Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?
Answer(s): B
Choice "b" is correct. In reviewing the financial statements of a nonpublic entity, one of the first steps would be to obtain sufficient knowledge of the entity's business, including its organization, operating characteristics, and products or services.Choice "a" is incorrect. In an audit, preliminary judgments about risk and materiality are used to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. Choice "c" is incorrect. In an audit, the risk of material misstatement arising from fraud must be assessed in order to determine the scope and nature of procedures to be performed. A review is substantially less in scope than an audit and consists principally of inquiries and analytical procedures. While inquiries would be made about fraud, a formal fraud risk assessment is not required.Choice "d" is incorrect. In a review of a nonissuer's financial statements, no assessment or testing of internal control is required.
An accountant's standard report issued after compiling the financial statements of a nonissuer should state that:
Answer(s): C
Choice "c" is correct. An accountant's standard report issued after compiling the financial statements of a nonissuer should state that "a compilation is limited to presenting in the form of financial statements information that is the representation of management." Choice "a" is incorrect. A review report (and not a compilation report) states that, "I am not aware of any material modifications that should be made to the accompanying financial statements." Choice "b" is incorrect. A review report (and not a compilation report) states that a review "consists principally of inquiries of company personnel and analytical procedures." Choice "d" is incorrect. A review report (and not a compilation report) states that a review "is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion."
Which of the following would be used on a review engagement?
Choice "c" is correct. A review consists of inquiries and analytical procedures. Comparison of current year and prior year account balances is an analytical procedure that would often be performed as part of a review.Choice "a" is incorrect. Examining board minutes is an audit procedure that would not typically be performed in a review.Choice "b" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not typically be performed in a review.Choice "d" is incorrect. Recalculation of expenses is an audit procedure that would not typically be performed in a review.
Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?
Answer(s): A
Choice "a" is correct. The accountant is not required to specifically assess fraud risk or to perform procedures designed to detect material misstatements due to fraud or illegal acts. Choice "b" is incorrect. Inconsequential instance of fraud or illegal acts need not be reported to management.Choice "c" is incorrect. The accountant should report to an appropriate level of management any evidence or information that comes to his or her attention indicating that fraud or an illegal act may have occurred.Choice "d" is incorrect. Information indicating that fraud or an illegal act may have occurred should be reported to an appropriate level of management, but it need not be in writing. Oral communication to management should be documented.
An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?
Choice "c" is correct. An audit may be changed to a compilation or review due to a change in client requirements. Since the creditors no longer require audited financial statements, this is a valid reason for requesting a change.Choices "a", "b", and "d" are incorrect. Client-imposed scope limitations, such as refusing to provide a signed representation letter, prohibiting correspondence with legal counsel, or refusing to allow examination of board minutes, are indicative of a lack of cooperation by management. Such limitations would not be a valid basis for changing an engagement from an audit to a compilation.
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