    B.Comparison of current-year to prior-year account balances.

    Review procedures consist of (1) making inquiries of management and other personnel, (2) applying analytical procedures, and (3) obtaining management representations. Comparison of current-year to prior-year account balances is an analytical procedure.
  3. In a review engagement, the accountant should establish an understanding with the entity regarding the services to be performed. The understanding should include all of the following except a

    A.Provision that the engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations.

    B.Provision that any errors, fraud, or noncompliance with laws and regulations that come to the accountant’s attention need not be reported to the entity.

    C.Description of the report the accountant expects to issue.

    D.Description of the nature and limitations of the services to be performed.
    B.Provision that any errors, fraud, or noncompliance with laws and regulations that come to the accountant’s attention need not be reported to the entity.

    The engagement cannot be relied upon to disclose errors, fraud, or noncompliance with laws and regulations. However, the accountant agrees to inform the appropriate level of management of (1) any material errors and (2) evidence or information coming to the accountant’s attention that fraud or noncompliance may have occurred. But the accountant need not report clearly inconsequential noncompliance (AR 90).
  4. Which of the following statements concerning prospective financial statements is true?

    A.Any type of prospective financial statements would normally be appropriate for general use.

    B.Only a financial projection would normally be appropriate for general use.

    C.Only a financial forecast would normally be appropriate for limited use.

    D.Any type of prospective financial statements would normally be appropriate for limited use.
    D.Any type of prospective financial statements would normally be appropriate for limited use.

    Limited use of prospective financial statements means use by the responsible party and those with whom that party is negotiating directly, e.g., in a submission to a regulatory body or in negotiations for a bank loan. These third parties are in a position to communicate directly with the responsible party. Consequently, AT 100 states, “Any type of prospective financial statements that would be useful in the circumstances would be appropriate for limited use.”
  5. Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review

    A.Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

    B.Provides only limited assurance that the financial statements are fairly presented.

    C.Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

    D.Includes examining, on a test basis, information that is the representation of management.
    A.Includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.

    The first paragraph of the review report contains a sentence stating, “A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.”
  6. 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.Recompile the financial statements using generally accepted accounting principles.

    B.Disclose the basis of accounting in the accountant’s report.

    C.Disclose the basis in the notes to the financial statements.

    D.Clearly label each page “unaudited.”
    B.Disclose the basis of accounting in the accountant’s report.

    An accountant may compile financial statements that omit disclosures required by GAAP or a special purpose framework (other comprehensive basis of accounting, or OCBOA). The accountant may compile financial statements that omit substantially all the disclosures required by an applicable reporting framework if the omission is not, to his/her knowledge, done to mislead those who might reasonably be expected to use the statements. When reporting on statements that omit substantially all disclosures, the accountant should include in the compilation report a paragraph stating that (1) management has elected to omit substantially all the disclosures, (2) the omitted disclosures might influence the user’s conclusions, and (3) the statements are not designed for those who are not informed about such matters. Furthermore, statements prepared in accordance with an OCBOA are not appropriate in form unless they include (1) a description of the OCBOA, including a summary of significant accounting policies and a description of the primary differences from GAAP, and (2) informative disclosures similar to those required by GAAP.
  7. When engaged to compile unaudited financial statements for a nonissuer, the accountant’s responsibility to detect fraud

    A.Arises out of the accountant’s obligation to apply procedures designed to bring to light indications that a fraud or defalcation may have occurred.

    B.Includes informing the client that the engagement cannot be relied upon to disclose fraud and noncompliance with laws and regulations.

    C.Does not exist unless an engagement letter is prepared.

    D.Is the same as the responsibility in an audit of financial statements in accordance with GAAS.
    B.Includes informing the client that the engagement cannot be relied upon to disclose fraud and noncompliance with laws and regulations.Answe

    The accountant’s understanding with the entity should provide that the engagement does not require assessing fraud risk and cannot be relied upon to detect errors, fraud, or noncompliance with laws and regulations. It also should provide that (s)he will inform the appropriate level of management of any (1) material errors and (2) evidence or information coming to his/her attention indicating fraud or noncompliance with laws and regulations. Clearly inconsequential noncompliance need not be reported (AR 80).

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