AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 1131:

  While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should:

  I. Refer to the scope limitation that caused the change.

  II.

  Describe the auditing procedures that have already been applied.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. If the CPA believes the client's request is reasonable, he/she must comply with the

  standards for a review and issue an appropriate report. The report should not refer to the original

  engagement, to any auditing procedures performed, or to the scope limitation.

  Choices "a", "b", and "c" are incorrect, based on the above Explanation: .

• Question 1132:

  The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:

  A. A review is limited to presenting in the form of financial statements information that is the representation of management.

  B. A review consists of inquiries of company personnel and analytical procedures applied to financial data.

  C. The accountant does not express an opinion or any other form of assurance on the financial statements.

  D. The accountant did not obtain an understanding of the entity's internal control or assess control risk.

  Correct Answer: B

  Explanation: Choice "b" is correct. The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that a review consists of inquiries of company personnel and analytical procedures applied to financial data. Choice "a" is incorrect. A compilation report uses language similar to this, stating that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management. Choice "c" is incorrect. A compilation report uses language similar to this, stating that the accountant does not express an opinion or any other form of assurance on the financial statements. A review provides negative assurance. Choice "d" is incorrect. While it is true that a review of the financial statements of a nonpublic entity does not require the accountant to obtain an understanding of the entity's internal control or assess control risk, the report does not explicitly state this.

• Question 1133:

  Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?

  A. The primary objective of a review engagement is to test the completeness of the financial statements prepared, but a compilation tests for reasonableness.

  B. The primary objective of a review engagement is to provide positive assurance that the financial statements are fairly presented, but a compilation provides no such assurance.

  C. In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.

  D. In a review engagement, accountants provide reasonable or positive assurance that the financial statements are fairly presented, but a compilation provides limited assurance.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A review provides limited assurance that there are no material modifications that

  should be made to the financial statements in order for them to be in conformity with generally accepted

  accounting principles, whereas a compilation provides no assurance.

  Choice "a" is incorrect. A review does not test for completeness, nor does a compilation test for reasonableness. A review provides limited assurance about the financial statements based on inquiry and analytical review procedures, while a compilation provides no assurance and includes no testing for reasonableness. Choice "b" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. Choice "d" is incorrect. A review provides limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles, and it is based on inquiry and analytical review procedures. Positive or reasonable assurance (such as an audit opinion) is only provided when more extensive procedures have been performed. A compilation provides no assurance at all.

• Question 1134:

  Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

  A. Inquiry regarding the client's principles and practices and the method of applying them.

  B. Inquiry concerning the effectiveness of the client's system of internal control.

  C. Inquiry to identify transactions between related parties and management.

  D. Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountant

  should inquire of management regarding the accounting principles and practices used, and the method of

  applying them.

  Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to make

  inquiries concerning the client's system of internal control.

  Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, but

  would likely make a more basic inquiry, about the client's accounting principles and practices, first.

  Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountant

  generally directs his/her inquiries to members of management, not to external parties.

• Question 1135:

  Which of the following statements is correct regarding a review engagement of a nonissuer's financial statements performed in accordance with the Statements on Standards for Accounting and Review Services (SSARS)?

  A. An accountant must establish an understanding with the client in an engagement letter.

  B. An accountant must obtain an understanding of the client's internal control when performing a review.

  C. A review provides an accountant with a basis for expressing limited assurance on the financial statements.

  D. A review report contains an accountant's opinion of the financial statements taken as a whole.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A review report is issued when inquiry and analytical procedures provide a

  reasonable basis for the expression of limited assurance on the financial statements.

  Choice "a" is incorrect. While the accountant is required to establish an understanding with the client,

  preferably in writing, an engagement letter is not required.

  Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to obtain

  an understanding of the client's internal control.

  Choice "d" is incorrect. A review results in the expression of limited assurance that no material

  modifications are necessary for the financial statements to be in conformity with generally accepted

  accounting principles. The limited nature of the work performed during a review does not provide sufficient

  evidence for an opinion on the financial statements taken as a whole.

• Question 1136:

  An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

  A. The entity's management does not provide the accountant with a signed representation letter.

  B. The accountant is prohibited from corresponding with the entity's legal counsel.

  C. The entity's principal creditors no longer require the entity to furnish audited financial statements.

  D. The accountant is prevented from examining the minutes of the board of directors' meetings.

  Correct Answer: C

  Explanation: Choice "c" is correct. An audit may be changed to a compilation or review due to a change in client requirements. Since the creditors no longer require audited financial statements, this is a valid reason for requesting a change. Choices "a", "b", and "d" are incorrect. Client-imposed scope limitations, such as refusing to provide a signed representation letter, prohibiting correspondence with legal counsel, or refusing to allow examination of board minutes, are indicative of a lack of cooperation by management. Such limitations would not be a valid basis for changing an engagement from an audit to a compilation.

• Question 1137:

  Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

  A. The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts.

  B. The accountant must inform an appropriate level of management of all instances of fraud or illegal acts.

  C. The accountant must report only definite instances of fraud or an illegal act, but need not report information indicating that fraud or an illegal act may have occurred.

  D. Information indicating that fraud or an illegal act may have occurred should be reported in writing to an appropriate level of management.

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The accountant is not required to specifically assess fraud risk or to perform

  procedures designed to detect material misstatements due to fraud or illegal acts.

  Choice "b" is incorrect. Inconsequential instance of fraud or illegal acts need not be reported to

  management.

  Choice "c" is incorrect. The accountant should report to an appropriate level of management any evidence

  or information that comes to his or her attention indicating that fraud or an illegal act may have occurred.

  Choice "d" is incorrect. Information indicating that fraud or an illegal act may have occurred should be

  reported to an appropriate level of management, but it need not be in writing. Oral communication to

  management should be documented.

• Question 1138:

  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.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. A review consists of inquiries and analytical procedures. Comparison of current year

  and prior year account balances is an analytical procedure that would often be performed as part of a

  review.

  Choice "a" is incorrect. Examining board minutes is an audit procedure that would not typically be

  performed in a review.

  Choice "b" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not

  typically be performed in a review.

  Choice "d" is incorrect. Recalculation of expenses is an audit procedure that would not typically be

  performed in a review.

• Question 1139:

  An accountant's standard report issued after compiling the financial statements of a nonissuer 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.

  Correct Answer: C

  Explanation: Choice "c" is correct. An accountant's standard report issued after compiling the financial statements of a nonissuer should state that "a compilation is limited to presenting in the form of financial statements information that is the representation of management." Choice "a" is incorrect. A review report (and not a compilation report) states that, "I am not aware of any material modifications that should be made to the accompanying financial statements." Choice "b" is incorrect. A review report (and not a compilation report) states that a review "consists principally of inquiries of company personnel and analytical procedures." Choice "d" is incorrect. A review report (and not a compilation report) states that a review "is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion."

• Question 1140:

  Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?

  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.

  Correct Answer: B

  Explanation: Choice "b" is correct. In reviewing the financial statements of a nonpublic entity, one of the first steps would be to obtain sufficient knowledge of the entity's business, including its organization, operating characteristics, and products or services. Choice "a" is incorrect. In an audit, preliminary judgments about risk and materiality are used to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. Choice "c" is incorrect. In an audit, the risk of material misstatement arising from fraud must be assessed in order to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. While inquiries would be made about fraud, a formal fraud risk assessment is not required. Choice "d" is incorrect. In a review of a nonissuer's financial statements, no assessment or testing of internal control is required.