Auditing and Attestation Paper 27

(a) The requirement is to determine the correct statement concerning both an engagement to compile and an engagement to review a nonissuer’s financial statements. Answer (a) is correct because neither a compilation nor a review contemplates obtaining an understanding of internal control. Answer (b) is incorrect because when performing a compilation the accountant need not be independent; independence is required for reviews. Answer (c) is incorrect because a review provides limited assurance. Answer (d) is incorrect because the accountant is not required to obtain a written management representation letter for a compilation; a management representation letter is required for a review.

(c) The requirement is to identify the type of assurance (if any) provided in a financial statement compilation report. Answer (c) is correct because the objective of a compilation is to present in the form of financial statements information that is the presentation of management (owners) without undertaking to express any assurance on the statements. Answer (a) is incorrect because accountants never provide absolute assurance. Answer (b) is incorrect because reviews result in limited (negative) assurance. Answer (d) is incorrect because audits, not compilations, provided reasonable assurance.

(a) The requirement is to identify the type of report that may be issued by a CPA who has invested in a company’s outstanding bonds payable. Answer (a) is correct because such an investment impairs independence and compilations allow a nonindependent CPA to perform the service when it is properly disclosed. Answers (b), (c), and (d) are all incorrect because independence is required for reviews, audits, and agreed-upon procedures engagements.

(d) The requirement is to determine whether reproducing client-prepared financial statements without modification and preparing standard monthly journal entries are included in the provisions of Statements on Standards for Accounting and Review Services. Answer (d) is correct because AR 100 allows these services as long as the accountant’s name is not associated with the financial statements.

(d) The requirement is to identify the correct statement about unaudited personal financial statements included in a personal financial plan. Answer (d) is correct because AT 600 requires that the financial statements be used solely to assist the client and the client’s advisor and not be used to obtain credit. Answer (a) is incorrect because financial statements may be presented in comparative form. Answer (b) is incorrect because omitted disclosures may be material. Answer (c) is incorrect because such financial statements may be disclosed to a non-CPA financial planner.

(d) The requirement is to identify the circumstance in which Statements on Standards for Accounting and Review Services apply. The Standards apply when a CPA submits unaudited financial statements of a nonissuer (nonpublic) entity to his or her client or others. Accordingly, answer (d) is correct. Answers (a), (b), and (c) are all incorrect because they are all included as services that do not constitute a submission of financial statements to a client.

(c) The requirement is to determine when a CPA may compile and be associated with financial statements that omit disclosures required by GAAP. Answer (c) is correct because the CPA may compile such financial statements provided that the omission of substantially all disclosures (1) is clearly indicated in the audit report and (2) is not, to the CPA’s knowledge, undertaken with the intention of misleading those who might reasonably be expected to use the financial statements.

(a) The requirement is to determine an accountant’s responsibility relating to knowledge of the client’s accounting principles and practices when performing a compilation. Answer (a) is correct because to compile financial statements the accountant should possess a general understanding of the nature of the entity’s business transactions, the form of its accounting records, the stated qualifications of its accounting personnel, the accounting basis on which the financial statements are to be presented, and the form and content of the financial statements. Answer (b) is incorrect because the accountant need not have a general understanding of the entity’s controls. Answer (c) is incorrect because no such consideration of risk factors is envisioned in a compilation. Answer (d) is incorrect because no such consideration of internal control awareness of senior management is made.

(a) The requirement is to identify the procedure an accountant ordinarily performs in a compilation engagement of a nonissuer. Answer (a) is correct because the accountant is required, at a minimum, to read the financial statements to consider whether they are free from obvious material errors.

(a) The requirement is to identify a CPA’s reporting responsibility when current year financial statements are compiled while the preceding year’s financial statements were audited. Answer (a) is correct because a separate paragraph to the report should indicate (1) that the financial statements of the prior period were audited, (2) the date of the previous report, (3) the type of opinion expressed, (4) if the opinion was other than unmodified, the substantive reasons therefor and (5) that no auditing procedures were performed after the date of the previous report. Answer (b) is incorrect because no indication is made concerning updating the assessment of control risk. Answer (c) is incorrect because the CPA does not indicate reasons for changing from an audit to a compilation. Answer (d) is incorrect because the audit report may be relied on for the prior year’s financial statements.