MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS 25-18 (Objective 25-1) The following are miscellaneous questions about compilation and review services. Choose the best response. a. It is acceptable for a CPA to be associated with financial statements when not inde- pendent with respect to the client and still issue a substantially unmodified report for which of the following (1) Audits of companies following GAAP. (2) Audits of companies on a comprehensive basis of accounting other than GAAP. (3) Review of financial statements following GAAP. (4) Compilation of financial statements following GAAP. b. A CPA is performing review services for a small, closely held manufacturing company. As a part of the follow-up of a significant decrease in the gross margin for the current year, the CPA discovers that there are no supporting documents for $40,000 of disburse- ments. The chief financial officer assures her that the disbursements are proper. What should the CPA do? (1) Include the unsupported disbursements without further work in the statements on the grounds that she is not doing an audit. (2) Modify the review opinion or withdraw from the engagement unless the unsup- ported disbursements are satisfactorily explained. (3) Exclude the unsupported disbursements from the statements. (4) Obtain a written representation from the chief financial officer that the disburse- ments are proper and should be included in the current financial statements. c. Which of the following best describes the responsibility of the CPA in performing compilation services for a company? (1) The CPA has to satisfy only himself or herself that the financial statements were prepared in conformity with accounting standards. (2) The CPA must understand the client's business and accounting methods and read the financial statements for reasonableness. (3) The CPA should obtain an understanding of internal control and perform tests of controls. (4) The CPA is relieved of any responsibility to third parties. 25-19 (Objectives 25-3, 25-6) The following questions concern attestation engagements. Choose the best response. a. Which of the following professional services is considered an attestation engagement? (1) Amanagement consulting engagement to provide IT advice to a client. (2) An income tax engagement to prepare federal and state tax returns. (3) An engagement to report on compliance with statutory requirements (4) A compilation of financial statements from a client's accounting records. b. A Type I service auditor's report on internal controls at a service organization (1) includes an opinion about the suitability of the design of controls at the service organization (2) is based on the performance of tests of controls and substantive tests of trans- actions at the service organization. (3) contains an opinion about the operating effectiveness of internal controls at the service organization. (4) provides an opinion about the fair presentation of the service organization's financial statements in accordance with accounting standards. c. Which of the following statements concerning prospective financial statements is correct? (1) Only a financial forecast is normally appropriate for limited use. (2) Any type of prospective financial statement is normally appropriate for limited use. (3) Only a financial projection is normally appropriate for general use. (4) Any type of prospective financial statement is normally appropriate for general use. Chapter 25 / OTHER ASSURANCE SERVICES 25-20 (Objective 25-8) The following questions concern reports issued by auditors, other than those on historical financial statements. Choose the best response. a. An auditor is reporting on cash basis financial statements. These statements are best referred to in the opinion of the auditor by which of the following descriptions? (1) Cash receipts and disbursements and the assets and liabilities arising from cash transactions. (2) Financial position and results of operations arising from cash transactions. (3) Balance sheet and income statements resulting from cash transactions. (4) Cash balance sheet and the source and application of funds. b. Which of the following statements with respect to an auditor's report expressing an opinion on a specific item on a financial statement is correct? (1) Such a report can be expressed only if the auditor is also engaged to audit the entire set of financial statements. (2) Materiality must be related to the specific item rather than to the financial state- ments taken as a whole. (3) The attention devoted to the specified item is usually less than it would be if the financial statements taken as a whole were being audited. (4) The auditor who has issued an adverse opinion on the financial statements taken as a whole can never express an opinion on a specified item in these financial statements. c. When asked to perform an audit to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor (1) may not describe auditing procedures applied. (2) should advise the client that the opinion can be issued only if the financial state- ments have been audited and found to be fairly presented. (3) may assume that the first standard of reporting with respect to GAAP does not apply. (4) should comply with the request only if they constitute a major portion of the financial statements on which an auditor has disclaimed an opinion based on an audit. MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS 25-18 (Objective 25-1) The following are miscellaneous questions about compilation and review services. Choose the best response. a. It is acceptable for a CPA to be associated with financial statements when not inde- pendent with respect to the client and still issue a substantially unmodified report for which of the following (1) Audits of companies following GAAP. (2) Audits of companies on a comprehensive basis of accounting other than GAAP. (3) Review of financial statements following GAAP. (4) Compilation of financial statements following GAAP. b. A CPA is performing review services for a small, closely held manufacturing company. As a part of the follow-up of a significant decrease in the gross margin for the current year, the CPA discovers that there are no supporting documents for $40,000 of disburse- ments. The chief financial officer assures her that the disbursements are proper. What should the CPA do? (1) Include the unsupported disbursements without further work in the statements on the grounds that she is not doing an audit. (2) Modify the review opinion or withdraw from the engagement unless the unsup- ported disbursements are satisfactorily explained. (3) Exclude the unsupported disbursements from the statements. (4) Obtain a written representation from the chief financial officer that the disburse- ments are proper and should be included in the current financial statements. c. Which of the following best describes the responsibility of the CPA in performing compilation services for a company? (1) The CPA has to satisfy only himself or herself that the financial statements were prepared in conformity with accounting standards. (2) The CPA must understand the client's business and accounting methods and read the financial statements for reasonableness. (3) The CPA should obtain an understanding of internal control and perform tests of controls. (4) The CPA is relieved of any responsibility to third parties. 25-19 (Objectives 25-3, 25-6) The following questions concern attestation engagements. Choose the best response. a. Which of the following professional services is considered an attestation engagement? (1) Amanagement consulting engagement to provide IT advice to a client. (2) An income tax engagement to prepare federal and state tax returns. (3) An engagement to report on compliance with statutory requirements (4) A compilation of financial statements from a client's accounting records. b. A Type I service auditor's report on internal controls at a service organization (1) includes an opinion about the suitability of the design of controls at the service organization (2) is based on the performance of tests of controls and substantive tests of trans- actions at the service organization. (3) contains an opinion about the operating effectiveness of internal controls at the service organization. (4) provides an opinion about the fair presentation of the service organization's financial statements in accordance with accounting standards. c. Which of the following statements concerning prospective financial statements is correct? (1) Only a financial forecast is normally appropriate for limited use. (2) Any type of prospective financial statement is normally appropriate for limited use. (3) Only a financial projection is normally appropriate for general use. (4) Any type of prospective financial statement is normally appropriate for general use. Chapter 25 / OTHER ASSURANCE SERVICES 25-20 (Objective 25-8) The following questions concern reports issued by auditors, other than those on historical financial statements. Choose the best response. a. An auditor is reporting on cash basis financial statements. These statements are best referred to in the opinion of the auditor by which of the following descriptions? (1) Cash receipts and disbursements and the assets and liabilities arising from cash transactions. (2) Financial position and results of operations arising from cash transactions. (3) Balance sheet and income statements resulting from cash transactions. (4) Cash balance sheet and the source and application of funds. b. Which of the following statements with respect to an auditor's report expressing an opinion on a specific item on a financial statement is correct? (1) Such a report can be expressed only if the auditor is also engaged to audit the entire set of financial statements. (2) Materiality must be related to the specific item rather than to the financial state- ments taken as a whole. (3) The attention devoted to the specified item is usually less than it would be if the financial statements taken as a whole were being audited. (4) The auditor who has issued an adverse opinion on the financial statements taken as a whole can never express an opinion on a specified item in these financial statements. c. When asked to perform an audit to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor (1) may not describe auditing procedures applied. (2) should advise the client that the opinion can be issued only if the financial state- ments have been audited and found to be fairly presented. (3) may assume that the first standard of reporting with respect to GAAP does not apply. (4) should comply with the request only if they constitute a major portion of the financial statements on which an auditor has disclaimed an opinion based on an audit