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Module A

Other Public Accounting Services

True / False Questions

1. Auditing standards apply to work on all audited financial statements and on unaudited financial statements of public and nonpublic companies. True False

2. In a review services engagement, an accountant performs some limited

procedures to achieve a moderate level of assurance. True False

3. A review service provides a basis for expressing an opinion on financial

statements. True False

4. CPA SysTrust provides assurance that a Web site meets certain

criteria. True False

5. A compilation report cannot be issued by an accountant who is not

independent. True False

6. When a new accountant is performing the current-year service, the

accountant cannot update the predecessors' report. True False

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7. When an accountant compiles prescribed forms, the compilation report always must call attention to GAAP departures and disclosure deficiencies. True False

8. An accountant associated with personal financial statements would

need to give the standard compilation report disclaimer. True False

9. Enhanced business reporting (EBR) focuses on improving business

reporting by developing a voluntary framework for presentation and disclosure of value drivers. True False

10.

For a compliance attestation engagement, the auditor accepts responsibility for compliance. True False

11.

An accountant may report on interim information presented separately from audited financial statements. True False

12.

Companies that are not subject to SEC regulations can choose to present financial information in accordance with a special purpose framework other than GAAP. True False

13.

Attestation reports on internal control effectiveness are required to be issued for all nonissuers. True False


14.

The user auditor can rely on special purpose reports on internal control of a service organization in connection with the evaluation of the client organization. True False

15.

Management does not have to accept responsibility for the effectiveness of its internal control in order for an accountant to conduct an examination of a client's internal control. True False

Multiple Choice Questions

16.

The AICPA Assurance Services Executive Committee identified five megatrends that can affect public accounting firms' business. Which of the following is not one of the megatrends it identified?

A. Information technology.

B. The shift from the industrial age to the knowledge age.

C. Globalization.

D. Merging of corporations creating fewer audit opportunities.


17.

Assurance services are defined as independent professional services that

A. Establish criteria for effective measurement of business activity.

B. Improve the quality of information or its context for decision makers.

C. Attest to the adequacy of controls over business operations.

D. Develop efficient and effective accounting systems to ensure compliance with accounting standards and policy.

18.

Many individuals are apprehensive about using the Internet to purchase items. This apprehension mainly arises from users' concerns about

A. The reliability of computer technology.

B. The time delays in Internet purchases.

C. A lack of security for information transmitted over the Internet.

D. The lack of CPA involvement in Internet company financial information.

19.

The phrase trust services refers to

A. WebTrust and SysTrust Services.

B. XBRL and SysTrust Services.

C. WebTrust and XBRL Services.

D. All AICPA designated assurance services.


20.

Which of the following is not a principle of trust service engagements?

A. Security from unauthorized use.

B. Availability of the system, products, or services.

C. Proficiency in preparing transactions.

D. Confidentiality of information.

21.

What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing integrity, availability, and confidentiality?

A. WebTrust.

B. SysTrust.

C. XBRL.

D. WebSecure.


22.

Extensible Business Reporting Language (XBRL) provides a computer-readable identifying tag for each individual item of data. The advantages of XBRL include all of the following except that it

A. Increases the speed of handling of financial data.

B. Reduces the chance of error.

C. Improves the full disclosure of financial information.

D. Permits automatic checking of information.

23.

Enhanced business reporting (EBR) focuses on improving business reporting by developing a voluntary framework for presentation and disclosure of value drivers and nonfinancial measures of performance. The advantages of EBR include all of the following except

A. More efficient and effective regulatory process.

B. Reduced financing costs for companies.

C. Better allocation of capital by investors

D. Better footnote disclosure in the companies' SEC filings.


24.

Attestation engagements include

A. Only examinations.

B. Examinations and assurance services.

C. Examinations, reviews, and agreed-upon procedures.

D. Examinations, reviews, compilations, agreed-upon procedures and assurance services.

25.

The accountant's standard report for a compilation service would not include a statement that

A. A compilation service has been performed in accordance with standards established by the AICPA.

B. Financial statement information is the representation of the owners of the business.

C. Compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data.

D. Financial statements have not been audited or reviewed and the accountant does not express an opinion or any other form of assurance.


26.

Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe Pete's count of the inventory and trace sampled items to the vendor invoices in order to determine that the value of inventory is not misstated. This service would be

A. An assurance service engagement.

B. An attestation engagement.

C. A review engagement.

D. A compilation engagement.

27.

The reporting standards for an attestation are different from those of an audit because attestation standards require

A. The report to include an opinion.

B. The report to identify the subject matter of the assertion being reported on.

C. The report requires a statement that the presentation is not in accordance with GAAP.

D. The report requires a disclosure of the procedures performed during the attestation.


28.

Attestation engagements may be more difficult than financial statement audits when

A. The establishment of suitable measurement criteria is difficult.

B. Internal controls are difficult to assess.

C. When management may not understand the underlying assumptions of the attestation.

D. When the report may be submitted to individuals with insufficient knowledge of the nature of an attestation engagement.

29.

In an agreed-upon procedures engagement, an accountant must

A. Follow the attestation standard related to internal control.

B. Follow the attestation standard related to evidential matter.

C. Include negative assurance explicitly in the report.

D. Perform all of the above.

30.

A responsible party for information to subject to an attestation engagement would not include

A. The client's controller.

B. The independent accountant.

C. The client's vice president of marketing.

D. A client employee named in a contract or regulation as being responsible for the information.


31.

Which of the following procedures would not be performed in a review of financial statements of a nonpublic company?

A. Inquire about the accounting system and bookkeeping procedures.

B. Perform analytical procedures to identify relationships and individual items that appear to be unusual.

C. Obtain an attorney's letter regarding litigation and unasserted claims.

D. Study the financial statements for indications that they conform to generally accepted accounting principles.

32.

ABC Company prepares financial statements showing the last two years, years X and Y (Year X is the year prior to year Y). The auditor performed an audit of year X and a review of year Y. The auditor may

A. Report on the year Y review and reissue the year X audit report.

B. Provide only the report concerning the year Y review.

C. Reissue the year X audit report with an explanatory paragraph disclosing that only a review was performed on year Y.

D. Notify the client that prior-year audited financial statements cannot be presented when the current-year statements have not been audited.

33.

In an agreed-upon procedures engagement, an accountant

A. Follows all of the fundamental principles of GAAS.

B. Restricts the report to specified users.

C. Includes negative assurance in the report.

D. Gives a qualified audit report.


34.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity?

A. Communicate reportable conditions discovered during the assessment of control risk.

B. Obtain a client representation letter from members of management.

C. Send bank confirmation letters to the entity's financial institutions.

D. Examine cash disbursements in the subsequent period for unrecorded liabilities.

35.

When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements

A. Might influence users' conclusions about the business if the disclosures were included.

B. Are prepared in conformity with a comprehensive basis of accounting other than GAAP.

C. Are not compiled in accordance with Statements on Standards for Accounting and Review Services.

D. Are special purpose financial statements not comparable to those of prior periods.


36.

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 cutoff tests for cash receipts and disbursements.

37.

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that

A. Justifies the reasons for departing from generally accepted principles.

B. States whether the financial statements are fairly presented in conformity with a special purpose framework.

C. Refers to the note to the financial statements that describes the special purpose framework.

D. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.


38.

Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company?

A. An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure.

B. An audit engagement to render an opinion on the entity's internal control structure.

C. A prospective engagement to project for a period of time not to exceed one year and report on the expected benefits of the entity's internal control structure.

D. A consulting engagement to provide constructive advice to the entity on its internal control structure.

39.

Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta's auditor. If Wall discovers that the statements are not suitably titled, Wall should

A. Disclose any reservations in an explanatory paragraph and qualify the opinion.

B. Apply to the state insurance commission for an advisory opinion.

C. Issue a special statutory basis report that clearly disclaims any opinion.

D. Explain in the notes to the financial statements the terminology used.


40.

When providing limited assurance that the reviewed financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should

A. Assess the risk that a material misstatement could occur in a financial statement assertion.

B. Confirm with the entity's lawyer that material loss contingencies are disclosed.

C. Understand the accounting principles of the industry in which the entity operates.

D. Develop audit plans to determine whether the entity's financial statements are fairly presented.

41.

Which of the following procedures does an accountant ordinarily perform in a compilation engagement of a nonpublic entity?

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.


42.

In reporting on a nonpublic entity's internal control over financial reporting, an accountant should include a paragraph that describes the

A. Documentary evidence regarding the control environment factors.

B. Changes in the entity's internal control since the prior report.

C. Potential benefits from the accountant's suggested improvements.

D. Inherent limitations of internal control.

43.

Compiled financial statements of a nonpublic entity 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 primarily of inquiries of entity personnel and analytical procedures applied to financial data.


44.

Hamell Corporation is making a presentation to a prospective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. In order to provide such a report, the CPA must do all of the following except

A. Obtain knowledge about the client's business.

B. Evaluate the assumptions used in preparing the projection.

C. Confirm expected sales with customers.

D. Identify key factors affecting the information.

45.

Hamell Corporation is making a presentation to a perspective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. The CPA should ensure that proper disclosure is made to indicate that

A. The $27,000,000 estimate is a best-case scenario.

B. The range of the projection is appropriate given the circumstances.

C. The range does not indicate a best- and worst-case scenario.

D. Projections are limited in their information content due to uncontrollable changes in the business environment.


46.

Which of the following is not a condition that must be met before an accountant can conduct an engagement concerning a nonpublic entity's internal control over financial reporting?

A. Management accepts responsibility for the effectiveness of its internal control.

B. Management has appropriately documented the internal controls.

C. Management's evaluation of control can be supported by sufficient evidence.

D. Management presents a written assertion about the effectiveness of its internal control.

47.

Which of the following steps is not required in performing a compliance attestation engagement?

A. Assess planning materiality.

B. Assess inherent risk.

C. Confirm restrictions with applicable third parties.

D. Consider subsequent events.

48.

An accountant's report includes the phrase "We are not aware.…" This phrase indicates that

A. An attestation was not performed.

B. Management had not established sufficient criteria for an opinion to be issued.

C. The auditor is providing negative assurance.

D. A disclaimer of opinion is presented.


49.

The procedures used in a review engagement are

A. Physical examination, reperformance, and obtaining a management representation letter.

B. Analytical procedures, reperformance, and obtaining a management representation letter.

C. Analytical procedures, inquiry, and obtaining a management representation letter.

D. Physical examination, inquiry, and obtaining a management representation letter.

50.

In a compilation engagement, the accountant

A. Provides reasonable assurance that no material misstatements exist.

B. Provides assurance that no material misstatement came to her or his attention.

C. Provides a list of procedures performed and results found.

D. Does not express an opinion.

51.

In a compilation engagement,

A. All appropriate disclosures must be presented.

B. Managers or owners may choose to omit all footnote disclosures.

C. Financial statements must be presented in prescribed forms.

D. An auditor provides only negative assurance.


52.

To perform a review of interim financial information, the auditor must

A. Have audited or be in the process of auditing the entity's latest financial statements.

B. Tested the entity's internal controls to determine that financial information is reliable.

C. Sent confirmation to third parties concerning significant related-party transactions.

D. Established sufficient criteria to form an opinion on the fair presentation of the financial information.

53.

When interim financial information is presented as supplementary information accompanying audited financial statements, the auditor should refer to the information

A. In all cases.

B. When it has not been labeled as "unaudited."

C. When it is material to the financial statement users.

D. When the information has been reviewed rather than audited.

54.

Other comprehensive basis of accounting (OCBOA) includes all of the following except

A. Statements that conform to a regulatory agency.

B. Statements prepared on a tax basis.

C. Statements that conform to accounting principles that are generally accepted.

D. Statements prepared on a cash basis.


55.

Which of the following account titles would not be appropriate for a company that prepared its financial statements using the tax basis of accounting?

A. Balance Sheet.

B. Statement of Assets, Liabilities, and Owner's Equity.

C. Statement of Revenue and Expenses.

D. Statement of Change in Partners' Capital Accounts.

56.

When a company uses a service organization to prepare its payroll, the company's auditors

A. Have no obligation concerning the internal controls at the service organization.

B. Need to understand the internal controls over the transaction regardless of the location of the control.

C. Must audit the internal controls at the service organization.

D. Should include the audit report of the service company's auditors with their auditors' report.

57.

Auditors can gain sufficient understanding of the internal controls at a service organization by

A. Reviewing the contract with the service organization.

B. Making an inquiry with management of the service organization.

C. Reviewing a report on internal controls provided by the service organization's auditors.

D. Sending a confirmation concerning internal controls to the service organization's auditors.


58.

Reports on an entity's internal control over financial reporting

A. Is required for all companies whether they report to the SEC or not.

B. Is optional for all companies whether they report to the SEC or not.

C. Is required by the PCAOB for large public companies and may be performed by a CPA for nonpublic companies.

D. Is limited to inquiry and analytical procedures for reports for non-SEC companies.

59.

During a review engagement, which of the following is not a required inquiry of management?

A. The accounting principles and practices used.

B. Significant transactions occurring near the end of the reporting period.

C. Status of uncorrected misstatements identified in previous engagements.

D. The changes made to internal controls during the period under review.

60.

During a review, the auditor is required to obtain written representations from management. Which of the following is not one of the required elements of the representation?

A. Management's responsibility for the fair presentation of the financial statements.

B. Management's belief that it has answered all inquiries fully and truthfully.

C. Management has made all adjustments identified during the review.

D. Management has disclosed information about subsequent events.


61.

AR 90 requires adequate documentation for a review engagement. Which items are required to be documented?

A. Analytical procedures, yes; management representations, no; understanding of internal controls, no.

B. Analytical procedures, no; management representations, yes; understanding of internal controls, no.

C. Analytical procedures, yes; management representations, yes; understanding of internal controls, no.

D. Analytical procedures, yes; management representations, yes; understanding of internal controls, yes.

62.

At a minimum to comply with PCAOB AS 5, an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization

A. A description of its internal controls.

B. A type one service auditors' report.

C. A type two service auditors' report.

D. A service organization control (SOC) 3 report.

63.

An auditor who is requested to provide a report on application of requirements of an appropriate financial reporting framework may not

A. Issue an opinion on the accounting treatment of a hypothetical transaction.

B. Discuss the requirements with the client's current auditors.

C. Limit the report to the sole use of specified parties.

D. State that differences in facts, circumstances, or assumptions might change the conclusion.


64.

A report on sustainability as defined by the AICPA might include all of the following except

A. Economic viability.

B. Social responsibility.

C. Environmental responsibility.

D. Internal control over financial reporting.

65.

Services in connection with unaudited historical cost financial statements is conducted by

A. International accounting firms only.

B. Regional and local public accounting firms.

C. Local CPAs only.

D. All public accounting firms.

66.

The official Statements on Standards for Accounting and Review Services are applicable to practice with

A. Audited financial statements of public companies.

B. Unaudited financial statements of public companies.

C. Unaudited financial statements of nonissuers.

D. Audited financial statements of nonissuers.


67.

Which of the following is a general standard of generally accepted attestation standards but is not a fundamental auditing principle?

A. Appropriate competence and capability.

B. Adequate knowledge in the subject matter.

C. Independence.

D. Due care.

68.

The performance of an attestation engagement on prospective financial information does not require which of the following?

A. If the basis of the prospective financial information is different than the financial statements, a reconciliation of the two must be provided.

B. Management must disclose all significant assumptions used in generating the prospective financial information.

C. Management must disclose significant accounting policies and procedures used in generating the prospective financial information.

D. Management must disclose the probability of obtaining the results included in the prospective financial information.

69.

To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except

A. Obtain knowledge about the entity's business and accounting principles.

B. Understand the internal controls used in the processes that generated the information.

C. Obtain an understanding of the process through which the information was developed.

D. Evaluate the assumptions used to prepare the information.


70.

If a nonissuer wants an accountant to perform an examination of its internal controls, the accountant should follow

A. PCAOB AS 5, "An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements."

B. AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements."

C. AICPA AU315, "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement."

D. FASB Concepts Statement No.1, "Objectives of Financial Reporting by Business Enterprises."

71.

A review service engagement involving unaudited financial statements involves

A. More work than a compilation and an audit.

B. Less work than an audit but more work than a compilation.

C. Less work than a compilation but more work than an audit.

D. More work than an audit but less work than a compilation.

72.

When accountants are not independent, which of the following reports can nevertheless be issued?

A. Compilation report.

B. Standard unqualified audit report.

C. Examination report on a forecast.

D. Examination of internal control over financial reporting.


73.

For a compliance engagement, three conditions must be met. Which of the following is not one of the three conditions?

A. Management accepts responsibility for compliance.

B. Management's evaluation of compliance is capable of evaluation and is measured against reasonable criteria.

C. Sufficient evidence is available to support management's evaluation.

D. Management provides a report attesting to the satisfactory compliance.

74.

Accountants are permitted to express "negative assurance" in which of the following reports?

A. Standard unqualified audit report on audited financial statements.

B. Compilation report on unaudited financial statements.

C. Review report on unaudited financial statements.

D. Adverse opinion report on audited financial statements.

75.

Which of the following conditions must be met before an accountant can conduct an examination of an entity's internal control?

A. Management presents its assertion about the effectiveness of its internal control in a written report.

B. Management represents that there are no internal control deficiencies.

C. The accountant represents that he or she has not conducted an audit of the financial statements.

D. The accountant has designed a significant portion of the internal controls.


76.

When interim financial information is presented in a footnote to annual financial statements, the standard audit report on the annual financial statements should

A. Not mention the interim information unless there is an exception that the auditors need to include in the report.

B. Contain an audit opinion paragraph that specifically mentions the interim financial information if it is not in conformity with the GAAP.

C. Contain an extra paragraph that gives negative assurance on the interim information if it has been reviewed.

D. Contain an extra explanatory paragraph if the interim information note is labeled "Unaudited."

77.

During a review of a nonissuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by the SSARS?

A. The basis for the preparation of financial statements.

B. Internal control deficiencies.

C. Significant transactions occurring near the end of the reporting period.

D. Material subsequent events.


78.

According to auditing standards, financial statements presented on a special purpose should not

A. Contain a note describing the special purpose framework.

B. Describe in general how the special purpose framework differs from generally accepted accounting principles.

C. Be accompanied by an audit report that gives an unqualified opinion with reference to the special purpose framework.

D. Contain a note with a quantified dollar reconciliation of the assets based on the special purpose framework with the assets based on generally accepted accounting principles.

79.

To be useful, an audit of a service organization's controls should cover a minimum of:

A. Three months.

B. Six months.

C. A year.

D. The user entity's fiscal period.

80.

In providing assurance services to clients, public accounting firms are building on their reputations for

A. Knowledge and integrity.

B. Objectivity and integrity.

C. Independence and due professional care.

D. Professionalism and trust.


81.

The AICPA Special Committee on Assurance Services identified five global "mega trends" that can affect a CPA's business. Which of the following is not one of these mega trends?

A. The decreasing supply of natural resources.

B. Information technology.

C. New social structures.

D. Demands for transparency.

82.

An assurance service is defined as a service that

A. Provides auditing services to nonfinancial information.

B. Reviews unaudited financial information.

C. Improves the quality of information for decision makers.

D. Reduces the risk in management decision making.


83.

B Harper is surfing the Internet and finds a great pair of rollerblades at a really low price. He has never heard of the company and is concerned that the product he ordered may not be the product he receives. Harper may be more willing to place an order with this company if

A. The website displays the WebTrust seal.

B. The company provides its annual report and the report of the independent auditors on its website.

C. The company provides a money-back guarantee.

D. Only a partial payment is required prior to receiving the product.

84.

Which of the following is not a principle of Trust Services?

A. Security.

B. Authentication.

C. Privacy.

D. Confidentiality.

85.

An accountant's review of unaudited financial statements would not include

A. Performing analytical procedures.

B. Confirming accounts receivable.

C. Inquiring about the accounting system and bookkeeping procedures.

D. Reading the financial statements for indications that they conform to GAAP.


86.

An accountant should reissue (not update) the prior year's report when

A. The accountant is a successor accountant performing a compilation and a compilation report was issued in the prior year.

B. The accountant is a successor accountant performing a compilation, and a review report was issued in the prior year.

C. The accountant issued a review report in the prior year and is performing a compilation in the current year.

D. The accountant issued a compilation report in the prior year and is performing a review in the current year.

87.

When an accountant compiles a prescribed form and the financial statements contain a departure from the information specified by the prescribed form, the accountant should

A. Withdraw from the engagement.

B. Issue an adverse opinion.

C. Ignore the departure because the financial statements do not purport to be in accordance with GAAP.

D. Disclose the departure in the body of the accountant's report.

88.

When an accountant is associated with a financial statement as part of a personal financial planning engagement, the accountant's report should include a statement that

A. We have not audited, reviewed, or compiled the statement.

B. These financial statements are not designed for those who are not informed about such differences.

C. We do not express an opinion or any other form of assurance on them.

D. We are not aware of any material modifications that should be made.


89.

Which of the following is not a condition that must be met for an internal control examination?


B. Management must base its evaluation of internal control on standards established by the AICPA.



90.

An accountant's standard internal control report for nonissuers is governed by

A. The Statements on Auditing Standards.

B. The Statements on Standards for Accounting and Review Services.

C. The Statements on Standards for Attestation Engagements.

D. The COSO report.

91.

The accountant's standard report for a review service would not include a statement that

A. A review service was performed in accordance with AICPA generally accepted auditing standards.

B. All information included in the representation of the management of the business.

C. A review consists primarily of making inquiries and performing analytical procedures.

D. The accountant is not aware of any material modifications that should be made to make this financial statement conform to generally accepted accounting principles.


92.

An accountant could not issue compiled financial statements that would include a report

A. Mentioning that the management has elected to omit substantively all footnote disclosures, and if they were included they might influence users' conclusions about the business.

B. Attesting to the overall fairness of the financial statements.

C. Stating that the accountant is not independent.

D. Stating that the objective of a compilation is to assist management in presenting financial information.

93.

The combination of prior-year/current-year order of lower level of service would not include

A. Review followed by compilation.

B. Audit followed by compilation.

C. Compilation followed by review.

D. Audit followed by review.

Fill in the Blank Questions

94.

Review work on unaudited financial statements consists primarily of conducting ____________________________, performing ____________________, and obtaining a management representation letter. ________________________________________


95.

Each page of the financial statements of a review service should be marked " __________________________________." ________________________________________

96.

Assurance services are _______________________________ professional services that improve the _____________________________ of information, or its ____________________________, for decision makers. ________________________________________

97.

The combination of prior-year/current-year order of the same or higher level of service would include a compilation followed by ____________________________, a _____________________________ followed by review, and a review followed by a ____________________________. ________________________________________

98.

When the current-year service is being performed by a new accountant, the _____________________________ can be asked to ___________________________ the prior report. ________________________________________

99.

Industry trade associations and regulatory agencies often use __________________________________ to specify the ____________________________ and _____________________________ of accounting information required for special purposes. ________________________________________

100.

A __________________________________ is based on expected conditions and courses of action. ________________________________________

101.

The ______________ requires the presentation of interim information outside the basic financial statements. ________________________________________


102.

The review of interim financial information _________________________ a complete assessment of internal control risk. ________________________________________

103.

Engagements to perform ______________ - ______________ procedures are not considered audits because they have a ______________________________. ________________________________________

104.

In a compilation engagement, the accountant explicitly states that __________________ and _________________ are expressed. ________________________________________

105.

In ____________________________ engagements, justifiable departures from official pronouncements are treated the same as they are in ____________________________. ________________________________________

Short Answer Questions


106.

This question is related to other public accounting services and reports. For each statement, description, or phrase (1-5), indicate the related type of engagement or report (A-F).

A. Reviews of unaudited financial statements of a nonissuerB. Compilations of financial statementsC. Reviews of unaudited interim financial statements of a public companyD. Reports on financial statements prepared according to a special purpose framework.E. Reports on compliance with contractual agreements or regulatory requirements.F. Reports on elements, accounts, or items of a financial statement

____ 1. The information should conform to the accounting principles in ASC 270, "Interim Financial Reporting."____ 2. "In our opinion, the schedule of accounts receivable referred to above presents fairly, in all material respects."____ 3. They are limited to presenting in the form of financial statements information that is the representation of management.____ 4. As described in Note 2, these financial statements were prepared on the cash receipts and disbursements basis of accounting.____ 5. They present a reasonable basis for expressing limited assurance that no material modifications should be made to the statements.


107.

This question is related to other public accounting services and reports. For each statement, description, or phrase (1-5), indicate the related type of engagement or report (A-F).

A. Reports on elements, accounts, or items of a financial statementB. Reports on compliance with contractual agreements or regulatory requirementsC. Reports on the agreed-upon proceduresD. Reports on internal controlE. Reviews of unaudited financial statements of a nonissuerF. Compilations of financial statements

____ 1. Management issues a separate report containing assertions.____ 2. "In our opinion, the schedule of inventory referred to above presents fairly, in all material respects____ 3. They are substantially less in scope than an audit in accordance with generally accepted auditing standards.____ 4. They are examinations or agreed-upon procedures about conforming to the rules and regulations of a regulatory agency.____ 5. The reports identify specific users and describe the procedures specified by the users in detail.


108.

For each term listed below (items 1-5) select the correct term (items A-F).

A. AttestationB. Assurance serviceC. CompilationD. Trust serviceE. Review serviceF. Service organization

____ 1. An engagement in which a practitioner provides limited assurance about financial information.____ 2. A situation in which the practitioner assists in assembling financial information.____ 3. An activity that results in a report on the subject matter or a claim about subject matter that is the responsibility of another party.____ 4. An entity that provides a service to another company regarding the processing of transactions or information.____ 5. Professional service aimed at improving the quality of information both financial and nonfinancial for decision makers.


109.

Complete the key words, names, and phrases in the following accountant's report on a review of financial statements (balance sheet and statements of income, comprehensive income, retained earnings, and cash flows) of a nonissuer.

We have ___________ the accompanying _____________ of Dandy Company as of December 31, 2012 and 2011, and the _____________________________________ ___________________________. A review includes primarily applying ________ _____________ to management's ______________ and making ________________ __________. A review is substantially ____________________ than an audit, the objective of which is the ___________________ regarding the financial statements ___________________. Accordingly, we _____________________________.

_______________ is responsible for the ____________________________ of the financial statements ______________________________________________ and for designing, implementing, and __________________________ relevant to the preparation and fair presentation of the financial statements.

Our responsibility is to ___________________ in accordance with ____________ _____________________________________ issued by the American Institute of Certified Public Accountants. Those standards _________________________ to obtain _______________ that there are _____________________ that should be made to the financial statements. We believe that the ___________________ provide a ___________________ for our report.

Based on our review, we are ________ of any ________________ that should be made to the accompanying financial statements in order for them to be in ____________ ________________________________.


Essay Questions

110.

Review work on unaudited financial statements consists primarily of conducting inquiries, performing analytical procedures, and obtaining a management representation letter. List the typical procedures accountants would perform on a review engagement.


111.

G. Wilson is on the board of directors of a small manufacturing company, Smith Plastics, Inc. Wilson holds a CPA certificate and is a member of the AICPA. The president of the company, J. Smith, has asked Wilson to prepare financial statements for the company to be submitted to Sixth First Bank as part of a loan request. Smith tells Wilson that the bank would like a review or an audit but would settle for a compilation from a CPA and would like Wilson to do the compilation.

Required:

Discuss under what conditions, if any, Wilson would be allowed to prepare a compilation of the financial statements of Smith Plastics, Inc.


112.

D. Prima, CPA, was engaged to review the unaudited financial statements of Rooster Restaurants, Inc., a nonpublic company. During her review, Prima found that Rooster had not capitalized leases as required by GAAP. The result was so material that Prima modified the standard review report to state that "the financial statements are not in conformity with GAAP."

Required:

Discuss whether Prima 's report is in accordance with professional standards. If not, what should she have done under the circumstances? Explain.


113.

Public accounting firms have consistently looked for additional services that might increase their profitability. To that end, CPAs can provide value to clients with assurance services.

Required:

Discuss each of the following topics.

A. Describe two of the services identified by the AICPA.B. Why would the public prefer to have a public accounting firm as a provider of these services?C. What are the possible negative consequences for public accounting firms if they provide services outside the realm of traditional accounting services?


114.

Big Ben's Toy (BBT) Company has recently outsourced its payroll operation to Mary's Payroll Service (MPS). MPS receives the changes to the payroll database (hirings, firings, rate increases, etc.) and the number of hours worked for all hourly employees. MPS calculates the payroll and sends BBT printed payroll checks and a payroll register. BBT then transfers an appropriate amount into its payroll bank account and distributes the checks. MPS also provides a list of payments to be made to third parties (IRS, insurance, pension plan, etc.). Accounts payable uses the list of third-party payments to make appropriate payments.

You have been hired to perform an audit of BBT Company. During your opening meeting with BBT management, you state that your audit plan includes inquiries of MPS and a review of the AT 801 report on internal controls at MPS. BBT's management is confused and states that BBT should not have to pay you to review controls at another organization.

Prepare a brief explanation for BBT's management as to why it is necessary to review the controls at MPS and the importance of this review to BBT Company.


Module A Other Public Accounting Services Answer Key

True / False Questions

1. Auditing standards apply to work on all audited financial statements and on unaudited financial statements of public and nonpublic companies. FALSE

Reference: Question also in study guide

AACSB: Analytic

AICPA BB: IndustryAICPA FN: Decision Making

Blooms: UnderstandDifficulty: 2 Medium

Learning Objective: A-01 Explain and provide examples of attestation engagements.Topic: Attestation Engagements

2. In a review services engagement, an accountant performs some limited procedures to achieve a moderate level of assurance. TRUE


AACSB: Communication

AICPA BB: IndustryAICPA BB: Legal

AICPA FN: Decision MakingAICPA FN: ReportingBlooms: UnderstandDifficulty: 2 Medium

Learning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare appropriate reports given specific factual circumstances.

Topic: Unaudited Financial Statements: Reviews and Compilations


3. A review service provides a basis for expressing an opinion on financial statements. FALSE







4. CPA SysTrust provides assurance that a Web site meets certain criteria. FALSE


AACSB: Analytic



Learning Objective: A-05 Explain and provide examples of assurance services engagements.Topic: Assurance Services

5. A compilation report cannot be issued by an accountant who is not independent. FALSE




AICPA FN: Decision MakingAICPA FN: Reporting





6. When a new accountant is performing the current-year service, the accountant cannot update the predecessors' report. TRUE







7. When an accountant compiles prescribed forms, the compilation report always must call attention to GAAP departures and disclosure deficiencies. FALSE








8. An accountant associated with personal financial statements would need to give the standard compilation report disclaimer. FALSE







9. Enhanced business reporting (EBR) focuses on improving business reporting by developing a voluntary framework for presentation and disclosure of value drivers. TRUE


AACSB: Analytic



Learning Objective: A-05 Explain and provide examples of assurance services engagements.Topic: Assurance Services

10. For a compliance attestation engagement, the auditor accepts responsibility for compliance. FALSE


AACSB: Analytic


Blooms: Understand


Difficulty: 2 MediumLearning Objective: A-01 Explain and provide examples of attestation engagements.

Topic: Attestation Engagements

11. An accountant may report on interim information presented separately from audited financial statements. TRUE





Learning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.Topic: Responsibilities Related to Reporting on Interim Financial Information

12. Companies that are not subject to SEC regulations can choose to present financial information in accordance with a special purpose framework other than GAAP. TRUE





Learning Objective: A-04 Define; explain; and give examples of other special reports provided by auditors; including specified elements of financial statements; special purpose frameworks and application of

requirements of appropriate financial reporting frameworks.Topic: Other Topics: Special and Restricted-Use Reports


13. Attestation reports on internal control effectiveness are required to be issued for all nonissuers. FALSE


AACSB: Analytic




14. The user auditor can rely on special purpose reports on internal control of a service organization in connection with the evaluation of the client organization. TRUE


AACSB: Analytic




15. Management does not have to accept responsibility for the effectiveness of its internal control in order for an accountant to conduct an examination of a client's internal control. FALSE


AACSB: Analytic





Multiple Choice Questions

16. The AICPA Assurance Services Executive Committee identified five megatrends that can affect public accounting firms' business. Which of the following is not one of the megatrends it identified?

A. Information technology.

B. The shift from the industrial age to the knowledge age.

C. Globalization.

D.Merging of corporations creating fewer audit opportunities.

AACSB: Analytic

AICPA BB: MarketingAICPA FN: Risk Analysis

Blooms: RememberDifficulty: 2 Medium

Learning Objective: A-05 Explain and provide examples of assurance services engagements.Source: Original

Topic: Assurance Services


17. Assurance services are defined as independent professional services that

A. Establish criteria for effective measurement of business activity.

B. Improve the quality of information or its context for decision makers.

C. Attest to the adequacy of controls over business operations.

D. Develop efficient and effective accounting systems to ensure compliance with accounting standards and policy.

AACSB: Analytic


Blooms: RememberDifficulty: 1 Easy



18. Many individuals are apprehensive about using the Internet to purchase items. This apprehension mainly arises from users' concerns about

A. The reliability of computer technology.

B. The time delays in Internet purchases.

C. A lack of security for information transmitted over the Internet.

D. The lack of CPA involvement in Internet company financial information.

AACSB: Analytic






19. The phrase trust services refers to

A.WebTrust and SysTrust Services.

B. XBRL and SysTrust Services.

C. WebTrust and XBRL Services.

D. All AICPA designated assurance services.

AACSB: Analytic

AICPA BB: MarketingAICPA FN: ResearchBlooms: RememberDifficulty: 2 Medium



20. Which of the following is not a principle of trust service engagements?

A. Security from unauthorized use.

B. Availability of the system, products, or services.

C. Proficiency in preparing transactions.

D. Confidentiality of information.

AACSB: Analytic


Blooms: ApplyDifficulty: 2 Medium




21. What is the appropriate name for an assurance service provided by a CPA regarding a client's commercial Internet site with reference to the principles of privacy, security, processing integrity, availability, and confidentiality?

A.WebTrust.

B. SysTrust.

C. XBRL.

D. WebSecure.

AACSB: Analytic



Learning Objective: A-05 Explain and provide examples of assurance services engagements.Source: AICPA


22. Extensible Business Reporting Language (XBRL) provides a computer-readable identifying tag for each individual item of data. The advantages of XBRL include all of the following except that it

A. Increases the speed of handling of financial data.

B. Reduces the chance of error.

C. Improves the full disclosure of financial information.

D. Permits automatic checking of information.

AACSB: Analytic






23. Enhanced business reporting (EBR) focuses on improving business reporting by developing a voluntary framework for presentation and disclosure of value drivers and nonfinancial measures of performance. The advantages of EBR include all of the following except

A. More efficient and effective regulatory process.

B. Reduced financing costs for companies.

C. Better allocation of capital by investors

D.Better footnote disclosure in the companies' SEC filings.

AACSB: Analytic


Blooms: ApplyDifficulty: 1 Easy



24. Attestation engagements include

A. Only examinations.

B. Examinations and assurance services.

C. Examinations, reviews, and agreed-upon procedures.

D. Examinations, reviews, compilations, agreed-upon procedures and assurance services.

AACSB: Analytic

AICPA BB: MarketingAICPA FN: Research


Learning Objective: A-01 Explain and provide examples of attestation engagements.


Source: OriginalTopic: Attestation

25. The accountant's standard report for a compilation service would not include a statement that

A. A compilation service has been performed in accordance with standards established by the AICPA.

B. Financial statement information is the representation of the owners of the business.

C. Compilation service consists primarily of inquiries of company personnel and analytical procedures applied to financial data.

D. Financial statements have not been audited or reviewed and the accountant does not express an opinion or any other form of assurance.


AICPA BB: LegalAICPA FN: Reporting

Blooms: ApplyDifficulty: 3 Hard


Source: OriginalTopic: Review

26. Shelly's Bank has loaned money to Pete's Auto Supply. The loan is collateralized by inventory. The loan also requires a CPA to observe Pete's count of the inventory and trace sampled items to the vendor invoices in order to determine that the value of inventory is not misstated. This service would be

A. An assurance service engagement.

B.An attestation engagement.

C. A review engagement.

D. A compilation engagement.

AACSB: Analytic




Learning Objective: A-01 Explain and provide examples of attestation engagements.Source: Original

Topic: Attestation

27. The reporting standards for an attestation are different from those of an audit because attestation standards require

A. The report to include an opinion.

B.The report to identify the subject matter of the assertion being reported on.

C. The report requires a statement that the presentation is not in accordance with GAAP.

D. The report requires a disclosure of the procedures performed during the attestation.





Topic: Attestation

28. Attestation engagements may be more difficult than financial statement audits when

A.The establishment of suitable measurement criteria is difficult.

B. Internal controls are difficult to assess.

C. When management may not understand the underlying assumptions of the attestation.

D. When the report may be submitted to individuals with insufficient knowledge of the nature of an attestation engagement.

AACSB: AnalyticAICPA BB: Legal

AICPA FN: Risk Analysis




Topic: Attestation

29. In an agreed-upon procedures engagement, an accountant must

A. Follow the attestation standard related to internal control.

B.Follow the attestation standard related to evidential matter.

C. Include negative assurance explicitly in the report.

D. Perform all of the above.


AICPA FN: ResearchBlooms: Apply

Difficulty: 3 HardLearning Objective: A-01 Explain and provide examples of attestation engagements.


30. A responsible party for information to subject to an attestation engagement would not include

A. The client's controller.

B.The independent accountant.

C. The client's vice president of marketing.

D. A client employee named in a contract or regulation as being responsible for the information.






Topic: Attestation

31. Which of the following procedures would not be performed in a review of financial statements of a nonpublic company?

A. Inquire about the accounting system and bookkeeping procedures.

B. Perform analytical procedures to identify relationships and individual items that appear to be unusual.

C. Obtain an attorney's letter regarding litigation and unasserted claims.

D. Study the financial statements for indications that they conform to generally accepted accounting principles.


AICPA FN: Risk AnalysisBlooms: Apply

Difficulty: 2 MediumLearning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare

appropriate reports given specific factual circumstances.Source: Original

Topic: Review

32. ABC Company prepares financial statements showing the last two years, years X and Y (Year X is the year prior to year Y). The auditor performed an audit of year X and a review of year Y. The auditor may

A.Report on the year Y review and reissue the year X audit report.

B. Provide only the report concerning the year Y review.

C. Reissue the year X audit report with an explanatory paragraph disclosing that only a review was performed on year Y.

D. Notify the client that prior-year audited financial statements cannot be presented when the current-year statements have not been audited.


AICPA BB: LegalAICPA FN: Risk Analysis

Blooms: Apply




Topic: Review

33. In an agreed-upon procedures engagement, an accountant

A. Follows all of the fundamental principles of GAAS.

B.Restricts the report to specified users.

C. Includes negative assurance in the report.

D. Gives a qualified audit report.





34. Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonpublic entity?

A. Communicate reportable conditions discovered during the assessment of control risk.

B.Obtain a client representation letter from members of management.

C. Send bank confirmation letters to the entity's financial institutions.

D. Examine cash disbursements in the subsequent period for unrecorded liabilities.



Difficulty: 2 Medium



Source: AICPATopic: Review

35. When an accountant is engaged to compile a nonpublic entity's financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements

A.Might influence users' conclusions about the business if the disclosures were included.

B. Are prepared in conformity with a comprehensive basis of accounting other than GAAP.

C. Are not compiled in accordance with Statements on Standards for Accounting and Review Services.

D. Are special purpose financial statements not comparable to those of prior periods.




appropriate reports given specific factual circumstances.Source: AICPA

Topic: Compilation

36. 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 cutoff tests for cash receipts and disbursements.

AACSB: Analytic




Learning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.Source: AICPA

Topic: Interim Statements

37. An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include a separate explanatory paragraph before the opinion paragraph that

A. Justifies the reasons for departing from generally accepted principles.

B. States whether the financial statements are fairly presented in conformity with a special purpose framework.

C. Refers to the note to the financial statements that describes the special purpose framework.

D. Explains how the results of operations differ from financial statements prepared in conformity with generally accepted accounting principles.





requirements of appropriate financial reporting frameworks.Source: AICPA

Topic: Special Purpose Frameworks


38. Which of the following best describes an engagement to report on an entity's internal control over financial reporting for a nonpublic company?

A.An attestation engagement to examine and report on management's written assertions about the effectiveness of its internal control structure.

B. An audit engagement to render an opinion on the entity's internal control structure.

C. A prospective engagement to project for a period of time not to exceed one year and report on the expected benefits of the entity's internal control structure.

D. A consulting engagement to provide constructive advice to the entity on its internal control structure.




Source: AICPATopic: Attestation

39. Delta Life Insurance Co. prepares its financial statements on an accounting basis insurance companies use pursuant to the rules of a state insurance commission. Wall, CPA, is Delta's auditor. If Wall discovers that the statements are not suitably titled, Wall should

A.Disclose any reservations in an explanatory paragraph and qualify the opinion.

B. Apply to the state insurance commission for an advisory opinion.

C. Issue a special statutory basis report that clearly disclaims any opinion.

D. Explain in the notes to the financial statements the terminology used.



Blooms: Apply


Difficulty: 2 MediumLearning Objective: A-04 Define; explain; and give examples of other special reports provided by auditors;

including specified elements of financial statements; special purpose frameworks and application of requirements of appropriate financial reporting frameworks.

Source: AICPATopic: Special Purpose Frameworks

40. When providing limited assurance that the reviewed financial statements of a nonpublic entity require no material modifications to be in accordance with generally accepted accounting principles, the accountant should

A. Assess the risk that a material misstatement could occur in a financial statement assertion.

B. Confirm with the entity's lawyer that material loss contingencies are disclosed.

C. Understand the accounting principles of the industry in which the entity operates.

D. Develop audit plans to determine whether the entity's financial statements are fairly presented.



Difficulty: 3 HardLearning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare

appropriate reports given specific factual circumstances.Source: AICPATopic: Review


41. Which of the following procedures does an accountant ordinarily perform in a compilation engagement of a nonpublic entity?

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.



Difficulty: 1 EasyLearning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare

appropriate reports given specific factual circumstances.Source: AICPA

Topic: Compilation

42. In reporting on a nonpublic entity's internal control over financial reporting, an accountant should include a paragraph that describes the

A. Documentary evidence regarding the control environment factors.

B. Changes in the entity's internal control since the prior report.

C. Potential benefits from the accountant's suggested improvements.

D.Inherent limitations of internal control.




Learning Objective: A-01 Explain and provide examples of attestation engagements.


Source: AICPATopic: Attestation

43. Compiled financial statements of a nonpublic entity 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 primarily of inquiries of entity personnel and analytical procedures applied to financial data.





Source: AICPATopic: Compilation


44. Hamell Corporation is making a presentation to a prospective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. In order to provide such a report, the CPA must do all of the following except

A. Obtain knowledge about the client's business.

B. Evaluate the assumptions used in preparing the projection.

C. Confirm expected sales with customers.

D. Identify key factors affecting the information.






45. Hamell Corporation is making a presentation to a perspective investor. The presentation includes a projection showing that the company's sales will be between $25,000,000 and $27,000,000 within the next three years. Hamell believes the information will be better received if its CPA provides an attestation report on the projection. The CPA should ensure that proper disclosure is made to indicate that

A. The $27,000,000 estimate is a best-case scenario.

B. The range of the projection is appropriate given the circumstances.

C. The range does not indicate a best- and worst-case scenario.

D. Projections are limited in their information content due to uncontrollable changes in the business environment.





46. Which of the following is not a condition that must be met before an accountant can conduct an engagement concerning a nonpublic entity's internal control over financial reporting?


B.Management has appropriately documented the internal controls.








Topic: Attestation

47. Which of the following steps is not required in performing a compliance attestation engagement?

A. Assess planning materiality.

B. Assess inherent risk.

C. Confirm restrictions with applicable third parties.

D. Consider subsequent events.





Topic: Compilation

48. An accountant's report includes the phrase "We are not aware.…" This phrase indicates that

A. An attestation was not performed.

B. Management had not established sufficient criteria for an opinion to be issued.

C. The auditor is providing negative assurance.

D. A disclaimer of opinion is presented.






Topic: Review

49. The procedures used in a review engagement are

A. Physical examination, reperformance, and obtaining a management representation letter.

B. Analytical procedures, reperformance, and obtaining a management representation letter.

C. Analytical procedures, inquiry, and obtaining a management representation letter.

D. Physical examination, inquiry, and obtaining a management representation letter.





Topic: Review

50. In a compilation engagement, the accountant

A. Provides reasonable assurance that no material misstatements exist.

B. Provides assurance that no material misstatement came to her or his attention.

C. Provides a list of procedures performed and results found.

D.Does not express an opinion.




appropriate reports given specific factual circumstances.


Source: OriginalTopic: Compilation

51. In a compilation engagement,

A. All appropriate disclosures must be presented.

B.Managers or owners may choose to omit all footnote disclosures.

C. Financial statements must be presented in prescribed forms.

D. An auditor provides only negative assurance.





Topic: Compilation

52. To perform a review of interim financial information, the auditor must

A.Have audited or be in the process of auditing the entity's latest financial statements.

B. Tested the entity's internal controls to determine that financial information is reliable.

C. Sent confirmation to third parties concerning significant related-party transactions.

D. Established sufficient criteria to form an opinion on the fair presentation of the financial information.



Difficulty: 2 MediumLearning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.

Source: OriginalTopic: Interim Statements


53. When interim financial information is presented as supplementary information accompanying audited financial statements, the auditor should refer to the information

A. In all cases.

B.When it has not been labeled as "unaudited."

C. When it is material to the financial statement users.

D. When the information has been reviewed rather than audited.



Difficulty: 3 HardLearning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.

Source: OriginalTopic: Interim Statements

54. Other comprehensive basis of accounting (OCBOA) includes all of the following except

A. Statements that conform to a regulatory agency.

B. Statements prepared on a tax basis.

C. Statements that conform to accounting principles that are generally accepted.

D. Statements prepared on a cash basis.





Source: Original


Topic: Special Purpose Frameworks

55. Which of the following account titles would not be appropriate for a company that prepared its financial statements using the tax basis of accounting?

A.Balance Sheet.

B. Statement of Assets, Liabilities, and Owner's Equity.

C. Statement of Revenue and Expenses.

D. Statement of Change in Partners' Capital Accounts.



Difficulty: 1 EasyLearning Objective: A-04 Define; explain; and give examples of other special reports provided by auditors;


Source: OriginalTopic: Special Purpose Frameworks

56. When a company uses a service organization to prepare its payroll, the company's auditors

A. Have no obligation concerning the internal controls at the service organization.

B.Need to understand the internal controls over the transaction regardless of the location of the control.

C. Must audit the internal controls at the service organization.

D. Should include the audit report of the service company's auditors with their auditors' report.






57. Auditors can gain sufficient understanding of the internal controls at a service organization by

A. Reviewing the contract with the service organization.

B. Making an inquiry with management of the service organization.

C. Reviewing a report on internal controls provided by the service organization's auditors.

D. Sending a confirmation concerning internal controls to the service organization's auditors.





58. Reports on an entity's internal control over financial reporting

A. Is required for all companies whether they report to the SEC or not.

B. Is optional for all companies whether they report to the SEC or not.

C. Is required by the PCAOB for large public companies and may be performed by a CPA for nonpublic companies.

D. Is limited to inquiry and analytical procedures for reports for non-SEC companies.


AICPA BB: LegalAICPA FN: ReportingBlooms: Remember

Difficulty: 1 EasyLearning Objective: A-01 Explain and provide examples of attestation engagements.



59. During a review engagement, which of the following is not a required inquiry of management?

A. The accounting principles and practices used.

B. Significant transactions occurring near the end of the reporting period.

C. Status of uncorrected misstatements identified in previous engagements.

D.The changes made to internal controls during the period under review.





Topic: Review

60. During a review, the auditor is required to obtain written representations from management. Which of the following is not one of the required elements of the representation?

A. Management's responsibility for the fair presentation of the financial statements.

B. Management's belief that it has answered all inquiries fully and truthfully.

C. Management has made all adjustments identified during the review.

D. Management has disclosed information about subsequent events.





Topic: Review


61. AR 90 requires adequate documentation for a review engagement. Which items are required to be documented?

A. Analytical procedures, yes; management representations, no; understanding of internal controls, no.

B. Analytical procedures, no; management representations, yes; understanding of internal controls, no.

C. Analytical procedures, yes; management representations, yes; understanding of internal controls, no.

D. Analytical procedures, yes; management representations, yes; understanding of internal controls, yes.





Topic: Review

62. At a minimum to comply with PCAOB AS 5, an auditor of a public company that has material transactions processed by a service organization would have to request from the service organization

A. A description of its internal controls.

B. A type one service auditors' report.

C. A type two service auditors' report.

D. A service organization control (SOC) 3 report.






63. An auditor who is requested to provide a report on application of requirements of an appropriate financial reporting framework may not

A. Issue an opinion on the accounting treatment of a hypothetical transaction.

B. Discuss the requirements with the client's current auditors.

C. Limit the report to the sole use of specified parties.

D. State that differences in facts, circumstances, or assumptions might change the conclusion.





Source: OriginalTopic: Application of Financial Reporting Framework

64. A report on sustainability as defined by the AICPA might include all of the following except

A. Economic viability.

B. Social responsibility.

C. Environmental responsibility.

D.Internal control over financial reporting.

AACSB: Analytic






65. Services in connection with unaudited historical cost financial statements is conducted by

A. International accounting firms only.

B. Regional and local public accounting firms.

C. Local CPAs only.

D.All public accounting firms.

Reference: Question also found in textbook

AACSB: Analytic




Source: OriginalTopic: Review and Compilation


66. The official Statements on Standards for Accounting and Review Services are applicable to practice with

A. Audited financial statements of public companies.

B. Unaudited financial statements of public companies.

C. Unaudited financial statements of nonissuers.

D. Audited financial statements of nonissuers.






Topic: Review and Compilation

67. Which of the following is a general standard of generally accepted attestation standards but is not a fundamental auditing principle?

A. Appropriate competence and capability.

B.Adequate knowledge in the subject matter.

C. Independence.

D. Due care.







68. The performance of an attestation engagement on prospective financial information does not require which of the following?

A. If the basis of the prospective financial information is different than the financial statements, a reconciliation of the two must be provided.

B. Management must disclose all significant assumptions used in generating the prospective financial information.

C. Management must disclose significant accounting policies and procedures used in generating the prospective financial information.

D.Management must disclose the probability of obtaining the results included in the prospective financial information.







69. To perform an attestation engagement on prospective information or pro forma information, accountants must do all of the following except

A. Obtain knowledge about the entity's business and accounting principles.

B.Understand the internal controls used in the processes that generated the information.

C. Obtain an understanding of the process through which the information was developed.

D. Evaluate the assumptions used to prepare the information.







70. If a nonissuer wants an accountant to perform an examination of its internal controls, the accountant should follow

A. PCAOB AS 5, "An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements."

B.AICPA AT 501, "An Examination of an Entity's Internal Control over Financial Reporting That Is Integrated with an Audit of Its Financial Statements."

C. AICPA AU315, "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement."

D. FASB Concepts Statement No.1, "Objectives of Financial Reporting by Business Enterprises."






71. A review service engagement involving unaudited financial statements involves

A. More work than a compilation and an audit.

B.Less work than an audit but more work than a compilation.

C. Less work than a compilation but more work than an audit.

D. More work than an audit but less work than a compilation.


AACSB: Analytic


AICPA BB: Resource ManagementAICPA FN: Risk Analysis




72. When accountants are not independent, which of the following reports can nevertheless be issued?

A.Compilation report.

B. Standard unqualified audit report.

C. Examination report on a forecast.

D. Examination of internal control over financial reporting.



AICPA FN: ReportingBlooms: Apply



Topic: Compilation


73. For a compliance engagement, three conditions must be met. Which of the following is not one of the three conditions?

A. Management accepts responsibility for compliance.

B. Management's evaluation of compliance is capable of evaluation and is measured against reasonable criteria.

C. Sufficient evidence is available to support management's evaluation.

D.Management provides a report attesting to the satisfactory compliance.






74. Accountants are permitted to express "negative assurance" in which of the following reports?

A. Standard unqualified audit report on audited financial statements.

B. Compilation report on unaudited financial statements.

C. Review report on unaudited financial statements.

D. Adverse opinion report on audited financial statements.








75. Which of the following conditions must be met before an accountant can conduct an examination of an entity's internal control?

A.Management presents its assertion about the effectiveness of its internal control in a written report.

B. Management represents that there are no internal control deficiencies.

C. The accountant represents that he or she has not conducted an audit of the financial statements.

D. The accountant has designed a significant portion of the internal controls.







76. When interim financial information is presented in a footnote to annual financial statements, the standard audit report on the annual financial statements should

A.Not mention the interim information unless there is an exception that the auditors need to include in the report.

B. Contain an audit opinion paragraph that specifically mentions the interim financial information if it is not in conformity with the GAAP.

C. Contain an extra paragraph that gives negative assurance on the interim information if it has been reviewed.

D. Contain an extra explanatory paragraph if the interim information note is labeled "Unaudited."





Learning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.Source: Original

Topic: Interim Statements


77. During a review of a nonissuer's financial statements, accountants are required to make certain inquiries of management. Which of the following inquiries is not required by the SSARS?

A. The basis for the preparation of financial statements.

B. Internal control deficiencies.

C. Significant transactions occurring near the end of the reporting period.

D. Material subsequent events.






Topic: Review


78. According to auditing standards, financial statements presented on a special purpose should not

A. Contain a note describing the special purpose framework.

B. Describe in general how the special purpose framework differs from generally accepted accounting principles.

C. Be accompanied by an audit report that gives an unqualified opinion with reference to the special purpose framework.

D.Contain a note with a quantified dollar reconciliation of the assets based on the special purpose framework with the assets based on generally accepted accounting principles.




Difficulty: 3 HardLearning Objective: A-04 Define; explain; and give examples of other special reports provided by auditors;


Source: OriginalTopic: Special Purpose Frameworks


79. To be useful, an audit of a service organization's controls should cover a minimum of:

A. Three months.

B.Six months.

C. A year.

D. The user entity's fiscal period.






80. In providing assurance services to clients, public accounting firms are building on their reputations for

A. Knowledge and integrity.

B.Objectivity and integrity.

C. Independence and due professional care.

D. Professionalism and trust.


AACSB: Ethics






81. The AICPA Special Committee on Assurance Services identified five global "mega trends" that can affect a CPA's business. Which of the following is not one of these mega trends?

A.The decreasing supply of natural resources.

B. Information technology.

C. New social structures.

D. Demands for transparency.




Difficulty: 1 EasyLearning Objective: A-05 Explain and provide examples of assurance services engagements.

Source: OriginalTopic: Assurance Services


82. An assurance service is defined as a service that

A. Provides auditing services to nonfinancial information.

B. Reviews unaudited financial information.

C. Improves the quality of information for decision makers.

D. Reduces the risk in management decision making.




Difficulty: 1 EasyLearning Objective: A-05 Explain and provide examples of assurance services engagements.



83. B Harper is surfing the Internet and finds a great pair of rollerblades at a really low price. He has never heard of the company and is concerned that the product he ordered may not be the product he receives. Harper may be more willing to place an order with this company if

A.The website displays the WebTrust seal.

B. The company provides its annual report and the report of the independent auditors on its website.

C. The company provides a money-back guarantee.

D. Only a partial payment is required prior to receiving the product.


AACSB: Analytic






84. Which of the following is not a principle of Trust Services?

A. Security.

B.Authentication.

C. Privacy.

D. Confidentiality.




Difficulty: 2 MediumLearning Objective: A-05 Explain and provide examples of assurance services engagements.


85. An accountant's review of unaudited financial statements would not include

A. Performing analytical procedures.

B.Confirming accounts receivable.

C. Inquiring about the accounting system and bookkeeping procedures.

D. Reading the financial statements for indications that they conform to GAAP.

Reference: Question also found in study guide






Topic: Review

86. An accountant should reissue (not update) the prior year's report when

A. The accountant is a successor accountant performing a compilation and a compilation report was issued in the prior year.

B. The accountant is a successor accountant performing a compilation, and a review report was issued in the prior year.

C. The accountant issued a review report in the prior year and is performing a compilation in the current year.

D. The accountant issued a compilation report in the prior year and is performing a review in the current year.








87. When an accountant compiles a prescribed form and the financial statements contain a departure from the information specified by the prescribed form, the accountant should

A. Withdraw from the engagement.

B. Issue an adverse opinion.

C. Ignore the departure because the financial statements do not purport to be in accordance with GAAP.

D.Disclose the departure in the body of the accountant's report.








88. When an accountant is associated with a financial statement as part of a personal financial planning engagement, the accountant's report should include a statement that

A.We have not audited, reviewed, or compiled the statement.

B. These financial statements are not designed for those who are not informed about such differences.

C. We do not express an opinion or any other form of assurance on them.

D. We are not aware of any material modifications that should be made.








89. Which of the following is not a condition that must be met for an internal control examination?


B.Management must base its evaluation of internal control on standards established by the AICPA.






Difficulty: 3 HardLearning Objective: A-01 Explain and provide examples of attestation engagements.


90. An accountant's standard internal control report for nonissuers is governed by

A. The Statements on Auditing Standards.

B. The Statements on Standards for Accounting and Review Services.

C. The Statements on Standards for Attestation Engagements.

D. The COSO report.



AICPA FN: Research




Topic: Attestation

91. The accountant's standard report for a review service would not include a statement that

A.A review service was performed in accordance with AICPA generally accepted auditing standards.

B. All information included in the representation of the management of the business.

C. A review consists primarily of making inquiries and performing analytical procedures.

D. The accountant is not aware of any material modifications that should be made to make this financial statement conform to generally accepted accounting principles.








92. An accountant could not issue compiled financial statements that would include a report

A. Mentioning that the management has elected to omit substantively all footnote disclosures, and if they were included they might influence users' conclusions about the business.

B.Attesting to the overall fairness of the financial statements.

C. Stating that the accountant is not independent.

D. Stating that the objective of a compilation is to assist management in presenting financial information.








93. The combination of prior-year/current-year order of lower level of service would not include

A. Review followed by compilation.

B. Audit followed by compilation.

C. Compilation followed by review.

D. Audit followed by review.







Fill in the Blank Questions

94. Review work on unaudited financial statements consists primarily of conducting ____________________________, performing ____________________, and obtaining a management representation letter. inquiry; analytical procedures



95. Each page of the financial statements of a review service should be marked " __________________________________." see accountant's review report


96. Assurance services are _______________________________ professional

services that improve the _____________________________ of information, or its ____________________________, for decision makers. independent; quality; context


97. The combination of prior-year/current-year order of the same or

higher level of service would include a compilation followed by ____________________________, a _____________________________ followed by review, and a review followed by a ____________________________. compilation or review or audit; compilation; review or audit


98. When the current-year service is being performed by a new

accountant, the _____________________________ can be asked to ___________________________ the prior report. predecessor; reissue



99. Industry trade associations and regulatory agencies often use __________________________________ to specify the ____________________________ and _____________________________ of accounting information required for special purposes. prescribed forms; content; measurement


100. A __________________________________ is based on expected conditions

and courses of action. financial forecast


101. The ______________ requires the presentation of interim information

outside the basic financial statements. SEC


102. The review of interim financial information _________________________ a

complete assessment of internal control risk. does not require



103. Engagements to perform ______________ - ______________ procedures are not considered audits because they have a ______________________________. agreed upon; limited scope


104. In a compilation engagement, the accountant explicitly states that

__________________ and _________________ are expressed. no opinion; no assurance


105. In ____________________________ engagements, justifiable departures

from official pronouncements are treated the same as they are in ____________________________. review; audits


Short Answer Questions


106. This question is related to other public accounting services and reports. For each statement, description, or phrase (1-5), indicate the related type of engagement or report (A-F).

A. Reviews of unaudited financial statements of a nonissuerB. Compilations of financial statementsC. Reviews of unaudited interim financial statements of a public companyD. Reports on financial statements prepared according to a special purpose framework.E. Reports on compliance with contractual agreements or regulatory requirements.F. Reports on elements, accounts, or items of a financial statement

____ 1. The information should conform to the accounting principles in ASC 270, "Interim Financial Reporting."____ 2. "In our opinion, the schedule of accounts receivable referred to above presents fairly, in all material respects."____ 3. They are limited to presenting in the form of financial statements information that is the representation of management.____ 4. As described in Note 2, these financial statements were prepared on the cash receipts and disbursements basis of accounting.____ 5. They present a reasonable basis for expressing limited assurance that no material modifications should be made to the statements.

1. C, 2. F, 3. B, 4. D, 5. A





Learning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.Learning Objective: A-04 Define; explain; and give examples of other special reports provided by auditors;


Source: OriginalTopic: Other Reports


107. This question is related to other public accounting services and reports. For each statement, description, or phrase (1-5), indicate the related type of engagement or report (A-F).

A. Reports on elements, accounts, or items of a financial statementB. Reports on compliance with contractual agreements or regulatory requirementsC. Reports on the agreed-upon proceduresD. Reports on internal controlE. Reviews of unaudited financial statements of a nonissuerF. Compilations of financial statements

____ 1. Management issues a separate report containing assertions.____ 2. "In our opinion, the schedule of inventory referred to above presents fairly, in all material respects____ 3. They are substantially less in scope than an audit in accordance with generally accepted auditing standards.____ 4. They are examinations or agreed-upon procedures about conforming to the rules and regulations of a regulatory agency.____ 5. The reports identify specific users and describe the procedures specified by the users in detail.

1. D, 2. A, 3. E, 4. B, 5. C




Learning Objective: A-01 Explain and provide examples of attestation engagements.Learning Objective: A-03 Explain auditors' responsibilities related to reporting on interim financial information.


requirements of appropriate financial reporting frameworks.Source: Original

Topic: Other Reports


108. For each term listed below (items 1-5) select the correct term (items A-F).

A. AttestationB. Assurance serviceC. CompilationD. Trust serviceE. Review serviceF. Service organization

____ 1. An engagement in which a practitioner provides limited assurance about financial information.____ 2. A situation in which the practitioner assists in assembling financial information.____ 3. An activity that results in a report on the subject matter or a claim about subject matter that is the responsibility of another party.____ 4. An entity that provides a service to another company regarding the processing of transactions or information.____ 5. Professional service aimed at improving the quality of information both financial and nonfinancial for decision makers.

1. E, 2. C, 3. A, 4. F, 5. B

AACSB: Analytic



Learning Objective: A-01 Explain and provide examples of attestation engagements.Learning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare

appropriate reports given specific factual circumstances.Learning Objective: A-05 Explain and provide examples of assurance services engagements.

Source: OriginalTopic: Other Reports


109. Complete the key words, names, and phrases in the following accountant's report on a review of financial statements (balance sheet and statements of income, comprehensive income, retained earnings, and cash flows) of a nonissuer.

We have ___________ the accompanying _____________ of Dandy Company as of December 31, 2012 and 2011, and the _____________________________________ ___________________________. A review includes primarily applying ________ _____________ to management's ______________ and making ________________ __________. A review is substantially ____________________ than an audit, the objective of which is the ___________________ regarding the financial statements ___________________. Accordingly, we _____________________________.

_______________ is responsible for the ____________________________ of the financial statements ______________________________________________ and for designing, implementing, and __________________________ relevant to the preparation and fair presentation of the financial statements.

Our responsibility is to ___________________ in accordance with ____________ _____________________________________ issued by the American Institute of Certified Public Accountants. Those standards _________________________ to obtain _______________ that there are _____________________ that should be made to the financial statements. We believe that the ___________________ provide a ___________________ for our report.

Based on our review, we are ________ of any ________________ that should be made to the accompanying financial statements in order for them to be in ____________ ________________________________.

We have reviewed the accompanying balance sheet of Dandy Company as of December 31, 2012 and 2011, and the related statements of income, comprehensive income, retained earnings, and cash flows. A review includes primarily applying analytical procedures to management's financial data and making inquiries of


company management. A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Management is responsible for the preparation and fair presentation of the financial statements in accordance with generally accepted accounting principles and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

Our responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require us to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. We believe that the results of our procedures provide a reasonable basis for our report.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.



Difficulty: 3 HardLearning Objective: A-02 Describe reviews and compilations of unaudited financial statements and prepare appropriate reports given specific factual circumstances.Feedback: Reference: Question also found in study

guideSource: Original


Essay Questions


110. Review work on unaudited financial statements consists primarily of conducting inquiries, performing analytical procedures, and obtaining a management representation letter. List the typical procedures accountants would perform on a review engagement.

The typical review procedures would include

1. Obtaining knowledge of the client's business.2. Inquiring about the accounting system.3. Inquiring about the preparation of the financial statements in accordance with GAAP.4. Inquiring about accounting principles and practices used.5. Inquiring about significant transactions that occurred or were recognized near the end of the reporting period.6. Inquiring about the status of uncorrected misstatements identified during previous engagements.7. Inquiring about questions that have arisen during the engagement.8. Inquiring about subsequent events.9. Inquiring about significant journal entries or adjustments.10. Inquiring about communications with regulatory agencies.11. Performing analytical procedures to identify relationships and individual items that appear to be unusual.12. Reading the financial statements to determine whether they conform to GAAP.13. Inquiring of officers and directors on accounting matters.14. Performing any procedures considered necessary.15. Preparing working papers.16. Obtaining a written representation letter.







111. G. Wilson is on the board of directors of a small manufacturing company, Smith Plastics, Inc. Wilson holds a CPA certificate and is a member of the AICPA. The president of the company, J. Smith, has asked Wilson to prepare financial statements for the company to be submitted to Sixth First Bank as part of a loan request. Smith tells Wilson that the bank would like a review or an audit but would settle for a compilation from a CPA and would like Wilson to do the compilation.

Required:

Discuss under what conditions, if any, Wilson would be allowed to prepare a compilation of the financial statements of Smith Plastics, Inc.

Wilson is not independent of Smith Plastics since he is a director. However, this does not prevent him from issuing a compilation report if he follows the requirements of SSARS 1. A separate last paragraph of the report should state: "I am not independent with respect to Smith Plastics, Inc." The reason for the lack of independence may be disclosed.







112. D. Prima, CPA, was engaged to review the unaudited financial statements of Rooster Restaurants, Inc., a nonpublic company. During her review, Prima found that Rooster had not capitalized leases as required by GAAP. The result was so material that Prima modified the standard review report to state that "the financial statements are not in conformity with GAAP."

Required:

Discuss whether Prima 's report is in accordance with professional standards. If not, what should she have done under the circumstances? Explain.

Prima's report is not in accordance with Statements for Accounting and Review Services. Review engagements are not audits; therefore, an adverse opinion cannot be given. Prima should have modified the standard review report by adding an explanatory paragraph to describe the known departure from GAAP. This exception would be referred to with the negative assurance provided in the last paragraph of the review report.


AICPA BB: LegalAICPA FN: Research





113. Public accounting firms have consistently looked for additional services that might increase their profitability. To that end, CPAs can provide value to clients with assurance services.

Required:

Discuss each of the following topics.

A. Describe two of the services identified by the AICPA.B. Why would the public prefer to have a public accounting firm as a provider of these services?C. What are the possible negative consequences for public accounting firms if they provide services outside the realm of traditional accounting services?

A. Students may choose any two of the following:

1. SysTrust service: An assurance service that reviews a client's information system to provide assurance to business partners concerning the security, privacy, confidentiality of information, system availability and processing integrity.2. WebTrust service: An assurance service designed to reduce the concerns of Internet users regarding the existence of a company and the reliability of key business information placed on the website.3. XBRL service: XBRL provides a computer-readable identifying tag for each individual item of data. For example, company net profit has its own unique tag. The XBRL tag enables automated processing of business information by computer software. As a result of XBRL, computers can now treat XBRL data "intelligently": They can recognize the information in an XBRL document, select it, analyze it, store it, exchange it with other computers, and present it automatically in a variety of ways for users. XBRL greatly increases the speed of handling financial data, reduces the chance of error, and permits automatic checking of information.4. Enhanced business reporting (EBR) service: EBR focuses on improving business reporting by developing an internationally recognized, voluntary framework for presentation and disclosure of value drivers, nonfinancial performance measures, and qualitative


information. Benefits would include improved allocation of capital by investors, reduced financing costs of companies, more efficient and effective regulatory processes, strengthened global competitiveness, and enhanced stability in the capital markets.

B. The public might prefer to have these services provided by public accounting firms because of their reputation for integrity and objectivity. Often the public is skeptical of advice and recommendations provided by other professionals, such as attorneys and consultants, for example. This skepticism is often founded in the belief that recommendations are based on an economic incentive to sell a product or service that the professional represents. Public accounting firms that perform an assurance service without representing any particular product or service are acting as client advocates and are seen as such by the public.

C. The accounting profession needs to be very careful regarding the pursuit of revenues as a primary objective. First, CPAs have always been viewed as specialists in financial and business information and assurance regarding that information. As they begin to branch out into information that might be perceived as outside their expertise, the public may lose confidence in them. Second, if the profession pursues revenues without maintaining the traditional values that have been its cornerstone (i.e., independence and objectivity), the profession's image and public trust may be damaged.

AACSB: Analytic






114. Big Ben's Toy (BBT) Company has recently outsourced its payroll operation to Mary's Payroll Service (MPS). MPS receives the changes to the payroll database (hirings, firings, rate increases, etc.) and the number of hours worked for all hourly employees. MPS calculates the payroll and sends BBT printed payroll checks and a payroll register. BBT then transfers an appropriate amount into its payroll bank account and distributes the checks. MPS also provides a list of payments to be made to third parties (IRS, insurance, pension plan, etc.). Accounts payable uses the list of third-party payments to make appropriate payments.

You have been hired to perform an audit of BBT Company. During your opening meeting with BBT management, you state that your audit plan includes inquiries of MPS and a review of the AT 801 report on internal controls at MPS. BBT's management is confused and states that BBT should not have to pay you to review controls at another organization.

Prepare a brief explanation for BBT's management as to why it is necessary to review the controls at MPS and the importance of this review to BBT Company.

The outsourcing of a significant portion of a business does not alleviate the company from its responsibilities for that portion of the business. Auditing standards require the auditor to gain an understanding of internal controls over all material areas of financial reporting, and in almost all cases, payroll is material. In addition, if the company is required to report on internal controls in compliance with PCAOB Standard No. 5 (AS 5), controls over third-party providers of financial information would need to be included. Finally, if there were a failure to meet regulatory requirements, such as improperly calculating the tax liability, the appropriate regulatory body would not take action against the third-party provider but against the organization responsible for meeting these regulatory requirements.

AACSB: Analytic

AICPA BB: Critical ThinkingAICPA FN: Risk Analysis




Topic: Attestation


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