Additional Assurance Services

Chapter 19

Additional Assurance Services:

Historical Financial Information

True / False Questions

1.An audit opinion on cash basis financial statements is an example of a special report.
TRUE

2.The balance sheet for an individual may be titled a .
TRUE

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

4.Personal financial statements may be compiled or reviewed, but they should be audited.
FALSE

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

6.Compiled financial statements may omit note disclosures.
TRUE

7.The auditors must issue a compilation report if they prepare a client's financial statements and submit them to a client who intends to use them for external purposes.
TRUE

8.In a compilation report on a prescribed form, the accountants should take exception to all departures from generally accepted accounting principles.
FALSE

9.Letters to underwriters should contain negative assurances.
FALSE

10.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.
TRUE

Multiple Choice Questions

11.Which of the following is correct relating to compiled financial statements when third party reliance upon those statements is anticipated?
A.A compilation report must be issued.
B.Omission of note disclosures is unacceptable.
C.A written engagement letter is required.
D.Each page of the financial statements should have a restriction such as "Restricted for Management's Use Only".

12.Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management?
A.Option A
B.Option B
C.Option C
D.Option D

13.A compilation report is required when compiled financial statements are expected to be used by:
A.Management only.
B.Management and third parties.
C.Third parties only.
D.A compilation report is required whenever financial statements are compiled.

14.It is the end of his client's first quarter and Bill Smith, CPA is performing a compilation of his client's interim financial statements. He has discovered that the client does wish to present notes to the financial statements. The appropriate CPA 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.

15.An accountant's standard report issued after compiling the financial statements of a nonpublic entity should state that
A.I am 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 is limited to presenting 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 GAAS, the objective of which is the expression of an opinion.

16.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.

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.

18.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.

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.

20.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.

21.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 comprehensive basis other than generally accepted accounting principles.
C.Reports on audits of specified accounts.
D.Reports on condensed financial statements.

22.An assertion that is particularly difficult to audit with respect to personal financial statements is:
A.Existence.
B.Rights.
C.Completeness.
D.Legality.

23.In which of the following types of reports do accountants provide no explicit assurance?
A.Compilations.
B.Reviews.
C.Examinations.
D.Audits.

24.Which of the following types of services is most likely to result in a restricted use report?
A.Compilations.
B.Reviews.
C.Agreed-upon procedures.
D.Audits.

25.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.

26.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.

27.A "comfort letter" to an investment banking firm will normally :
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.

28.When the auditors are associated with the financial statements of a public company, but have audited the financial statements, they should:
A.Issue a compilation report.
B.Issue a disclaimer of opinion.
C.Issue a qualified opinion.
D.Not issue any report.

29.Which of the following is an appropriate form of report for auditors who have audited the financial statements of a company when they are independent?
A.A simple disclaimer of opinion.
B.A disclaimer of opinion, with an indication of the lack of independence.
C.An audit opinion.
D.A qualified audit opinion.

30.Which of the following does 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.

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.

32.Which of the following is correct when a company is issuing condensed financial statements developed from audited financial statements?
A.Such condensed 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 condensed 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 condensed financial statements.
D.The CPA who has audited the financial statements who is asked to report on the condensed statements should decline the engagement because the condensed statements do not include all disclosures necessary under generally accepted accounting principles.

33.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.Condensed financial statements.
D.Reviewed financial statements.

34.The term "special reports" may include all of the following reports on financial statements:
A.Of a partnership which follows accounting practices used to file its tax return.
B.Prepared for limited purposes such as a report that relates to certain aspects of financial statements.
C.Of an organization that has limited the scope of the auditor's examination.
D.Of an organization which maintains its accounts and prepares its statements on a cash or other comprehensive basis of accounting which is materially at variance with accounting practices customarily followed in preparing accrual-basis statements.

35.Whenever special reports, filed on a printed form designed by authorities, call upon the independent auditors to make an assertion that the auditors believe is 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.

36.During a review of the financial statements of a non-public 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.

37.The accountants' compilation report should be dated as of the date of:
A.Completion of fieldwork.
B.Completion of the compilation.
C.Transmittal of the compilation report.
D.The latest subsequent event referred to in the notes to the financial statements.

38.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.

39.A CPA should 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.

40.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.

41.Which of the following would 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.

42.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.

43.If the auditor believes that financial statements prepared on the entity's income tax basis are 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.

44.An auditor's report on financial statements prepared in accordance with a comprehensive basis of accounting other than generally accepted accounting principles should include all of the following :
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.

45.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 comprehensive 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 comprehensive basis of accounting used.
D.Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting.

46.An auditor's report would be designated as a special report when it is issued in connection with financial statements that 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 comprehensive 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.

47.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.

48.Comfort letters are ordinarily signed by the:
A.Client.
B.Client's lawyer.
C.Independent auditor.
D.Internal auditor.

49.Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of publicly held entity?
A.Option A
B.Option B
C.Option C
D.Option D

50.If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting do 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.

51.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.

52.Which of the following should be included in an accountant's standard report based upon the compilation of an entity's financial statements?
A.A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management.
B.A statement that the compilation was performed in accordance with standards established by the American Institute of CPAs.
C.A statement that the accountant has not audited or reviewed the financial statements.
D.A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

53.Each page of the financial statements compiled by an accountant should include a reference such as:
A.See accompanying accountant's notes.
B.Unaudited, see accountant's disclaimer.
C.See accountant's compilation report.
D.Subject to compilation restrictions.

54.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.

55.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 accounting.
D.Questions that have arisen in applying review procedures.

56.When performing a review of a nonpublic company, the auditors must obtain in a representation letter acknowledgement of management for its responsibility for reach 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.

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

a. A compilation is limited to taking the representations of management and putting them in the form of financial statements.
b. A review of financial statements involves the performance of inquiry and analytical procedures to provide the accountants with a reasonable basis for expressing limited assurance that the financial statements are in accordance with generally accepted accounting principles.
c. Procedures performed in the review of financial statements include (only three required):
 Inquiries of officers and other executives.
 Analytical procedures applied to financial data by reference to prior financial data, budgets, and other operating data.
 Inquiries concerning actions taken in meetings of stockholders, board of directors, and committees of the board.
 Additional procedures if the accountants become aware that the information may be incorrect, incomplete, or otherwise unsatisfactory.