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The correct answer for each question is indicated by a .

1
INCORRECT A public accountant cannot express an opinion on future-oriented financial
information

True
A)

False
B)

Feedback: Although the public accountant cannot report on whether a


forecast will be achieved, he or she can provide an opinion on the suitability
of the assumptions, whether the forecast reflects such assumptions, as well
as the presentation and disclosure of the forecast and its compliance with
GAAP.

2 CORRECT
Review engagements are performed for clients who do not require an audit, but
still want a level of assurance for their financial statement users.

True
A)

False
B)

Feedback: Review engagements provide limited assurance for a lesser cost.

3
INCORRECT A compilation is a type of assurance engagement whereby the accountant
compiles financial statements based on information supplied by management.

True
A)

False
B)

Feedback: A compilation is not an assurance engagement – no


assurance is provided on the compiled information.

4
INCORRECT A projection differs from a forecast in that it includes assumptions that may not
be the most likely, in the auditors opinion.

True
A)

False
B)

Feedback: A projection includes assumptions that may not be the most likely,
in management’s opinion.

5
INCORRECT In performing a review an accountant must comply with GAAS.

True
A)

Arens/Elder/Beasley
False
B)

Feedback: Review accountants much comply with generally accepted review


standards GARS. In many ways GARS are very similar but not identical to
GAAS.

6 CORRECT
The standards set for a compilation engagement do not include a requirement
for the accountant to be independent.

True
A)

False
B)

Feedback: Under the current compilation standards there is no requirement


for the accountant to be independent.

7 CORRECT
A typical attest engagement involves three parties: a user or users; a party
responsible for making the assertion and a public accountant.

True
A)

False
B)

Feedback: The attest engagement does involve three parties. Typically the
responsible party is responsible for the assertion to the user and
acknowledges that responsibility to the public accountant.

8 CORRECT
Due to the terms of a rental agreement an audit of a stores reported sales
figures is required. This is considered an examination of other financial
information other than financial statements.

True
A)

False
B)

Feedback: This is a common type of engagement for clients’ locations


in a shopping mall. Often in a mall setting part of the store’s rent is
based upon a percentage its sales.

9
INCORRECT Auditors that specialize in embezzlement and money laundering investigation
typically will have their CBV specialization.

True
A)

False
B)

Feedback: A Certified Business Valuator (CBV) specialization focus is on


valuating businesses prior to sale or merger, estate valuations or property
valuations for martial breakdowns.

Arens/Elder/Beasley
10
INCORRECT In conducting a review engagement, the accountants work includes
corroborative inquiry and discussion.

True
A)

False
B)

Feedback: A review engagement does not require the accountant to


corroborate inquiries of management.
The correct answer for each question is indicated by a .

1
INCORRECT When performing a compilation, the accountant notices that the client has failed
to record numerous expenses, including amortization of capital assets. What
should the accountant do?
The accountant has no responsibility to verify or examine the information in
A) any way. No further steps are required.
The accountant must determine who the intended users of the information
B) are, and notify them of the omissions.
Because the financial statements will otherwise be misleading, the
accountant should require that changes be made prior to issuing the Notice
C)
to Reader.
The accountant should withdraw from the engagement and seek legal
D) advice.

Feedback: p. 692

2
INCORRECT Ca Trust Services are an example of which of the following type of engagement?

Audit.
A)

Attest.
B)

Assurance.
C)

Review.
D)

Feedback: p. 700

3 CORRECT
In an ElderCare engagement, reporting on the quality of care provided to the
elderly person is an example of a(n)

Assurance service.
A)

Consulting / facilitating service.


B)

Monitoring service.
C)

Direct service.
D)

Arens/Elder/Beasley
Feedback: p. 700

4
INCORRECT When performing a review engagement, the public accountant is referred to in
the review standards as a(n)

Assurer.
A)

Auditor.
B)

Accountant.
C)

Practitioner.
D)

Feedback: p. 687

5
INCORRECT Subject matter of an attest engagement could be any of the following except

Internal controls.
A)

Financial forecasts.
B)

Business performance measures.


C)

Compliance with regulations.


D)

Feedback: p. 700

6 CORRECT
Before issuing a comfort letter, the public accountant should

Perform a review of the interim financial statements.


A)

Perform a compilation of the interim financial statements.


B)

Perform an audit of the interim financial statements.


C)

Undertake limited procedures for the stub period.


D)

Feedback: p. 696

7
INCORRECT AuG-6 provides guidance if future-oriented financial information is included in a
prospectus and must have an audit report attached. The public accountant
reports on all of the following except
Managements assumptions are suitably supported and consistent with the
A) plans of the entity.
The forecast reflects accurately the assumptions made in preparing the
B) forecast.

Arens/Elder/Beasley
The forecast complies with GAAP in regards to its presentation and
C) disclosure.
The auditor agrees with managements assertion that the forecast will be
D) achieved.

Feedback: p. 698

8
INCORRECT Before signing and transmitting the letter of consent to the securities
commission it is recommended by the handbook that all of the following
procedures be performed except

The reading of minutes of shareholder meetings.


A)

Obtaining a new management representation letter.


B)
The reading of internal financial statements relating to the period since the
C) year-end.

The reading of the minutes of the board of directors meetings.


D)

Feedback: p. 696

9
INCORRECT A Notice to Reader report provides the financial users

No assurance.
A)

Limited assurance.
B)

Reasonable assurance.
C)

Absolute assurance.
D)

Feedback: p. 690

10
CORRECT When conducting a review, the accountant's work includes all of the following
except

Obtaining an understanding of internal control.


A)

Obtaining a general knowledge of the entity's business.


B)

Performing analytical procedures.


C)

Obtaining a representation letter from management.


D)

Feedback: p. 687-688

The correct answer for each question is indicated by a .

Arens/Elder/Beasley
1 CORRECT
Assurance services are independent professional services that improve the
quality of information or its:

Context.
A)

Profitability.
B)

Reliability.
C)

Sufficiency.
D)

2
INCORRECT The primary standards for attestation services other than historical financial
statements are the:

Accounting and Review Services.


A)

Attestation Standards.
B)

Generally Accepted Auditing Standards.


C)

Field Standards of Professional Conduct.


D)

3 CORRECT
A practitioner performing an attestation engagement may ordinarily report upon
the subject matter or a(n):

Assertion about the subject matter.


A)

Control criterion.
B)

Reliability statement.
C)

Suitable criteria.
D)

4
INCORRECT Which of the following is a basic type of attestation engagement?

Certified agreed-upon review process


A)

Taxation advisory
B)

Examination
C)

Arens/Elder/Beasley
Suitable criterion
D)

5
INCORRECT What type of an attestation engagement is similar in assurance provided to an
audit of historical financial statements?

Assessment
A)

Detailed review
B)

Evaluation
C)

Examination
D)

6
INCORRECT The circumstance most likely to make it impossible for a practitioner to issue a
review report is when the:

Criteria are only available to specified users.


A)

Subject matter contains a departure from the criteria.


B)

Company faces a going concern uncertainty.


C)

Scope of the engagement has been significantly limited.


D)

7
INCORRECT Which of the following is not an attestation form of report?

Agreed-upon procedures
A)

Assembly
B)

Examination
C)

Review
D)

8 CORRECT
A report for an agreed-upon procedure ordinarily includes:

A summary of findings.
A)

Arens/Elder/Beasley
An opinion.
B)

Negative assurance.
C)

Unlimited assurance.
D)

9
INCORRECT Which of the following is most accurate relating to attest engagements?
The engagement must be performed in accordance with both the generally
A) accepted auditing standards and the attestation standards.
Criteria only available to certain users result in CPA's report that is
B) restricted to those specified parties.
The CPA's report is on management's assertion, not the subject matter
C) itself.
The subject matter of an attest engagement may take many forms, but it
D) must be based on historical events.

10
CORRECT When an accountant issues an examination report on a financial forecast, the
report ordinarily should:
State that the forecast is presented in conformity with guidelines
A) established by the AICPA.
Provide an explanation of the differences between an examination and an
B) audit.
State that the accountant is responsible for events and circumstances not to
C) exceed one year after the report's date.
Disclaim an opinion on whether the assumptions provide a reasonable basis
D) for the projection.

11
INCORRECT Which of the following is not an objective of a practitioner's examination of
management's discussion and analysis?
Report on whether the presentation includes, in all material respects, the
A) required elements of the rules and regulations adopted by the SEC.
Report on whether the presentation is in conformity with rules and
B) regulations adopted the SEC.
Report on whether the historical financial amounts included in the
presentation have been accurately derived, in all material respects, from the
C)
company's financial statements.
Report on whether the underlying information, determinations, estimates
and assumptions provide a reasonable basis for the disclosures contained in
D)
the MD&A.

Arens/Elder/Beasley
12
INCORRECT A CPA's report relating to a Trust Services engagement is most likely to provide
assurance on:

Complementarity.
A)

Offline Privacy.
B)

Security.
C)

Trusteeship.
D)

The correct answer for each question is indicated by a .

1 CORRECT
Assurance services are independent professional services that improve the
quality of information or its:

Context.
A)

Profitability.
B)

Reliability.
C)

Sufficiency.
D)

2
INCORRECT The primary standards for attestation services other than historical financial
statements are the:

Accounting and Review Services.


A)

Attestation Standards.
B)

Generally Accepted Auditing Standards.


C)

Field Standards of Professional Conduct.


D)

3 CORRECT
A practitioner performing an attestation engagement may ordinarily report upon
the subject matter or a(n):

Assertion about the subject matter.


A)

Control criterion.
B)

Arens/Elder/Beasley
Reliability statement.
C)

Suitable criteria.
D)

4
INCORRECT Which of the following is a basic type of attestation engagement?

Certified agreed-upon review process


A)

Taxation advisory
B)

Examination
C)

Suitable criterion
D)

5
INCORRECT What type of an attestation engagement is similar in assurance provided to an
audit of historical financial statements?

Assessment
A)

Detailed review
B)

Evaluation
C)

Examination
D)

6
INCORRECT The circumstance most likely to make it impossible for a practitioner to issue a
review report is when the:

Criteria are only available to specified users.


A)

Subject matter contains a departure from the criteria.


B)

Company faces a going concern uncertainty.


C)

Scope of the engagement has been significantly limited.


D)

7
INCORRECT Which of the following is not an attestation form of report?

Arens/Elder/Beasley
Agreed-upon procedures
A)

Assembly
B)

Examination
C)

Review
D)

8 CORRECT
A report for an agreed-upon procedure ordinarily includes:

A summary of findings.
A)

An opinion.
B)

Negative assurance.
C)

Unlimited assurance.
D)

9
INCORRECT Which of the following is most accurate relating to attest engagements?
The engagement must be performed in accordance with both the generally
A) accepted auditing standards and the attestation standards.
Criteria only available to certain users result in CPA's report that is
B) restricted to those specified parties.
The CPA's report is on management's assertion, not the subject matter
C) itself.
The subject matter of an attest engagement may take many forms, but it
D) must be based on historical events.

10
CORRECT When an accountant issues an examination report on a financial forecast, the
report ordinarily should:
State that the forecast is presented in conformity with guidelines
A) established by the AICPA.
Provide an explanation of the differences between an examination and an
B) audit.
State that the accountant is responsible for events and circumstances not to
C) exceed one year after the report's date.
Disclaim an opinion on whether the assumptions provide a reasonable basis
D) for the projection.

Arens/Elder/Beasley
11
INCORRECT Which of the following is not an objective of a practitioner's examination of
management's discussion and analysis?
Report on whether the presentation includes, in all material respects, the
A) required elements of the rules and regulations adopted by the SEC.
Report on whether the presentation is in conformity with rules and
B) regulations adopted the SEC.
Report on whether the historical financial amounts included in the
presentation have been accurately derived, in all material respects, from the
C)
company's financial statements.
Report on whether the underlying information, determinations, estimates
and assumptions provide a reasonable basis for the disclosures contained in
D)
the MD&A.

12
INCORRECT A CPA's report relating to a Trust Services engagement is most likely to provide
assurance on:

Complementarity.
A)

Offline Privacy.
B)

Security.
C)

Trusteeship.
D)

The correct answer for each question is indicated by a .

1
INCORRECT Nonaudit clients sometime engage public accounting firms to perform a specified
set of audit procedures rather than a complete audit of the financial statements
taken as a whole. This type of engagement is called a(n)

Individual account engagement.


A)

Agreed-upon procedures engagement.


B)

Assurance service.
C)

Compliance audit.
D)

Feedback: Incorrect. There is no service provided to that is named Individual


Account engagement.

2
INCORRECT Even though Sarbanes-Oxley only applies to publicly traded companies, private
companies and organizations may request that public accounting firms attest to
the effectiveness of their internal controls. Several conditions must be met
before a public accounting firm can undertake such an engagement. Which of
the following is NOTone of the necessary conditions?

Arens/Elder/Beasley
Management accepts responsibility for the effectiveness of its internal
A) control.

Management's evaluation of control is based on reasonable criteria.


B)
Management's evaluation of control is be supported by an internal audit
C) review.
Management presents a written assertion about the effectiveness of its
D) internal control.

Feedback: Incorrect. This condition is required.

3
INCORRECT Which of the following statements is true concerning a compliance audit?

Compliance audits are only performed by governmental auditors.


A)
Risks such as inherent risk, control risk, and detection risk are not
B) appropriate in the planning and performance of a compliance audit.

Materiality is difficult to measure in a compliance audit.


C)

A report on compliance can only include negative assurance.


D)

Feedback: Incorrect. While governmental auditors do perform compliance


audits as a major part of their assurance responsibilities, public accountants
also provide compliance audits to their clients.

4
INCORRECT A review of unaudited financial states consists of
Conducting internal control evaluation and obtaining a management
A) representation letter.

Conducting inquiry of management and documenting internal controls.


B)
Performing analytical procedures and determining compliance with laws and
C) regulations.
Conducting inquiry of management, performing analytical procedures, and
D) obtaining a management representation letter.

Feedback: Incorrect. Reviews require conducting inquiry of management,


performing analytical procedures, and obtaining a management
representation letter.

5
INCORRECT A compilation report should include all of the following except
A statement that the compilation has been performed in accordance with
A) Statement of Standards for Accounting and Review Services.
A statement that the financial statements are the representation of
B) management.
A statement that adequate disclosure has been made concerning accounting
C) policy and practice.

Arens/Elder/Beasley
A statement that the financial statements have not been audited or
D) reviewed.

Feedback: Incorrect. This statement is included in the compilation report.

6
INCORRECT Which of the following statements is true concerning interim financial
information?

An audit of interim financial information is required for SEC companies.


A)
The accountant needs to obtain sufficient knowledge of the entity's business
and industry before undertaking an engagement on interim financial
B)
information.
An accountant may not report on financial information presented separately
C) from audited financial statements.
Interim financial information may not be included as part of a note to the
D) audited financial statements.

Feedback: Incorrect. A review is normally performed of interim financial


information.

7 CORRECT
According to AU 915, "Reports on Application of Requirements of an Appropriate
Financial Reporting Framework", which of the following is NOT allowed when
writing a report in response to a request for consultation regarding the
application of requirements of an appropriate financial reporting framework?

Providing a written report on a hypothetical transaction.


A)

Identification of the entity requesting the information.


B)
A statement that the entity's management is responsible for proper
C) accounting treatment in consultation with its own auditors.

A statement that the report is for the sole use of specified parties.
D)

Feedback: Correct. A written report on hypothetical transactions is


prohibited.

8
INCORRECT A business that executes or records transactions on behalf of a client is called
a(n)

Third-party provider.
A)

Service organization.
B)

Outsourcer.
C)

Profit center.
D)

Feedback: Incorrect. The correct term is service organization.

Arens/Elder/Beasley
9
INCORRECT The AICPA Special Committee on Assurance Services (SCAS) identified eight
mega trends that can affect a CPA's business. Which of the following is not one
of these mega trends identified by the SCAS?

Information technology.
A)

Demands for transparency.


B)

New social structures.


C)

All of the above were identified as mega trends.


D)

Feedback: Incorrect. Information technology was identified as a mega trend.

10
INCORRECT Which of the following would not be included in an auditor's report on financial
statements prepared under a special purpose framework?

A sentence that identifies the special purpose framework.


A)

Referral to the special purpose framework in the opinion sentence.


B)
A statement that the financial statements were prepared in accordance with
C) accounting principles generally accepted in the United States of America.

All of the above would be included in the report.


D)

Feedback: Incorrect. A sentence that identifies the special purpose


framework must be included in the auditor's report
The correct answer for each question is indicated by a .

1
INCORRECT You own Wobble Inc., which manufactures wooden tables. You need to hire an
accountant to prepare your quarterly financial statements and you want a report
to be issued on those financial statements. The service most likely to be
appropriate for you is a(n):

Audit.
A)

Compilation.
B)

Review.
C)

Special report.
D)

2
INCORRECT A politician has asked an accounting firm to audit his personal financial
statements with regard to his public disclosures. Which of the following is most
likely to be a greater concern on this audit than on an audit of a corporation?

Arens/Elder/Beasley
The basis of accounting used.
A)

Completeness.
B)

Presentation.
C)

Rights and obligations.


D)

3
INCORRECT Which of the following is correct about an accountant's engagement to prepare
financial statements for a client?

It results in an accountant's report with only limited assurance.


A)

Ordinarily, it results in no accountant's report.


B)

It should not be performed when the accountant lacks independence.


C)

Those financial statements must include note disclosures.


D)

4
INCORRECT Which of the following statements should not be included in an accountant's
standard report based on the compilation of a client's financial statements?
The compilation was performed in accordance with standards established by
A) the AICPA.

The accountant does not express an opinion on the financial statements.


B)
The accountant expresses only limited assurance on the financial
C) statements.

Management is responsible for the financial statements.


D)

5 CORRECT
Which of the following would be most likely to be used in a review engagement?

Comparison of the total of current year equipment to the prior year total.
A)

Confirmation of accounts receivable.


B)

Observation of the counting of inventory.


C)

Testing of the cutoff of year-end payables through vouching transactions.


D)

Arens/Elder/Beasley
6
INCORRECT Which of the following represents the highest to lowest level of assurance
provided by auditors in the performance of engagements?

An audit; a compilation; a review.


A)

A compilation; a review; an audit.


B)

A review; an audit; a compilation.


C)

An audit; a review; a compilation.


D)

7 CORRECT
What type of assurance is provided by an auditor in conjunction with a review?

Limited.
A)

Neutral.
B)

None.
C)

Positive.
D)

8
INCORRECT Which of the following is not a special purpose financial reporting framework?

Cash basis.
A)

Contractual basis.
B)

GAAP basis.
C)

Regulatory basis.
D)

9
INCORRECT Independence is required in which of the following types of CPA engagements?

Compilation.
A)

Consulting.
B)

Review.
C)

Arens/Elder/Beasley
Tax.
D)

10
INCORRECT A client wants to include a set of summary financial statements on a trifold card
which is sent to all prospective customers who have requested information on its
new cell phone. The financial statements have been audited by X & Y CPAs who
issued a standard unmodified report; X & Y believes that the summary financial
statements are fairly stated, in all material respects, in relation to the
consolidated financial statements. If X and Y are asked to issue a report to
accompany the summary financial statements it is most likely that the report
would:

Be identical to the report on the consolidated statements.


A)

Include an adverse opinion.


B)

Be issued in accordance with the specified elements reporting requirements.


C)
State whether the summary financial statements are fairly presented, in all
D) material respects, in relation to the consolidated financial statements.

11
INCORRECT A comfort letter is typically sent to whom and for what reason?

Banks when a company is applying for a loan.


A)

The Board of Directors of a company on the internal control.


B)
The underwriters of a company's securities to assist them in their
C) reasonable investigation of a registration statement.
Company management indication the types of procedures performed during
D) the audit and general findings.

12
INCORRECT Audit reports on financial statements prepared following which of the following
bases are most likely to include a restriction on use (i.e., include an alert to
users as to the intended use or purpose of the report)?

Cash basis.
A)

Contractual basis.
B)

GAAP basis.
C)

Tax Basis.
D)
The correct answer for each question is indicated by a .

Arens/Elder/Beasley
1
INCORRECT Which of the following services would be considered an assurance engagement?

Compilation of financial statements from an entitys accounting records.


A)

Providing information systems advice to a former audit client.


B)

Reporting on compliance with a universitys accreditation requirements.


C)
Providing advice on the structure of the internal audit function for an entity
D) whose external audit is performed by another firm.

2
INCORRECT Unlike auditing standards, the assurance standards do not contain a requirement
that auditors obtain

Independence of mind and in appearance


A)
Sufficient appropriate evidence to support the conclusion expressed in their
B) report.

Adequate background and knowledge in the subject matter being examined.


C)
Reasonable assurance about the subject matter as the only appropriate
D) level of assurance.

3
INCORRECT A practitioners engaged to express his or her opinion on a managements report
on the effectiveness of the companys internal control is an example of which of
the following types of engagements?

Audit engagement.
A)

Assurance engagement.
B)

Review engagement.
C)

Agreed-upon procedure engagement.


D)

4
INCORRECT Which of the following professional services would be considered an attest
engagement?

A management consulting engagement to provide IT advice to a client.


A)

An engagement to report on compliance with statutory requirements.


B)

An income tax engagement to prepare the tax return.


C)

Arens/Elder/Beasley
Compilation of financial statements from a clients accounting records.
D)

5
INCORRECT The practitioner provides absolute assurance to the user in the performance of

An assurance engagement.
A)

A review engagement.
B)

An audit engagement.
C)

None of the above.


D)

6
INCORRECT When conducting a review, the practitioners work would generally not include
which of the following procedures?

Performing analytical procedures.


A)
Obtaining a general understanding of the entitys methods and policies
B) related to the capitalization of assets.

Obtaining a representation letter from management.


C)
Observing the year-end inventory count and subsequent testing of inventory
D) counts.

7
INCORRECT A review engagement will typically
Require the practitioner to obtain an understanding of the entitys internal
A) control.
Result in a statement of limited assurance about the fair presentation of the
B) financial information.
Result in an explicit opinion about whether the financial information is
C) presented fairly.
Include only the gathering of financial data for the primary purpose of
D) preparing the financial information with the related notes.

8
INCORRECT The standard report issued by a practitioner after reviewing the financial
statements of an entity states that
A review includes evaluating the appropriateness of the reasonableness of
A) accounting estimates made by management.

Arens/Elder/Beasley
A review includes examining, on a test basis, evidence supporting the
B) amounts and disclosures in the financial statements.
Nothing has come to the practitioners attention that causes he or her to
believe that the financial statements do not present fairly, in all material
C)
respects.
The practitioner does not express an opinion or any other form of assurance
D) on the financial statements.

9
INCORRECT Financial statements of an entity that have been reviewed by an practitioner
should be accompanied by a report stating that
The scope of the inquiry and the analytical procedures performed by the
A) accountant have not been restricted.
All information included in the financial statements is the representation of
B) the management of the entity.
A review includes examining, on a test basis, evidence supporting the
C) amounts and disclosures in the financial statements.
A review is greater in scope than a compilation, the objective of which is to
D) present financial statements that are free of material misstatements.

10
CORRECT Which of the following statements is correct concerning both an engagement to
compile and an engagement to review an entitys financial statements?
The practitioner is not required to obtain an understanding of internal
A) control.

The practitioner must be independent of mind and in appearance.


B)

The practitioner expresses no assurance on the financial statements.


C)

The practitioner should obtain a written management representation letter.


D)

11
CORRECT When engaged to compile the financial statements, the practitioner is required
to possess a general knowledge of the entitys accounting principles and
practices. This requirement will most likely include obtaining an understanding of
the

Qualifications of the accounting department personnel.


A)

Risk factors associated with potential non-compliance with laws.


B)

Internal control structure in place.


C)

None of the above are required for a compilation.


D)

Arens/Elder/Beasley
12
INCORRECT When compiling the financial statements of a non-public entity, an accountant
should
Review agreements with financial institutions for restrictions on cash
A) balances.

Understand the accounting principles and practices of the entitys industry.


B)

Inquire of key personnel concerning related parties and subsequent events.


C)

Perform ratio analyses of the financial data of comparable prior periods.


D)

13
CORRECT The objectivity of an internal audit function will most likely be enhanced if the
director of the IA department reports to the entitys

Those charged with governance.


A)

Chief financial officer [CFO].


B)

Controller.
C)

Senior management team [as a group].


D)

14
CORRECT Which of the following is a service least likely provided by the internal audit
function?

Audit of financial statements.


A)

Operational auditing.
B)

Compliance reviews.
C)

Evaluation of risks and controls.


D)

15
INCORRECT Which of the following is not one of the Principles in the IIA Code of Ethics?

Integrity.
A)

Objectivity.
B)

Arens/Elder/Beasley
Due Professional Care.
C)

Competency.
D)

16
INCORRECT Which of the following is a performance standard from the International
Standards for the Professional Practice of Internal Auditing?

Purpose, authority and responsibility.


A)

Proficiency and due professional care.


B)

Independence and objectivity.


C)

Managing the internal audit function.


D)

17
INCORRECT The general accreditation granted by the Institute of Internal Auditors is known
as the

CFE.
A)

CGAP.
B)

CFSA.
C)

CIA.
D)

18
INCORRECT Which of the following is not one of the general areas of the IIAs International
Standards for the Professional Practice of Internal Auditing?

Performance standards.
A)

Implementation standards.
B)

Ethical standards.
C)

Attribute standards.
D)

19
CORRECT The four principles of the IIA Code of Ethics are

Arens/Elder/Beasley
Confidentiality, competency, objectivity, and integrity.
A)

Objectivity, independence, compliance, and due diligence.


B)

Honesty, integrity, independence, and competency.


C)

Integrity, confidentiality, independence, and compliance.


D)

1. Which of the following is not one of the major categories of auditors


services?

Your Answer: Compilation engagement.

2. Which of the following is not one of five elements exhibited by all


assurance engagements?

Your Answer: Evidence.


Correct Answer: A multi-party relationship involving a practitioner, a
responsible party, those in charge of governance, and
the intended users.

3. Which of the following is one of the basic elements required to be included


in the assurance report according to International Standards on Assurance
Engagements 3000?

Your Answer: Identification of the criteria.


Correct Answer: Summarisation of work performed.

4. Subject matter and subject matter information of an assurance


engagement can take all the following forms EXCEPT:

Your Answer: Physical characteristics.


Correct Answer: Litigation planning.

5. What is the type of assurance engagement that has as its subject matter
non-historical financial information?

Your Answer: Prospective financial information.

Arens/Elder/Beasley
6. The report on a review of financial statements should contain all of the
following basic elements except:

Your Answer: Statement of positive assurance.

7. How does the related services framework differ from the assurance
framework?

Your Answer: Related services enhance the degree of confidence


intended users can have.
Correct Answer: Related services engagements do not result in an
opinion.

8. Which of the following is not true about the subject matter of an


assurance engagement?

Your Answer: It could be International Financial Reporting Standards.

9. A responsible party does each of the following except:

Your Answer: Engages the practitioner.


Correct Answer: Selects the audit procedures.

10. The characteristics for assessing whether criteria are suitable are all the
following except:

Your Answer: International acceptance.

11. Sufficiency of evidence is:

Your Answer: The measure of the quality of evidence.


Correct Answer: The measure of the quantity of evidence.

Arens/Elder/Beasley
12. In a limited assurance engagement, the practitioner:

Your Answer: Expresses the conclusion in the negative form.

13. Professional judgement is the application of relevant training, knowledge


and experience, within the context provided by __________________, in
making informed decisions about the courses of action that are
appropriate in the circumstances of the audit engagement.

Your Answer: The Code of Professional Ethics.


Correct Answer: Auditing, accounting and ethical standards.

14. The auditor is required to prepare audit documentation sufficient to enable


an experienced auditor, having no previous connection with the audit, to
understand the _______________ in reaching conclusions on significant
matters arising during the audit.

Your Answer: The interviews conducted with employees and


management.
Correct Answer: Significant professional judgements made.

15. Professional scepticism is:

Your Answer: An attitude that includes a questioning mind, being alert


to conditions which may indicate possible misstatement
due to error or fraud, and a critical assessment of audit
evidence.

16. ISQC 1:

Your Answer: Gives the requirements designed to enable the firm to


meet the objective of quality control.
Correct Answer: All of the above.

17. The subject matter, and subject matter information, of an assurance


engagement can take many forms, such as:

Your Answer: All of the above.

Arens/Elder/Beasley
18. What standards are practitioners who perform assurance engagements
governed by no matter what type of assurance audit they are performing?

Your Answer: The IESBA Code of Ethics for Professional Accountants and
International Standards on Quality Control (ISQCs).

19. An assurance report:

Your Answer: Provides a written report containing a conclusion that


conveys the assurance obtained about the subject matter
information.

20. The audit firm must establish, maintain, document and communicate to
their personnel a system of quality control that includes policies and
procedures that address each of the following elements except:

Your Answer: Human resources.


Correct Answer: Public relations.

The correct answer for each question is indicated by a .

1
INCORRECT A public accountant cannot express an opinion on future-oriented financial
information

True
A)

False
B)

Feedback: Although the public accountant cannot report on whether a


forecast will be achieved, he or she can provide an opinion on the suitability
of the assumptions, whether the forecast reflects such assumptions, as well
as the presentation and disclosure of the forecast and its compliance with
GAAP.

2 CORRECT
Review engagements are performed for clients who do not require an audit, but
still want a level of assurance for their financial statement users.

True
A)

False
B)

Feedback: Review engagements provide limited assurance for a lesser cost.

Arens/Elder/Beasley
3
INCORRECT A compilation is a type of assurance engagement whereby the accountant
compiles financial statements based on information supplied by management.

True
A)

False
B)

Feedback: A compilation is not an assurance engagement – no


assurance is provided on the compiled information.

4
INCORRECT A projection differs from a forecast in that it includes assumptions that may not
be the most likely, in the auditors opinion.

True
A)

False
B)

Feedback: A projection includes assumptions that may not be the most likely,
in management’s opinion.

5
INCORRECT In performing a review an accountant must comply with GAAS.

True
A)

False
B)

Feedback: Review accountants much comply with generally accepted review


standards GARS. In many ways GARS are very similar but not identical to
GAAS.

6 CORRECT
The standards set for a compilation engagement do not include a requirement
for the accountant to be independent.

True
A)

False
B)

Feedback: Under the current compilation standards there is no requirement


for the accountant to be independent.

7 CORRECT
A typical attest engagement involves three parties: a user or users; a party
responsible for making the assertion and a public accountant.

True
A)

False
B)

Arens/Elder/Beasley
Feedback: The attest engagement does involve three parties. Typically the
responsible party is responsible for the assertion to the user and
acknowledges that responsibility to the public accountant.

8 CORRECT
Due to the terms of a rental agreement an audit of a stores reported sales
figures is required. This is considered an examination of other financial
information other than financial statements.

True
A)

False
B)

Feedback: This is a common type of engagement for clients’ locations


in a shopping mall. Often in a mall setting part of the store’s rent is
based upon a percentage its sales.

9
INCORRECT Auditors that specialize in embezzlement and money laundering investigation
typically will have their CBV specialization.

True
A)

False
B)

Feedback: A Certified Business Valuator (CBV) specialization focus is on


valuating businesses prior to sale or merger, estate valuations or property
valuations for martial breakdowns.

10
INCORRECT In conducting a review engagement, the accountants work includes
corroborative inquiry and discussion.

True
A)

False
B)

Feedback: A review engagement does not require the accountant to


corroborate inquiries of management.

The correct answer for each question is indicated by a .

For non-public companies not subject to the standards of the PCAOB, reports on
1 INCORRECT
internal control are an example of which of the following types of engagements?

A)Audit.

B)Attest.

C)Assurance.

D)Special reports.

Arens/Elder/Beasley
In a CPA PrimePlus engagement, visiting the client and inspecting logs,
2 CORRECT diaries, or other evidence to support that the services contracted have been
provided appropriately is an example of

A)Assurance services.

B)Consulting/facilitating services.

C)Monitoring services.

D)Direct services.

3 INCORRECT In an attest engagement, the CPA is referred to as a(n)

A)Attester.

B)Auditor.

C)Public accountant.

D)Practitioner.

When a CPA firm examines projected financial statements, their report should
4 CORRECT
include a separate paragraph that:

A)Describes the limitations on the usefulness of the presented


statements.

B)States that the CPA firm is responsible for the opinion presented for
only a specified amount of time.

C)Provides an explanation of the difference between an audit and an


examination.

D)Disclaims an opinion on whether the assumptions listed provide a


reasonable basis for the projection.

Which of the following is not considered a type of assurance service currently


5 INCORRECT
provided by CPA firms?

A)Healthcare.

B)Systems reliability & e-commerce.

Arens/Elder/Beasley
C)Estate planning.

D)Risk assessment.

6 INCORRECT Which of the following services would be considered an attest engagement?

A)Compilation of financial statements from a client's accounting records.

B)A tax engagement to prepare state and federal tax returns.

C)Providing information systems advice to a former audit client.

D)Reporting on compliance with a university's accreditation


requirements.

7 INCORRECT Compilation reports can be in any of the following forms except:

A)Compilation with full disclosure.

B)Compilation that omits substantially all disclosures.

C)Compilation with partial assurance.

D)Compilation when the accountant is not independent.

When conducting a review, the accountant's work includes would not include
8 CORRECT
which of the following procedures?

A)Confirming accounts receivable.

B)Obtaining a general understanding of the entity's compensation


methods.

C)Performing analytical procedures.

D)Obtaining a representation letter from management.

When engaged to compile the financials of a non-public entity, the CPA is


required to possess a level of knowledge of the entity's accounting principles and
9 CORRECT
practices. This requirement will most likely include obtaining an understanding
of the:

Arens/Elder/Beasley
A)Qualifications of the accounting department personnel.

B)Risk factors associated with potential illegal acts.

C)Internal control structure in place.

D)None of the above.

The objectivity of an internal audit department will most likely be enhanced if it


10 CORRECT
reports to the client's:

A)Audit committee

B)Chief Financial Officer [CFO]

C)Controller

D)Senior Management Team [as a group]

Which of the following is generally considered one of the main reasons why
11 INCORRECT internal auditors evaluate the effectiveness of their company's internal control
structure?

A)To determine whether all risks and exposures of the company have
been either reduced or eliminated.

B)To determine whether the established internal controls are functioning


as intended by management.

C)To determine the extent of reliance the internal auditors can place on
the controls in the process of evaluating the financial statements.

D)To reduce the amount of detailed testing for their external auditors.

Chapter 25

Multiple-Choice Questions

1. The standards which govern the CPAs association with unaudited financial statements of private
companies are the:
easy a. AICPAs Code of Professional Conduct.
d b. Statements on Auditing Standards (SASs).

c. Statements of Standards on Attestation Engagements (SSAEs).

Arens/Elder/Beasley
d. Statements on Standards for Accounting and Review Services (SSARS).

2. The two types of services provided in connection with the Statements on Standards for
Accounting and Review Services are:
easy a. audit and examination services.
b b. compilation and review services.

c. examination and review services.

d. management advisory services and compilations.

3. Statements on Standards for Attestation Engagements are established by the:

easy a. Securities and Exchange Commission.

c b. Public Company Accounting Oversight Board.

c. Auditing Standards Board.

d. Accounting and Review Services Committee.

4. Because the same CPA firm does both the annual audit and the public company interim financial
statement review, they are referred to as _______.
easy
a. bookkeepers
c
b. accountants

c. auditors

d. CPAs

5. Practitioners who perform reviews and compilations are referred to in the SSARS standards as:

easy a. bookkeepers.

b b. accountants.

c. auditors.

d. CPAs.

6. A(n) _______ results in a conclusion that represents positive assurance.

easy a. review

c b. compilation

c. examination

d. agreed upon procedure engagement

Arens/Elder/Beasley
7. Compilation reports may be of all but which of the following types?

easy a. Compilation with limited independence.

a b. Compilation with full disclosure

c. Compilation without independence.

d. Compilation that omits substantially all disclosures.

8. An examination results in a conclusion that represents _______ assurance.

easy a. limited assurance

c b. negative

c. positive

d. unequivocal

9. A CPA firm can issue a compilation report:

easy a. only if the partners are independent.

d b. only if all the partners and the staff in the office performing the engagement are
independent.

c. if the partners have no material or direct immaterial interest in client.

d. even if it is not independent.

10. Which of the following meets the attestation standards definition of an examination?

easy a. Preparing a corporations annual tax returns.

b b. An audit of the financial statements.

c. A review of the financial statements.

d. A compilation of the financial statements.

11. Which of the following would not be included in a CPAs report based upon a review of the
financial statements of a nonpublic entity?
easy
a. A statement that the review was in accordance with generally accepted auditing standards.
a
b. A statement that all information included in the financial statements is the representation
of management.

c. A statement describing the principal procedures performed.

Arens/Elder/Beasley
d. A statement describing the auditors conclusions based upon the results of the review.

12. The distribution of which of the following types of reports is unrestricted?

easy a. Examinations and reviews

a b. Reviews and agreed-upon procedures

c. Examinations and agreed-upon procedures

d. Examinations, reviews, and agreed-upon procedures

13. The statement that Nothing came to our attention which would indicate that these statements
are not fairly presented expresses which of the following?
easy
a. Disclaimer of an opinion.
b
b. Negative assurance.

c. Negative confirmation.

d. Shared opinion.

14. For reviews, an accountant does which of the following?

easy Obtain an understanding Perform tests Perform tests of


of internal control. of controls. transactions.
d

a. Yes Yes No

b. Yes No Yes

c. No Yes Yes

d. No No No

15. An auditor who conducts an examination in accordance with generally accepted auditing
standards and concludes that the financial statements are fairly presented in accordance with
easy
a comprehensive basis of accounting other than GAAP, should issue a:
b
a. review report.

b. special report.

c. qualified opinion.

d. disclaimer of opinion.

Arens/Elder/Beasley
16. Specific attestation standards have been developed in all but which of the following areas?

medium a. Pro forma financial information.

d b. Compliance with laws and regulations.

c. Prospective financial statements.

d. Standards have been developed for all of the above.

17. Reports on agreed-upon procedures are intended to be distributed:

medium a. to only the involved parties, who would have the requisite knowledge about those
procedures and the level of assurance resulting from them.
a
b. to only the involved parties, who would have the requisite knowledge about those
procedures but not the level of assurance resulting from them.

c. to any party to whom the client wishes.

d. only to the stockholders of the client.

18. Which of the following is not an area of emphasis in a review conducted under the SSARS?

medium a. Tests of internal controls.

a b. Make inquiries of management.

c. Obtain knowledge of the client.

d. Obtain knowledge of the accounting principles and practices of the clients industry.

19. Distribution of which of the following types of reports is limited?

medium a. Audit

c b. Review

c. Agreed-upon procedures

d. Examination

20. In which type of report would you read the following statement: We believe that our
examination provides a reasonable basis for our opinion.?
medium
a. Review
c
b. Audit

c. Examination

d. Agreed-upon procedures

Arens/Elder/Beasley
21. Which of the following forms of review are permissible under SSARS?

medium a. Review without positive assurance.

a b. Review on financial statements that omit substantially all disclosures.

c. Reviews without CPA independence.

d. Review without limited procedures.

22. Evidence for a review engagement consists primarily of:

medium

a Inquiries Analytical procedures Tests of details

a. No Yes No

b. Yes Yes No

c. No No Yes

d. Yes No Yes

23. Which of the following services is performed under the attestation standards?

medium

a WebTrust SysTrust

a. Yes Yes

b. No No

c. Yes No

d. No Yes

24. (Public) The Securities and Exchange Commission requires quarterly financial information as a part of
the:
medium
a. 10-K report.
b
b. 10-Q report.

c. 8-K report.

d. auditors report.

25. (Public) The quarterly reports submitted to the SEC by the client:

Arens/Elder/Beasley
medium a. have to be audited and the CPA firm must be identified.

d b. do not have to be audited, but the CPA firm which does the year-end audit must be
identified.

c. have to be audited, but the CPA firm does not have to be identified.

d. do not have to be audited, but the CPA firm which does the year-end audit must review the
quarterly statements before they are submitted to the SEC.

26. The WebTrust service requires that a CPA update its testing of the e-commerce aspects of a
entitys Web site at least every:
medium
a. ninety days.
d
b. month.

c. six months.

d. twelve months.

27. Reports on debt compliance and similar engagements may be issued as a separate report or as
part of a report that expresses the auditors opinion on the financial statements. When they
medium
are issued as a part of the report on the financial statements, it is done by:
b
a. adding a middle paragraph before the opinion paragraph.

b. adding a paragraph after the opinion paragraph.

c. adding an additional phrase or sentence within the opinion paragraph.

d. adding a paragraph between the introductory and scope paragraphs.

28. Auditors frequently audit statements that were prepared on a comprehensive basis of
accounting other than GAAP. When this occurs:
medium
a. generally accepted auditing standards apply to these engagements and the reporting
a
requirements differ.

b. generally accepted auditing standards apply to these engagements and the reporting
requirements are the same as well.

c. generally accepted auditing standards do not apply to these examinations and the
reporting requirements differ also.

d. generally accepted auditing standards do not apply to this engagement and the reporting
requirements remain the same for the CPA.

29. Which of the following is not a standard contained in both the Statement on Standards for
Attestation Engagements and the Statement on Auditing Standards?
medium

Arens/Elder/Beasley
d a. The examination is to be performed by a person having adequate technical training.

b. An independence in mental attitude is to be maintained.

c. Sufficient evidence is to be obtained.

d. The practitioner must obtain a sufficient understanding of the clients internal control.

30. Which of the following is not one of the types of engagements and related forms of
conclusions that are defined by the attestation standards?
medium
a. Reviews.
b
b. Compilations.

c. Examinations.

d. Agreed-upon procedures.

31. Which of the following types of engagement reports would provide positive assurance?

medium a. An examination.

a b. A review.

c. An agreed-upon procedures engagement.

d. A compilation.

32. Which of the following is not one of the general types of prospective financial statements
included in the attestation standards?
medium

Forecasts Projections Earnings estimates

a. No No Yes

b. No Yes No

c. Yes Yes No

d. Yes No Yes

33. A report on an examination is _______ as to the distribution by the client after it is issued.

medium a. restricted

c b. limited

c. unrestricted

Arens/Elder/Beasley
d. directed

34. Which are prospective financial statements that present an entitys expected financial
position, results of operations, and cash flows, to the best of the responsible partys
medium knowledge and belief?
c

a Forecasts Projections

a. Yes Yes

b. No No

c. Yes No

d. No Yes

35. Which are prospective financial statements that present an entitys financial position, results of
operations, and cash flows, to the best of the responsible partys knowledge and belief, given
medium
one or more hypothetical assumptions?
d

a Forecasts Projections

a. Yes Yes

b. No No

c. Yes No

d. No Yes

36. Professional standards prohibit one of the following types of engagements for prospective
financial statements from being undertaken.
medium a. A compilation.
b b. A review.

c. An examination.

d. An agreed-upon procedures engagement.

37. General use statements are prepared for use by ________.


a. known contractual parties
medium
b. any third party
b
c. regulators

d. internal auditor.

Arens/Elder/Beasley
38. An agreed-upon procedures engagement is one in which:
a. the auditor and management agree that procedures will be applied to all accounts and
medium circumstances.
b. the auditor and management agree that procedures will not be applied to all accounts and
c circumstances.
c. the auditor and management or a third party agree that the engagement will be limited to
certain specific procedures.
d. the auditor and management or a 3rd party agree that the auditor will apply his or her
judgment to determine procedures to be performed.

39. Statements on Accounting and Review Services are issued by the:


a. Auditing Standards Board.
medium b. Securities and Exchange Commission.
c. Public Company Accounting Oversight Board.
d d. Accounting and Review Services Committee of the AICPA.

40. Assurance provided by a review is substantially less than an audit. Which of the following
statements is true regarding these services?
medium a. A review requires more substantive evidence than an audit.
b. An audit requires less evidence related to internal control than a review.
c c. A review requires less evidence than an audit.
d. None of the above statements is true.

41. An accountant who reviews the financial statements of a nonpublic entity should issue a report
stating that a review:
medium a. is substantially equivalent in scope to an audit.
b. is substantially more in scope than a compilation.
c c. is substantially less in scope than an audit.
d. provides only limited assurance that the financial statements are fairly presented.

42. Which of the following procedures is not included in a review engagement of a nonpublic entity?
a. Inquiries of management.
medium b. Inquiries regarding events subsequent to the balance sheet date.
c. Any procedures designed to identify relationships among data that appear to be unusual.
d d. A study and evaluation of internal control.

43. When an accountant performs more than one level of service (for example, a compilation and a
review, or a compilation and an audit) concerning the financial statements of a nonpublic entity,
medium the accountant generally should issue the report that is appropriate for:
a. a review engagement.
d b. a compilation engagement.
c. the lowest level of service rendered.
d. the highest level of service rendered.

44. (Public) The title of a review report issued for a public companys quarterly financial statements is titled
with which of the following?
medium a. Report of Independent Public Accountants.
b. Report of Independent Auditors.
c c. Report of Independent Registered Public Accounting Firm.
d. Report of Certified Public Accountant.

45. You are a CPA retained by the manager of a cooperative retirement village to do write-up work.
You are expected to prepare unaudited financial statements with each page marked unaudited
medium and accompanied by a disclaimer of opinion stating no audit was performed. In performing the
work, you discover that there are no invoices to support a claim for a $25,000 disbursement. The
manager informs you that all the disbursements are proper. What should you do?

Arens/Elder/Beasley
d a. Submit the expected statements but omit $25,000 of unsupported disbursements.
b. Include the unsupported disbursements in the statements since you are not expected to
make an audit.
c. Obtain from the manager a written statement that you informed him of the missing invoices
and include his assurance that the disbursements are proper.
d. Notify the owners that some of the claimed disbursements are unsupported and withdraw
if the situation is not satisfactorily resolved.

46. Debt compliance letters are ordinarily addressed to:


a. underwriters of securities.
medium b. the clients audit committee.
c. creditor financial institutions.
c d. the Securities and Exchange Commission.

47. Why do standards prohibit accepting an engagement on a projection for general use?
a. The CPAs procedures would violate SSARS.
medium b. Reports on projections are not well understood by the general public.
c. Underlying hypothetical assumptions are difficult to interpret without obtaining additional
c information.
d. The CPA is not qualified to report on the use of GAAP in the projected financial statement.

48. Which of the following is not an element of examining a forecast?


a. Evaluating the preparation of the prospective financial statements.
medium b. Understanding internal controls.
c . Evaluating the support underlying the assumptions.
b d. Issuing an examination report.

49. An accountant may accept an engagement to apply agreed-upon procedures to prospective


financial statements provided that:
medium a. distribution of the report is to be restricted to the specified users involved.
b. the prospective financial statements are also examined.
a c . responsibility for the adequacy of the procedures performed is taken by the accountant.
d. negative assurance is expressed on the prospective financial statements taken as a whole.

50. Non-accounting data included in a long-form report have been subjected to auditing procedures.
The auditors report should state this fact and should explain that the non-accounting data are
medium presented for analysis purposes. In addition, the auditors report should state whether the non-
accounting data are:
b a. audited, unaudited, or reviewed on a limited basis.
b. fairly stated in all material respects in relation to the basic financial statements taken as a
whole.
c. beyond the scope of the normal engagement and therefore, not covered by the opinion on
the financial statements.
d. within the framework of generally accepted auditing standards, which apply to the financial
statements taken as a whole.

51. An auditor has been asked to report on the balance sheet of Kane Company but not on the other
basic financial statements. The auditor will have access to all information underlying the basic
medium financial statements. Under these circumstances, the auditor:
a. may accept the engagement because such engagements merely involve limited reporting
a objectives.
b. may accept the engagement but should disclaim an opinion because of an inability to apply
the procedures considered necessary.
c. should refuse the engagement because there is a client-imposed scope limitation.
d. should refuse the engagement because of a departure from generally accepted auditing
standards.

Arens/Elder/Beasley
52. A CPA who has been engaged to audit financial statements that were prepared on a cash basis:
a. must ascertain that there is proper disclosure of the fact that the cash basis has been used,
medium the general nature of material items omitted, and the net effect of such omissions.
b. may not be associated with such statements which are not in accordance with generally
a accepted accounting principles.
c. must render a qualified report explaining the departure from generally accepted accounting
principles in the opinion paragraph.
d. must restate the financial statements on an accrual basis and then render the standard (short-
form) report.

53. One example of a special report, as defined by Statements on Auditing Standards, is a report
issued in connection with:
challenging a. a feasibility study.
b. price-level basis financial statements.
b c. a limited review of interim financial information.
d. compliance with a contractual agreement not related to the financial statements.

54. In a review service where the client has failed to follow GAAP, the accountant is:
a. not required to determine the effect of a departure if management has not done so, but that
challenging fact must be disclosed in the report.
b. required to determine the effect of a departure if management has not done so, and that fact
a must be disclosed in the report.
c. not required to determine the effect of a departure if management has not done so, and that
fact need not be disclosed in the report.
d. required to determine the effect of a departure if management has not done so, and that fact
need not be disclosed in the report.

55. WebTrust engagements should be performed following guidance provided by the:


a. AICPA attestation standards.
challenging b. AICPA auditing standards.
c. AICPA accounting standards.
a d. AICPA review standards.

56. The engagement and report on debt compliance letters should be limited to compliance matters
that the auditor is qualified to evaluate. Which of the following engagements would be
challenging inappropriate for the CPA to attempt to evaluate?
a. Determining whether the client has properly restricted its business activities to the
a requirements of an agreement.
b. Determining whether principal and interest payments were made when due.
c. Determining whether the proper limitations were maintained on dividends, working capital,
and debt ratios.
d. Determining whether the accounting records were adequate for conducting an ordinary audit.

57. Prospective financial statements are for general use or for limited use. General use refers to use
by any third party, whereas limited use refers to use by third parties with which the responsible
challenging party is negotiating directly. Which of the following statements is not correct?
a. Forecasts can be provided for general use.
c b. Forecasts can be provided for limited use.
c. Projections can be provided for general use.
d. Projections can be provided for limited use.

58. Before performing a review of a nonpublic entitys financial statements, an accountant should:
a. complete a series of inquiries concerning the entitys procedures for recording, classifying,
challenging and summarizing transactions.
b. obtain a sufficient level of knowledge of the accounting principles and practices of the
b industry in which the entity operates.

Arens/Elder/Beasley
c. inquire whether management has omitted substantially all of the disclosures required by
generally accepted accounting principles.
d. apply analytical procedures to provide limited assurance that no material modifications
should be made to the financial statements.

59. An auditor who was engaged to perform an examination of the financial statements of a nonpublic
entity has been asked by the client to refrain from performing various audit procedures and change
challenging the nature of the engagement to a review of the financial statements in accordance with standards
established by the AICPA. The clients request was made because the cost to complete the
d examination was significant. Under these circumstances, the auditor would most likely:
a. qualify the auditors report and refer to the scope limitation.
b. view the request as an indication of a possible irregularity.
c. complete the examination that was in progress.
d. honor the clients request.

60. An accountants standard report on a compilation of a projection should not include a:


a. statement that a compilation of a projection is limited in scope.
challenging b. separate paragraph that describes the limitations on the presentations usefulness.
c. disclaimer of responsibility to update the report for events occurring after the reports date.
d d. statement that the accountant expresses only limited assurance that the results may be
achieved.

61. Attestation standards allow a CPA to perform all but which of the following services for a forecast
or projection?
challenging a. Compilation
b. Review
b c. Examination
d. Agreed-upon procedures

62. Under what standards are WebTrust and SysTrust engagements performed?
a. SSAR
challenging b. SSAE
c. SAS
b d. SSARS

63. Negative assurance is not permissible in:


a. reports based upon a review engagement.
challenging b. letters required by security underwriters for data pertinent to SEC registration statements.
c. reports based on an audit of interim financial statements of a closely held business entity.
c d. reports relating to the results of agreed-upon procedures to one or more specified elements,
accounts, or items of financial statement.

64. The auditors best course of action with respect to other financial information included in an
annual report containing the auditors report is to:
challenging a. read and consider the manner of presentation of the other financial information.
b. indicate in the auditors report that the other financial information is unaudited.
a c. consider whether the other financial information is accurate by performing a limited
review.
d. obtain written representations from management as to the accuracy of the other financial
information.
65. A CPA who is not independent and is associated with financial statements should disclaim an
opinion with respect to those financial statements. The disclaimer should:
challenging a. clearly state the specific reasons for lack of independence.
b. not mention any reason for the disclaimer other than that the CPA was unable to conduct the
c examination in accordance with generally accepted auditing standards.
c. not describe the reason for lack of independence but should state specifically that the CPA is
not independent.

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d. include a middle paragraph clearly describing the CPAs association with the client and
explaining why the CPA was unable to gather sufficient competent evidential matter to
warrant the expression of an opinion.

Essay Questions

66.
easy Define forecast and projection.

Answer:

Forecasts are prospective financial statements that present an entitys expected financial
position, results of operations, and cash flows, to the best of the responsible partys
knowledge and belief.

Projections are prospective financial statements that present an entitys financial position,
results of operations, and cash flows, to the best of the responsible partys knowledge and
belief, given one or more hypothetical assumptions.

67. What are SSARS and who issues them?


easy

Answer:

SSARS are Statements on Standards for Accounting and Review Services. They are issued
by the Accounting and Review Services Committee of the AICPA.

68. What are SSAEs and who issues them?


easy
Answer:

SSAEs are Statements on Standards for Attestation Engagements. They are issued by the
Auditing Standards Board.

69. Who developed the WebTrust service? Briefly explain this service.
easy
Answer:

WebTrust was developed jointly by the AICPA and the Canadian Institute of Chartered
Accountants. In a WebTrust engagement, a client engages a CPA to provide reasonable
assurance that the clients Web site complies with certain Trust Services principles and

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criteria for one or more e-commerce activities. A site that meets the Trust Service principles
is eligible to display the WebTrust seal on its transaction or order page.

70. A financial statement review conducted in compliance with SSARS emphasizes five activities,
one of which is to perform analytical procedures. State the other four.
medium

Answer:

Obtain knowledge of the accounting principles and practices of the clients industry.
Obtain knowledge of the client; that is understood, the clients business transactions,
its accounting records and employees, and the basis, form, and content of the financial
statements.
Make inquiries of management to determine whether the financial statements are
fairly presented.
The accountant is specifically required to obtain a letter of representation from
members of management who are knowledgeable about financial matters.

71. Discuss each of the three types of compilation reports and the circumstances in which each
medium should be used.

Answer:

Compilation with full disclosure. This report is used when the financial statements
include all disclosures required by generally accepted accounting principles.
Compilation that omits substantially all disclosures. This type of report is used when
the financial statements omit substantially all of the disclosures required by GAAP, and
the absence of disclosures is not, to the CPAs knowledge, undertaken with the intent
to mislead users.
Compilation without independence. If the accountant is not independent with respect
to the client, the compilation report should include, as a separate last paragraph, a
statement to that effect.

72. State four types of assurance services that fall within the auditing standards but are not audits,
medium reviews, or compilations of financial statements in accordance with GAAP.

Answer:
Other comprehensive basis of accounting.
Specified elements, accounts, or items.
Information accompanying basic financial statements.
Debt compliance letters and similar reports.

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73. Auditors frequently audit statements prepared on bases other than GAAP. Discuss four commonly
medium used bases other than GAAP.

Answer:

Cash or modified cash basis. With the cash basis, receipts and disbursements are
recorded; there are no accruals. Under the modified cash basis, the cash basis is
followed except for certain items, such as recording fixed assets and depreciation.
Basis used to comply with the requirements of a regulatory agency.
Income tax basis. The same measurement rules used for filing tax returns are often
used for financial statement preparation, even though this is not in accordance with
generally accepted accounting principles.
A definite set of criteria having substantial support. For example, the price-level basis
of accounting could be applied to all material items in the financial statements.

74. Briefly describe a SysTrust engagement.


medium
Answer:

A SysTrust licensed accountant evaluates a companys computer system using Trust


Services principles and criteria and determines whether controls over the system exist. The
accountant then performs tests to determine whether those controls were operating
effectively during a specified period. If the system meets the requirements of the Trust
Services principles and criteria, an examination-level unqualified attestation report is
issued under the AICPA attestation standards.

75. Frequently, clients request auditors to include additional information beyond the basis financial
medium statements in the set of materials prepared for management or outside users. List three types of
additional information commonly included in the additional information section.

Answer: (students should list three of the five)


Detailed comparative statements supporting the control totals on the primary financial
statements for accounts such as cost of goods sold, operating expenses, and
miscellaneous assets.
Supplementary information required by the Financial Accounting Standards Board or
Securities and Exchange Commission.
Statistical data for past years in the form of ratios and trends.
A schedule of insurance coverage.
Specific comments on the changes that have taken place in the statements.

76. Briefly describe each of the five Trust Services principles.


challenging
Answer:

The five Trust Services principles are:

1. Online Privacy personal information obtained as a result of e-commerce is collected,


used, disclosed, and retained as committed or agreed.

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2. Security the system is protected against unauthorized access (both physical and
logical access).
3. Processing integrity system processing is complete, accurate, timely, and authorized.
4. Availability the system is available for operation and use as committed or agreed.
5. Confidentiality information designated as confidential is protected as committed or
agreed.

77. Draft a report that would be appropriate when an independent accountant has performed a
challenging compilation of financial statements with disclosures in accordance with GAAP.

Answer:
We have compiled the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements information that is
the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.

78. Draft a report that would be appropriate when an accountant has made a proper review of the
accounting records and the financial statements of a nonpublic entity and has concluded they
challenging appear reasonable.

Answer:
We have reviewed the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants. All information
included in these financial statements is the representation of the management of XYZ
Company.
A review consists principally of inquiries of company personnel and analytical procedures
applied to financial data. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, 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.
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.

79. Discuss the five SSARS requirements that must be met when an accountant is performing a
compilation of financial statements.

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challenging

Answer:

The preparer of the statements must:


Establish an understanding with the client about the type and limitations of the services
to be provided and a description of the report, if a report is to be issued.
Possess knowledge about the accounting principles and practices of the clients
industry.
Know the client; understand the nature of the clients business transactions, accounting
records, and employees; and know the content of the financial statements (the
knowledge can be less than that for a review).
Make inquiries to determine whether the clients information is satisfactory.
Read the compiled financial statements and be alert for any obvious omissions or errors
in arithmetic and GAAP.

80. Draft a report that would be appropriate when an independent accountant has performed a
challenging compilation of financial statements which substantially omit all disclosures and the statement
of cash flows required by GAAP.

Answer:

We have compiled the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review
Services issued by the American Institute of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements information that
is the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.
Management has elected to omit substantially all of the disclosures and the statement of
cash flows required by generally accepted accounting principles. If the omitted disclosures
were included in the financial statements, they might influence the users conclusions
about the companys financial position, results of operations, and cash flows. Accordingly,
these financial statements are not designed for those who are not informed about such
matters.

81. Draft a report that would be appropriate when an accountant has performed a compilation of
challenging financial statements with disclosures in accordance with GAAP, but the accountant is not
independent with respect to the client.

Answer:
We have compiled the accompanying balance sheet of XYZ Company as of December 31,
200X, and the related statements of income, retained earnings, and cash flows for the year
then ended, in accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants.

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A compilation is limited to presenting in the form of financial statements information that is
the representation of management. We have not audited or reviewed the accompanying
financial statements and, accordingly, do not express an opinion or any other form of
assurance on them.
We are not independent with respect to XYZ Company.

82. The format and contents of an audit report for specified elements, accounts, or items is similar to
challenging the standard audit report of financial statements in accordance with GAAP. However, it must also
reflect four requirements for reporting on specified elements, accounts, or items. State each of
these four requirements.

Answer:
The specified elements, accounts, or items must be identified.
The basis on which the specified elements, accounts, or items are presented and the
agreements specifying the basis must be described.
The source of significant interpretations made by the client about the provisions of a
relevant agreement must be indicated and described.
If the specified element, account, or item is presented on a basis that is not in
conformity with generally accepted accounting principles or another comprehensive
basis of accounting, a paragraph that restricts the distribution of the report to those
within the entity and the parties to the contract or agreement must be added.

Other Objective Answer Format Questions

83. Match the type of engagement (a-g) with the source of authoritative support for that
engagement provided below (1-7). Sources may be used more than once (or not at all).
medium

a. Auditing standards

b. Accounting and review service standards

c. Auditing standards and governmental auditing standards

d. Attestation standards

e. Governmental auditing standards

f. No standards have been set for these engagements

g. Standards of the Public Company Accounting Oversight Board

b 1. Compilation of financial statements prepared in accordance with GAAP for a


nonpublic company.

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d 2. Attestation of forecasted financial statements.

f 3. Operational auditing.

g 4. Review financial statements prepared in accordance with GAAP for a public


company.

a 5. Audits of financial statements for a nonpublic entity prepared in accordance with


GAAP.

c 6. Governmental auditing.

a 7. Limited assurance engagements other than audits, reviews, or compilations of


historical financial statements prepared in accordance with GAAP.

84. Review reports are normally dated as of the clients balance sheet date.
a. True
easy
b. False
b

85. SSARS are issued by the SEC.

easy a. True

b b. False

86. A primary concern in reporting on a comprehensive basis is to make sure that the statements
clearly indicate that they are prepared on a basis other than GAAP.
easy
a. True
a
b. False

87. SSAEs are issued by the PCAOB.

easy a. True

b b. False

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88. A nonaudit engagement in which the accountant undertakes to present, in the form of financial
statements, information that is the representation of management, without undertaking to
easy
express any assurance on the statements is called a review engagement.
b
a. True

b. False

89. CPAs must be independent to issue a compilation report.

easy a. True

b b. False

90. CPAs must be independent to issue a review report.


a. True
easy
b. False
a

91. When an auditor issues an opinion on additional information accompanying the financial
statements, materiality is the same as that used in forming an opinion on the basic financial
medium statements.
a. True
a b. False

92. WebTrust services are performed under the direction of the SSARS.
a. True
medium b. False
b

93. Systrust services are performed under the direction of the SSAEs.
a. True
medium
b. False
a

94. A financial statement review conducted in compliance with SSARS includes obtaining an
understanding of internal control.
medium a. True
b. False
b

95. Statements on Standards for Accounting and Review Services (SSARS) govern the CPAs
association with unaudited financial statements of nonpublic (private) companies, but not public
medium companies.
a. True
a
b. False

96. CPAs can issue a WebTrust opinion only on all five Trust Services principles.
a. True
medium

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b b. False

97. When performing a review (SSARS review) of financial statements, the accountant is required to
obtain a letter of representation from management.
medium a. True
a b. False

98. The use of negative assurance is appropriate in audit reports.


a. True
medium
b. False
b

99. The use of positive assurance is appropriate in review reports.

medium a. True

b b. False

100. When performing compilation services, the accountant is not required to obtain an
understanding of the clients internal control.
medium
a. True
a
b. False

101. A CPA firm can issue a compilation report even if it is not independent with respect to the client.

medium a. True

a b. False

102. (Public) When performing a review of interim information for a public company, the accountant
ordinarily does not perform tests of the accounting records, independent confirmations, or
medium
physical examinations.
a
a. True

b. False

103. When issuing a debt compliance letter, the auditors opinion should be in the form of a negative
assurance.
medium a. True
b. False
a

104. Of the three types of attestation engagements, examination engagements provide a higher level
of assurance than agreed-upon procedures engagements but less than review engagements.
medium

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b a. True

b. False

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105. Examination attestation engagements result in a conclusion that is in a positive form, whereas
review attestation engagements result in a conclusion in the form of a negative assurance.
medium
a. True
a
b. False

106. Current professional standards prohibit accountants from performing engagements to review
forecasts or projections.
medium
a. True
a
b. False

107. The accountants report on the examination of prospective financial statements should include a
caveat that the prospective results may not be achieved.
medium a. True
b. False
a

108. Auditors should provide debt compliance letters only for clients for whom the auditor has done
an audit of the overall financial statements.
challenging
a. True
a
b. False

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