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1
INCORRECT A public accountant cannot express an opinion on future-oriented financial
information
True
A)
False
B)
2 CORRECT
Review engagements are performed for clients who do not require an audit, but
still want a level of assurance for their financial statement users.
True
A)
False
B)
3
INCORRECT A compilation is a type of assurance engagement whereby the accountant
compiles financial statements based on information supplied by management.
True
A)
False
B)
4
INCORRECT A projection differs from a forecast in that it includes assumptions that may not
be the most likely, in the auditors opinion.
True
A)
False
B)
Arens/Elder/Beasley
Feedback: A projection includes assumptions that may not be the most likely,
in management’s opinion.
5
INCORRECT In performing a review an accountant must comply with GAAS.
True
A)
False
B)
6 CORRECT
The standards set for a compilation engagement do not include a requirement
for the accountant to be independent.
True
A)
False
B)
7 CORRECT
A typical attest engagement involves three parties: a user or users; a party
responsible for making the assertion and a public accountant.
True
A)
False
B)
Feedback: The attest engagement does involve three parties. Typically the
responsible party is responsible for the assertion to the user and
acknowledges that responsibility to the public accountant.
8 CORRECT
Due to the terms of a rental agreement an audit of a stores reported sales
figures is required. This is considered an examination of other financial
information other than financial statements.
True
A)
False
B)
Arens/Elder/Beasley
in a shopping mall. Often in a mall setting part of the store’s rent is
based upon a percentage its sales.
9
INCORRECT Auditors that specialize in embezzlement and money laundering investigation
typically will have their CBV specialization.
True
A)
False
B)
10
INCORRECT In conducting a review engagement, the accountants work includes
corroborative inquiry and discussion.
True
A)
False
B)
1
INCORRECT When performing a compilation, the accountant notices that the client has failed
to record numerous expenses, including amortization of capital assets. What
should the accountant do?
The accountant must determine who the intended users of the information
are, and notify them of the omissions.
B)
Because the financial statements will otherwise be misleading, the
accountant should require that changes be made prior to issuing the Notice
C) to Reader.
The accountant should withdraw from the engagement and seek legal
advice.
D)
Feedback: p. 692
2
INCORRECT Ca Trust Services are an example of which of the following type of engagement?
Audit.
Arens/Elder/Beasley
A)
Attest.
B)
Assurance.
C)
Review.
D)
Feedback: p. 700
3 CORRECT
In an ElderCare engagement, reporting on the quality of care provided to the
elderly person is an example of a(n)
Assurance service.
A)
Monitoring service.
C)
Direct service.
D)
Feedback: p. 700
4
INCORRECT When performing a review engagement, the public accountant is referred to in
the review standards as a(n)
Assurer.
A)
Auditor.
B)
Accountant.
C)
Practitioner.
D)
Feedback: p. 687
5
INCORRECT Subject matter of an attest engagement could be any of the following except
Internal controls.
A)
Arens/Elder/Beasley
Financial forecasts.
B)
Feedback: p. 700
6 CORRECT
Before issuing a comfort letter, the public accountant should
Feedback: p. 696
7
INCORRECT AuG-6 provides guidance if future-oriented financial information is included in a
prospectus and must have an audit report attached. The public accountant
reports on all of the following except
The auditor agrees with managements assertion that the forecast will be
achieved.
D)
Feedback: p. 698
8
INCORRECT Before signing and transmitting the letter of consent to the securities
commission it is recommended by the handbook that all of the following
procedures be performed except
The reading of minutes of shareholder meetings.
Arens/Elder/Beasley
A)
The reading of internal financial statements relating to the period since the
year-end.
C)
Feedback: p. 696
9
INCORRECT A Notice to Reader report provides the financial users
No assurance.
A)
Limited assurance.
B)
Reasonable assurance.
C)
Absolute assurance.
D)
Feedback: p. 690
10
CORRECT When conducting a review, the accountant's work includes all of the following
except
Feedback: p. 687-688
1 CORRECT
Assurance services are independent professional services that improve the
quality of information or its:
Arens/Elder/Beasley
Context.
A)
Profitability.
B)
Reliability.
C)
Sufficiency.
D)
2
INCORRECT The primary standards for attestation services other than historical financial
statements are the:
Attestation Standards.
B)
3 CORRECT
A practitioner performing an attestation engagement may ordinarily report upon
the subject matter or a(n):
Control criterion.
B)
Reliability statement.
C)
Suitable criteria.
D)
4
INCORRECT Which of the following is a basic type of attestation engagement?
Arens/Elder/Beasley
Certified agreed-upon review process
A)
Taxation advisory
B)
Examination
C)
Suitable criterion
D)
5
INCORRECT What type of an attestation engagement is similar in assurance provided to an
audit of historical financial statements?
Assessment
A)
Detailed review
B)
Evaluation
C)
Examination
D)
6
INCORRECT The circumstance most likely to make it impossible for a practitioner to issue a
review report is when the:
7
INCORRECT Which of the following is not an attestation form of report?
Arens/Elder/Beasley
Agreed-upon procedures
A)
Assembly
B)
Examination
C)
Review
D)
8 CORRECT
A report for an agreed-upon procedure ordinarily includes:
A summary of findings.
A)
An opinion.
B)
Negative assurance.
C)
Unlimited assurance.
D)
9
INCORRECT Which of the following is most accurate relating to attest engagements?
The subject matter of an attest engagement may take many forms, but it
must be based on historical events.
D)
10
CORRECT When an accountant issues an examination report on a financial forecast, the
report ordinarily should:
Arens/Elder/Beasley
State that the forecast is presented in conformity with guidelines
established by the AICPA.
A)
State that the accountant is responsible for events and circumstances not to
exceed one year after the report's date.
C)
11
INCORRECT Which of the following is not an objective of a practitioner's examination of
management's discussion and analysis?
12
INCORRECT A CPA's report relating to a Trust Services engagement is most likely to provide
assurance on:
Complementarity.
A)
Offline Privacy.
B)
Security.
C)
Trusteeship.
D)
1 CORRECT
Assurance services are independent professional services that improve the
Arens/Elder/Beasley
quality of information or its:
Context.
A)
Profitability.
B)
Reliability.
C)
Sufficiency.
D)
2
INCORRECT The primary standards for attestation services other than historical financial
statements are the:
Attestation Standards.
B)
3 CORRECT
A practitioner performing an attestation engagement may ordinarily report upon
the subject matter or a(n):
Control criterion.
B)
Reliability statement.
C)
Suitable criteria.
D)
4
INCORRECT Which of the following is a basic type of attestation engagement?
Arens/Elder/Beasley
Certified agreed-upon review process
A)
Taxation advisory
B)
Examination
C)
Suitable criterion
D)
5
INCORRECT What type of an attestation engagement is similar in assurance provided to an
audit of historical financial statements?
Assessment
A)
Detailed review
B)
Evaluation
C)
Examination
D)
6
INCORRECT The circumstance most likely to make it impossible for a practitioner to issue a
review report is when the:
7
INCORRECT Which of the following is not an attestation form of report?
Arens/Elder/Beasley
Agreed-upon procedures
A)
Assembly
B)
Examination
C)
Review
D)
8 CORRECT
A report for an agreed-upon procedure ordinarily includes:
A summary of findings.
A)
An opinion.
B)
Negative assurance.
C)
Unlimited assurance.
D)
9
INCORRECT Which of the following is most accurate relating to attest engagements?
The subject matter of an attest engagement may take many forms, but it
must be based on historical events.
D)
10
CORRECT When an accountant issues an examination report on a financial forecast, the
report ordinarily should:
Arens/Elder/Beasley
State that the forecast is presented in conformity with guidelines
established by the AICPA.
A)
State that the accountant is responsible for events and circumstances not to
exceed one year after the report's date.
C)
11
INCORRECT Which of the following is not an objective of a practitioner's examination of
management's discussion and analysis?
12
INCORRECT A CPA's report relating to a Trust Services engagement is most likely to provide
assurance on:
Complementarity.
A)
Offline Privacy.
B)
Security.
C)
Trusteeship.
D)
1
Nonaudit clients sometime engage public accounting firms to perform a specified
Arens/Elder/Beasley
INCORRECT set of audit procedures rather than a complete audit of the financial statements
taken as a whole. This type of engagement is called a(n)
Assurance service.
C)
Compliance audit.
D)
2
INCORRECT Even though Sarbanes-Oxley only applies to publicly traded companies, private
companies and organizations may request that public accounting firms attest to
the effectiveness of their internal controls. Several conditions must be met
before a public accounting firm can undertake such an engagement. Which of
the following is NOTone of the necessary conditions?
3
INCORRECT Which of the following statements is true concerning a compliance audit?
Risks such as inherent risk, control risk, and detection risk are not
appropriate in the planning and performance of a compliance audit.
B)
Arens/Elder/Beasley
Feedback: Incorrect. While governmental auditors do perform compliance
audits as a major part of their assurance responsibilities, public accountants
also provide compliance audits to their clients.
4
INCORRECT A review of unaudited financial states consists of
5
INCORRECT A compilation report should include all of the following except
6
INCORRECT Which of the following statements is true concerning interim financial
information?
Arens/Elder/Beasley
D)
7 CORRECT
According to AU 915, "Reports on Application of Requirements of an Appropriate
Financial Reporting Framework", which of the following is NOT allowed when
writing a report in response to a request for consultation regarding the
application of requirements of an appropriate financial reporting framework?
A statement that the report is for the sole use of specified parties.
D)
8
INCORRECT A business that executes or records transactions on behalf of a client is called
a(n)
Third-party provider.
A)
Service organization.
B)
Outsourcer.
C)
Profit center.
D)
9
INCORRECT The AICPA Special Committee on Assurance Services (SCAS) identified eight
mega trends that can affect a CPA's business. Which of the following is not one
of these mega trends identified by the SCAS?
Information technology.
A)
Arens/Elder/Beasley
New social structures.
C)
10
INCORRECT Which of the following would not be included in an auditor's report on financial
statements prepared under a special purpose framework?
1
INCORRECT You own Wobble Inc., which manufactures wooden tables. You need to hire an
accountant to prepare your quarterly financial statements and you want a report
to be issued on those financial statements. The service most likely to be
appropriate for you is a(n):
Audit.
A)
Compilation.
B)
Review.
C)
Special report.
D)
2
INCORRECT A politician has asked an accounting firm to audit his personal financial
statements with regard to his public disclosures. Which of the following is most
likely to be a greater concern on this audit than on an audit of a corporation?
Arens/Elder/Beasley
The basis of accounting used.
A)
Completeness.
B)
Presentation.
C)
3
INCORRECT Which of the following is correct about an accountant's engagement to prepare
financial statements for a client?
4
INCORRECT Which of the following statements should not be included in an accountant's
standard report based on the compilation of a client's financial statements?
5 CORRECT
Which of the following would be most likely to be used in a review engagement?
Arens/Elder/Beasley
Comparison of the total of current year equipment to the prior year total.
A)
6
INCORRECT Which of the following represents the highest to lowest level of assurance
provided by auditors in the performance of engagements?
7 CORRECT
What type of assurance is provided by an auditor in conjunction with a review?
Limited.
A)
Neutral.
B)
None.
C)
Positive.
D)
8
INCORRECT Which of the following is not a special purpose financial reporting framework?
Arens/Elder/Beasley
Cash basis.
A)
Contractual basis.
B)
GAAP basis.
C)
Regulatory basis.
D)
9
INCORRECT Independence is required in which of the following types of CPA engagements?
Compilation.
A)
Consulting.
B)
Review.
C)
Tax.
D)
10
INCORRECT A client wants to include a set of summary financial statements on a trifold card
which is sent to all prospective customers who have requested information on its
new cell phone. The financial statements have been audited by X & Y CPAs who
issued a standard unmodified report; X & Y believes that the summary financial
statements are fairly stated, in all material respects, in relation to the
consolidated financial statements. If X and Y are asked to issue a report to
accompany the summary financial statements it is most likely that the report
would:
State whether the summary financial statements are fairly presented, in all
material respects, in relation to the consolidated financial statements.
D)
Arens/Elder/Beasley
11
INCORRECT A comfort letter is typically sent to whom and for what reason?
12
INCORRECT Audit reports on financial statements prepared following which of the following
bases are most likely to include a restriction on use (i.e., include an alert to
users as to the intended use or purpose of the report)?
Cash basis.
A)
Contractual basis.
B)
GAAP basis.
C)
Tax Basis.
D)
The correct answer for each question is indicated by a .
1
INCORRECT Which of the following services would be considered an assurance engagement?
Providing advice on the structure of the internal audit function for an entity
whose external audit is performed by another firm.
D)
Arens/Elder/Beasley
2
INCORRECT Unlike auditing standards, the assurance standards do not contain a requirement
that auditors obtain
3
INCORRECT A practitioners engaged to express his or her opinion on a managements report
on the effectiveness of the companys internal control is an example of which of
the following types of engagements?
Audit engagement.
A)
Assurance engagement.
B)
Review engagement.
C)
4
INCORRECT Which of the following professional services would be considered an attest
engagement?
Arens/Elder/Beasley
5
INCORRECT The practitioner provides absolute assurance to the user in the performance of
An assurance engagement.
A)
A review engagement.
B)
An audit engagement.
C)
6
INCORRECT When conducting a review, the practitioners work would generally not include
which of the following procedures?
7
INCORRECT A review engagement will typically
Include only the gathering of financial data for the primary purpose of
preparing the financial information with the related notes.
D)
Arens/Elder/Beasley
8
INCORRECT The standard report issued by a practitioner after reviewing the financial
statements of an entity states that
The practitioner does not express an opinion or any other form of assurance
on the financial statements.
D)
9
INCORRECT Financial statements of an entity that have been reviewed by an practitioner
should be accompanied by a report stating that
The scope of the inquiry and the analytical procedures performed by the
accountant have not been restricted.
A)
10
CORRECT Which of the following statements is correct concerning both an engagement to
compile and an engagement to review an entitys financial statements?
Arens/Elder/Beasley
11
CORRECT When engaged to compile the financial statements, the practitioner is required
to possess a general knowledge of the entitys accounting principles and
practices. This requirement will most likely include obtaining an understanding of
the
12
INCORRECT When compiling the financial statements of a non-public entity, an accountant
should
13
CORRECT The objectivity of an internal audit function will most likely be enhanced if the
director of the IA department reports to the entitys
Controller.
C)
Arens/Elder/Beasley
14
CORRECT Which of the following is a service least likely provided by the internal audit
function?
Operational auditing.
B)
Compliance reviews.
C)
15
INCORRECT Which of the following is not one of the Principles in the IIA Code of Ethics?
Integrity.
A)
Objectivity.
B)
Competency.
D)
16
INCORRECT Which of the following is a performance standard from the International
Standards for the Professional Practice of Internal Auditing?
Arens/Elder/Beasley
17
INCORRECT The general accreditation granted by the Institute of Internal Auditors is known
as the
CFE.
A)
CGAP.
B)
CFSA.
C)
CIA.
D)
18
INCORRECT Which of the following is not one of the general areas of the IIAs International
Standards for the Professional Practice of Internal Auditing?
Performance standards.
A)
Implementation standards.
B)
Ethical standards.
C)
Attribute standards.
D)
19
CORRECT The four principles of the IIA Code of Ethics are
Arens/Elder/Beasley
Which of the following is not one of the major categories of auditors
services?
1.
Compilation engagement.
Your Answer:
Litigation planning.
Correct Answer:
Arens/Elder/Beasley
What is the type of assurance engagement that has as its subject matter
non-historical financial information?
5.
Prospective financial information.
Your Answer:
How does the related services framework differ from the assurance
framework?
7.
Related services enhance the degree of confidence
Your Answer: intended users can have.
Arens/Elder/Beasley
The characteristics for assessing whether criteria are suitable are all the
following except:
10
. International acceptance.
Your Answer:
Arens/Elder/Beasley
The interviews conducted with employees and
Your Answer: management.
ISQC 1:
16
Gives the requirements designed to enable the firm to
.
Your Answer: meet the objective of quality control.
Arens/Elder/Beasley
An assurance report:
19
Provides a written report containing a conclusion that
.
Your Answer: conveys the assurance obtained about the subject matter
information.
Public relations.
Correct Answer:
1
INCORRECT A public accountant cannot express an opinion on future-oriented financial
information
True
A)
False
B)
2 CORRECT
Review engagements are performed for clients who do not require an audit, but
still want a level of assurance for their financial statement users.
True
A)
False
B)
3
INCORRECT A compilation is a type of assurance engagement whereby the accountant
compiles financial statements based on information supplied by management.
Arens/Elder/Beasley
True
A)
False
B)
4
INCORRECT A projection differs from a forecast in that it includes assumptions that may not
be the most likely, in the auditors opinion.
True
A)
False
B)
Feedback: A projection includes assumptions that may not be the most likely,
in management’s opinion.
5
INCORRECT In performing a review an accountant must comply with GAAS.
True
A)
False
B)
6 CORRECT
The standards set for a compilation engagement do not include a requirement
for the accountant to be independent.
True
A)
False
B)
7 CORRECT
A typical attest engagement involves three parties: a user or users; a party
responsible for making the assertion and a public accountant.
True
A)
Arens/Elder/Beasley
False
B)
Feedback: The attest engagement does involve three parties. Typically the
responsible party is responsible for the assertion to the user and
acknowledges that responsibility to the public accountant.
8 CORRECT
Due to the terms of a rental agreement an audit of a stores reported sales
figures is required. This is considered an examination of other financial
information other than financial statements.
True
A)
False
B)
9
INCORRECT Auditors that specialize in embezzlement and money laundering investigation
typically will have their CBV specialization.
True
A)
False
B)
10
INCORRECT In conducting a review engagement, the accountants work includes
corroborative inquiry and discussion.
True
A)
False
B)
INCORREC For non-public companies not subject to the standards of the PCAOB, reports on
1
Arens/Elder/Beasley
T internal control are an example of which of the following types of engagements?
A) Audit.
B) Attest.
C) Assurance.
D) Special reports.
In a CPA PrimePlus engagement, visiting the client and inspecting logs, diaries,
2 CORRECT or other evidence to support that the services contracted have been provided
appropriately is an example of
A) Assurance services.
B) Consulting/facilitating services.
C) Monitoring services.
D) Direct services.
A) Attester.
B) Auditor.
C) Public accountant.
D) Practitioner.
When a CPA firm examines projected financial statements, their report should
4 CORRECT
include a separate paragraph that:
B)States that the CPA firm is responsible for the opinion presented for
only a specified amount of time.
Arens/Elder/Beasley
C)Provides an explanation of the difference between an audit and an
examination.
INCORREC Which of the following is not considered a type of assurance service currently
5 T provided by CPA firms?
A) Healthcare.
C) Estate planning.
D) Risk assessment.
Arens/Elder/Beasley
When conducting a review, the accountant's work includes would not include
8 CORRECT
which of the following procedures?
C) Controller
Arens/Elder/Beasley
1 INCORREC
Which of the following is generally considered one of the main reasons why
internal auditors evaluate the effectiveness of their company's internal control
T
1 structure?
A)To determine whether all risks and exposures of the company have
been either reduced or eliminated.
C)To determine the extent of reliance the internal auditors can place on
the controls in the process of evaluating the financial statements.
D)To reduce the amount of detailed testing for their external auditors.
Chapter 25
Multiple-Choice Questions
1. The standards which govern the CPAs association with unaudited financial statements of
private companies are the:
easy a. AICPAs Code of Professional Conduct.
d b. Statements on Auditing Standards (SASs).
2. The two types of services provided in connection with the Statements on Standards for
Accounting and Review Services are:
easy a. audit and examination services.
b b. compilation and review services.
4. Because the same CPA firm does both the annual audit and the public
Arens/Elder/Beasley
easy company interim financial statement review, they are referred to as _______.
c a. bookkeepers
b. accountants
c. auditors
d. CPAs
c. auditors.
d. CPAs.
easy a. review
c b. compilation
c. examination
c b. negative
c. positive
d. unequivocal
Arens/Elder/Beasley
d b. only if all the partners and the staff in the office performing the
engagement are independent.
11. Which of the following would not be included in a CPAs report based upon a
review of the financial statements of a nonpublic entity?
easy
a. A statement that the review was in accordance with generally accepted
a auditing standards.
13. The statement that Nothing came to our attention which would indicate
that these statements are not fairly presented expresses which of the
easy following?
b a. Disclaimer of an opinion.
b. Negative assurance.
c. Negative confirmation.
d. Shared opinion.
Arens/Elder/Beasley
14. For reviews, an accountant does which of the following?
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No No No
a. review report.
b. special report.
c. qualified opinion.
d. disclaimer of opinion.
16. Specific attestation standards have been developed in all but which of the
following areas?
medium
a. Pro forma financial information.
d
b. Compliance with laws and regulations.
medium a. to only the involved parties, who would have the requisite knowledge
about those procedures and the level of assurance resulting from them.
a
b. to only the involved parties, who would have the requisite knowledge
about those procedures but not the level of assurance resulting from
them.
Arens/Elder/Beasley
18. Which of the following is not an area of emphasis in a review conducted
under the SSARS?
medium
a. Tests of internal controls.
a
b. Make inquiries of management.
medium a. Audit
c b. Review
c. Agreed-upon procedures
d. Examination
20. In which type of report would you read the following statement: We believe
that our examination provides a reasonable basis for our opinion.?
medium
a. Review
c
b. Audit
c. Examination
d. Agreed-upon procedures
21. Which of the following forms of review are permissible under SSARS?
medium
a Inquiries Analytical Tests of details
procedures
a. No Yes No
b. Yes Yes No
c. No No Yes
Arens/Elder/Beasley
d. Yes No Yes
a WebTrust SysTrust
a. Yes Yes
b. No No
c. Yes No
d. No Yes
24. (Public) The Securities and Exchange Commission requires quarterly financial
information as a part of the:
medium
a. 10-K report.
b
b. 10-Q report.
c. 8-K report.
d. auditors report.
25. (Public) The quarterly reports submitted to the SEC by the client:
d b. do not have to be audited, but the CPA firm which does the year-end
audit must be identified.
c. have to be audited, but the CPA firm does not have to be identified.
d. do not have to be audited, but the CPA firm which does the year-end
audit must review the quarterly statements before they are submitted to
the SEC.
26. The WebTrust service requires that a CPA update its testing of the e-
commerce aspects of a entitys Web site at least every:
medium
a. ninety days.
d
b. month.
c. six months.
d. twelve months.
Arens/Elder/Beasley
medium the financial statements. When they are issued as a part of the report on the
financial statements, it is done by:
b
a. adding a middle paragraph before the opinion paragraph.
29. Which of the following is not a standard contained in both the Statement on
Standards for Attestation Engagements and the Statement on Auditing
medium Standards?
d a. The examination is to be performed by a person having adequate
technical training.
30. Which of the following is not one of the types of engagements and related
forms of conclusions that are defined by the attestation standards?
medium
a. Reviews.
b
b. Compilations.
c. Examinations.
d. Agreed-upon procedures.
31. Which of the following types of engagement reports would provide positive
assurance?
Arens/Elder/Beasley
medium a. An examination.
a b. A review.
d. A compilation.
32. Which of the following is not one of the general types of prospective
financial statements included in the attestation standards?
medium
d
Forecasts Projections Earnings estimates
a. No No Yes
b. No Yes No
c. Yes Yes No
d. Yes No Yes
c. unrestricted
d. directed
a Forecasts Projections
a. Yes Yes
b. No No
c. Yes No
d. No Yes
35. Which are prospective financial statements that present an entitys financial
position, results of operations, and cash flows, to the best of the responsible
medium partys knowledge and belief, given one or more hypothetical assumptions?
d
Arens/Elder/Beasley
a Forecasts Projections
a. Yes Yes
b. No No
c. Yes No
d. No Yes
36. Professional standards prohibit one of the following types of engagements for prospective
financial statements from being undertaken.
medium a. A compilation.
b b. A review.
c. An examination.
d. internal auditor.
40. Assurance provided by a review is substantially less than an audit. Which of the following
statements is true regarding these services?
medium a. A review requires more substantive evidence than an audit.
b. An audit requires less evidence related to internal control than a review.
c
c. A review requires less evidence than an audit.
d. None of the above statements is true.
41. An accountant who reviews the financial statements of a nonpublic entity should issue a report
stating that a review:
medium a. is substantially equivalent in scope to an audit.
b. is substantially more in scope than a compilation.
Arens/Elder/Beasley
c c. is substantially less in scope than an audit.
d. provides only limited assurance that the financial statements are fairly presented.
42. Which of the following procedures is not included in a review engagement of a nonpublic
entity?
medium a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance sheet date.
d
c. Any procedures designed to identify relationships among data that appear to be unusual.
d. A study and evaluation of internal control.
43. 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 nonpublic entity,
medium the accountant generally should issue the report that is appropriate for:
a. a review engagement.
d
b. a compilation engagement.
c. the lowest level of service rendered.
d. the highest level of service rendered.
44. (Public) The title of a review report issued for a public companys quarterly financial statements is titled
with which of the following?
medium a. Report of Independent Public Accountants.
b. Report of Independent Auditors.
c
c. Report of Independent Registered Public Accounting Firm.
d. Report of Certified Public Accountant.
45. You are a CPA retained by the manager of a cooperative retirement village to do write-up
work. You are expected to prepare unaudited financial statements with each page marked
medium unaudited and accompanied by a disclaimer of opinion stating no audit was performed. In
performing the work, you discover that there are no invoices to support a claim for a $25,000
d
disbursement. The manager informs you that all the disbursements are proper. What should you
do?
a. Submit the expected statements but omit $25,000 of unsupported disbursements.
b. Include the unsupported disbursements in the statements since you are not expected to
make an audit.
c. Obtain from the manager a written statement that you informed him of the missing
invoices and include his assurance that the disbursements are proper.
d. Notify the owners that some of the claimed disbursements are unsupported and withdraw
if the situation is not satisfactorily resolved.
47. Why do standards prohibit accepting an engagement on a projection for general use?
a. The CPAs procedures would violate SSARS.
medium b. Reports on projections are not well understood by the general public.
c. Underlying hypothetical assumptions are difficult to interpret without obtaining additional
c
information.
d. The CPA is not qualified to report on the use of GAAP in the projected financial statement.
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49. An accountant may accept an engagement to apply agreed-upon procedures to prospective
financial statements provided that:
medium a. distribution of the report is to be restricted to the specified users involved.
b. the prospective financial statements are also examined.
a
c . responsibility for the adequacy of the procedures performed is taken by the accountant.
d. negative assurance is expressed on the prospective financial statements taken as a whole.
50. Non-accounting data included in a long-form report have been subjected to auditing procedures.
The auditors report should state this fact and should explain that the non-accounting data are
medium presented for analysis purposes. In addition, the auditors report should state whether the non-
accounting data are:
b
a. audited, unaudited, or reviewed on a limited basis.
b. fairly stated in all material respects in relation to the basic financial statements taken as a
whole.
c. beyond the scope of the normal engagement and therefore, not covered by the opinion on
the financial statements.
d. within the framework of generally accepted auditing standards, which apply to the
financial statements taken as a whole.
51. An auditor has been asked to report on the balance sheet of Kane Company but not on the other
basic financial statements. The auditor will have access to all information underlying the basic
medium financial statements. Under these circumstances, the auditor:
a. may accept the engagement because such engagements merely involve limited reporting
a
objectives.
b. may accept the engagement but should disclaim an opinion because of an inability to
apply the procedures considered necessary.
c. should refuse the engagement because there is a client-imposed scope limitation.
d. should refuse the engagement because of a departure from generally accepted auditing
standards.
52. A CPA who has been engaged to audit financial statements that were prepared on a cash basis:
a. must ascertain that there is proper disclosure of the fact that the cash basis has been used,
medium the general nature of material items omitted, and the net effect of such omissions.
b. may not be associated with such statements which are not in accordance with generally
a
accepted accounting principles.
c. must render a qualified report explaining the departure from generally accepted
accounting principles in the opinion paragraph.
d. must restate the financial statements on an accrual basis and then render the standard
(short-form) report.
53. One example of a special report, as defined by Statements on Auditing Standards, is a report
issued in connection with:
challenging a. a feasibility study.
b. price-level basis financial statements.
b
c. a limited review of interim financial information.
d. compliance with a contractual agreement not related to the financial statements.
54. In a review service where the client has failed to follow GAAP, the accountant is:
a. not required to determine the effect of a departure if management has not done so, but that
challenging fact must be disclosed in the report.
b. required to determine the effect of a departure if management has not done so, and that fact
a
must be disclosed in the report.
c. not required to determine the effect of a departure if management has not done so, and that
fact need not be disclosed in the report.
d. required to determine the effect of a departure if management has not done so, and that fact
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need not be disclosed in the report.
56. The engagement and report on debt compliance letters should be limited to compliance matters
that the auditor is qualified to evaluate. Which of the following engagements would be
challenging inappropriate for the CPA to attempt to evaluate?
a. Determining whether the client has properly restricted its business activities to the
a
requirements of an agreement.
b. Determining whether principal and interest payments were made when due.
c. Determining whether the proper limitations were maintained on dividends, working capital,
and debt ratios.
d. Determining whether the accounting records were adequate for conducting an ordinary
audit.
57. Prospective financial statements are for general use or for limited use. General use refers to use
by any third party, whereas limited use refers to use by third parties with which the responsible
challenging party is negotiating directly. Which of the following statements is not correct?
a. Forecasts can be provided for general use.
c
b. Forecasts can be provided for limited use.
c. Projections can be provided for general use.
d. Projections can be provided for limited use.
58. Before performing a review of a nonpublic entitys financial statements, an accountant should:
a. complete a series of inquiries concerning the entitys procedures for recording, classifying,
challenging and summarizing transactions.
b. obtain a sufficient level of knowledge of the accounting principles and practices of the
b
industry in which the entity operates.
c. inquire whether management has omitted substantially all of the disclosures required by
generally accepted accounting principles.
d. apply analytical procedures to provide limited assurance that no material modifications
should be made to the financial statements.
59. An auditor who was engaged to perform an examination of the financial statements of a
nonpublic entity has been asked by the client to refrain from performing various audit
challenging procedures and change the nature of the engagement to a review of the financial statements in
accordance with standards established by the AICPA. The clients request was made because the
d
cost to complete the examination was significant. Under these circumstances, the auditor would
most likely:
a. qualify the auditors report and refer to the scope limitation.
b. view the request as an indication of a possible irregularity.
c. complete the examination that was in progress.
d. honor the clients request.
61. Attestation standards allow a CPA to perform all but which of the following services for a
forecast or projection?
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challenging a. Compilation
b. Review
b c. Examination
d. Agreed-upon procedures
62. Under what standards are WebTrust and SysTrust engagements performed?
a. SSAR
challenging b. SSAE
c. SAS
b
d. SSARS
64. The auditors best course of action with respect to other financial information included in an
annual report containing the auditors report is to:
challenging a. read and consider the manner of presentation of the other financial information.
b. indicate in the auditors report that the other financial information is unaudited.
a
c. consider whether the other financial information is accurate by performing a limited
review.
d. obtain written representations from management as to the accuracy of the other financial
information.
65. A CPA who is not independent and is associated with financial statements should disclaim an
opinion with respect to those financial statements. The disclaimer should:
challenging a. clearly state the specific reasons for lack of independence.
b. not mention any reason for the disclaimer other than that the CPA was unable to conduct the
c
examination in accordance with generally accepted auditing standards.
c. not describe the reason for lack of independence but should state specifically that the CPA
is not independent.
d. include a middle paragraph clearly describing the CPAs association with the client and
explaining why the CPA was unable to gather sufficient competent evidential matter to
warrant the expression of an opinion.
Essay Questions
66.
easy Define forecast and projection.
Answer:
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67. What are SSARS and who issues them?
easy
Answer:
69. Who developed the WebTrust service? Briefly explain this service.
easy
Answer:
WebTrust was developed jointly by the AICPA and the Canadian Institute
of Chartered Accountants. In a WebTrust engagement, a client engages
a CPA to provide reasonable assurance that the clients Web site
complies with certain Trust Services principles and criteria for one or
more e-commerce activities. A site that meets the Trust Service
principles is eligible to display the WebTrust seal on its transaction or
order page.
Answer:
Obtain knowledge of the accounting principles and practices of the clients industry.
Obtain knowledge of the client; that is understood, the clients
business transactions, its accounting records and employees, and
the basis, form, and content of the financial statements.
Make inquiries of management to determine whether the financial
statements are fairly presented.
The accountant is specifically required to obtain a letter of
representation from members of management who are
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knowledgeable about financial matters.
71. Discuss each of the three types of compilation reports and the
medium circumstances in which each should be used.
Answer:
72. State four types of assurance services that fall within the auditing standards but are not audits,
medium reviews, or compilations of financial statements in accordance with GAAP.
Answer:
Other comprehensive basis of accounting.
Specified elements, accounts, or items.
Information accompanying basic financial statements.
Debt compliance letters and similar reports.
73. Auditors frequently audit statements prepared on bases other than GAAP. Discuss four
medium commonly used bases other than GAAP.
Answer:
Cash or modified cash basis. With the cash basis, receipts and
disbursements are recorded; there are no accruals. Under the
modified cash basis, the cash basis is followed except for certain
items, such as recording fixed assets and depreciation.
Basis used to comply with the requirements of a regulatory agency.
Income tax basis. The same measurement rules used for filing tax
returns are often used for financial statement preparation, even
though this is not in accordance with generally accepted accounting
principles.
A definite set of criteria having substantial support. For example, the
price-level basis of accounting could be applied to all material items
in the financial statements.
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74. Briefly describe a SysTrust engagement.
medium
Answer:
77. Draft a report that would be appropriate when an independent accountant has performed a
challenging compilation of financial statements with disclosures in accordance with GAAP.
Answer:
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We have compiled the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements information that is
the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.
78. Draft a report that would be appropriate when an accountant has made a proper review of the
accounting records and the financial statements of a nonpublic entity and has concluded they
challenging appear reasonable.
Answer:
We have reviewed the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All information
included in these financial statements is the representation of the management of XYZ
Company.
A review consists principally of inquiries of company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in order
for them to be in conformity with generally accepted accounting
principles.
79. Discuss the five SSARS requirements that must be met when an accountant is performing a
challenging compilation of financial statements.
Answer:
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Make inquiries to determine whether the clients information is satisfactory.
Read the compiled financial statements and be alert for any obvious omissions or
errors in arithmetic and GAAP.
Answer:
81. Draft a report that would be appropriate when an accountant has performed a compilation of
challenging financial statements with disclosures in accordance with GAAP, but the accountant is not
independent with respect to the client.
Answer:
We have compiled the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements information that is
the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.
We are not independent with respect to XYZ Company.
82. The format and contents of an audit report for specified elements, accounts, or items is similar
challenging to the standard audit report of financial statements in accordance with GAAP. However, it must
also reflect four requirements for reporting on specified elements, accounts, or items. State each
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of these four requirements.
Answer:
The specified elements, accounts, or items must be identified.
The basis on which the specified elements, accounts, or items are
presented and the agreements specifying the basis must be
described.
The source of significant interpretations made by the client about
the provisions of a relevant agreement must be indicated and
described.
If the specified element, account, or item is presented on a basis
that is not in conformity with generally accepted accounting
principles or another comprehensive basis of accounting, a
paragraph that restricts the distribution of the report to those within
the entity and the parties to the contract or agreement must be
added.
83. Match the type of engagement (a-g) with the source of authoritative support
for that engagement provided below (1-7). Sources may be used more than
medium once (or not at all).
a. Auditing standards
b. Accounting and review service standards
c. Auditing standards and governmental auditing standards
d. Attestation standards
e. Governmental auditing standards
f. No standards have been set for these engagements
g. Standards of the Public Company Accounting Oversight Board
f 3. Operational auditing.
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for a public company.
c 6. Governmental auditing.
84. Review reports are normally dated as of the clients balance sheet date.
a. True
easy
b. False
b
easy a. True
b b. False
b. False
easy a. True
b b. False
a. True
b. False
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easy
b a. True
b. False
91. When an auditor issues an opinion on additional information accompanying the financial
statements, materiality is the same as that used in forming an opinion on the basic financial
medium statements.
a. True
a
b. False
92. WebTrust services are performed under the direction of the SSARS.
a. True
medium b. False
b
93. Systrust services are performed under the direction of the SSAEs.
a. True
medium
b. False
a
94. A financial statement review conducted in compliance with SSARS includes obtaining an
understanding of internal control.
medium a. True
b. False
b
95. Statements on Standards for Accounting and Review Services (SSARS) govern the CPAs
association with unaudited financial statements of nonpublic (private) companies, but not public
medium companies.
a. True
a
b. False
96. CPAs can issue a WebTrust opinion only on all five Trust Services principles.
a. True
medium
b. False
b
97. When performing a review (SSARS review) of financial statements, the accountant is required
to obtain a letter of representation from management.
medium a. True
a b. False
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medium a. True
b b. False
medium a. True
b b. False
101. A CPA firm can issue a compilation report even if it is not independent with
respect to the client.
medium
a. True
a
b. False
102. (Public) When performing a review of interim information for a public company, the
accountant ordinarily does not perform tests of the accounting records,
medium independent confirmations, or physical examinations.
a a. True
b. False
103. When issuing a debt compliance letter, the auditors opinion should be in the form of a negative
assurance.
medium a. True
b. False
a
b. False
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b. False
107. The accountants report on the examination of prospective financial statements should include a
caveat that the prospective results may not be achieved.
medium a. True
b. False
a
108. Auditors should provide debt compliance letters only for clients for whom
the auditor has done an audit of the overall financial statements.
challenging
a. True
a
b. False
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