Wiley Module 6 Acconting and Review Serv PDF
Wiley Module 6 Acconting and Review Serv PDF
Compilation and Review—General a. The accountant does not contemplate obtaining an un-
derstanding of internal control.
1. Statements on Standards for Accounting and Review Ser-
The accountant must be independent in fact and ap-
b.
vices establish standards and procedures for which of the follow- pearance.
ing engagements? The accountant expresses no assurance on the financial
c.
a. Assisting in adjusting the books of account for a statements.
partnership. The accountant should obtain a written management
d.
b. Reviewing interim financial data required to be filed representation letter.
with the SEC.
c. Processing financial data for clients of other accounting 6. The objective of an accountant’s compilation of the finan-
firms. cial statements of a nonissuer (nonpublic company) is to provide
d. Compiling an individual’s personal financial statement what type of assurance?
to be used to obtain a mortgage. a. Absolute assurance.
b. Limited assurance.
2. The authoritative body designated to promulgate standards
c. No assurance.
concerning an accountant’s association with unaudited financial d. Reasonable assurance.
statements of an entity that is not required to file financial state-
ments with an agency regulating the issuance of the entity’s secu- 7. A company hires a CPA who has invested in its outstanding
rities is the bonds payable to issue accounting reports for the company. As-
a. Financial Accounting Standards Board. suming any required disclosures are made, which of the following
b. General Accounting Office. reports may the CPA issue?
c. Accounting and Review Services Committee. a. Compilations.
d. Auditing Standards Board. b. Reviews.
c. Audits.
3. Which of the following accounting services may an accoun-
d. Agreed-upon procedures.
tant perform without being required to issue a compilation or
review report under the Statements on Standards for Accounting Compilation—General
and Review Services? 8. An accountant is required to comply with the provisions of
I. Preparing a working trial balance. Statements on Standards for Accounting and Review Services
II. Preparing standard monthly journal entries. when
a. I only. I. Reproducing client-prepared financial statements, without
b. II only. modification, as an accommodation to a client.
c. Both I and II. II. Preparing standard monthly journal entries for depreciation
d. Neither I nor II. and expiration of prepaid expenses.
4. May an accountant accept an engagement to compile or a. I only.
review the financial statements of a not-for-profit entity if the b. II only.
accountant is unfamiliar with the specialized industry accounting c. Both I and II.
principles, but plans to obtain the required level of knowledge d. Neither I nor II.
before compiling or reviewing the financial statements? 9. Kell engaged March, CPA, to submit to Kell a written per-
Compilation Review sonal financial plan containing unaudited personal financial
a. No No statements. March anticipates omitting certain disclosures re-
b. Yes No quired by GAAP because the engagement’s sole purpose is to
c. No Yes assist Kell in developing a personal financial plan. For March to
d. Yes Yes
be exempt from complying with the requirements of Statements
5. Which of the following statements is correct concerning on Standards for Accounting and Review Services. Kell is re-
both an engagement to compile and an engagement to review a quired to agree that the
nonissuer’s financial statements? a. Financial statements will not be presented in compara-
tive form with those of the prior period.
b. Omitted disclosures required by GAAP are not mate-
rial.
216
Module 6: Accounting and Review Services Multiple-Choice Questions 217
c. Financial statements will not be disclosed to a non- 14. Which of the following procedures is ordinarily performed
CPA financial planner. by an accountant in a compilation engagement of a nonissuer
d. Financial statements will not be used to obtain credit. (nonpublic) entity?
a. Reading the financial statements to consider whether
10. Statements on Standards for Accounting and Review Ser-
they are free of obvious mistakes in the application of
vices (SSARS) apply when an accountant has
accounting principles.
a. Typed client-prepared financial statements, without
b. Obtaining written representations from management
modification, as an accommodation to the client.
indicating that the compiled financial statements will
b. Provided a client with a financial statement format that
not be used to obtain credit.
does not include dollar amounts, to be used by the cli-
c. Making inquiries of management concerning actions
ent in preparing financial statements.
taken at meetings of the stockholders and the board of
c. Proposed correcting journal entries to be recorded by
directors.
the client that change client-prepared financial state-
d. Applying analytical procedures designed to corrobo-
ments.
rate management’s assertions that are embodied in the
d. Generated, through the use of computer software, fi-
financial statement components.
nancial statements prepared in accordance with a
comprehensive basis of accounting other than GAAP. Compilation Reporting
11. Davis, CPA, accepted an engagement to audit the financial 15. A CPA is reporting on comparative financial statements of a
statements of Tech Resources, a nonissuer. Before the comple- nonissuer. The CPA audited the prior year’s financial statements
tion of the audit, Tech requested Davis to change the engage- and compiled those of the current year in accordance with State-
ment to a compilation of financial statements. Before Davis ments on Standards for Accounting and Review Services
agrees to change the engagement, Davis is required to consider (SSARS). The CPA has added a separate paragraph to the
the review report to describe the responsibility assumed for the prior
Additional audit year’s audited financial statements. This separate paragraph
effort necessary to Reason given for should indicate
complete the audit Tech’s request a. The type of opinion expressed previously.
a. No No b. That the CPA did not update the assessment of con-
b. Yes Yes trol risk.
c. Yes No c. The reasons for the change from an audit to a review.
d. No Yes d. That the audit report should no longer be relied on.
12. An accountant may compile a nonissuer’s financial state- 16. One of the conditions required for an accountant to submit
ments that omit all of the disclosures required by GAAP only if a written personal financial plan containing unaudited financial
the omission is statements to a client without complying with the requirements
I. Clearly indicated in the accountant’s report. of Statements on Standards of Accounting and Review Services,
II. Not undertaken with the intention of misleading the financial is that the
statement users. a. Client agrees that the financial statements will not be
used to obtain credit.
a. I only.
b. Accountant compiled or reviewed the client’s financial
b. II only.
statements for the immediate prior year.
c. Both I and II.
c. Engagement letter acknowledges that the financial
d. Either I or II.
statements will contain departures from generally ac-
Compilation Procedures cepted accounting principles.
d. Accountant expresses limited assurance that the finan-
13. When engaged to compile the financial statements of a cial statements are free of any material misstatements.
nonissuer (nonpublic) entity, an accountant is required to pos-
sess a level of knowledge of the entity’s accounting principles and 17. While performing a compilation of financial statements,
practices. This requirement most likely will include obtaining a information indicating that the entity whose information is being
general understanding of the compiled may lack the ability to continue as a going concern has
a. Stated qualifications of the entity’s accounting person- come to the accountant’s attention. The client agrees that such a
nel. situation does exist, but refuses to add disclosures relating to it.
b. Design of the entity’s internal controls placed in opera- What effect is this most likely to have on the accountant’s review
tion. report?
c. Risk factors relating to misstatements arising from ille- a. No effect, a standard unqualified report is appropriate.
gal acts. b. The report should indicate a departure from generally
d. Internal control awareness of the entity’s senior man- accepted accounting principles, with modification of
agement. the report’s third paragraph and addition of an explana-
tory paragraph.
218 Module 6: Accounting and Review Services Multiple-Choice Questions
c. An adverse opinion should be issued, with modifica- d. In a compilation an accountant obtains only limited as-
tion of the opinion paragraph and addition of an ex- surance of detecting misstatements.
planatory paragraph.
22. Clark, CPA, compiled and properly reported on the finan-
d. A qualified opinion should be issued, with modification
cial statements of Green Co., a nonissuer, for the year ended
of the opinion paragraph and addition of an explana-
March 31, 2008. These financial statements omitted substan-
tory paragraph.
tially all disclosures required by generally accepted accounting
18. When compiled financial statements are accompanied by an principles (GAAP). Green asked Clark to compile the state-
accountant’s report, that report should state that ments for the year ended March 31, 2009, and to include all
a. A compilation includes assessing the accounting princi- GAAP disclosures for the 2009 statements only, but otherwise
ples used and significant management estimates, as present both years’ financial statements in comparative form.
well as evaluating the overall financial statement What is Clark’s responsibility concerning the proposed engage-
presentation. ment?
b. The accountant compiled the financial statements in a. Clark may not report on the comparative financial
accordance with Statements on Standards for Ac- statements because the 2008 statements are not com-
counting and Review Services. parable to the 2009 statements that include the GAAP
c. A compilation is substantially less in scope than an au- disclosures.
dit in accordance with GAAS, the objective of which is b. Clark may report on the comparative financial state-
the expression of an opinion. ments provided the 2009 statements do not contain
d. The accountant is not aware of any material modifica- any obvious material misstatements.
tions that should be made to the financial statements to c. Clark may report on the comparative financial state-
conform with GAAP. ments provided an explanatory paragraph is added to
Clark’s report on the comparative financial statements.
19. Miller, CPA, is engaged to compile the financial statements
d. Clark may report on the comparative financial state-
of Web Co., a nonissuer (nonpublic) entity, in conformity with
ments provided Clark updates the report on the 2008
the income tax basis of accounting. If Web’s financial statements
statements that do not include the GAAP disclosures.
do not disclose the basis of accounting used, Miller should
a. Disclose the basis of accounting in the accountant’s 23. Which of the following statements should not be included
compilation report. in an accountant’s standard report based on the compilation of
b. Clearly label each page “Distribution Restricted— an entity’s financial statements?
Material Modifications Required.” a. A statement that the compilation was performed in ac-
c. Issue a special report describing the effect of the in- cordance with standards established by the American
complete presentation. Institute of CPAs.
d. Withdraw from the engagement and provide no fur- b. A statement that the accountant has not audited or re-
ther services to Web. viewed the financial statements.
c. A statement that the accountant does not express an
20. When an accountant is engaged to compile a nonissuer’s
opinion but expresses only limited assurance on the fi-
financial statements that omit substantially all disclosures re-
nancial statements.
quired by GAAP, the accountant should indicate in the compila-
d. A statement that a compilation is limited to presenting,
tion report that the financial statements are
in the form of financial statements, information that is
a. Not designed for those who are uninformed about
the representation of management.
the
omitted disclosures. 24. How does an accountant make the following representa-
b. Prepared in conformity with a comprehensive basis of tions when issuing the standard report for the compilation of a
accounting other than GAAP. nonissuer’s financial statements?
c. Not compiled in accordance with Statements on
Standards for Accounting and Review Services.
The financial The accountant
d. Special-purpose financial statements that are not
statements have has compiled the
comparable to those of prior periods.
not been audited financial statements
21. Which of the following is least likely to be included in the a. Implicitly Implicitly
understanding with management that an accountant obtains b. Explicitly Explicitly
when a compilation is to be performed? c. Implicitly Explicitly
a. The objective of a compilation is to assist management d. Explicitly Implicitly
in presenting financial information in the form of fi- 25. An accountant’s compilation report should be dated as of
nancial statements. the date of
b. Management is responsible for preventing and detect- a. Completion of fieldwork.
ing fraud. b. Completion of the compilation.
c. Management is responsible for identifying and ensur- c. Transmittal of the compilation report.
ing that the company complies with laws and regula-
tions applicable to its activities.
Module 6: Accounting and Review Services Multiple-Choice Questions 219
d. The latest subsequent event referred to in the notes to a. Balance sheet is presented in a prescribed form of an
the financial statements. industry trade association.
b. Scope of the inquiry and analytical procedures has not
26. An accountant has compiled the financial statements of a
been restricted.
nonissuer in accordance with Statements on Standards for Ac-
c. Balance sheet is not to be used to obtain credit or dis-
counting and Review Services (SSARS). Does SSARS require
tributed to creditors.
that the compilation report be printed on the accountant’s letter-
d. Specialized accounting principles and practices of Do-
head and that the report be manually signed by the accountant?
ver’s industry are disclosed.
Printed on the Manually signed
accountant’s letterhead by the accountant 32. Baker, CPA, was engaged to review the financial statements
a. Yes Yes of Hall Co., a nonissuer. During the engagement Baker uncov-
b. Yes No ered a complex scheme involving client illegal acts that materially
c. No Yes affect Hall’s financial statements. If Baker believes that modifica-
d. No No tion of the standard review report is not adequate to indicate the
deficiencies in the financial statements, Baker should
27. Which of the following is correct relating to compiled finan-
a. Disclaim an opinion.
cial statements when third-party reliance upon those statements
b. Issue an adverse opinion.
is anticipated?
c. Withdraw from the engagement.
a. A compilation report must be issued.
d. Issue a qualified opinion.
b. Omission of note disclosures is unacceptable.
c. A written engagement letter is required. Review Procedures
d. Each page of the financial statements should have a re-
33. Which of the following is not generally considered a proce-
striction such as “Restricted for Management’s Use
Only.” dure followed by an accountant in obtaining a reasonable basis
for the expression of limited assurance for a review of financial
28. Which communication option(s) may be used when an statements?
accountant submits compiled financial statements to be used a. Apply analytical procedures.
only by management? b. Assess fraud risk.
Written c. Make inquiries of management.
Compilation report engagement letter d. Obtain written representations from management.
a. Yes Yes 34. Which of the following procedures would an accountant
b. Yes No
least likely perform during an engagement to review the financial
c. No Yes
statements of a nonissuer?
d. No No
a. Observing the safeguards over access to and use of as-
29. A compilation report is not required when compiled finan- sets and records.
cial statements are expected to be used by b. Comparing the financial statements with anticipated
a. Management only. results in budgets and forecasts.
b. Management and third parties. c. Inquiring of management about actions taken at the
c. Third parties only. board of directors’ meetings.
d. A compilation report is required whenever financial d. Studying the relationships of financial statement ele-
statements are compiled. ments expected to conform to predictable patterns.
Review—General 35. Which of the following procedures should an accountant
perform during an engagement to review the financial statements
30. If requested to perform a review engagement for a nonissuer
of a nonissuer?
in which an accountant has an immaterial direct financial interest,
a. Communicating significant deficiencies discovered
the accountant is
during the assessment of control risk.
a. Not independent and, therefore, may not be associated
b. Obtaining a client representation letter from members
with the financial statements.
of management.
b. Not independent and, therefore, may not issue a re-
c. Sending bank confirmation letters to the entity’s finan-
view report.
cial institutions.
c. Not independent and, therefore, may issue a review re-
d. Examining cash disbursements in the subsequent pe-
port, but may not issue an auditor’s opinion.
riod for unrecorded liabilities.
d. Independent because the financial interest is immate-
rial and, therefore, may issue a review report.
31. Moore, CPA, has been asked to issue a review report on the
balance sheet of Dover Co., a nonissuer. Moore will not be re-
porting on Dover’s statements of income, retained earnings, and
cash flows. Moore may issue the review report provided the
220 Module 6: Accounting and Review Services Multiple-Choice Questions
36. An accountant should perform analytical procedures during c. Determine the effects of the departures from GAAP
an engagement to and issue a special report on the financial statements.
Compile a nonissuer’s Review a nonissuer’s d. Issue a modified review report provided the entity
agrees that the financial statements will not be used to
financial statements financial statements
No No obtain credit.
a.
b. Yes Yes 42. When providing limited assurance that the financial state-
c. Yes No ments of a nonissuer (nonpublic entity) require no material
d. No Yes modifications to be in accordance with generally accepted ac-
37. Which of the following inquiry or analytical procedures counting principles, the accountant should
ordinarily is performed in an engagement to review a nonissuer’s a. Assess the risk that a material misstatement could oc-
financial statements? cur in a financial statement assertion.
a. Analytical procedures designed to test the accounting b. Confirm with the entity’s lawyer that material loss con-
records by obtaining corroborating audit evidence. tingencies are disclosed.
b. Inquiries concerning the entity’s procedures for re- c. Understand the accounting principles of the industry
cording and summarizing transactions. in which the entity operates.
c. Analytical procedures designed to test management’s d. Develop audit programs to determine whether the en-
assertions regarding continued existence. tity’s financial statements are fairly presented.
d. Inquiries of the entity’s attorney concerning contin- 43. Smith, CPA, has been asked to issue a review report on the
gent liabilities. balance sheet of Cone Company, a nonissuer, and not on the
38. Which of the following procedures would most likely be other related financial statements. Smith may do so only if
included in a review engagement of a nonissuer? a. Smith compiles and reports on the related statements
a. Preparing a bank transfer schedule. of income, retained earnings, and cash flows.
b. Inquiring about related-party transactions. b. Smith is not aware of any material modifications
c. Assessing internal control. needed for the balance sheet to conform with GAAP.
d. Performing cutoff tests on sales and purchases transac- c. The scope of Smith’s inquiry and analytical procedures
tions. is not restricted.
d. Cone is a new client and Smith accepts the engage-
39. Which of the following would the accountant most likely
ment after the end of Cone’s fiscal year.
investigate during the review of financial statements of a nonis-
suer if accounts receivable did not conform to a predictable pat- 44. In reviewing the financial statements of a nonissuer, an ac-
tern during the year? countant is required to modify the standard report for which of
a. Sales returns and allowances. the following matters?
b. Credit sales. Inability to assess the Discovery of significant
c. Sales of consigned goods. risk of material deficiencies in the design
d. Cash sales. misstatement of the entity’s
due to fraud internal control
40. When performing an engagement to review a nonissuer’s
a. Yes Yes
financial statements, an accountant most likely would b. Yes No
a. Confirm a sample of significant accounts receivable c. No Yes
balances. d. No No
b. Ask about actions taken at board of directors’ meet-
ings. 45. Each page of a nonissuer’s financial statements reviewed by
c. Obtain an understanding of internal control. an accountant should include the following reference:
d. Limit the distribution of the accountant’s report. a. See Accompanying Accountant’s Footnotes.
b. Reviewed, No Material Modifications Required.
Review Reporting c. See Accountant’s Review Report.
41. An accountant has been engaged to review a nonissuer’s d. Reviewed, No Accountant’s Assurance Expressed.
financial statements that contain several departures from GAAP. 46. Financial statements of a nonissuer that have been reviewed
If the financial statements are not revised and modification of the by an accountant should be accompanied by a report stating that
standard review report is not adequate to indicate the deficien- a review
cies, the accountant should a. Provides only limited assurance that the financial state-
a. Withdraw from the engagement and provide no fur- ments are fairly presented.
ther services concerning these financial statements. b. Includes examining, on a test basis, information that is
b. Inform management that the engagement can proceed the representation of management.
only if distribution of the accountant’s report is re- c. Consists principally of inquiries of company personnel
stricted to internal use. and analytical procedures applied to financial data.
Module 6: Accounting and Review Services Multiple-Choice Questions 221
d. Does not contemplate obtaining corroborating eviden- 51. During a review of the financial statements of a nonissuer,
tial matter or applying certain other procedures ordi- an accountant becomes aware of a lack of adequate disclosure
narily performed during an audit. that is material to the financial statements. If management re-
fuses to correct the financial statement presentations, the ac-
47. An accountant who had begun an audit of the financial
countant should
statements of a nonissuer was asked to change the engagement to
a. Issue an adverse opinion.
a review because of a restriction on the scope of the audit. If
b. Issue an “except for” qualified opinion.
there is reasonable justification for the change, the accountant’s
c. Disclose this departure from generally accepted ac-
review report should include reference to the
counting principles in a separate paragraph of the re-
Scope limitation Original port.
that caused the engagement d. Express only limited assurance on the financial state-
changed engagement that was agreed to ment presentations.
a. Yes No
52. An accountant who reviews the financial statements of a
b. No Yes
c. No No nonissuer should issue a report stating that a review
d. Yes Yes a. Is substantially less in scope than an audit.
b. Provides negative assurance that internal control is
48. Gole, CPA, is engaged to review the 20X8 financial state-
functioning as designed.
ments of North Co., a nonissuer. Previously, Gole audited c. Provides only limited assurance that the financial state-
North’s 20X7 financial statements and expressed an unqualified ments are fairly presented.
opinion. Gole decides to include a separate paragraph in the d. Is substantially more in scope than a compilation.
20X8 review report because North plans to present comparative
financial statements for 20X8 and 20X7. This separate paragraph
should indicate that
a. The 20X8 review report is intended solely for the infor-
mation of management and the board of directors.
b. The 20X7 auditor’s report may no longer be relied on.
c. No auditing procedures were performed after the date
of the 20X7 auditor’s report.
d. There are justifiable reasons for changing the level of
service from an audit to a review.
49. An accountant’s standard report on a review of the financial
statements of a nonissuer should state that the accountant
a. Does not express an opinion or any form of limited as-
surance on the financial statements.
b. Is not aware of any material modifications that should
be made to the financial statements for them to con-
form with GAAP.
c. Obtained reasonable assurance about whether the fi-
nancial statements are free of material misstatement.
d. Examined evidence, on a test basis, supporting the
amounts and disclosures in the financial statements.
50. Financial statements of a nonissuer that have been reviewed
by an accountant should be accompanied by a report stating that
a. The scope of the inquiry and analytical procedures per-
formed by the accountant has not been restricted.
b. All information included in the financial statements is
the representation of the management of the entity.
c. A review includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.
d. A review is greater in scope than a compilation, the ob-
jective of which is to present financial statements that
are free of material misstatements.