Gleim's CPA Test Prep Auditing [1] Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
... [Show More] A. A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting. B. An audit program setting forth in detail the procedures necessary to accomplish the engagement's objectives. C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. D. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved. • Answer (A) is incorrect because the auditor should document the understanding of internal control, but a flowchart or narrative of the information system for financial reporting is just one method. For example, the auditor may use a questionnaire to document the understanding. • Answer (B) is correct. According to AU 311, in planning the audit, the auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program (or a set of written audit programs) for every audit. The audit program sets forth in reasonable detail the specific audit procedures the auditor believes are necessary to accomplish the audit objectives. • Answer (C) is incorrect because the auditor may request and receive assistance from entity personnel, but a planning memorandum establishing the timing is not required under GAAS. • Answer (D) is incorrect because the auditor should document the understanding of internal control, but a questionnaire is only one method of accomplishing this objective. For example, flowcharts and narratives are other methods. [2] Audit programs should be designed so that A. Most of the required procedures can be performed as interim work. B. Inherent risk is assessed at a sufficiently low level. C. The auditor can make constructive suggestions to management. D. The audit evidence gathered supports the auditor's conclusions. • Answer (A) is incorrect because, depending on the assertion, work may be performed at interim dates or in the subsequent events period. • Answer (B) is incorrect because the auditor must assess inherent risk based upon the characteristics of the client. • Answer (C) is incorrect because suggestions to management are not required in an audit. • Answer (D) is correct. The auditor is responsible for collecting sufficient, competent evidential matter. Audit programs describe the steps involved in that process. The evidence should support the auditor's conclusions. [3] contact: royfields12@gmail.com In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Financial statement assertions. • Answer (A) is incorrect because timing is important in meeting the objectives of the audit but does not relate to the audit objectives themselves. • Answer (B) is incorrect because the cost-benefit of gathering evidence is important to the auditor but is not the primary objective. • Answer (C) is incorrect because audit objectives determine the specific audit techniques. • Answer (D) is correct. Most audit work consists of obtaining and evaluating evidence about financial statement assertions, which are management representations embodied in financial statement components. AU 326 states, "In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit objectives in light of those assertions." [4] In comparison with the detailed audit program of the independent auditor who is engaged to audit the financial statements of a large publicly held company, the audit client's comprehensive internal audit program is A. More detailed and covers areas that normally are not considered by the independent auditor. B. More detailed although it covers fewer areas than are normally covered by the independent auditor. C. Substantially identical to the audit program used by the independent auditor because both consider substantially identical areas. D. Less detailed and covers fewer areas than are normally considered by the independent auditor. • Answer (A) is correct. The independent auditor's objective is limited to expressing an opinion on the fairness of the financial statements. The internal auditor's work is more comprehensive because (s)he must evaluate and help to improve the effectiveness of the organization's risk management, control, and governance processes. Thus, an internal auditor's scope of work extends to the reliability and integrity of operational as well as financial information; the effectiveness and efficiency of operations; the safeguarding of assets; and compliance with laws, regulations, and contracts. • Answer (B) is incorrect because the internal audit program covers more areas than that of the independent auditor. • Answer (C) is incorrect because the internal audit program is more detailed and covers more areas. • Answer (D) is incorrect because the internal audit program is more detailed and covers more areas. [5] Which of the following is the authoritative body designated to promulgate attestation standards? A. Auditing Standards Board. B. Governmental Accounting Standards Board. C. Financial Accounting Standards Board. D. General Accounting Office. • Answer (A) is correct. Statements on Standards for Attestation Engagements are issued by the Auditing Standards Board, the Accounting and Review Services Committee, and the Management Consulting Services Executive Committee. The Council of the AICPA granted these bodies, which also promulgate SASs, SSARSs, and SSCSs, respectively, the authority to interpret Conduct Rules 201 and 202. The SSAEs are issued pursuant to that authority. • Answer (B) is incorrect because the GASB issues accounting and reporting standards for local and state governments. • Answer (C) is incorrect because the FASB establishes GAAP. • Answer (D) is incorrect because the GAO issues government auditing standards. [6] Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards. C. The attestation standards do not permit an attest engagement to be part of a business acquisition study or a feasibility study. D. None of the standards of field work in generally accepted auditing standards are included in the attestation standards. • Answer (A) is correct. Two principal conceptual differences exist between the attestation standards and GAAS. First, the attestation standards provide a framework for the attest function beyond historical financial statements. Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion). • Answer (B) is incorrect because, in any attest engagement, the practitioner must be independent in mental attitude. • Answer (C) is incorrect because attestation services may be provided in conjunction with other services provided to clients. • Answer (D) is incorrect because the attestation standards and GAAS require that work be adequately planned and that assistants be properly supervised. Both also require sufficient evidence. [7] In performing an attest engagement, a CPA typically A. Supplies litigation support services. B. Assesses control risk at a low level. C. Expresses a conclusion about a written assertion. D. Provides management consulting advice. • Answer (A) is incorrect because litigation support services are consulting services. • Answer (B) is incorrect because the CPA assesses control risk in an audit but not necessarily in all attest engagements. Furthermore, the assessment may not be at a low level. • Answer (C) is correct. When a CPA in the practice of public accounting performs an attest engagement, the engagement is subject to the attestation standards. An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, according to the second attestation standard of reporting, "The report shall state the practitioner's conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated." However, the conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter. • Answer (D) is incorrect because an attest engagement results in a report on subject matter or on an assertion about the subject matter. [8] Which of the following professional services would be considered an attest engagement? A. A consulting service engagement to provide computer advice to a client. B. An engagement to report on compliance with statutory requirements. C. An income tax engagement to prepare federal and state tax returns. D. The compilation of financial statements from a client's accounting records. • Answer (A) is incorrect because the attestation standards explicitly do not apply to consulting services in which the practitioner provides advice or recommendations to a client. • Answer (B) is correct. Attest services have traditionally been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with GAAS. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion. Thus, attest services may extend to engagements related to management's compliance with specified requirements or the effectiveness of internal control over compliance. • Answer (C) is incorrect because tax return preparation is not an attest service according to the attestation standards. • Answer (D) is incorrect because a compilation of a financial statement is not an attest service according to the attestation standards. [9] Which of the following is not an attestation standard? A. Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report. B. The report shall identify the subject matter or the assertion being reported on and state the character of the engagement. C. The work shall be adequately planned and assistants, if any, shall be properly supervised. D. A sufficient understanding of internal control shall be obtained to plan the engagement. • Answer (A) is incorrect because the evidentiary requirement is contained in the second attestation standard of field work. • Answer (B) is incorrect because the first attestation standard of reporting concerns the character of the engagement. • Answer (C) is incorrect because the first attestation standard of field work concerns planning and supervision. • Answer (D) is correct. No attestation standard mentions internal control. The second standard of field work applicable to audits in accordance with GAAS states, "A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed." [10] Which of the following best describes what is meant by generally accepted auditing standards? A. Pronouncements issued by the Auditing Standards Board (ASB). B. Procedures to be used to gather evidence to support financial statements. C. Rules acknowledged by the accounting profession because of their universal application. D. Measures of the quality of the auditor's performance. • Answer (A) is incorrect because, although Statements on Auditing Standards (SASs) issued by the ASB are now deemed to be GAAS, they do not constitute all GAAS. • Answer (B) is incorrect because "auditing procedures are acts that the auditor performs during the course of an audit to comply with auditing standards" (AU 150). • Answer (C) is incorrect because adherence to good practice is not universal. • Answer (D) is correct. According to AU 150, GAAS are concerned with the quality of the auditor's performance, including his/her professional qualities and exercise of judgment in connection with audit engagements. The 10 standards include three general standards, three standards of field work, and four standards of reporting. [11] Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? A. Making suggestions that are adopted about the form and content of an entity's financial statements impairs an auditor's independence. B. An auditor may draft an entity's financial statements based on information from management's accounting system. C. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor's responsibilities. D. An auditor's responsibilities for audited financial statements are not confined to the expression of the auditor's opinion. • Answer (A) is incorrect because suggestions about the form and content of an entity's financial statements do not impair an auditor's independence as long as management takes responsibility for the financial statements. • Answer (B) is correct. "The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management's accounting system. However, the auditor's responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them" (AU 110). • Answer (C) is incorrect because the presentation of the financial statements in conformity with GAAP is the responsibility of management. • Answer (D) is incorrect because the auditor's responsibilities for audited financial statements are confined to the expression of the opinion. [12] Which of the following accounting services may an accountant most likely be able to perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services? I. Preparing a working trial balance II. Preparing standard monthly journal entries A. I only. B. II only. C. Both I and II. D. Neither I nor II. • Answer (A) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. • Answer (B) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. • Answer (C) is correct. An accountant must comply with SSARSs when (s)he submits unaudited financial statements of a nonpublic entity to a client or third parties. A submission of financial statements is defined as "presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software." Standard monthly journal entries and a working trial balance are not financial statements, so a compilation or review report is not necessary (assuming these items are properly characterized). • Answer (D) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. [13] North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to generate North's interim financial statements on King's personal computer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of A. Statements on Standards for Accounting and Review Services. B. Statements on Standards for Unaudited Financial Services. C. Statements on Standards for Consulting Services. D. Statements on Standards for Attestation Engagements. • Answer (A) is correct. The Statements on Standards for Accounting and Review Services apply to compilations and reviews performed by practitioners. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. • Answer (B) is incorrect because these standards do not exist. • Answer (C) is incorrect because the practitioner is providing compilation services, not consulting services. • Answer (D) is incorrect because Statements on Standards for Attestation Engagements are appropriate whenever the practitioner is engaged in providing attestation services. A compilation, however, provides no assurance. [14] Blue Co., a privately held entity, asked its tax accountant, Cook, a CPA in public practice, to reproduce Blue's internally prepared interim financial statements on Cook's personal computer when Cook prepared Blue's quarterly tax return. Cook should not transmit these financial statements to Blue unless, as a minimum, Cook complies with the provisions of A. Statements on Standards for Tax Services (SSTSs). B. Statements on Standards for Accounting and Review Services (SSARSs). C. Statements on Standards for Attestation Engagements (SSAEs). D. None of the answers are correct. • Answer (A) is incorrect because SSTSs concern the preparation of tax returns. • Answer (B) is incorrect because SSARSs are not applicable if the accountant is not deemed to have submitted unaudited financial statements. • Answer (C) is incorrect because SSAEs apply to a report that expresses a conclusion about subject matter or an assertion that is the responsibility of another party. • Answer (D) is correct. A submission of financial statements is defined as "presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software." Thus, a submission includes both preparation and presentation. Accordingly, merely reproducing client-prepared financial statements, without modification, as an accommodation to a client most likely does not constitute a submission of financial statements, and the accountant need not comply with SSARSs. [15] Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements? A. Assisting in adjusting the books of account for a partnership. B. Reviewing interim financial information required to be filed by public companies with the SEC. C. Processing financial data for clients of other accounting firms. D. Compiling an individual's personal financial statement to be used to obtain a mortgage. • Answer (A) is incorrect because SSARSs do not apply to assisting in adjusting the books of account. This service is unlikely to constitute a submission of financial statements. • Answer (B) is incorrect because Statements on Auditing Standards apply to reviews of interim financial information filed by public entities with the SEC. SSARs apply only to nonpublic entities. • Answer (C) is incorrect because SSARSs do not apply to processing financial data for clients of other accounting firms. This service is unlikely to constitute a submission of financial statements. • Answer (D) is correct. AR 100 describes the accountant's procedures and reporting responsibilities for compilations and reviews. AR 600 exempts personal financial statements from SSARS under certain conditions. The exemption applies only if the statements (1) are included in written personal financial plans, (2) will not be used to obtain credit (e.g., a mortgage), and (3) will not be used for any purposes other than developing the client's personal financial goals and objectives. [16] An accountant has compiled the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARSs). Do the SSARSs require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant? Printed on the Manually Signed Accountant's Letterhead by the Accountant ─────────────────────── ───────────────── A. Yes Yes B. Yes No C. No Yes D. No No • Answer (A) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (B) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (C) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (D) is correct. The compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. However, the report must be signed by the accounting firm or the accountant as appropriate. Hence, the signature may be manual, stamped, electronic, or typed (AR 100 as amended by SSARS 9). [17] May an accountant accept an engagement to compile or review the financial statements of a not-forprofit entity if the accountant is unfamiliar with the specialized industry accounting principles but plans to obtain the required level of knowledge before compiling or reviewing the financial statements? Compilation Review ─────────── ────── A. No No B. Yes No C. No Yes D. Yes Yes • Answer (A) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (B) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (C) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (D) is correct. The accountant may accept a compilation or review engagement for an entity in an industry with which the accountant has no previous experience. Acceptance, however, places upon him/her a responsibility to obtain the required level of knowledge prior to performing the engagement. [18] In a review engagement, the accountant should establish an understanding with the entity, preferably in writing, regarding the services to be performed. The understanding should include all of the following except a A. Description of the nature and limitations of the services to be performed. B. Description of the report the accountant expects to issue. C. Provision that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts. D. Provision that any errors, fraud, or illegal acts that come to the accountant's attention need not be reported. • Answer (A) is incorrect because the description of the nature and limitations of the services to be performed should be included in an understanding with the entity. • Answer (B) is incorrect because the description of the report the accountant expects to render should be included in an understanding with the entity. • Answer (C) is incorrect because a provision that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts should be included in an understanding with the entity. • Answer (D) is correct. Although the engagement cannot be relied upon to disclose errors, fraud, or illegal acts, the accountant should indicate to the client that any such acts discovered will be reported to management or the board of directors (AR 100). [19] A financial forecast consists of prospective financial statements that present an entity's expected financial position, results of operations, and cash flows. A forecast A. Is based on the most conservative estimates. B. Presents estimates given one or more hypothetical assumptions. C. Unlike a projection, may contain a range. D. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken. • Answer (A) is incorrect because the information presented is based on expected (most likely) conditions and courses of action rather than the most conservative estimate. • Answer (B) is incorrect because a financial projection (not a forecast) is based on assumptions by the responsible party reflecting expected conditions and courses of action, given one or more hypothetical assumptions (a condition or action not necessarily expected to occur). • Answer (C) is incorrect because both forecasts and projections may be stated either in point estimates or ranges. • Answer (D) is correct. According to AT 301, a financial forecast consists of prospective financial statements "that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows." A forecast is based on "the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take." [20] The party responsible for assumptions identified in the preparation of prospective financial statements is usually A. A third-party lending institution. B. The client's management. C. The reporting accountant. D. The client's independent auditor. • Answer (A) is incorrect because management is usually the responsible party. • Answer (B) is correct. Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying prospective financial statements. However, the responsible party may be a party outside the entity, such as a possible acquirer. • Answer (C) is incorrect because management is usually the responsible party. • Answer (D) is incorrect because management is usually the responsible party. [21] Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and cash flows. Such prospective financial statements are known as A. Pro forma financial statements. B. Financial projections. C. Partial presentations. D. Financial forecasts. • Answer (A) is incorrect because pro forma statements are essentially historical, not prospective, statements. • Answer (B) is correct. Prospective statements include forecasts and projections. A forecast is defined as an entity's expected financial position while a projection is the expected financial position based on a number of hypothetical assumptions. A forecast is for general use and a projection is for limited use. The difference between a forecast and a projection is that only the latter is based on one or more hypothetical assumptions, which are conditions or actions not necessarily expected to occur. • Answer (C) is incorrect because partial presentations are not prospective statements. They do not meet the minimum presentation guidelines. • Answer (D) is incorrect because forecasts are based on assumptions about conditions the responsible party expects to exist and the course of action it expects to take. [22] Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a A. Partial presentation. B. Projected balance sheet. C. Financial forecast. D. Financial projection. • Answer (A) is correct. Under the minimum presentation guidelines, prospective financial statements may take the form of complete basic statements or be limited to certain minimum items (when the items would be presented for the period's historical statements). A presentation is partial if it omits one or more of the following: (1) sales or gross revenues, (2) gross profit or cost of sales, (3) unusual or infrequently occurring items, (4) provision for income taxes, (5) discontinued operations or extraordinary items, (6) income from continuing operations, (7) net income, (8) basic and diluted earnings per share, (9) significant changes in financial position. • Answer (B) is incorrect because prospective information in the form of financial statements includes more than a balance sheet even if it omits gross profit or net income. • Answer (C) is incorrect because forecasts are not defined in terms of the omission of items listed in the presentation guidelines. • Answer (D) is incorrect because projections are not defined in terms of the omission of items listed in the presentation guidelines. [23] Which of the following statements concerning prospective financial statements is correct? A. Only a financial forecast would normally be appropriate for limited use. B. Only a financial projection would normally be appropriate for general use. C. Any type of prospective financial statements would normally be appropriate for limited use. D. Any type of prospective financial statements would normally be appropriate for general use. • Answer (A) is incorrect because projections as well as forecasts are appropriate for limited use. • Answer (B) is incorrect because only a forecast is appropriate for general use. • Answer (C) is correct. Limited use of prospective financial statements means use by the responsible party and those with whom that party is negotiating directly, e.g., in a submission to a regulatory body or in negotiations for a bank loan. These third parties are in a position to communicate directly with the responsible party. Consequently, SSAE 10 states, "Any type of prospective financial statements that would be useful in the circumstances would be appropriate for limited use." • Answer (D) is incorrect because only a forecast is appropriate for general use. [24] 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 shareholders who request a prospectus or a registration statement. C. A bank with which the entity is negotiating for a loan. D. All shareholders of record as of the report date. • Answer (A) is incorrect because a projection is inappropriate for distribution to those who will not be negotiating directly with the responsible party. • Answer (B) is incorrect because a projection is inappropriate for distribution to those who will not be negotiating directly with the responsible party. • Answer (C) is correct. A projection is based on one or more hypothetical assumptions and, therefore, should be considered for limited use only. Limited use of prospective financial statements means use by the responsible party and those with whom that party is negotiating directly. Examples of appropriate use include negotiations for a bank loan and submission to a regulatory body. • Answer (D) is incorrect because a projection is inappropriate for distribution to those who will not be negotiating directly with the responsible party. [25] Which of the following is a prospective financial statement for general use upon which a practitioner may appropriately report? A. Financial projection. B. Partial presentation. C. Pro forma financial statement. D. Financial forecast. • Answer (A) is incorrect because a projection is appropriate only for limited use. • Answer (B) is incorrect because a presentation not in compliance with minimum guidelines is not appropriate for general use. • Answer (C) is incorrect because pro forma statements are essentially historical, not prospective, statements. • Answer (D) is correct. Prospective financial statements are for general use if they are for use by persons with whom the responsible party is not negotiating directly, e.g., in an offering statement of the party's securities. Only a report based on a financial forecast is appropriate for general use. [26] When a practitioner examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the practitioner should describe the assumptions in the practitioner's report and express A. An "except for" qualified opinion. B. A "subject to" qualified opinion. C. An unqualified opinion with a separate explanatory paragraph. D. An adverse opinion. • Answer (A) is incorrect because omission of significant assumptions requires an adverse opinion. Other departures from the presentation guidelines, however, may justify a qualified opinion. • Answer (B) is incorrect because the language "subject to" is never permissible. • Answer (C) is incorrect because an explanatory paragraph is insufficient when significant assumptions are omitted. • Answer (D) is correct. An examination results in issuance of a report stating the practitioner's opinion on whether (1) the presentation conforms with AICPA guidelines and (2) the assumptions provide a reasonable basis for the forecast. If significant assumptions are not disclosed in the presentation, including the summary of assumptions, the practitioner must express an adverse opinion. Moreover, a practitioner should not examine a presentation that omits all such disclosures. [27] A practitioner's standard report on a compilation of a projection should not include a A. Statement that the practitioner expresses only limited assurance that the results may be achieved. B. Separate paragraph that describes the limitations on the presentation's usefulness. C. Statement that a compilation of a projection is limited in scope. D. Disclaimer of responsibility to update the report for events occurring after the report's date. • Answer (A) is correct. The standard report on a compilation of prospective financial statements should include a caveat that the prospective results may not be achieved. Furthermore, a report on a compilation does not provide any assurance. • Answer (B) is incorrect because the practitioner's report should include a separate paragraph that describes the limitations on the usefulness of a projection. • Answer (C) is incorrect because a scope limitation statement is included. • Answer (D) is incorrect because disclaimer of responsibility to update the report is included. [28] A practitioner's compilation report on a financial forecast should include a statement that A. The forecast should be read only in conjunction with the audited historical financial statements. B. The practitioner expresses only limited assurance on the forecasted statements and their assumptions. C. There will usually be differences between the forecasted and actual results. D. The hypothetical assumptions used in the forecast are reasonable in the circumstances. • Answer (A) is incorrect because a forecast may stand alone. • Answer (B) is incorrect because a compilation provides no assurance. • Answer (C) is correct. The standard report states that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance. It adds that there will usually be differences between the forecasted and actual results. • Answer (D) is incorrect because a financial projection, not a financial forecast, contains hypothetical assumptions. [29] When a practitioner compiles projected financial statements, the practitioner's report should include a separate paragraph that A. Describes the differences between a projection and a forecast. B. Identifies the accounting principles used by management. C. Expresses limited assurance that the actual results may be within the projection's range. D. Describes the limitations on the projection's usefulness. • Answer (A) is incorrect because a practitioner's report on compiled prospective financial statements does not describe the differences between a projection and a forecast. • Answer (B) is incorrect because the standard compilation report does not mention accounting principles. • Answer (C) is incorrect because a compilation report expresses no assurance. • Answer (D) is correct. When the presentation is a projection, the practitioner's report should include a separate paragraph that describes the limitations on the usefulness of the presentation. [30] A practitioner may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that A. Use of the report is restricted to the specified parties. B. The prospective financial statements are also examined. C. Responsibility for the sufficiency of the procedures performed is taken by the practitioner. D. Negative assurance is expressed on the prospective financial statements taken as a whole. • Answer (A) is correct. The following conditions should be met to accept an engagement: (1) The specified parties have participated in determining its nature and scope, and they take responsibility for the adequacy of the procedures; (2) report use is restricted to those parties; and (3) the statements include a summary of significant assumptions. • Answer (B) is incorrect because the practitioner may apply agreed-upon procedures without providing the more extensive services required by an examination. • Answer (C) is incorrect because the specified parties must assume this responsibility. • Answer (D) is incorrect because the practitioner should state his/her findings. [31] When third-party use of prospective financial statements is expected, a practitioner may not accept an engagement to A. Perform a review. B. Perform a compilation. C. Perform an examination. D. Apply agreed-upon procedures. • Answer (A) is correct. AT 301 does not provide for the review form of engagement with regard to prospective statements. • Answer (B) is incorrect because a compilation may be performed provided the report does not express any form of assurance. • Answer (C) is incorrect because an examination report may express an opinion on presentation in conformity with AICPA guidelines and the reasonableness of assumptions. • Answer (D) is incorrect because application of agreed-upon procedures is permissible. [32] A practitioner's standard report on a compilation of a projection should not include a A. Statement that a compilation of a projection is limited in scope. B. Disclaimer of responsibility to update the report for events occurring after the report's date. C. Statement that the practitioner expresses only limited assurance that the results may be achieved. D. Separate paragraph that describes the limitations on the presentation's usefulness. • Answer (A) is incorrect because the report should state that a compilation is limited in scope and does not provide any form of assurance. • Answer (B) is incorrect because the report should contain a statement that the practitioner assumes no responsibility to update the report for events and circumstances occurring after the report date. • Answer (C) is correct. A standard report states that the compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective statements. Limited assurance (e.g., based on a review) should not be provided by the practitioner based on any prospective financial statement service. • Answer (D) is incorrect because, if the practitioner has reservations about the usefulness of the statements (e.g., the statements fail to provide notes), (s)he should so indicate in a separate paragraph. [33] Which of the following presents what the effects on historical financial data might have been if a consummated transaction had occurred at an earlier date? A. Prospective financial statements. B. Pro forma financial information. C. Interim financial information. D. A financial projection. • Answer (A) is incorrect because prospective financial statements do not cover periods that have completely expired. Hence, they are not historical statements. • Answer (B) is correct. Pro forma information shows what the significant effects on historical financial information would have been had a consummated or proposed transaction (or event) occurred at an earlier date. Examples of these transactions include a business combination, disposal of a segment, a change in the form or status of an entity, and a change in capitalization. • Answer (C) is incorrect because interim financial information states actual results. • Answer (D) is incorrect because a financial projection is a prospective statement and therefore is not a presentation of historical information. [34] A practitioner may report on an examination of pro forma financial information if the related historical financial statements have been A. Audited. B. Audited or reviewed. C. Audited, reviewed, or compiled. D. Reviewed or compiled. • Answer (A) is correct. A practitioner may examine or review pro forma financial information only if certain conditions are met. One of these conditions is that the level of assurance provided on the pro forma financial information be limited to that given on the historical statements. Accordingly, an examination of pro forma financial information, which provides a basis for giving positive assurance, is appropriate only if the historical statements have been audited. • Answer (B) is incorrect because, if the historical statements have been reviewed, only a review of the pro forma financial information would be appropriate. • Answer (C) is incorrect because a compilation of the historical statements provides no assurance; thus, it would not provide a basis for the practitioner to examine or review the pro forma statements. • Answer (D) is incorrect because a compilation of the historical statements provides no assurance; thus, it would not provide a basis for the practitioner to examine or review the pro forma statements. [35] The practitioner's report on an examination of pro forma financial information A. Should have the same date as the related historical financial statements. B. Should be added to the report on the historical financial statements. C. Need not mention the report on the historical financial statements. D. May state an unqualified, qualified, or adverse opinion. • Answer (A) is incorrect because the report should be dated as of the completion of procedures. • Answer (B) is incorrect because the report may appear separately. Moreover, if it is combined with the report on the historical statements, the combined report may need to be dual-dated. • Answer (C) is incorrect because the report should refer to the financial statements from which the historical information is derived and state whether they were audited or reviewed. • Answer (D) is correct. The report should include an opinion on whether (1) management's assumptions provide a reasonable basis for the significant effects attributable to the transaction or event, (2) the pro forma adjustments give appropriate effect to the assumptions, and (3) the pro forma column reflects the proper application of those adjustments to the historical data. Scope limitations, uncertainties, reservations about the assumptions or the presentation (including inadequate disclosure), and other matters may lead to modification of the opinion or a disclaimer. [36] A practitioner's report on a review of pro forma financial information should include a A. Statement that the entity's internal control was not relied on in the review. B. Disclaimer of opinion on the financial statements from which the pro forma financial information is derived. C. Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur. D. Reference to the financial statements from which the historical financial information is derived. • Answer (A) is incorrect because the report should not mention internal control. • Answer (B) is incorrect because the practitioner should disclaim an opinion on the pro forma financial information. • Answer (C) is incorrect because the transaction may already have occurred. • Answer (D) is correct. A practitioner's report on pro forma information should include (1) an identification of the pro forma information, (2) a reference to the financial statements from which the historical financial information is derived and a statement as to whether such financial statements were audited or reviewed, (3) a statement that the review was made in accordance with standards established by the AICPA, (4) a caveat that a review is substantially less in scope than an examination and that no opinion is expressed, (5) a separate paragraph explaining the objective of pro forma financial information and its limitations, and (6) the practitioner's conclusion providing negative assurance. [37] One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is p [Show Less]