Other Assurance Services

MULTIPLE CHOICE:
1. A study and evaluation of internal control made in
connection with an annual audit is usually not sufficient
to express an opinion on an entity's internal control
because
a.
Weaknesses in the system may go unnoticed during the
audit engagement.
b.
A study and evaluation of internal control is not
necessarily made during an audit engagement.
c.
Only those controls of interest to the auditor are
reviewed, tested, and evaluated.
d.
Internal controls can change each year.
ANSWER:
2.

Of the following statements, which one does not describe a

distinction between the auditing standards and the
attestation standards?
a.
Unlike the auditing standards, the attestation
standards do not require the auditor to obtain an
understanding of the client's internal control system
b.
The attestation standards are broader in coverage than
the auditing standards.
c.
In performing an attest engagement, the CPA need not be
independent.
d.
In an attest engagement, unlike an audit, generally
accepted accounting principles are not the standard
used to measure the reasonableness of assertions.
ANSWER:

3.

Each page of a non-public entity's financial statements

reviewed by an accountant should include the following
reference:
a.
See Accountant's Review Report.
b.
Reviewed, No Accountant's Assurance Expressed.
c.
See Accompanying Accountant's Footnotes.
d.
Reviewed, No Material Modifications Required.
ANSWER:

4.

A CPA may accept an engagement to apply agreed-upon

procedures to prospective financial statements provided
a.
All parties have agreed on the procedures to be
applied.

254

Chapter 15 Other Assurance Services

b.
c.

d.

The CPA has previously audited the entity for which the
agreed-upon procedures are to be applied.
Users have participated in establishing the nature and
scope of the engagement, distribution of the report is
limited to the users involved, and the prospective
statements include a summary of significant
assumptions.
The set of agreed-upon procedures include, at a
minimum, a study and evaluation of the existing
internal control.

ANSWER:
5.

Which of the following is not a distinction between a

compilation and a review?
a.
The CPA must be independent as a prerequisite to
performing a review engagement, but need not be
independent to perform a compilation.
b.
In conducting a review, the CPA must obtain an
understanding of the client's internal control system;
but this is not necessary for a compilation engagement.
c.
Analytical procedures are applied in a review
engagement, but are not required in a compilation.
d.
A compilation offers no assurance, whereas a review
provides limited assurance.
ANSWER:

7.

The statement that "nothing came to our attention which

would indicate that these statements are not fairly
presented" expresses which of the following?
a.
Disclaimer of an opinion.
b.
Negative assurance.
c.
Negative confirmation.
d.
Piecemeal opinion.
ANSWER:

6.

255

During a compilation of a non-public entity's financial

statements, an accountant would be least likely to
a.
Omit substantially all of the disclosures required
by generally accepted accounting principles.
b.
Issue a compilation report on one or more, but not
all, of the basic financial statements.
c.
Perform analytical procedures designed to identify
relationships that appear to be unusual.
d.
Read the compiled financial statements and consider
whether they appear to include adequate disclosure.
ANSWER:

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8.

Chapter 15 Other Assurance Services

When an independent CPA is associated with the financial

statements of a publicly held entity but has not audited or
reviewed such statements, the appropriate form of report to
be issued must include a(an)
a.
Compilation report.
b.
Disclaimer of opinion.
c.
Unaudited association report.
d.
Qualified opinion.
ANSWER:

9.

When an auditor issues an unqualified opinion on an entity's

internal control, it is implied that the
a.
Entity has not violated provisions of the Foreign
Corrupt Practices Act.
b.
Likelihood of management fraud is minimal.
c.
Financial records are sufficiently reliable to permit
the preparation of financial statements.
d.
Entity's internal control system is in conformity
with criteria established by its audit committee.
ANSWER:

10.

Which of the following statements best distinguishes a

forecast from a projection?
a.
A forecast contains one or more hypothetical
assumptions, whereas a projection reflects conditions
expected to exist.
b.
A projection is appropriate for general distribution to
third parties, whereas a forecast is more tentative and
should be restricted to those parties with whom the
client is negotiating directly.
c.
The CPA may review a financial forecast, but may only
compile a projection.
d.
A forecast reflects conditions expected to exist,
whereas a projection presents financial position,
results of operations, and cash flows given one or more
hypothetical assumptions.
ANSWER:

11.

If an accountant concludes that unaudited financial

statements on which the accountant is disclaiming an
opinion also lack adequate disclosure, the accountant
should suggest appropriate revision. If the client does
not accept the accountant's suggestion, the accountant
should
a.
Issue an adverse opinion and describe the appropriate
revision in the report.

Chapter 15 Other Assurance Services

b.
c.
d.

Make reference to the appropriate revision and issue a

modified report expressing limited assurance.
Describe the appropriate revision to the financial
statements in the accountant's disclaimer of opinion.
Accept the client's inaction because the statements
are unaudited and the accountant has disclaimed
an opinion.

ANSWER:
12.

Which of the following should not be included in an

accountant's standard report based upon the compilation of
an entity's financial statements?
a.
A statement that a compilation is limited to presenting
in the form of financial statements information that is
the representation of management.
b.
A statement that the compilation was performed in
accordance with standards established by the American
Institute of CPAs.
c.
A statement that the accountant has not audited or
reviewed the financial statements.
d.
A statement that the accountant does not express an
opinion but expresses only limited assurance on the
financial statements.
ANSWER:

14.

An accountant who reviews the financial statements of a

non-public entity should issue a report stating that a
review
a.
Is substantially less in scope than an audit.
b.
Provides negative assurance that the internal control
system is functioning as designed.
c.
Provides only limited assurance that the financial
statements are fairly presented.
d.
Is substantially more in scope than a compilation.
ANSWER:

13.

257

Of the following statements, which one is not a precondition

for performing attest services?
a.
The practitioner must be a certified public accountant.
b.
The practitioner must have adequate knowledge of the
subject matter.
c.
There are reasonable measurement and disclosure
criteria concerning the subject matter.
d.
The assertions are capable of reasonably consistent
estimation or measurement using such criteria.
ANSWER:

258

15.

Chapter 15 Other Assurance Services

In which of the following reports should a CPA not express

negative or limited assurance?
a.
A standard compilation report on financial statements
of a non-public entity.
b.
A standard review report on financial statements of a
non-public entity.
c.
A standard review report on interim financial
statements of a public entity.
d.
A standard comfort letter on financial information
included in a registration statement of a public
entity.
ANSWER:

16.

In accordance with SEC requirements, a publicly held company

has included interim financial information in its annual
report to shareholders. The independent auditor has
examined the annual financial statements and believes that
they fairly present financial position, results of
operations, and cash flows. The auditor, however, has not
applied limited procedures to the interim data. In drafting
the audit report covering the annual financial statements,
therefore, the independent auditor should
a.
Qualify the audit opinion for a scope limitation,
given failure to apply the limited procedures.
b.
Issue an unqualified opinion on the financial
statements followed by an explanatory paragraph stating
that the procedures were not applied.
c.
Disclaim an opinion given the material impact of the
interim financial information.
d.
Qualify the audit opinion and describe the limited
procedures in a separate paragraph explaining the scope
restriction.
ANSWER:

17.

Comfort letters are ordinarily signed by the

a.
Client.
b.
Client's lawyer.
c.
Independent auditor.
d.
Internal auditor.
ANSWER:

18.

Before performing a review of a non-public entity's

financial statements, an accountant should
a.
Complete a series of inquiries concerning the entity's
procedures for recording, classifying, and
summarizing transactions.

Chapter 15 Other Assurance Services

b.
c.
d.

Apply analytical procedures to provide limited

assurance that no material modifications should be
made to the financial statements.
Obtain a sufficient level of knowledge of the
accounting principles and practices of the industry
in which the entity operates.
Inquire whether management has omitted substantially
all of the disclosures required by generally accepted
accounting principles.

ANSWER:
19.

Which of the following procedures is not necessary in

conducting a review of interim financial information?
a.
Inquiry concerning the accounting system and any
changes in internal control.
b.
Application of analytical procedures to the interim
information.
c.
Inquiry of and obtaining written representations from
management concerning its responsibility for the
financial information and other matters.
d.
Confirmation of significant customer accounts
receivable as of the interim balance sheet date.
ANSWER:

21.

The objective of a review of interim financial information

is to provide the accountant with a basis for reporting
whether
a.
A reasonable basis exists for expressing an updated
opinion regarding the financial statements that were
previously audited.
b.
Material modifications should be made to conform with
generally accepted accounting principles.
c.
The financial statements are presented fairly in
accordance with standards of interim reporting.
d.
The financial statements are presented fairly in
accordance with generally accepted accounting
principles.
ANSWER:

20.

259

The accountant's report expressing an opinion on an entity's

internal control would not include a
a.
Brief explanation of the broad objectives and inherent
limitations of internal control.
b.
Specific date that the report covers, rather than a
period of time.
c.
Statement that the entity's control system is
consistent with that of the prior year after giving

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Chapter 15 Other Assurance Services

d.

effect to subsequent changes.

Description of the scope of the engagement.

ANSWER:
22.

Comfort letters are ordinarily addressed to

a.
The Securities and Exchange Commission.
b.
Underwriters of securities.
c.
Creditor financial institutions.
d.
The client's audit committee.
ANSWER:

23.

Which of the following should be included in an accountant's

standard report based upon the review of a non-public
entity's financial statements?
a.
A statement that the review was performed in
accordance with generally accepted review
standards.
b.
A statement that a review consists principally of
inquiries and analytical procedures.
c.
A statement that the accountant is independent with
respect to the entity.
d.
A statement that a review is substantially greater in
scope than a compilation.
ANSWER:

24.

Engagements for the purpose of expressing an opinion on

internal control differ from the CPA's evaluation of
internal control as part of a financial audit in that
a.
In an engagement to express an opinion, the CPA is
examining and reporting on controls as of a specified
date, whereas in conducting a financial audit, the CPA
frequently tests controls for effectiveness over the
period covered by the financial statements.
b.
In conducting a financial statement audit, the CPA
expresses an opinion as to the operating effectiveness
of the client's internal control system, whereas in an
engagement to express an opinion on internal control,
the CPA addresses design and implementation of control
structure.
c.
In conducting a financial statement audit, the CPA is
concerned with general controls only, whereas in an
engagement to express an opinion on internal control,
the CPA tests both general and application controls.
d.
Scope limitations that affect a financial audit are
irrelevant in an engagement to express an opinion on
internal control.

Chapter 15 Other Assurance Services

ANSWER:
25.

Accepting an engagement to compile a financial projection

for a publicly held company most likely would be
inappropriate if the projection were to be distributed to
a.
A bank with which the entity is negotiating for a
loan.
b.
A labor union with which the entity is negotiating a
contract.
c.
The principal stockholder, to the exclusion of the
other stockholders.
d.
All stockholders of record as of the report date.
ANSWER:

29.

A modification of the CPA's report on a review of the

interim financial statements of a publicly-held company
would be necessitated by which of the following?
a.
An uncertainty.
b.
Lack of consistency.
c.
Reference to another accountant.
d.
Inadequate disclosure.
ANSWER:

28.

The CPA is asked to audit financial statements prepared on a

modified cash basis. This is acceptable provided the CPA
a.
Converts the financial statement to an accrual basis
before rendering an audit report.
b.
Qualifies the audit opinion for a departure from GAAP.
c.
Issues an adverse opinion.
d.
States clearly in the audit report that fairness was
evaluated within the framework of the other basis
rather than GAAP.
ANSWER:

27.

Each page of the financial statements compiled by an

accountant should include a reference such as
a.
See accompanying accountant's footnotes.
b.
Unaudited, see accountant's disclaimer.
c.
See accountant's compilation report.
d.
Subject to compilation restrictions.
ANSWER:

26.

261

When an independent accountant issues a comfort letter to an

underwriter containing comments on data that have not been
audited, the underwriter most likely will receive

262

Chapter 15 Other Assurance Services

a.
b.
c.
d.

A disclaimer on prospective financial statements.

A limited opinion on "pro forma" financial statements.
Positive assurance on supplementary disclosures.
Negative assurance on capsule information.

ANSWER:
30.

31.

Which of the following professional services would be

considered an attest engagement?
a.
A management consulting engagement to provide CBIS
advice to a client.
b.
An engagement to report on compliance with statutory
requirements.
c.
An income tax engagement to prepare federal and state
tax returns.
d.
The compilation of financial statements from a
client's accounting records.
ANSWER: B
The accountant's report expressing an opinion on an entity's
internal control should state that the
a.
Establishment and maintenance of internal control is
the responsibility of management.
b.
Objectives of the client's internal control are being
met.
c.
Study and evaluation of internal control was
conducted in accordance with generally accepted
auditing standards.
d.
Inherent limitations of the client's internal control
structure were examined.
ANSWER:

32.

Which of the following procedures would most likely be

included in a review engagement of a non-public entity?
a.
Preparing a bank transfer schedule.
b.
Inquiring about related party transactions.
c.
Assessing the internal control structure.
d.
Performing cutoff tests on sales and purchases
transactions.
ANSWER:

33.

An accountant should not submit unaudited financial

statements to the management of a non-public company
unless, at a minimum, the accountant
a.
Assists in adjusting the books of account and prepares
the trial balance.
b.
Types or reproduces the financial statements on plain
paper.

Chapter 15 Other Assurance Services

c.
d.

Complies with the standards applicable to compilation

engagements.
Applies analytical procedures to the financial
statements.

ANSWER:
34.

263

A CPA in public practice must be independent in fact and

appearance when providing which of the following services?
Compilation
Compilation
Preparation
of a
of personal
of a
financial
financial
tax return
forecast
statements
____________
____________
______________
a.
Yes
No
No
b.
No
Yes
No
c.
No
No
Yes
d.
No
No
No
ANSWER:

COMPLETION:
35.

The two levels of attestation are

assurance.
ANSWER:

36.

assurance.

NEGATIVE

A CPAs expression of an opinion on the effectiveness of a

clients internal control system is known as __________
attestation.
ANSWER:

39.

LIMITED (NEGATIVE) ASSURANCE

Another term for limited assurance is

ANSWER:

38.

POSITIVE, NEGATIVE

Unlike a compilation, a review report includes, after the

disclaimer, a paragraph expressing
on
the financial statements.
ANSWER:

37.

assurance and

DIRECT

A CPAs expression of an opinion on managements assertions

as to the effectiveness of a clients internal control
system is known as ______________ attestation.

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Chapter 15 Other Assurance Services

ANSWER:
40.

A report covering the application of agreed-upon procedures

an
on the financial statements because
the procedures are less extensive than those applied in an
audit.
ANSWER:

41.

FOREIGN CORRUPT PRACTICES ACT OF 1977

If interim financial information which has been reviewed is

presented alone, rather than in an unaudited footnote to the
annual financial statements, a
report must
accompany the statements.
ANSWER:

44.

LIMITED, NEGATIVE ASSURANCE

The
requires
that public companies establish and maintain adequate
systems of internal control.
ANSWER:

43.

DISCLAIMS, OPINION

If
procedures have been applied to unaudited
data, the CPA may give
in the comfort
letter to underwriters of proposed securities issues.
ANSWER:

42.

INDIRECT

REVIEW

An examination of prospective financial statements, like an

audit, requires a form of
.
ANSWER:

ATTESTATION (OPINION)

MATCHING:
45.

Select the term that best fits the listed definition.

A. Review
B. Assertion
C. Forecast
D. Compilation
E. Prospective financial statements
F. Projection
G. Agreed-upon procedures engagement
H. Assurance services
I. Compliance attestation
J. Negative assurance
K. Attestation

Chapter 15 Other Assurance Services

265

____1. The CPA presents information that is the representation

of management without undertaking to express any assurance on the
statements.
____2. Independent professional services that improve the
quality of information, or its context, for decision makers.
____3. A disclaimer of opinion followed by a statement that
nothing came to the CPAs attention indicating that the financial
statements were not in conformity with GAAP.
____4.
audit.

More extensive than a compilation but less so than an

____5. The resulting report is in the form of procedures applied

and findings.
____6. Results in a written communication that expresses a
conclusion about the reliability of a written assertion that is
the responsibility of another party.
____7. Any declaration, or set of related declarations taken as
a whole, by a party responsible for it.
____8. Assurance regarding an entitys conformity with specified
laws, regulations, rules, contracts, or grants.
____9.

Future-oriented financial statements.

____10. Presents the entitys expected financial position,

results of operations, and cash flows reflecting conditions
expected to exist.
SOLUTION:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

D
H
J
A
G
K
B
I
E
C

PROBLEM/ESSAY
46.For each of the following engagements, indicate the nature of
the service performed (i.e., audit, review, compilation,

266

Chapter 15 Other Assurance Services

etc.), the standards covering the engagement (i.e., auditing,
attestation, or accounting and review), the type of report to
be issued (i.e., opinion, review, compilation), the level of
assurance provided, and the principal
procedures to be
applied.
A.

Kramer.com, a publicly-held company, has requested

Doom & Gloom, CPAs, to review its quarterly financial
statements presented to the companys stockholders.

B.

Brewers Investment Consortium has requested Crocker &

Benson, CPAs to apply certain procedures to a
financial projection submitted by Stevens Developers as
part of a loan application relative to a new river
front development project under consideration.

C.

Gray Ltd., a small auto repair facility requested

Holly Lance, CPA, to prepare a set of financial
statements from the companys records. Third/Fifth
Bank has requested the statements as part of a loan
application submitted by Gray.

D.

Morley Distributors has requested Dolores Del Rio,

CPA, to perform necessary procedures for determining
conformity to a royalty contract granting Morley 1.5%
of all domestic sales of its franchised distributors.

SOLUTION:
A.

Nature of service:
Applicable standards:
Type of report:
Level of assurance:
Principal procedures:

B.

Nature of service:
Applicable standards:
Type of report:
Level of assurance:
Principal procedures:

C.

Nature of service:
Applicable standards:
Type of report:

Review of interim financial

information
Auditing standards
Review report
Limited or negative
Inquiry and analytical
procedures
Prospective financial statements
Attestation standards
Agreed-upon procedures report
None
As agreed (inquiry, testing
assumptions for reasonableness)
Compilation of financial
statements for a nonpublic
entity
Accounting and review
Compilation report

267

Chapter 15 Other Assurance Services

Level of assurance:
Principal procedures:

D.

46.

None
Understand industry accounting
practices
Read the financial statements

Nature of service:
Applicable standards:
Type of report:
Level of assurance:
Princpal procedures:

Compliance attestation
Attestation standards
Agreed-upon procedures report
None
As agreed (inquiry, reading
royalty agreement, recomputing
royalty amounts)
You have been asked by Kromleys Recreation and Fitness
Center to review its financial statements for the year
ending December 31, 2002. Kromlelys has requested a
substantial loan from Renters Life & Casualty Insurance Ltd.
The loan proceeds will be used to construct a second
facility in the western suburbs of the city. In the past you
have compiled Kromleys financial statements, but have never
audited or reviewed them.
Required:
a.

Differentiate among audits, reviews, and compilations

in terms of procedures to be applied and level of
assurance provided.

b.

Assuming you completed your field work on February 14,

2003 and do not find any material cause for
modification of the financial statements, draft the
review report.

c.

Assume that you discover that Kromley has not

recognized any asset or liability for a material
financing-type lease. What modifications should you
make to the standard review report?

d.

What should you do if management and the board do not

agree to these modifications?

SOLUTION:
a.
Procedures

Compilation
Inquiry
Read financial
statements

Review

Audit

Inquiry
Study and evaluate internal
Read financial
control
statements
Observe
Apply analytical Confirm
procedures
Examine

268

Chapter 15 Other Assurance Services

Calculate
Inspect
Vouch

Level of assurance

None

Limited

Positive

b.
To the Board of Directors of Kromleys Recreation and
Fitness Center:
We have reviewed the accompanying balance sheet of Kromleys
Recreation and Fitness Center as of December 31, 2002, and the
related statements of income, retained earnings, and cash flows
for the year then ended, in accordance with standards established
by the American Institute of Certified Public Accountants. All
information included in these financial statements is the
representation of the management of Kromley Recreation and
Fitness Center.
A review consists principally of inquiries of company
personnel and analytical procedures applied to financial data.
It is substantially less in scope than an examination 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.
Students Name, CPA
February 14, 2003
c.
1. This departure from GAAP should be identified in the third
paragraph and explained in a separate fourth paragraph of the
review report as follows:
As disclosed in Note X to the financial statements,
generally accepted accounting principles require that financing
leases be included on the balance sheet as part of property,
plant, and equipment, and also as a long-term liability at the
present value of such obligations. Management has informed us
that the company accounts for these costs as they are disbursed
to the lessor. The effects of this departure from generally
accepted accounting principles on financial position, results of
operations, and cash flows have not been determined.

Chapter 15 Other Assurance Services

269

2. If management and the board do not agree to the above

modification, you should refuse to be associated with the
financial statements.