- A private company (a nonissuer) wants a CPA to provide assurance on a forecast of future revenues to be provided to a potential investor. The CPA will evaluate the presentation of the forecast in accordance with suitable criteria and express an opinion providing reasonable assurance. Under these circumstances, which engagement should be performed?
Answer: Examination engagement under SSAE on prospective financial information
This question tests the appropriate engagement type for providing assurance on prospective financial information under professional standards. The key facts are that the entity is a nonissuer seeking reasonable assurance on a forecast of future revenues through an evaluation against suitable criteria and an expressed opinion. An examination engagement under SSAE aligns with authoritative guidance in AT-C Section 305, which specifically addresses attestation engagements on prospective financial information and provides reasonable assurance similar to an audit. An audit engagement under AU-C is incorrect because AU-C standards apply to historical financial statements, not prospective information; a review engagement under SSARS is incorrect as SSARS (AR-C) governs reviews of historical financial statements offering limited assurance, not applicable to forecasts. A compilation engagement under SSARS is incorrect because compilations provide no assurance and do not include negative assurance, which is not permitted under AR-C standards. When determining the appropriate engagement for prospective information, CPAs should first identify if the service requires attestation-level assurance and refer to SSAE for guidance on examinations providing reasonable assurance. This decision rule ensures compliance with the AICPA's framework for attest engagements not covered by auditing or review standards.
- A nonissuer client has requested a CPA to provide a service that results in a report expressing an opinion on the company's compliance with specific provisions of a debt covenant. The report will be restricted to the client and the lender. Which type of engagement should the CPA perform?
Answer: An examination engagement under Statements on Standards for Attestation Engagements (SSAE).
An examination engagement under SSAE is appropriate when a practitioner is engaged to express an opinion, which provides a high level of assurance (reasonable assurance), on a subject matter such as compliance with specified requirements. The scenario specifically asks for an opinion.
- A regional retailer (a nonissuer) wants some assurance on its interim financial statements for internal use and a prospective line of credit, but management does not want the cost of an audit. The accountant will primarily perform inquiries of management and analytical procedures and will provide limited assurance. Under these circumstances, which engagement should be performed?
Answer: Review engagement under SSARS to provide limited assurance
This question tests understanding of review engagements under SSARS for nonissuers. The key facts are that the nonissuer wants some assurance but not the cost of an audit, and the accountant will perform inquiries and analytical procedures to provide limited assurance. A review engagement under SSARS is specifically designed for this purpose, providing limited assurance through inquiries and analytical procedures without the extensive testing required in an audit. An audit (choice A) would provide reasonable assurance but at higher cost than desired. A compilation (choice C) provides no assurance and does not require inquiries or analytics. An agreed-upon procedures engagement (choice D) reports findings on specific procedures but does not provide an overall opinion or conclusion on financial statements. The professional judgment framework is: when limited assurance is sufficient and cost is a concern, a review engagement balances assurance needs with efficiency.
- Which of the following engagements is performed under the Statements on Auditing Standards (SAS) but provides a level of assurance that is less than reasonable?
Answer: A review of a public entity's interim financial information.
A review of a public entity's interim financial information is conducted in accordance with SAS (for nonissuers) or PCAOB Auditing Standards (for issuers). This engagement provides limited assurance (negative assurance) and is distinct from a SSARS review, which applies to nonissuers' annual or interim statements.
- A public company (an issuer) has accelerated filer status and is preparing its annual report. Management requests an engagement that includes both an audit of the financial statements and an audit of internal control over financial reporting, with separate opinions. What is the correct engagement type given the client's needs?
Answer: Integrated audit under PCAOB standards (financial statements and internal control over financial reporting)
This question tests knowledge of integrated audits required for certain public companies. The key facts are that this is an accelerated filer (large public company) requiring both a financial statement audit and an audit of internal control over financial reporting (ICFR). For accelerated filers, Section 404(b) of the Sarbanes-Oxley Act requires an integrated audit under PCAOB standards covering both financial statements and ICFR. AICPA standards with SSARS (choice B) cannot be used for issuers. A review combined with agreed-upon procedures (choice C) would not provide the required reasonable assurance and opinions. A compilation with representations (choice D) provides no assurance and is inappropriate for issuers. The rule is: accelerated filers must have integrated audits under PCAOB standards addressing both financial statements and ICFR.
- A privately held manufacturing company (a nonissuer) needs an independent auditor's opinion on whether its financial statements are presented fairly in accordance with the applicable financial reporting framework for a bank loan. The auditor plans to obtain reasonable assurance through risk assessment and substantive procedures. What is the correct engagement type given the client's needs?
Answer: Audit engagement performed under AICPA auditing standards (AU-C) resulting in an opinion
This question tests the identification of engagement types for nonissuers based on the level of assurance required. The key facts are that this is a nonissuer requiring an independent auditor's opinion with reasonable assurance for a bank loan. An audit engagement under AICPA auditing standards (AU-C) is the only service that provides an opinion on whether financial statements are fairly presented with reasonable assurance. A review (choice B) provides only limited assurance and a conclusion, not an opinion. An examination under SSAE (choice C) applies to subject matter other than historical financial statements. A compilation (choice D) provides no assurance and cannot result in an opinion. The decision rule is: when a nonissuer needs an opinion on financial statements with reasonable assurance, an audit under AU-C standards is required.
- A private distributor (a nonissuer) requests an engagement where the practitioner will perform only procedures specifically listed by the distributor's lender (for example, recalculating inventory extensions and agreeing selected receivable balances to subsequent cash receipts). The lender wants a report of findings and does not want an opinion or conclusion. Under these circumstances, which engagement should be performed?
Answer: Agreed-upon procedures engagement under SSAE, restricting use as appropriate and reporting findings
This question tests understanding of agreed-upon procedures engagements. The key facts are that specific procedures are dictated by the lender, and only findings (not opinions or conclusions) are to be reported. An agreed-upon procedures engagement under SSAE is designed for situations where specified parties determine the procedures to be performed and the practitioner reports only factual findings without providing assurance. An examination (choice B) would provide an opinion, which the lender does not want. A review (choice C) involves inquiries and analytics to provide limited assurance, not specific procedures with findings. An audit under PCAOB standards (choice D) applies only to issuers, not private companies. The framework is: when users specify exact procedures and want only findings reported, an agreed-upon procedures engagement provides the appropriate service.
- A private company (a nonissuer) wants a CPA to provide assurance on a sustainability report containing greenhouse gas emissions metrics. The CPA will apply suitable criteria, obtain evidence, and express a conclusion designed to provide limited assurance. Under these circumstances, which engagement should be performed?
Answer: Review engagement under SSAE (limited assurance on subject matter)
This question tests review-level attestation under SSAE for non-financial subject matter. The key facts are the nonissuer status, assurance on sustainability metrics using criteria, evidence, and limited assurance conclusion. The correct answer aligns with SSAE reviews as they provide limited assurance on subject matter like emissions through inquiry and analytics. Choice A is incorrect as SSARS reviews apply to financial statements, not sustainability reports; choice B is incorrect as AU-C agreed-upon procedures report findings, not assurance conclusions; choice D is incorrect as SSARS compilations provide no assurance. Choice C fits the limited assurance on non-financial metrics. Practitioners should classify subject matter as non-financial to apply SSAE over SSARS. Match assurance level to user needs, opting for review when limited assurance suffices.
- An accountant is asked to issue a report on the application of the requirements of an applicable financial reporting framework to a specific transaction. This type of engagement is known as a(n):
Answer: Reporting on the application of accounting principles.
When a CPA provides a written report or oral advice on the application of accounting principles to a specific transaction or on the type of opinion that may be rendered on a specific entity's financial statements, it is considered a 'Reporting on the Application of Accounting Principles' engagement. These engagements have specific performance and reporting standards to ensure objectivity and avoid opinion shopping.
- A private company (a nonissuer) wants a CPA to provide a report on the design and implementation of controls at a service organization relevant to user entities' internal control over financial reporting. The CPA will issue a report intended for use by user auditors and management. Which type of engagement is most appropriate for this client?
Answer: Attestation engagement under SSAE on controls at a service organization
This question tests attestation reports on service organization controls under SSAE. The key facts are the nonissuer status, report on control design and implementation, and use by user auditors. The correct answer aligns with SSAE as it covers SOC reports on controls. Choice B is incorrect as SSARS reviews are for financial statements; choice C is incorrect as SSARS compilations do not evaluate controls; choice D is incorrect as PCAOB is for issuers. Choice A matches the attestation on controls. Practitioners should use SSAE for service organization reports. Determine report type based on design vs. operating effectiveness needs.
- A small, privately owned retail business (a nonissuer) needs financial statements for a local bank renewal, but the bank only requires limited assurance and does not require tests of controls or substantive audit procedures. The accountant will perform inquiry and analytical procedures and issue a report stating whether any material modifications are needed for the statements to conform with U.S. generally accepted accounting principles. What is the correct engagement type given the client's needs?
Answer: Review engagement under SSARS providing limited assurance
This question tests the identification of review engagements under SSARS for nonissuers needing limited assurance. The key facts are the nonissuer status, bank requirement for limited assurance without audit procedures, and use of inquiry and analytics to assess material modifications under GAAP. The correct answer aligns with SSARS as they govern reviews providing limited assurance through inquiry, analytics, and a report on potential modifications. Choice A is incorrect as audits under AU-C provide reasonable assurance with extensive testing, exceeding the bank's needs; choice C is incorrect as compilations under SSARS provide no assurance and no inquiry; choice D is incorrect as agreed-upon procedures under SSAE report findings without assurance conclusions. Choice B fits the limited procedures and assurance level requested. Accountants should match engagement type to the specified assurance level and procedures. Assess third-party requirements to ensure the engagement meets minimal assurance needs without over-auditing.
- A publicly traded company (an issuer) is preparing for its annual filing and requests an examination of its year-end financial statements to express an opinion. The engagement includes obtaining reasonable assurance and issuing an auditor's report for use by investors. Under these circumstances, which professional standards apply to the engagement?
Answer: PCAOB auditing standards for an audit of an issuer's financial statements
This question tests the application of professional standards based on entity type, specifically for issuers (publicly traded companies). The key fact is that this is a publicly traded company (issuer) requesting an examination of financial statements to express an opinion for investors. PCAOB auditing standards govern all audits of issuers' financial statements as mandated by the Sarbanes-Oxley Act of 2002. SSARS (choice A) applies only to nonissuer compilations and reviews, not audits of issuers. SSAE (choice C) applies to attestation engagements on subject matter other than financial statements. Government Auditing Standards (choice D) apply only when required by law, regulation, or agreement, not merely because external users exist. The fundamental rule is: if the entity is an issuer and financial statements require an opinion, PCAOB standards always apply.
- A publicly traded company is required to have an audit of its annual financial statements. Which set of standards must the auditor follow, and what is the scope of this required engagement?
Answer: PCAOB Auditing Standards for an integrated audit of financial statements and internal control over financial reporting.
Publicly traded companies (issuers) are required by the SEC and the Sarbanes-Oxley Act to have an integrated audit conducted in accordance with PCAOB Auditing Standards. An integrated audit includes an audit of both the financial statements and the effectiveness of internal control over financial reporting (ICFR).
- A private construction company (a nonissuer) asks for "some assurance" that its annual financial statements are free of material misstatement, but also wants the accountant to provide an explicit opinion that the statements are fairly presented. The accountant explains the differences in assurance levels and the resulting report wording. What is the primary difference between these engagement types as described?
Answer: An audit provides reasonable assurance and an opinion, while a review provides limited assurance and a conclusion
This question tests fundamental understanding of assurance levels and report types across engagement types. The correct distinction is that an audit provides reasonable assurance and results in an opinion on whether financial statements are fairly presented, while a review provides limited assurance and results in a conclusion about whether anything came to the accountant's attention indicating material misstatement. Choice A reverses these relationships incorrectly. Choice C incorrectly states that compilations provide limited assurance (they provide no assurance) and that reviews provide no assurance (they provide limited assurance). Choice D incorrectly suggests attestation examinations are required for all nonissuers seeking financing, when in fact the type of engagement depends on user needs. The fundamental framework is: audits provide reasonable assurance with opinions, reviews provide limited assurance with conclusions, and compilations provide no assurance.
- A CPA is engaged by a local government entity that receives significant federal funding. The entity expended $950,000 in federal awards during its fiscal year. In addition to a financial statement audit under generally accepted auditing standards, which additional engagement is most likely required?
Answer: A Single Audit in accordance with the Uniform Guidance.
The Uniform Guidance requires a Single Audit for entities that expend $750,000 or more in federal awards in a fiscal year. This audit includes both the financial statements and the entity's compliance with federal program requirements. Since the entity expended $950,000, a Single Audit is required.
- A franchisor (a nonissuer) must comply with a contract requiring it to maintain a specified current ratio at year-end. The franchisor requests that a practitioner report on whether management's assertion about compliance with the covenant is fairly stated, using the contract as the criteria. Under these circumstances, which engagement should be performed?
Answer: Attestation examination under SSAE, expressing an opinion on management's compliance assertion
This question tests understanding of attestation engagements for compliance assertions. The key facts are that the practitioner will report on management's assertion about compliance with a debt covenant using the contract as criteria. An attestation examination under SSAE is appropriate for expressing an opinion on management's assertion about compliance with specified requirements. An agreed-upon procedures engagement (choice A) would only report findings without providing an opinion on the assertion. An audit (choice B) applies to financial statements, not compliance assertions. A review under SSARS (choice C) applies to financial statements of nonissuers, not compliance matters. The decision framework is: when an opinion is needed on management's assertion about compliance or other nonfinancial matters, an examination engagement under SSAE provides the appropriate framework.
- When comparing a review of a nonissuer's financial statements with a compilation of those same statements, a primary difference is that a review engagement requires the accountant to:
Answer: Be independent and perform inquiry and analytical procedures.
A review engagement requires the accountant to be independent and to perform inquiry and analytical procedures to provide a basis for limited assurance. A compilation engagement does not require independence (though lack of it must be disclosed) and the procedures are limited to reading the financial statements. Neither engagement requires an understanding of internal control or an assessment of fraud risk like an audit, and a review provides limited (negative) assurance, not positive assurance.
- An issuer asks its external auditor to provide assurance on management's assertion about the effectiveness of internal control over financial reporting as of year-end, in conjunction with the annual financial statement audit. The auditor is required to perform testing of controls and issue an opinion on internal control. Which engagement best describes this requirement?
Answer: PCAOB integrated audit (financial statements and internal control over financial reporting)
This question tests PCAOB requirements for integrated audits of issuers' ICFR. The key facts include the issuer status, assurance on ICFR effectiveness with the FS audit, control testing, and opinion issuance. The correct answer aligns with PCAOB as it requires integrated audits opining on ICFR for issuers under SOX. Choice B is incorrect as SSARS reviews do not provide ICFR assurance; choice C is incorrect as SSAE agreed-upon procedures report findings, not opinions; choice D is incorrect as SSARS compilations offer no assurance. Choice A meets the mandated integrated approach. Professionals should confirm SOX applicability for issuers to perform integrated audits. Integrate ICFR testing with FS audits to enhance efficiency and compliance.
- A nonissuer company requests that a CPA perform procedures on its inventory count and report the results to management only, without providing assurance to third parties. The CPA will observe the count, perform test counts, and report findings without an opinion or conclusion. What is the correct engagement type given the client's needs?
Answer: Agreed-upon procedures engagement under SSAE (report of findings)
This question tests agreed-upon procedures under SSAE for inventory procedures. The key facts are the nonissuer status, procedures on inventory with findings to management, no assurance, and observations. The correct answer aligns with SSAE as it allows restricted-use reports of findings without opinions. Choice B is incorrect as SSARS reviews provide assurance conclusions; choice C is incorrect as AU-C audits provide opinions; choice D is incorrect as SSARS compilations involve no procedures. Choice A fits the findings-only need. Accountants should restrict reports in agreed-upon procedures. Agree on procedures with users to meet specific needs.
- A client has requested an engagement where the CPA applies specific procedures to financial data and reports on the findings without providing an opinion or conclusion. The procedures have been determined by the client and a third-party user, and the report will be restricted to these specified parties. This engagement is best described as:
Answer: An agreed-upon procedures engagement.
An agreed-upon procedures (AUP) engagement involves a CPA performing specific procedures on a subject matter and reporting the factual findings. The CPA provides no assurance, opinion, or conclusion. The specified parties are responsible for the sufficiency of the procedures for their purposes, which aligns perfectly with the scenario described.
