The limitations on professional responsibilities of CPAs when they are associated with unaudited financial statements are often misunderstood. These misunderstandings can be reduced substantially if CPAs carefully follow professional pronouncements in the course of their work and take other appropriate measures.

The following list describes four situations CPAs may encounter in their association with and preparation of unaudited financial statements. Briefly discuss the extent of the CPAs’ responsibilities and, if appropriate, the actions to be taken to minimize misunderstandings. Identify your answers to correspond with the letters in the following list.

a.A CPA was engaged by telephone to perform accounting work, including the compilation of financial statements. His client believes that the CPA has been engaged to audit the financial statements and examine the records accordingly.

b.A group of business executives who own a farm managed by an independent agent engage Linda Lopez, a CPA, to compile quarterly unaudited financial statements for them. Ms. Lopez compiles the financial statements from information given to her by the independent agent. Subsequently, the business executives find the statements were inaccurate because their independent agent was embezzling funds. The executives refuse to pay Ms. Lopez’s fee and blame her for allowing the situation to go undetected, contending that she should not have relied on representations from the independent agent.

c.In comparing the trial balance with the general ledger, a CPA finds an account labeled “Audit Fees” in which the client has accumulated the CPA’s quarterly billings for accounting services, including the compilation of quarterly unaudited financial statements.

d.To determine appropriate account classification, John Day, CPA, reviewed a number of the client’s invoices. He noted in his working papers that some invoices were missing but did nothing further because he thought they did not affect the unaudited financial statements he was compiling. When the client subsequently discovered that invoices were missing, he contended that the CPA should not have ignored the missing invoices when compiling the financial statements and had a responsibility to at least inform him that they were missing.