CHAPTER 17 MULTIPLE CHOICE d Which of the following is generally more important in a review than in a compilation? Determining the accounting basis on which the financial statements are to be presented Gaining familiarity with industry accounting principles and practices Obtaining a signed engagement letter Obtaining a signed representation letter (AICPA ADAPTED) d a b c d Which of the following procedures is not included in a review engagement on a nonpublic entity? Inquiries of management Inquiries regarding events subsequent to the balance sheet date Any procedures designed to identify relationships among data that appear to be unusual A study and evaluation of internal control structure (AICPA ADAPTED) c When auditing a public entity's financial statements that include segment information, the auditor should a Make certain the segment information is labeled "unaudited" and determine that the information is consistent with audited information b Make certain the segment information is labeled "unaudited" and perform only analytical review procedures on the segment information c Audit the segment information and, if the information is adequate and in conformity with GAAP, not make reference to the segment information in the auditor's report d Audit the segment information and, if the information is adequate and in conformity with GAAP, refer to the segment information in the auditor's report (AICPA ADAPTED) a If management chooses to place supplementary information required by the FASB in footnotes attached to the financial statements, this information should be clearly marked as a Unaudited b Supplementary information required by the FASB c Disclosures required by the FASB d Audited financial data required by GAAP (AICPA ADAPTED) b Which of the following best describes the auditor's responsibility for "other information" included in the annual report to stockholders, which contains financial statements and the auditor's report? a The auditor has no obligation to read the "other information." b The auditor has no obligation to corroborate the "other information" but should read the "other information" to determine whether it is materially inconsistent with the financial statements c The auditor should extend the examination to the extent necessary to verify the "other information." d The auditor must modify the auditor's report to state that the "other information is unaudited" or "not covered by the auditor's report." (AICPA ADAPTED) d When an independent audit report is incorporated by reference in a SEC registration statement, a prospectus that includes a statement about the independent accountant's involvement should refer to the independent accountant as a Auditor of the financial reports b Management's designate before the SEC c Certified preparer of the report d Expert in auditing and accounting (AICPA ADAPTED) 119 c If information accompanying the basic financial statements in an auditor-submitted document has been subjected to auditing procedures, the auditor may express an opinion which states that the accompanying information is fairly stated in a Conformity with generally accepted accounting principles b Terms of negative assurance c All material respects in relation to the basic financial statements taken as a whole d Conformity with principles for presenting accompanying information (AICPA ADAPTED) b The auditor's inquiries of management regarding supplementary information on the effects of price level changes should be directed to the judgments made concerning a Relevance and validity b Measurement and presentation c Accuracy and objectivity d Rights and obligations (AICPA ADAPTED) a a b c d Comfort letters are ordinarily signed by the Independent auditor Client Client's lawyer Internal auditor (AICPA ADAPTED) c 10 When an auditor submits a document containing audited financial statements to a client, the auditor has the responsibility to report on a Only the basic financial statements included in the document b The basic financial statements and only that additional information required to be presented in accordance with provisions of the FASB c All of the information included in the document d Only that portion of the document which was audited (AICPA ADAPTED) b 11 a b c d b 12 A CPA has been engaged to compile financial statements for a nonpublic client Which of the following statements best describes this engagement? a The CPA must perform the basic accepted auditing procedures necessary to determine that the statements are in conformity with GAAP b The CPA is performing an accounting service rather than an examination of financial statements c The financial statements are representations of both management and the CPA d The CPA may prepare the statements from the books but may not assist in adjusting and closing the books (AICPA ADAPTED) An accountant's compilation report should be dated as of the date of Completion of fieldwork Completion of the engagement Transmittal of the compilation report The latest subsequent event referred to in the notes to the financial statements (AICPA ADAPTED) 120 a 13 Which of the following would not be included in an accountant's review report on the financial statements of a nonpublic entity? a A statement that the review was made in accordance with generally accepted auditing standards b A statement that all information included in the financial statements is the representation of management c A statement describing the principal procedures performed d A statement describing the auditor's conclusions based on the results of the review (AICPA ADAPTED) a 14 a b c d An accountant who is not independent may issue a Compilation report Review report Comfort letter Qualified opinion c 15 a b c d The objective of a review of the interim financial information of a public company is to Provide the accountant with a basis for expressing of an opinion Estimate the accuracy of financial statements from limited tests of accounting records Provide the accountant with a basis for reporting to the board of directors or shareholders Obtain corroborating evidence through inspection, observation, and confirmation (AICPA ADAPTED) b 16 An auditor's report would be designated as a special report when it is issued in connection with which of the following financial statements? a Financial statements for an interim period that are subjected to a limited review b Financial statements that are prepared in accordance with a comprehensive basis of accounting other than GAAP c Financial statements that purport to be in accordance with GAAP but not include a statement of cash flows d Financial statements that are unaudited and are prepared from a client's accounting records (AICPA ADAPTED) a 17 An auditor has been engaged to audit financial statements that were prepared on a cash basis The auditor a Must ascertain that there is proper disclosure of the fact that the cash basis has been used, the general nature of material items omitted, and the net effect of the omissions b May not be associated with statements that are not in accordance with GAAP c Must render a qualified report explaining the departure from GAAP in the opinion paragraph d Must restate the financial statements on an accrual basis and then issue the standard report (AICPA ADAPTED) d 18 a b c d When issuing a comfort letter to underwriters, the accountant should File a copy with the SEC Disclaim an opinion Avoid any reference to the accountant's independence Express negative assurance 121 (AICPA ADAPTED) (AICPA ADAPTED) a 19 a b c d An auditor should not issue a report on The achievability of forecasts Internal control Management performance Quarterly financial information (AICPA ADAPTED) b 20 Under which of the following circumstances may audited financial statements contain a note disclosing a subsequent event that is labeled unaudited? a When the subsequent event does not require adjustment of the financial statements b When the event occurs after completion of fieldwork and before issuance of the auditor's report c When audit procedures with respect to the subsequent event were not performed by the auditor d When the event occurs between the date of the auditor's original report and the date of the reissuance of the report (AICPA ADAPTED) d 21 Auditors often request that the audit client send a letter of inquiry to those attorneys who have been consulted with respect to litigation, claims, or assessments The primary reason for this request is to provide the auditor with a An estimate of the dollar amount of the probable loss b An opinion about whether the loss is possible, probable, or remote c Information concerning the progress of cases to date d Corroborative evidential matter (AICPA ADAPTED) a 22 A lawyer's response to an auditor's request for information concerning litigation, claims, and assessments will ordinarily contain which of the following information? a An explanation for limitations on the scope of the response b A statement of concurrence with the client's determination of which unasserted possible claims warrant specification c Confidential information that would be prejudicial to the client's defense if publicized d An assertion that the list of possible unasserted claims identified by the client represents all claims of which the lawyer may be aware (AICPA ADAPTED) c 23 A lawyer's response to a letter of audit inquiry may be limited to matters that are considered individually or collectively material to the financial statements if a The auditor has instructed the lawyer about the limits of materiality in financial statements b The client and the auditor have agreed on the limits of materiality and the lawyer has been notified c The lawyer and auditor have reached an understanding about the limits of materiality d The lawyer's response to the inquiry explains the legal meaning of materiality limits and establishes quantitative parameters (AICPA ADAPTED) b 24 An attorney is responding to an independent auditor as a result of the audit client's letter of inquiry The attorney may appropriately limit the response to a Asserted claims and litigation b Matters to which the attorney has given substantive attention in the form of legal consultation or representation c Asserted, overtly threatened, or pending claims and litigation d Items that have an extremely high probability of being resolved to the client's detriment (AICPA ADAPTED) 122 SHORT ANSWER Compare and contrast a review engagement and a compilation engagement Answer: In a review engagement, an attestation service, the independent accountant performs analytical procedures, makes inquiries of management, and issues a report that provides negative assurance, using language that states the accountant is “not aware of any material modifications that should be made to the financial statements in order for them to be conformity with GAAP.” In a compilation engagement, the accountant compiles financial statements from management’s unaudited and unreviewed accounts, and issues a report that provides literally no assurance Describe what is involved in a review of financial statements Answer: A review of financial statements consists of “performing inquiry and analytical procedures that provide the accountant with a reasonable basis for expressing negative assurance that there are no material modifications that should be made to the statements in order for them to be in conformity with GAAP, or if applicable, with another comprehensive basis of accounting.” When an entity’s financial statements are presented in a generally accepted comprehensive basis other than GAAP, what should be included in an accountant’s report? Answer:  A title that includes the word independent, and  Separate paragraphs stating the:  Statements were audited and are management’s responsibility,  Audit compiled with GAAS,  Comprehensive basis of accounting, and  Auditor’s opinion on whether the financial statements conform to the comprehensive basis of accounting In general what does SAS No 72, “Letters for Underwriters and Certain Other Requesting Parties,” state should be included in the comfort letter? Answer: In general, the letter reports: An opinion on whether the latest audited financial statements comply with the Security Act of 1933’s accounting requirements, and Negative assurance on unaudited interim financial information for the period between the date of the latest audited financial statements and the date of the registration statement Describe the scope of a compilation of prospective financial statements Answer: A compilation of prospective financial statements involves:  Assembling prospective financial statements based on management’s assumptions, and  Performing compilation procedures, including comparing the prospective financial statements with the summaries of significant assumptions and accounting policies 123 PROBLEMS When performing a review of interim financial information under SAS No 71, describe the analytical procedures and inquiries that are made by the auditor Answer: Analytical procedures that may identify unusual matters, including:  Comparing interim financial information with the immediate preceding interim period and with corresponding prior periods  Considering plausible relationships between both financial state and nonfinancial data  Comparing recorded amounts, or ratios calculated from recorded amounts, to budgets, forecasts, and industry gross margin information  Inquiries about internal control, including significant changes  Reading the minutes of shareholders’ and directors’ meetings to identify actions that may affect the interim financial information  Considering whether the interim financial information conforms with GAAP  Obtaining reports from other accountants engaged to review a subsidiary’s financial information  Inquiries of personnel responsible for financial and accounting matters concerning: o Whether the interim financial information has been prepared in accordance with GAAP o Changes in business activities and accounting principles o Matters about which questions have arisen o Events subsequent to the date interim financial information that would have a material effect on the information  Obtaining a written representation from management Prepare a compilation report for Otis Company Otis Company has entered into negotiations with First U.S Bank to obtain a plant expansion loan Your firm has been retained to complete a compilation engagement to prepare projected financial statements that will be used in the negotiations The compilation engagement covers the financial statements for year ended December 31, 2006 124 Answer: Accountant’s Compilation Report on a Financial Projection We have compiled the accompanying projected balance sheet, statements of income, retained earnings, and cash flows of Otis Company as of December 31, 2006, and for the year then ended, in accordance with standards established by the American Institute of Certified Public Accountants The accompanying projection and this report were prepared for the First U.S Bank for the purpose of negotiating a plant expansion loan and should not be used for any other purpose A compilation is limited to presenting in the form of projection information that is the representation of management and does not include evaluation of the support for the assumptions underlying the projection We have not audited the projection and, accordingly, not express an opinion or any other form of assurance on the accompanying statements or assumptions Furthermore, even if the loan is granted and the physical plant is expanded, there will usually be differences between the projected and actual results, because events and circumstances frequently not occur as expected, and those differences may be material We have no responsibility to update this report for events and circumstances occurring after the date of this report 125 126 ... concerning a Relevance and validity b Measurement and presentation c Accuracy and objectivity d Rights and obligations (AICPA ADAPTED) a a b c d Comfort letters are ordinarily signed by the Independent... granted and the physical plant is expanded, there will usually be differences between the projected and actual results, because events and circumstances frequently not occur as expected, and those... accounting requirements, and Negative assurance on unaudited interim financial information for the period between the date of the latest audited financial statements and the date of the registration