Chapter 19 - Additional Assurance Services: Historical Financial Information Chapter 19 Additional Assurance Services: Historical Financial Information True / False Questions An audit opinion on cash basis financial statements is an example of a special report True False The balance sheet for an individual may be titled a Statement of Financial Condition True False The auditors should take exception to assets presented at their estimate current values in personal financial statements True False Personal financial statements may be compiled or reviewed, but they should not be audited True False A compilation of financial statement provides limited assurance regarding the financial statements True False Compiled financial statements may omit note disclosures True False 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 False 19-1 Chapter 19 - Additional Assurance Services: Historical Financial Information In a compilation report on a prescribed form, the accountants should take exception to all departures from generally accepted accounting principles True False Letters to underwriters should not contain negative assurances True 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 False 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 19-2 Chapter 19 - Additional Assurance Services: Historical Financial Information 13 A compilation report is not 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 not 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 19-3 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 19-4 Chapter 19 - Additional Assurance Services: Historical Financial Information 21 In which of the following types of reports 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 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 19-5 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 not: A Express negative assurance B Be included with the registration statement for the securities C Include the CPA's opinion as to whether the audited financial statements comply in all material respects with applicable requirements of the related securities acts D Include a statement as to the auditors' independence 28 When the auditors are associated with the financial statements of a public company, but have not 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 not 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 not result in a modification of a compilation report? A A lack of independence on the part of the auditors B A departure from generally accepted accounting principles C A lack of adequate disclosure in the financial statements D A lack of consistent application of generally accepted accounting principles 19-6 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 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 except 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 19-7 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 notjustified, 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 19-8 Chapter 19 - Additional Assurance Services: Historical Financial Information 39 A CPA should not normally refer to which one of the following subjects in a "comfort letter" to underwriters? A The independence of the CPA B Changes in financial-statement items during a period subsequent to the date and period of the latest financial statements in the registration statement C Unaudited financial statements and schedules in the registration statement D Management's determination of line of business classifications 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 not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity? A A statement that the review was in accordance with generally accepted auditing standards B A statement that all information included in the financial statements are the representations of management C A statement describing the nature of the procedures performed D A statement describing the auditor's conclusions based upon the results of the review 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 19-9 Chapter 19 - Additional Assurance Services: Historical Financial Information 43 If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled, the auditor should: A Issue a disclaimer of opinion B Explain in the notes to the financial statements the terminology used C Issue a compilation report D Modify the auditor's report to disclose any reservations 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 except: A Reference to the note to the financial statements that describes the basis of preparation of the financial statements B Disclosure that the audit was performed in accordance with generally accepted auditing standards C An opinion as to whether the basis of accounting used is appropriate under the circumstances D An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described 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 19-10 Chapter 19 - Additional Assurance Services: Historical Financial Information 23 In which of the following types of reports accountants provide no explicit assurance? A Compilations B Reviews C Examinations D Audits Difficulty: Easy 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 Difficulty: Medium 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 Difficulty: Medium Source: AICPA 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 Difficulty: Medium 19-22 Chapter 19 - Additional Assurance Services: Historical Financial Information 27 A "comfort letter" to an investment banking firm will normally not: A Express negative assurance B Be included with the registration statement for the securities C Include the CPA's opinion as to whether the audited financial statements comply in all material respects with applicable requirements of the related securities acts D Include a statement as to the auditors' independence Difficulty: Medium 28 When the auditors are associated with the financial statements of a public company, but have not 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 Difficulty: Hard 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 not 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 Difficulty: Medium 30 Which of the following does not result in a modification of a compilation report? A A lack of independence on the part of the auditors B A departure from generally accepted accounting principles C A lack of adequate disclosure in the financial statements D A lack of consistent application of generally accepted accounting principles Difficulty: Hard 19-23 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Hard 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 not include all disclosures necessary under generally accepted accounting principles Difficulty: Hard 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 Difficulty: Medium 19-24 Chapter 19 - Additional Assurance Services: Historical Financial Information 34 The term "special reports" may include all of the following except 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 Difficulty: Hard Source: AICPA 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 notjustified, 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 Difficulty: Medium Source: AICPA 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 Difficulty: Medium Source: AICPA 19-25 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Medium Source: AICPA 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 Difficulty: Medium Source: AICPA 39 A CPA should not normally refer to which one of the following subjects in a "comfort letter" to underwriters? A The independence of the CPA B Changes in financial-statement items during a period subsequent to the date and period of the latest financial statements in the registration statement C Unaudited financial statements and schedules in the registration statement D Management's determination of line of business classifications Difficulty: Hard Source: AICPA 19-26 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Medium Source: AICPA 41 Which of the following would not be included in a CPA's report based upon a review of the financial statements of a nonpublic entity? A A statement that the review was in accordance with generally accepted auditing standards B A statement that all information included in the financial statements are the representations of management C A statement describing the nature of the procedures performed D A statement describing the auditor's conclusions based upon the results of the review Difficulty: Medium Source: AICPA 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 Difficulty: Medium Source: AICPA 19-27 Chapter 19 - Additional Assurance Services: Historical Financial Information 43 If the auditor believes that financial statements prepared on the entity's income tax basis are not suitably titled, the auditor should: A Issue a disclaimer of opinion B Explain in the notes to the financial statements the terminology used C Issue a compilation report D Modify the auditor's report to disclose any reservations Difficulty: Easy Source: AICPA 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 except: A Reference to the note to the financial statements that describes the basis of preparation of the financial statements B Disclosure that the audit was performed in accordance with generally accepted auditing standards C An opinion as to whether the basis of accounting used is appropriate under the circumstances D An opinion as to whether the financial statements are presented fairly in conformity with the basis of accounting described Difficulty: Medium Source: AICPA 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 Difficulty: Medium Source: AICPA 19-28 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 not include a presentation of the statement of cash flows Difficulty: Medium Source: AICPA 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 Difficulty: Easy Source: AICPA 48 Comfort letters are ordinarily signed by the: A Client B Client's lawyer C Independent auditor D Internal auditor Difficulty: Easy Source: AICPA 19-29 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Hard Source: AICPA 50 If compiled financial statements presented in conformity with the cash receipts and disbursements basis of accounting not disclose the basis of accounting used, the accountant should: A Disclose the basis in the notes to the financial statements B Clearly label each page "Unaudited." C Disclose the basis of accounting in the accountant's report D Recompile the financial statements using generally accepted accounting principles Difficulty: Hard Source: AICPA 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 Difficulty: Medium Source: AICPA 19-30 Chapter 19 - Additional Assurance Services: Historical Financial Information 52 Which of the following should not 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 Difficulty: Hard Source: AICPA 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 Difficulty: Easy Source: AICPA 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 Difficulty: Hard Source: AICPA 19-31 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Medium 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 Difficulty: Hard Essay Questions 19-32 Chapter 19 - Additional Assurance Services: Historical Financial Information 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 Difficulty: Medium 19-33 Chapter 19 - Additional Assurance Services: Historical Financial Information 58 One may envisions a continuum of assurance ranging from absolute assurance to no assurance In between may be reasonable assurance, limited assurance, and a summary of findings with no other assurance a What level of assurance is provided in the CPA's report by each of the following types of engagements?  Examinations  Audits  Review  Agreed-upon procedures  Compilations b What type of assurance is provided on financial statements prepared following a comprehensive basis of accounting other than generally accepted accounting principles? a Assurance provided:  Examinations reasonable assurance  Audits reasonable assurance  Review limited assurance  Agreed-upon procedures summary of findings  Compilations no assurance b The assurance provided is dependent upon the nature of the service provided With financial statements the options (and assurance) possible are audit (reasonable assurance), review (limited assurance), and compilations (no assurance) Additionally, agreed-upon procedures could be applied to various elements, accounts or items of the financial statements (a summary of findings would be provided) Difficulty: Hard 19-34 Chapter 19 - Additional Assurance Services: Historical Financial Information 59 Items a through j present various phrases or characteristics that may apply to audits, reviews, and compilations Place check mark in the cell if the phrase or characteristic applies to the listed service: 19-35 Chapter 19 - Additional Assurance Services: Historical Financial Information 19-36 ... applies to the listed service: 19- 15 Chapter 19 - Additional Assurance Services: Historical Financial Information Chapter 19 Additional Assurance Services: Historical Financial Information Answer... 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 19- 5 Chapter 19 - Additional Assurance Services: Historical. .. accounting principles C A lack of adequate disclosure in the financial statements D A lack of consistent application of generally accepted accounting principles 19- 6 Chapter 19 - Additional Assurance Services: