- Which statement accurately describes a primary difference between an accountant's report on a review versus a compilation of a nonissuer's financial statements?
Answer: A review report provides limited assurance, whereas a compilation report provides no assurance.
The fundamental distinction between a review and a compilation is the level of assurance provided. A review engagement results in a report that provides limited assurance. A compilation engagement provides no assurance, and the report explicitly states this.
- Under these circumstances, what is the accountant's most appropriate response?
Answer: Refuse to change the engagement and withdraw, considering the reason for the request is unreasonable.
When asked to change an engagement to a lower level of service, the accountant must consider the reason for the request. A scope limitation imposed by the client is generally not considered a reasonable basis for the change. In this case, the inability to complete procedures due to client actions suggests the client may be trying to hide information, making withdrawal the most appropriate action.
- A practitioner is engaged to perform a review of a nonissuer not-for-profit's financial statements. The practitioner identifies that contributions revenue increased 60% while cash receipts are flat; management explains that a large pledge was recorded but cannot provide donor documentation or board approval. Which report modification is appropriate given the circumstances if the practitioner cannot resolve the matter through additional procedures?
Answer: Modify the review report to express a qualified conclusion or adverse conclusion due to a material misstatement
This question tests reporting modifications under AR-C Section 90 for review engagements with unresolved material misstatements. The key facts are the unexplained increase in contributions revenue without documentation, indicating a potential misstatement. Choice B is correct because AR-C 90 requires a qualified or adverse conclusion when material misstatements cannot be resolved, reflecting the impact on limited assurance. Choice A is incorrect as practitioners must address unresolved matters beyond inquiry; choice C is incorrect because downgrading to compilation does not resolve the issue. Choice D is incorrect since disclaimers are not standard in reviews but may apply in severe scope limitations under SSARS. Practitioners should assess the pervasiveness of misstatements to choose between qualified or adverse conclusions. This decision rule maintains the credibility of review reports by highlighting known issues.
- The client's refusal to provide a representation letter constitutes a scope limitation. What is the most likely effect on the accountant's report?
Answer: The accountant is precluded from issuing a review report and should withdraw.
A signed representation letter from management is a required component of a review engagement. Management's refusal to provide one is a scope limitation that is so significant that the accountant cannot complete the engagement. Therefore, the accountant is precluded from issuing a review report and should withdraw from the engagement.
- An accountant performing a review concludes there is substantial doubt about an entity's ability to continue as a going concern. Management has included adequate disclosures regarding this matter in the financial statements. How should the accountant's review report be modified?
Answer: The report should include an emphasis-of-matter paragraph referencing management's disclosures.
When an accountant becomes aware of conditions that indicate substantial doubt about an entity's ability to continue as a going concern, and management's disclosures are adequate, the accountant should include an emphasis-of-matter paragraph in the review report. This paragraph draws attention to the note in the financial statements that discusses the matter, but it does not modify the accountant's conclusion.
- An accountant is engaged to perform a compilation for a nonissuer and becomes aware that management intends to use the compiled financial statements to solicit outside investors, but the statements omit substantially all disclosures and the omission is not clearly described to prospective users. What is the most appropriate action for the accountant to take?
Answer: Request that management include disclosures or ensure the omission is not misleading; if management refuses and the statements would be misleading, consider withdrawing
This question tests responsibilities under AR-C Section 80 when compiled statements may mislead external users. The key facts are the omission of disclosures without clear description to investors. Choice C is correct because AR-C 80 requires requesting corrections if statements are misleading, and withdrawal if refused, to avoid association with deceptive information. Choice A is incorrect as accountants cannot rely solely on management for external communications; choice B is incorrect because compilations provide no assurance. Choice D is incorrect since upgrading to review requires additional procedures. Practitioners should evaluate intended use and potential misleading effects before issuing reports. This framework protects users and the profession from misuse of compiled statements.
- During a review of a nonissuer's financial statements, an accountant accumulates several uncorrected misstatements that are individually immaterial. However, the aggregate of these misstatements is material to the financial statements as a whole. Management refuses to make the proposed adjustments. The accountant should:
Answer: Issue a review report with a modified conclusion describing the aggregate material misstatement.
The accountant must evaluate the effect of uncorrected misstatements, both individually and in the aggregate. If the aggregate of uncorrected misstatements is material, it constitutes a departure from the applicable financial reporting framework. Therefore, the accountant should modify the conclusion in the review report and describe the material misstatement.
- An accountant is engaged to compile the financial statements of a company for which the accountant is not independent. What is the accountant's reporting responsibility in this situation?
Answer: The accountant may issue the compilation report but must disclose the lack of independence.
Under SSARS, an accountant may perform a compilation engagement even if they are not independent. However, the lack of independence must be disclosed in the accountant's compilation report, typically as the last paragraph.
- An accountant has reviewed a nonissuer's basic financial statements and is asked to issue a separate report on supplementary information that is accompanying the statements. The supplementary information was subjected to the review procedures. The report on the supplementary information should:
Answer: State whether the accountant is aware of any material modifications that should be made to the information.
When reporting on supplementary information in conjunction with a review of financial statements, the accountant's conclusion should be based on the review procedures performed. The report should state whether the accountant is aware of any material modifications that should be made to the supplementary information for it to be in accordance with the applicable criteria.
- An accountant is engaged to perform a compilation engagement for a nonissuer retailer on financial statements prepared using a special purpose framework. Management refuses to include substantially all disclosures because "the bank only wants the numbers," and the omission is not intended to mislead. Which report modification is appropriate given the circumstances?
Answer: Modify the compilation report to disclose the omission of substantially all disclosures and include the statement that the financial statements are not designed for those not informed about the omission
This question tests the reporting requirements under AR-C Section 80 for compilation engagements when substantially all disclosures are omitted. The key facts are the use of a special purpose framework and management's refusal to include disclosures, with no intent to mislead. Choice C is correct because AR-C 80 requires modifying the compilation report to disclose the omission and state that the financial statements are not designed for those uninformed about it, aligning with standards to prevent misunderstanding. Choice A is incorrect as compilations provide no assurance, so adding limited assurance violates AR-C 80; choice B is incorrect because omissions require disclosure in the report even in compilations. Choice D is incorrect because adverse opinions are not issued in compilations, which disclaim assurance entirely under SSARS. Practitioners should assess if omitted disclosures could mislead users and request inclusion if necessary, withdrawing if the statements are misleading. This framework promotes transparency in compilation reports by clearly communicating limitations to intended users.
- A successor accountant is reviewing a nonissuer's current-period financial statements. The prior-period financial statements, which were compiled by a predecessor accountant, are also presented. The predecessor's report is not reissued. What should the successor accountant do?
Answer: Include an other-matter paragraph in the current-period report referencing the predecessor's report on the prior period.
When a predecessor accountant's report is not reissued, the successor accountant should include an other-matter paragraph in their report on the current period. This paragraph should state that the prior-period financial statements were handled by another accountant, the type of service performed (compilation), the date of the report, and the assurance (or lack thereof) provided.
- The objective of a review of a nonissuer's financial statements, as stated in the accountant's report, is to obtain limited assurance as a basis for reporting whether the accountant is aware of any:
Answer: Material modifications that should be made to the financial statements.
The standard review report explicitly states the objective is to obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework. This is the definition of limited assurance provided in a review.
- An accountant reviewed a nonissuer's financial statements for the current year and had compiled the financial statements for the prior year. How should the accountant report on the comparative financial statements?
Answer: The report on the current period should be expanded to include a separate paragraph describing the responsibility assumed for the prior period's compiled financial statements.
When the level of service performed on comparative financial statements differs between periods, the accountant's report should be updated. The report should include a separate paragraph (an other-matter paragraph) that describes the service performed in the prior period, the date of the previous report, a statement that no procedures were performed after that date, and the type of assurance (or lack thereof) expressed.
- A practitioner is performing a review engagement of a nonissuer technology startup. Management refuses to provide a written management representation letter at the conclusion of the engagement, stating that verbal representations should be sufficient. Which report modification is appropriate given the circumstances?
Answer: Withdraw from the review engagement because the practitioner cannot complete the engagement without written representations
This question tests the requirement for written representations under AR-C Section 90 in review engagements. The key facts are management's refusal to provide a written representation letter, which is essential for completing the engagement. Choice C is correct because AR-C 90 requires written representations, and inability to obtain them necessitates withdrawal to avoid issuing an incomplete report. Choice A is incorrect as written representations are mandatory in reviews; choice B is incorrect because the issue is a scope limitation, not a framework departure. Choice D is incorrect as converting to an audit requires client agreement and changes the engagement scope under professional standards. Practitioners should insist on written representations to confirm management's responsibilities and support limited assurance. This framework protects the practitioner from undue risk when evidence is insufficient.
- An accountant is engaged to review financial statements prepared on the cash basis of accounting, a special purpose framework. The financial statements and related disclosures are appropriate for the framework. What modification, if any, is required for the accountant's review report?
Answer: An emphasis-of-matter paragraph should be added to draw attention to the special purpose framework.
When reporting on financial statements prepared in accordance with a special purpose framework, the accountant should include an emphasis-of-matter paragraph in the review report. This paragraph states that the financial statements are prepared in accordance with the special purpose framework, refers to the note describing the framework, and indicates that the framework is a basis of accounting other than GAAP.
- A practitioner is engaged to perform a review of a nonissuer entity. The practitioner identifies that accounts receivable increased significantly, but management refuses to provide an aged trial balance or any support for collectability estimates. Which report modification is appropriate given the circumstances if the practitioner cannot obtain sufficient information to complete required procedures?
Answer: Issue a qualified conclusion due to a scope limitation, or withdraw if necessary
This question tests scope limitations under AR-C Section 90 in review engagements. The key facts are the significant increase in accounts receivable without supporting information, preventing procedure completion. Choice A is correct because AR-C 90 requires a qualified conclusion or withdrawal for scope limitations that preclude sufficient evidence. Choice B is incorrect as adverse conclusions are for misstatements, not scope issues; choice C is incorrect because reviews require addressing such matters. Choice D is incorrect since disclaimers under auditing standards do not apply to reviews. Practitioners should evaluate the impact of limitations on the ability to form a conclusion and modify accordingly. This decision rule ensures reports reflect the reliability of limited assurance provided.
- Which of the following paragraphs is included in an accountant's standard report on a compilation of a nonissuer's financial statements but not in a standard report on a review?
Answer: A paragraph stating that the accountant is not required to perform any procedures to verify the accuracy or completeness of the information provided by management.
A key part of the Accountant's Responsibility paragraph in a compilation report is the statement that the accountant was not required to perform procedures to verify the accuracy or completeness of the information provided by management. This language highlights the lack of assurance and is unique to the compilation report compared to a review report, which describes performing analytical procedures and inquiries.
- An accountant is performing a compilation engagement for a nonissuer and is asked by management to include a statement in the report that the accountant "reviewed and verified" the accuracy of inventory quantities. What is the most appropriate action for the accountant to take?
Answer: Refuse to include the statement because it implies assurance; if additional services were performed, describe them in a separate engagement under appropriate standards
This question tests the prohibition on implying assurance in compilation reports under AR-C Section 80. The key facts are management's request to include a statement implying verification, which exceeds compilation scope. Choice B is correct because AR-C 80 prohibits implying assurance in compilations, requiring separate engagements for additional procedures. Choice A is incorrect as such statements imply assurance, violating standards; choice C is incorrect because even with disclaimers, the implication risks misunderstanding. Choice D is incorrect since upgrading to review requires performing full procedures under AR-C 90. Practitioners should clearly delineate services to avoid user confusion about assurance levels. This framework ensures compliance with SSARS by matching report language to performed procedures.
- During a compilation engagement, an accountant becomes aware that the client's inventory is materially overstated. The client agrees to disclose this departure from the applicable financial reporting framework in a footnote but will not adjust the financial statements. What is the accountant's reporting obligation?
Answer: Modify the compilation report to describe the departure from the framework.
If the accountant becomes aware of a departure from the applicable financial reporting framework during a compilation, the accountant should recommend that the client revise the financial statements. If the client does not make the revisions, the accountant should consider modifying the compilation report to disclose the departure. Disclosure in a footnote by the client is insufficient; the accountant's report must be modified.
- A practitioner is performing a review for a nonissuer and identifies evidence that management may have overridden controls to accelerate revenue recognition. The practitioner believes the matter could be material and pervasive. What is the most appropriate action for the practitioner to take?
Answer: Expand inquiries and other review procedures to address the risk of material misstatement due to fraud, and consider the effect on the review report if unresolved
This question tests fraud considerations under AR-C Section 90 in review engagements. The key facts are indicators of material and pervasive revenue fraud. Choice A is correct because AR-C 90 requires expanding procedures and considering report modifications if unresolved, addressing risks to the conclusion. Choice B is incorrect as fraud is within review scope; choice C is incorrect because disclaimers are not automatic. Choice D is incorrect since communication to governance is required. Practitioners should scale procedures based on risk assessment and document findings. This rule enhances detection and response in limited assurance contexts.
