chapter 19 test bank addition asurrance services financial information

An audit opinion on cash basis financial statements is an example of an opinion on financial statements that follow a special purpose financial reporting framework... A compilation repor

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Chapter 19 Additional Assurance Services: Historical Financial Information

True / False Questions

1 An audit opinion on cash basis financial statements is an example of an opinion on

financial statements that follow a special purpose financial reporting framework

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8 The auditors should not accept an engagement to issue a compilation report on financial information presented in a prescribed form

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"

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12 Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management?

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 the client's first quarter and Bill Smith, CPA has been engaged to perform acompilation and to issue a compilation report on the financial statements The client does not wish to present notes to the financial statements The appropriate 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 bepresented with the statements

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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 themisappropriation of assets

D Perform a preliminary assessment of the operating efficiency of the entity's internal controlactivities

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

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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

21 In which of the following types of reports do the auditors express negative assurance?

A Letters for underwriters

B Reports on audits of financial statements on a basis other than generally accepted

accounting principles

C Reports on audits of specified accounts

D Reports on summary 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

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23 In which of the following types of reports do accountants provide no explicit assurance?

25 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

26 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

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27 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

28 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

29 When the auditors have performed an audit and are asked to report on the client's

compliance with aspects of contractual agreements, which of the following is correct?

A They may do so and provide reasonable assurance as to compliance

B They may do so and provide negative assurance as to compliance

C They only may do so when details of the contracts have been audited

D They may not do so

30 Which of the following is accurate relating to audit reports on tax basis financial

statements?

A No emphasis of matter paragraph is included in the audit report

B Use of the report need not be restricted

C The purpose of the financial statements should be described in the audit report

D Only reports with modified opinions are appropriate

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

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32 Which of the following is correct when a company is issuing summary financial

statements developed from audited financial statements?

A Such summary 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 summary 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 summary financial statements

D The CPA who has audited the financial statements who is asked to report on the summary statements should decline the engagement because the summary statements do 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 Summary financial statements

D Reviewed financial statements

34 Which of the following is not an example of financial statements that use a special

purpose financial reporting framework?

A Of a partnership which follows accounting practices used to file its tax return

B Prepared for limited purposes such as relating to a contract a company has entered into

C Of an organization that has limited the scope of the auditor's examination

D Of an organization that follows procedures of a regulatory agency that oversees the

company and its operations

35 Whenever a report filed on a printed form designed by authorities, call upon the

independent auditors to make an assertion that the auditors believe is not justified, 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

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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 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

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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

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

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44 An auditor's report on financial statements prepared in accordance with a special purpose financial reporting framework 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

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 basis of accounting used

D Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting

46 An auditor's report would be designated as a report on financial statements following a special purpose financial reporting framework for financial statements when they 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 regulatory basis of accounting other than generally accepted accounting principles

D Purported to be in accordance with generally accepted accounting principles but do not include a presentation of the statement of cash flows

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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

48 Comfort letters are ordinarily signed by the:

A Client

B Client's lawyer

C Independent auditor

D Internal auditor

49 Which of the following circumstances requires modification of the accountant's report on

a review of interim financial information of publicly held entity?

50 If compiled financial statements presented in conformity with the cash receipts and

disbursements basis of accounting do 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

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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

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

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

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

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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

56 When performing a review of a nonpublic company, the auditors must obtain in a

representation letter acknowledgement of management for its responsibility for each 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

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Essay Questions

57 Items a through j present various phrases or characteristics that may apply to audits, reviews, and compilations Place an X in the cell if the phrase or characteristic applies to the listed service:

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58 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

59 One may envision 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?

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Chapter 19 Additional Assurance Services: Historical Financial Information

Answer Key

True / False Questions

1 An audit opinion on cash basis financial statements is an example of an opinion on financial statements that follow a special purpose financial reporting framework

Learning Objective: 19-05 Explain the special considerations involved in auditing personal financial statements.

Topic: Additional GAAS Audits

3 The auditors should take exception to assets presented at their estimated current values in personal financial statements

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4 Personal financial statements may be compiled or reviewed, but they should not be

5 A compilation of financial statement provides limited assurance regarding the financial statements

Learning Objective: 19-08 Explain the accountant's responsibilities when performing a compilation of financial statements.

Topic: Compilations of Historical Financial Statements

6 Compiled financial statements may omit note disclosures

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7 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

8 The auditors should not accept an engagement to issue a compilation report on financial information presented in a prescribed form

9 Letters to underwriters should not contain negative assurances

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10 When a U.S.-based organization prepares financial statements which are for use in anothercountry, a U.S report, modified to reflect the accounting principles of the other country, may

Topic: Auditing Financial Statements—Other Than GAAP

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"

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12 Which communication option(s) may be used when an accountant submits compiled financial statements to be used only by management?

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

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14 It is the end of the client's first quarter and Bill Smith, CPA has been engaged to perform acompilation and to issue a compilation report on the financial statements The client does not wish to present notes to the financial statements The appropriate 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

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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 themisappropriation of assets

D Perform a preliminary assessment of the operating efficiency of the entity's internal controlactivities

Topic: Reviews of Historical Financial Statements