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Free AICPA CPA-Auditing Exam Questions (page: 31)

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An auditor's report would be designated a special report when it is issued in connection with:

  1. Interim financial information of a publicly held company that is subject to a limited review.
  2. Compliance with aspects of regulatory requirements related to audited financial statements.
  3. Application of accounting principles to specified transactions.
  4. Limited use prospective financial statements such as a financial projection.

Answer(s): B

Explanation:

Choice "b" is correct. An auditor's report would be designated a special report when it is issued in connection with compliance with aspects of regulatory requirements related to audited financial statements.
Choice "a" is incorrect. A "review report" (not a "special report") should be issued in connection with a limited review of interim financial information of a publicly held company. Choice "c" is incorrect. Special reports are not issued in connection with the application of accounting principles to specified transactions.
Choice "d" is incorrect. An auditor may compile, examine, or apply agreed-upon procedures to limited use prospective financial statements (PFS) such as a financial projection, but this would not constitute a special report.



When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:

  1. Explain why this basis of accounting is more useful for the readers of this entity's financial statements than GAAP.
  2. Refer to the note in the financial statements that describes management's responsibility for the financial statements.
  3. State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
  4. Include a separate explanatory paragraph that discusses the justification for, and the CPA's concurrence with, the departure from GAAP.

Answer(s): C

Explanation:

Choice "c" is correct. A report on other comprehensive basis of accounting ("OCBOA") financial statements should include an explanatory paragraph stating the basis, referring to the footnote that describes it, and indicating that it is a non-GAAP basis. Choice "a" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements does not include an evaluation of the usefulness of the basis of accounting. Choice "b" is incorrect. A report on other comprehensive basis of accounting ("OCBOA") financial statements makes reference to the note in the financial statements that describes the accounting basis, not to a note describing management's responsibility. Choice "d" is incorrect. The separate explanatory paragraph states the basis, refers to the footnote describing it, and indicates that it is a non-GAAP basis. It does not discuss the justification for the non-GAAP basis, nor does the CPA indicate concurrence.



Which option best describes the level of assurance provided in the following special reports?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

Choice "a" is correct. Positive assurance is provided in all of the listed reports except "compliance with contractual or regulatory requirements related to audited financial statements." Negative assurance is provided in this report.
Choices "b", "c", and "d" are incorrect, based on the above Explanation.



Which of the following situations would not result in restricted use language being included in an auditor's special report?

  1. A report on a specified element in a financial statement, where that element is prepared in accordance with the terms specified in a related contract.
  2. A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements.
  3. An "OCBOA" report on financial statements prepared in conformity with requirements established by a regulatory agency, assuming that the auditor's report is a matter of public record.
  4. A report on an incomplete financial presentation that is prepared in conformity with GAAP, assuming that the presentation and report will be filed with a regulatory agency and included in a document distributed to the general public.

Answer(s): D

Explanation:

Choice "d" is correct. A report on an incomplete financial presentation that is otherwise prepared in conformity with GAAP generally would contain restricted use language; however, an exception occurs when the presentation and the report are filed with a regulatory agency and included in a document distributed to the general public.
Choice "a" is incorrect. A report on a specified element in a financial statement, where that element is prepared in accordance with the terms specified in a related contract, would contain restricted use language.
Choice "b" is incorrect. A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language.
Choice "c" is incorrect. An "OCBOA" report on financial statements prepared in conformity with requirements established by a regulatory agency should contain restrictive use language. This is appropriate even though law or regulation may make the auditor's report is a matter of public record.
Compilation and Review of Financial Statements



Which of the following is true about management representations obtained during an engagement to review the financial statements of a nonissuer?

  1. Written representations from the current management are required for all periods being reported on.
  2. Written representations with respect to prior periods should not be provided by the current management if they were not present during those periods.
  3. Written representations should be addressed to members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter.
  4. Written representations need not include information concerning subsequent events.

Answer(s): A

Explanation:

Choice "a" is correct. Written representations from the current management are required for all periods being reported on.
Choice "b" is incorrect. Written representations from the current management are required for all periods being reported on, even if the current management was not present during all such periods. Choice "c" is incorrect. Written representations should be addressed to the accountant. The letter should be signed by members of management whom the accountant believes are responsible for and knowledgeable about the matters covered in the representation letter. Choice "d" is incorrect. Written representations should include information concerning subsequent events.



In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

Choice "d" is correct. Modifications are made to the standard review report only when there is a departure from generally accepted accounting principles. Neither an inability to assess risk nor a discovery of internal control deficiencies constitutes a departure from GAAP, and therefore neither would result in a modified review report. Note that assessing the risk of material misstatement due to fraud is a requirement of an audit, not a review. Also, note that testing of internal control is not required in a review of financial statements of a nonissuer. Choices "a", "b", and "c" are incorrect, based on the above Explanation.



An accountant has compiled the financial statements of a nonissuer but declines to issue a compilation report. This is an example of:

  1. An inappropriate reporting decision, because SSARS require that a report be issued whenever an accountant is associated with financial statements.
  2. An inappropriate reporting decision, if the accountant is not independent with respect to the nonpublic entity.
  3. An appropriate reporting decision, if the compiled financial statements are not expected to be used by a third party.
  4. An appropriate reporting decision, as long as the financial statements are prepared in conformity with GAAP.

Answer(s): C

Explanation:

Choice "c" is correct. If the accountant has compiled the financial statements of a nonissuer, and the compiled financial statements are not expected to be used by a third party, the accountant may decline to issue a compilation report.
Choice "a" is incorrect, since SSARS allow the accountant to decline to issue a compilation report when the compiled financial statements are not expected to be used by a third party. Choice "b" is incorrect, since there is no requirement that the accountant be independent when the accountant declines to issue a compilation report. Note that an accountant who lacks independence is still permitted to compile the financial statements of a nonissuer entity. Choice "d" is incorrect, since there is no requirement that the financial statements be prepared in conformity with GAAP when the accountant declines to issue a compilation report.



An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:

I). Each page of the financial statements is clearly marked to restrict its use.
II). A written engagement letter is used to document the understanding with the client.
III). A written representation letter is obtained from the client's management.

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): B

Explanation:

Choice "b" is correct. The accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client.
Choice "a" is incorrect, since a written engagement letter is required to document the understanding with the client, and since representation letters are not required in compilation engagements. Choice "c" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Representation letters are not required in compilation engagements.
Choice "d" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use (and a written engagement letter is used to document the understanding with the client).



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