AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1121:

  The objective of a review of interim financial information of a public entity is to provide an 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.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The objective of a review is to provide the accountant with a reasonable basis for

  expressing limited assurance that there are no material modifications that should be made to the

  accompanying financial statements for them to be in conformity with generally accepted accounting

  principles.

  Choice "a" is incorrect. When performing a review, the accountant does not gather enough evidence to

  update an audit opinion.

  Choice "c" is incorrect. There are no "standards of interim reporting."

  Choice "d" is incorrect. Expressing an opinion as to whether the financial statements are presented fairly in

  accordance with GAAP is the result of an audit, not a review.

• Question 1122:

  An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

  A. Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

  B. Accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

  C. Accountant's review was performed in accordance with standards established by the Securities and Exchange Commission.

  D. Accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. If a report on a review of interim financial information is presented in a registration

  statement, the prospectus should include a statement that the report is not a "report" or "part" of the

  registration statement. The accountant should also read the other portions of the registration statement to

  ensure that his or her name is not used in a way that indicates greater responsibility than s/he intends.

  Choice "b" is incorrect. The auditor is responsible to update the report for events occurring after the date of

  the report but prior to filing.

  Choice "c" is incorrect. The accountant's review of interim financial information is performed in accordance

  with PCAOB standards, as approved (not established) by the SEC.

  Choice "d" is incorrect. Obtaining corroborating evidence is an audit procedure, not a review procedure.

• Question 1123:

  In which case would the accountant be least likely to perform a review of interim financial information under PCAOB (auditing) standards?

  A. Quarterly reports are required to be filed with the SEC.

  B. Selected quarterly financial data is included in an annual report.

  C. Quarterly financial data is included in the financial statements of a nonissuer.

  D. The accountant is performing an initial audit of financial statements that include selected quarterly data.

  Correct Answer: C

  Explanation: Choice "c" is correct. A review of data included in financial statements of a nonissuer is performed under Statements on Standards for Accounting and Review Services, not under PCAOB (auditing) standards. A review of interim financial information under PCAOB (auditing) standards is only conducted for public companies (or companies anticipating going public). Choice "a" is incorrect. When an entity is required by the SEC to file a quarterly report, the SEC also requires that an independent accountant perform a review (of the interim financial information) in accordance with PCAOB (auditing) standards before the report is filed. Choice "b" is incorrect. When a company is required by the SEC to include selected quarterly financial data in its annual report or in other SEC filings, a review (of the interim financial information) in accordance with PCAOB (auditing) standards is required. Choice "d" is incorrect. An accountant performing an initial audit of financial statements that include selected quarterly data should also perform a review (of the interim financial information) in accordance with PCAOB (auditing) standards as part of the overall audit.

• Question 1124:

  Which of the following is not a required procedure in an engagement to review the interim financial information of a publicly held entity?

  A. Obtaining corroborating evidence about the entity's ability to continue as a going concern.

  B. Comparing disaggregated revenue data for the current interim period with that of comparable prior periods.

  C. Obtaining evidence that the interim financial information reconciles with the accounting records.

  D. Inquiring of management about their knowledge of fraud or suspected fraud.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. A review of interim financial information is not designed to provide information

  regarding an entity's ability to continue as a going concern. Even if such information comes to the

  accountant's attention, the accountant is not required to corroborate it.

  Choice "b" is incorrect. As part of a review, the accountant is required to compare disaggregated revenue

  data for the current interim period with that of comparable prior periods.

  Choice "c" is incorrect. As part of a review, the accountant is required to obtain evidence that the interim

  financial information reconciles with the accounting records.

  Choice "d" is incorrect. As part of a review, the accountant is required to inquire of management about their

  knowledge of fraud, suspected fraud, or allegations of fraud.

• Question 1125:

  The annual financial statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

  A. PCAOB standards apply.

  B. Statements on Standards for Accounting and Review Services apply.

  C. Both PCAOB standards and SSARS apply.

  D. None of the above.

  Correct Answer: A

  Explanation: Choice "a" is correct. A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards, and it is these standards which should be referenced in the auditor's review report. (Note, however, that the PCAOB has adopted, at least initially, generally accepted auditing standards in this area.) Choices "b" and "c" are incorrect. Statements on Standards for Accounting and Review Services apply to reviews of the financial statements of nonissuers. Choice "d" is incorrect. A review of the interim financial information of a publicly held company is conducted in accordance with PCAOB standards.

• Question 1126:

  Davidson, CPA, is performing a review under auditing standards of Gold's interim financial information. As part of planning, Davidson reads the audit documentation from the preceding year's annual audit. Which of the following is least likely to affect Davidson's review?

  A. A summary of both corrected and uncorrected misstatements.

  B. Identified risks of material misstatement due to fraud.

  C. Significant weaknesses in internal control.

  D. Scope limitations that were overcome through acceptable alternative procedures.

  Correct Answer: D

  Explanation: Choice "d" is correct. Scope limitations relate to problems in performing the audit, and, especially since they were overcome, they would bear little relationship to procedures performed in a review. Choice "a" is incorrect. The nature of corrected misstatements should be considered, as they may be indicative of an ongoing problem. Uncorrected misstatements must also be considered as misstatements in one period often affect subsequent periods. Choice "b" is incorrect. Identified risks of material misstatement due to fraud help the accountant to identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence. Choice "c" is incorrect. Consideration of significant weaknesses in internal control helps the accountant identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence.

• Question 1127:

  Silver, CPA, has been hired by ABC Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of ABC's branch locations. Which of the following might Silver consider performing in response to this situation?

  A. Making additional inquiries, such as whether management has monitored the changes and considered whether they were operating as intended.

  B. Employing analytical procedures with a less precise expectation.

  C. Both "a" and "b" above.

  D. Neither "a" nor "b" above.

  Correct Answer: A

  Explanation: Choice "a" is correct. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in further inquiry of management. Choice "b" is incorrect. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in the accountant employing analytical procedures with a more precise expectation, since more precise expectations are more effective at detecting misstatements. Choices "c" and "d" are incorrect. Only choice "a" is correct, as explained above.

• Question 1128:

  Clark, CPA, compiled and properly reported on the financial statements of ABC Co., a nonissuer, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). ABC asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?

  A. Clark may not report on the comparative financial statements because the 20X1 statements are not comparable to the 20X2 statements that include the GAAP disclosures.

  B. Clark may report on the comparative financial statements provided the 20X1 statements do not contain any obvious material misstatements.

  C. Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark's report on the comparative financial statements.

  D. Clark may report on the comparative financial statements provided Clark updates the report on the 20X1 statements that do not include the GAAP disclosures.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Compiled financial statements that omit substantially all the disclosures required by

  GAAP are not comparable to financial statements that do include required GAAP disclosures.

  Accordingly, the 20X1 statements are not comparable to the 20X2 statements and Clark cannot report on

  them.

  Choice "b" is incorrect. The lack of material misstatements does not alter the fact that the statements are

  not comparable and therefore Clark may not report on them.

  Choice "c" is incorrect. Compiled financial statements that omit substantially all of the disclosures required

  by GAAP are not comparable to financial statements that include such disclosures. Accordingly, Clark may

  not report on the comparative financial statements, even if an explanatory paragraph is added.

  Choice "d" is incorrect. Updating the auditor's report does not change the fact that the financial statements

  for the two periods are not comparable.

• Question 1129:

  When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation:

  Choice "a" is correct. When unaudited financial statements (generally the first quarter of the following year

  in an annual report) are presented in comparative form with audited financial statements in documents filed

  with the SEC, such statements should be clearly marked as "unaudited," but should not be referred to in

  the auditor's report. The statements need not be withheld until audited.

  Choices "b", "c", and "d" are incorrect, based on explanation above.

• Question 1130:

  When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

  I. The report on the unaudited financial statements should be reissued.

  II.

  The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Either I or II.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. When audited financial statements are presented in comparative form with unaudited

  financial statements from a prior year, the auditor should either reissue his or her report on the unaudited

  statements or include a separate paragraph in the current year report describing the responsibility

  assumed for the unaudited statements.

  Choices "a", "b", and "c" are incorrect, per above explanation.