When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:I). The report on the unaudited financial statements should be reissued.II). The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.
Answer(s): D
Choice "d" is correct. When audited financial statements are presented in comparative form with unaudited financial statements from a prior year, the auditor should either reissue his or her report on the unaudited statements or include a separate paragraph in the current year report describing the responsibility assumed for the unaudited statements. Choices "a", "b", and "c" are incorrect, per above Explanation.
When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the Securities and Exchange Commission, such statements should be:
Answer(s): A
Choice "a" is correct. When unaudited financial statements (generally the first quarter of the following year in an annual report) are presented in comparative form with audited financial statements in documents filed with the SEC, such statements should be clearly marked as "unaudited," but should not be referred to in the auditor's report. The statements need not be withheld until audited.Choices "b", "c", and "d" are incorrect, based on above.
Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, 20X1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 20X2, and to include all GAAP disclosures for the 20X2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?
Choice "a" is correct. Compiled financial statements that omit substantially all the disclosures required by GAAP are not comparable to financial statements that do include required GAAP disclosures.Accordingly, the 20X1 statements are not comparable to the 20X2 statements and Clark cannot report on them.Choice "b" is incorrect. The lack of material misstatements does not alter the fact that the statements are not comparable and therefore Clark may not report on them. Choice "c" is incorrect. Compiled financial statements that omit substantially all of the disclosures required by GAAP are not comparable to financial statements that include such disclosures. Accordingly, Clark may not report on the comparative financial statements, even if an explanatory paragraph is added.Choice "d" is incorrect. Updating the auditor's report does not change the fact that the financial statements for the two periods are not comparable.Review of Interim Financial Information
Silver, CPA, has been hired by Andrews Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of Andrew's branch locations. Which of the following might Silver consider performing in response to this situation?
Choice "a" is correct. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in further inquiry of management. Choice "b" is incorrect. An accountant's knowledge of an entity's business and its internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in the accountant employing analytical procedures with a more precise expectation, since more precise expectations are more effective at detecting misstatements. Choices "c" and "d" are incorrect. Only choice "a" is correct, as explained above.
Davidson, CPA, is performing a review under auditing standards of Gold's interim financial information.As part of planning, Davidson reads the audit documentation from the preceding year's annual audit. Which of the following is least likely to affect Davidson's review?
Choice "d" is correct. Scope limitations relate to problems in performing the audit, and, especially since they were overcome, they would bear little relationship to procedures performed in a review. Choice "a" is incorrect. The nature of corrected misstatements should be considered, as they may be indicative of an ongoing problem. Uncorrected misstatements must also be considered as misstatements in one period often affect subsequent periods. Choice "b" is incorrect. Identified risks of material misstatement due to fraud help the accountant to identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence.Choice "c" is incorrect. Consideration of significant weaknesses in internal control helps the accountant identify the types of material misstatements that may occur in the interim financial information, and to consider the likelihood of their occurrence.
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