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Auditing & Attestation 2

Class Questions

1. CPA-02432

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?

a. Complying with laws and regulations.

b. Using statistical sampling techniques.

c. Assigning personnel to engagements.

d. Considering audit risk and materiality.

CPA-02432

Choice "c" is correct. The AICPA's Statements on Quality Control Standards assert that a system of quality control for a firm encompasses the firm's organizational structure and the policies and procedures established by the firm in order to provide reasonable assurance of conforming with professional standards. Toward that end, policies and procedures for personnel management, including assigning personnel to engagements, should be established to provide reasonable assurance that the persons assigned will have the technical training and proficiency required to perform their work and progress within the firm.

Choice "a" is incorrect. Compliance with laws and regulations falls under the Code of Professional

Conduct.

Choice "b" is incorrect. The use of statistical sampling techniques involves auditing standards, not standards of quality control.

Choice "d" is incorrect. The consideration of audit risk and materiality involves auditing standards, not standards of quality control.

2. CPA-02418

Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS?

a. Quality control standards relate to the conduct of a firm's entire practice whereas professional standards such as GAAS relate to the conduct of an individual engagement.

b. The adoption of quality control standards increases the likelihood of compliance with professional standards on individual engagements.

c. A firm's failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

d. A firm that has not adopted an appropriate system of quality control may still be in compliance with professional standards with respect to individual engagements.

CPA-02418

Choice "c" is correct. A firm's failure to establish or comply with an appropriate system of quality control does not necessarily imply that the firm has failed to follow professional standards on individual

engagements.

Choice "a" is incorrect. Quality control standards relate to the conduct of a firm's entire practice whereas professional standards such as GAAS relate to the conduct of an individual engagement.

Choice "b" is incorrect. The adoption of an effective system of quality control standards is conducive to complying with professional standards on individual engagements.

Choice "d" is incorrect. Deficiencies in or noncompliance with a firm's quality control standards do not necessarily indicate a lack of compliance with professional standards for any one specific engagement.

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Auditing & Attestation 2

Class Questions

3. CPA-02732

An auditor's report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:

a. A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.

b. A statement that the cash receipts and disbursements basis of accounting is not a comprehensive basis of accounting.

c. An opinion as to whether the financial statements are presented fairly in conformity with the cash receipts and disbursements basis of accounting.

d. A statement that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.

CPA-02732

Choice "b" is correct. The auditor's report on financial statements prepared in conformity with a comprehensive basis of accounting other than GAAP would include a statement that the basis is a comprehensive basis of accounting other than GAAP. It would not state that the cash receipts and disbursements basis is not a comprehensive basis of accounting.

Choice "a" is incorrect. The auditor's report should include a paragraph that states the basis and refers to the note to the financial statements that describes the basis.

Choice "c" is incorrect. The auditor's report should include a paragraph that expresses the auditor's opinion on whether the financial statements are presented fairly, in all material respects, in conformity with the basis described.

Choice "d" is incorrect. The auditor's report should state that the audit was conducted in accordance with U.S. GAAS.

4. CPA-02719

An auditor may express an opinion on an entity's accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the:

a. Report on accounts receivable discloses the reason for the disclaimer of opinion on the financial statements.

b. Use of the report on accounts receivable is restricted to internal use only.

c. Auditor also reports on the current asset portion of the entity's balance sheet.

d. Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

CPA-02719

Choice "d" is correct. If the auditor has disclaimed an opinion on the financial statements taken as a whole, the auditor may express an opinion on an entity's accounts receivable balance only if the special report on accounts receivable is presented separately from the disclaimer of opinion on the financial

statements.

Choice "a" is incorrect. The report on the accounts receivable balance should not refer to the disclaimer of opinion on the financial statements.

Choice "b" is incorrect. A special report expresses an opinion on the accounts receivable balance based on an audit of this specified element of the balance sheet. The report need not be restricted to internal use only.

Choice "c" is incorrect. A special report expresses an opinion on the accounts receivable balance based on an audit of this specified element. The auditor need not also report on the current asset portion of the entity's balance sheet.

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Auditing & Attestation 2

Class Questions

5. CPA-03044

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

b. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit.

c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors.

d. Applying analytical procedures designed to corroborate management's assertions that are embodied in the financial statement components.

CPA-03044

Choice "a" is correct. In a compilation engagement, the accountant should read the financial statements for obvious material misstatements.

Choice "b" is incorrect. Compiled financial statements may be used to obtain credit. (The prohibition on using compiled financial statement to obtain credit relates to personal financial statements when the accountant would like to be exempted from the requirements of SSARS.)

Choice "c" is incorrect. As part of a review engagement, an accountant would ask about actions taken at board of directors' meetings that affect the financial statements. Inquiry is not part of a compilation

engagement.

Choice "d" is incorrect. Analytical procedures are part of a review engagement, but not necessary for a compilation engagement.

6. CPA-03011

Financial statements of a nonissuer compiled without audit or review by an accountant, which are expected to be used by a third party, should be accompanied by a report stating that:

a. The scope of the accountant's procedures has not been restricted in testing the financial information that is the representation of management.

b. The accountant assessed the accounting principles used and significant estimates made by management.

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

d. A compilation consists principally of inquiries of entity personnel and analytical procedures applied to financial data.

CPA-03011

Choice "c" is correct. Financial statements compiled without audit or review by an accountant, which are expected to be used by a third party, should be accompanied by a report stating that the financial statements have not been audited or reviewed and, accordingly, the accountant does not express an opinion or any other form of assurance on them.

Choice "a" is incorrect. There is no discussion of the scope of the accountant's procedures in a

compilation report. The appropriate reference to the representation of management is that a compilation is "limited to presenting in the form of financial statements information that is the representation of

management."

Choice "b" is incorrect. This statement is part of the standard audit report, not the accountant's compilation report.

Choice "d" is incorrect. It is a review report, not a compilation report, that states that a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.

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Auditing & Attestation 2

Class Questions

7. CPA-03142

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

a. Observing the safeguards over access to and use of assets and records.

b. Comparing the financial statements with anticipated results in budgets and forecasts.

c. Inquiring of management about actions taken at the board of directors' meetings.

d. Studying the relationships of financial statement elements expected to conform to predictable patterns.

CPA-03142

Choice "a" is correct. Observing safeguards over access to and use of assets and records is part of the study and evaluation of the client's internal control; such an evaluation is not conducted in a review.

Choice "b" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

Choice "c" is incorrect. As part of a review engagement, the accountant inquires of management about actions taken at the board of directors' meetings.

Choice "d" is incorrect. As part of a review engagement, the accountant performs analytical procedures to identify relationships and items that appear to be unusual. Analytical procedures consist of comparisons of the financial statements with statements for a comparable prior period, comparisons of the financial statements with anticipated results (budgets and forecasts), and a study of the relationships of the elements of the financial statements that would be expected to conform to a predictable pattern.

8. CPA-04629

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

a. The entity does not have reasonable justification for making a change in accounting principle.

b. The entity prepares its financial statements on the income tax basis of accounting.

c. The entity requests the accountant to report only on the balance sheet, and not on the other financial statements.

d. The entity declines to provide the accountant with a signed representation letter.

CPA-04629

Choice "d" is correct. The accountant is required to obtain a representation letter from management. When the client does not provide such a letter, the review is incomplete and the accountant may not issue the review report.

Choice "a" is incorrect. Lack of a reasonable justification for a change in accounting principle is a departure from GAAP, generally resulting in a modified report. It would not require the accountant to withdraw from the engagement.

Choice "b" is incorrect. The income tax basis is an "other comprehensive basis of accounting" (OCBOA). It is acceptable for an auditor to review OCBOA financial statements, and there would be no need to

withdraw.

Choice "c" is incorrect. A review engagement may involve reporting on only one financial statement as long as the scope of the engagement is not limited. There would be no need to withdraw in this

circumstance.

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Auditing & Attestation 2

Class Questions

9. CPA-02976

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review:

a. Provides only limited assurance that the financial statements are fairly presented.

b. Includes examining, on a test basis, information that is the representation of management.

c. Consists principally of inquiries of company personnel and analytical procedures applied to financial data.

d. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

CPA-02976

Choice "c" is correct. Financial statements reviewed by an accountant should be accompanied by a report stating that a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.

Choice "a" is incorrect. While a review does provide only limited (negative) assurance, this statement is not explicitly stated in the accountant's review report.

Choice "b" is incorrect. Examination of client information is part of an audit engagement, not a review

engagement.

Choice "d" is incorrect. While this statement is true, it is not explicitly stated in the accountant's review

report.

10. CPA-02970

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:

a. Issue an adverse opinion because of the departure from GAAP.

b. Express no assurance of any kind on the entity's financial statements.

c. Emphasize that the financial statements are for limited use only.

d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

CPA-02970

Choice "d" is correct. Failure to properly capitalize leases that the accountant considers material to the financial statements is a departure from GAAP. If management will not capitalize the leases, the accountant should modify the standard review report or withdraw from the engagement. If modification to the report is sufficient to disclose the departure from GAAP, then the accountant may modify the review

report.

Choice "a" is incorrect. An opinion is not issued with a review report. Instead, the report may be modified to disclose the departure from GAAP.

Choice "b" is incorrect. The accountant may still provide limited assurance with respect to the entity's financial statements in the review report, as long as the departures from GAAP are disclosed. The third paragraph of the review report would read, "Based on my review, with the exception of the matter described in the following paragraph, I am not aware of any material modifications…"

Choice "c" is incorrect. There is no need for the auditor to restrict the use of the financial statements.

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Auditing & Attestation 2

Class Questions

11. CPA-03381

Gole, CPA, is engaged to review the 20X4 financial statements of North Co., a nonissuer. Previously, Gole audited North's 20X3 financial statements and expressed an unqualified opinion. Gole decides to include a separate paragraph in the 20X4 review report because North plans to present comparative financial statements for 20X4 and 20X3. This separate paragraph should indicate that:

a. The 20X4 review report is intended solely for the information of management and the board of directors.

b. The 20X3 auditor's report may no longer be relied on.

c. No auditing procedures were performed after the date of the 20X3 auditor's report.

d. There are justifiable reasons for changing the level of service from an audit to a review.

CPA-03381

Choice "c" is correct. If the review report on the current period includes a separate paragraph describing the responsibility assumed for the prior period's financial statements, the additional paragraph should explicitly state that no audit procedures were performed subsequent to the previous period's audit.

Choice "a" is incorrect. The review report can be considered a general use report; no restriction on use is

necessary.

Choice "b" is incorrect. The previous year's audit report may still be relied upon.

Choice "d" is incorrect. No mention of the reasons for the change in engagement service is necessary.

12. CPA-03401

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. Material modifications should be made to conform with generally accepted accounting principles.

b. A reasonable basis exists for expressing an updated opinion regarding the financial statements that were previously audited.

c. Condensed financial statements or pro forma financial information should be included in a registration statement.

d. The financial statements are presented fairly in accordance with generally accepted accounting principles.

CPA-03401

Choice "a" is correct. The objective of a review of interim financial information is to provide the

accountant, through inquiries and analytical procedures, with a basis for reporting whether material modifications should be made to such information to conform with generally accepted accounting

principles.

Choice "b" is incorrect. The accountant would not express an updated opinion on the basis of the review procedures performed.

Choice "c" is incorrect. The objective of a review is not to determine whether or not condensed financial statements or pro forma financial statements should be included in a registration statement.

Choice "d" is incorrect. An audit, rather than a review, would determine whether the financial statements are in conformity with GAAP.

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Auditing & Attestation 2

Class Questions

13. CPA-03418

Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity?

a. Verify changes in key account balances.

b. Read the minutes of the board of directors' meetings.

c. Inspect the open purchase order file.

d. Perform cut-off tests for cash receipts and disbursements.

CPA-03418

Choice "b" is correct. An independent accountant will generally read the minutes of the board of directors' meetings when conducting a review of interim financial information of a publicly held entity.

Choices "a", "c", and "d" are incorrect. When conducting a review of interim financial information of a publicly held entity, the following audit procedures generally are not performed:

a.

Verification of changes in key account balances.

c.

Inspection of the open purchase order file.

d.

Performance of cut-off tests for cash receipts and disbursements.

14.

CPA-03419

Green, CPA, is aware that Green's name is to be included in the annual report of National Company, a publicly-held entity, because Green has audited the annual financial statements included therein. National's quarterly financial statements are also contained in the annual report. Green has not audited but has reviewed these interim financial statements. Green should request that:

I. Green's name not be included in the annual report.

II. The interim financial statements be marked as unaudited.

a. I only.

b. Both I and II.

c. Either I or II.

d. II only.

CPA-03419

Choice "d" is correct. Since the CPA has not audited the interim financial statements of this publicly-held entity, the CPA (Green) should request that the first quarter interim financial statements be marked as

unaudited.

Choices "a", "b", and "c" are incorrect. As long as the CPA has completed the review, his or her name may be included in the annual report.

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Auditing & Attestation 2

Class Questions

15. CPA-03424

Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters?

a. Letters for underwriters are required by the Securities Act of 1933 for the initial public sale of registered securities.

b. Letters for underwriters typically give negative assurance on unaudited interim financial information.

c. Letters for underwriters usually are included in the registration statement accompanying a prospectus.

d. Letters for underwriters ordinarily update auditors' opinions on the prior year's financial statements.

CPA-03424

Choice "b" is correct. Comments concerning the unaudited interim financial information provide negative assurance as to whether any material modifications should be made to the unaudited interim financial information in order for it to be in conformity with GAAP.

Choice "a" is incorrect. Comfort letters are not required by the Securities Act of 1933, and copies are not filed with the SEC.

Choice "c" is incorrect. Comfort letters are addressed to the underwriter and are not included in the registration statement accompanying the prospectus.

Choice "d" is incorrect. The comfort letter does not update the opinion on previous financial statements. Often, underwriters will request that the accountants repeat in the comfort letter their report on the audited financial statements. Because of the special significance of the auditor's report, the auditors should not repeat their report.

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Auditing & Attestation 2

Class Questions

16. CPA-02445

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements

(SSAE) when engaged to:

a. Report on financial statements that the CPA generated through the use of computer software.

b. Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

c. Provide the client with a financial statement format that does not include dollar amounts.

d. Audit financial statements that the client prepared for use in another country.

CPA-02445

Choice "b" is correct. A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

Choice "a" is incorrect. Attestation standards were created to provide assurance on representations other than historical financial statements and in forms other than the positive opinion. Unless the financial

statements in question are something other than historical financial statements (which is not indicated in the question), it is likely that other standards (SAS, SSARS) would be more appropriate for this

engagement.

Choice "c" is incorrect. An attest engagement is one in which a CPA is engaged to issue an examination,

a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject

matter, that is the responsibility of another party. Providing the client with a financial statement format

does not fall under this description.

Choice "d" is incorrect. Statements on Standards for Attestation Engagements (SSAE) do not apply to audits of financial statements. (The CPA would, however, be required to comply with GAAS--specifically the general standards and the standards of fieldwork--when engaged to audit financial statements prepared for use in another country.)

17. CPA-02450

Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a (an):

a. Disclaimer of opinion about the fair presentation of Modern's financial statements.

b. List of the procedures performed (or reference thereto) and Mill's findings.

c. Opinion about the effectiveness of Modern's internal control activities concerning royalty payments.

d. Acknowledgment that the sufficiency of the procedures is solely Mill's responsibility.

CPA-02450

Choice "b" is correct. A report on agreed-upon procedures should include a list of the procedures performed (or reference thereto) and the related findings.

Choice "a" is incorrect. An agreed-upon procedures engagement to evaluate compliance with contractual requirements does not address the fair presentation of financial statements.

Choice "c" is incorrect. A report on agreed-upon procedures should be in the form of procedures and findings. An opinion is not provided.

Choice "d" is incorrect. A report on agreed-upon procedures would indicate that the sufficiency of the procedures is solely the responsibility of the specified parties, who in this case would be the group of royalty recipients (not Mill).

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Auditing & Attestation 2

Class Questions

18. CPA-02514

Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to:

a. All employees who work for the entity.

b. Potential stockholders who request a prospectus or a registration statement.

c. A bank with which the entity is negotiating for a loan.

d. All stockholders of record as of the report date.

CPA-02514

Choice "c" is correct. Financial projections are hypothetical, "what if" prospective financial statements. Because the user may need to ask the responsible party questions about the underlying assumptions, financial projections are "restricted use" reports, whose use is restricted to the responsible party and those third parties with whom the responsible party is negotiating directly.

Choices "a", "b", and "d" are incorrect. Only financial forecasts (based on expected conditions) are appropriate for general use.

19. CPA-02436

When a CPA examines a client's projected financial statements, the CPA's report should:

a. Explain the principal differences between historical and projected financial statements.

b. State that the CPA performed procedures to evaluate management's assumptions.

c. Refer to the CPA's auditor's report on the historical financial statements.

d. Include the CPA's opinion on the client's ability to continue as a going concern.

CPA-02436

Choice "b" is correct. When a CPA examines projected financial statements, the standard report should include a statement that the examination "…included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the

projection."

Choice "a" is incorrect. The accountant's report on the examination of projected financial statements would not explain the principal differences between historical and projected financial statements.

Choice "c" is incorrect. The accountant's report on the examination of projected financial statements would not make any reference to the CPA's auditor's report on the historical financial statements.

Choice "d" is incorrect. The accountant's report would not express an opinion on the client's ability to continue as a going concern.

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Auditing & Attestation 2

Class Questions

20. CPA-04618

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity's business. Other than the procedures previously applied to the historical financial statements, the accountant is required to:

Reevaluate the entity's internal control over financial reporting

Determine that the computations of the pro forma adjustments

a.

Yes

are mathematically correct Yes

b.

Yes

No

c.

No

Yes

d.

No

No

CPA-04618

Choice "c" is correct. The accountant should evaluate the pro forma adjustments, but need not reevaluate the entity's internal control over financial reporting.

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

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