AUD Sample CPA Exam Questions

Weekly Review Quiz #366 - AUD: Interim Financial Information

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Question 1

Which of the following statements is correct regarding a review of interim financial information under AICPA Professional Standards?

  1. The independent accountant should establish an understanding with the client regarding the engagement, but documenting that understanding through a written communication with the client is optional.
  2. An engagement to review the entity's interim financial information can only be accepted if the independent accountant has already audited the entity's most recent annual financial statements.
  3. The independent accountant should make appropriate inquiries of persons responsible for financial and accounting matters, but need not obtain written representations from management.
  4. The independent accountant is required to obtain sufficient knowledge of the entity's business and its internal control related to the interim financial information.

The correct answer is: D.

A. Incorrect... The accountant should document that understanding through an engagement letter or other form of written agreement with the client.p>

B. Incorrect… One of the conditions required to conduct a review of a nonissuer's interim financial information is that the entity's latest annual financial statements have been audited. However, it is permissible for those financial statements to have been audited by a predecessor.

C. Incorrect… Written representations from management should be obtained for all interim financial information presented.

D. Correct! The professional standards indicate that in order to perform a review of interim financial information, the accountant should have an understanding of the entity's business and its internal control as they relate to the preparation of both annual and interim financial information sufficient to identify potential material misstatements and to select appropriate inquiry and analytical procedures.

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Question 2

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

  1. To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.
  2. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
  3. We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
  4. We have made available to you all financial records and related data.

The correct answer is: C.

A. Incorrect... The AICPA's sample management representation letter for interim financial information specifically includes a bullet point to address subsequent events issues.

B. Incorrect… The AICPA's sample management representation letter for interim financial information specifically includes a bullet point to address management's responsibilities for the design and implementation of controls, including those related to the prevention and detection of fraud.

C. Correct! The AICPA's sample management representation letter for interim financial information does not include a representation about understanding the meaning of a "review" of interim financial information. The nature of such an engagement would be clearly communicated in the required engagement letter, but it would not be a statement of fact by management in response to the auditor's inquiries.

D. Incorrect… The AICPA's sample management representation letter for interim financial information specifically includes a bullet point commenting on the availability of all financial records and related data.

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Question 3

When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?

  1. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end.
  2. Inquire of the entity's outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity.
  3. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.
  4. Consider the results of audit procedures performed with respect to the current year's financial statements.

The correct answer is: D.

A. Incorrect... Although this would be done as a basis for conclusions for the review, it would not be performed in connection with planning the review.

B. Incorrect… A review engagement would not involve obtaining a lawyer's letter regarding litigation issues that would be relevant to an audit engagement.

C. Incorrect... A review engagement would not involve corroboration of the inquiries and analytical procedures by inspection of supporting documentation.

D. Correct! AICPA Professional Standards specifically identify that the accountant should consider the results of any audit procedures performed with respect to the current year's financial statements as a procedure that would be applicable to planning a review of interim financial information with respect to updating the auditor's knowledge of the entity's business and its internal control.

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Question 4

In an accountant's review of interim financial information, the accountant typically performs each of the following, except:

  1. Reading the available minutes of the latest stockholders' meeting.
  2. Applying financial ratios to the interim financial information.
  3. Inquiring of the accounting department's management.
  4. Obtaining corroborating external evidence.

The correct answer is: D.

A. Incorrect… In a review, the accountant normally reads the available minutes of stockholders' meetings and meetings of those charged with governance.

B. Incorrect… Performing appropriate analytical procedures is a major activity of the accountant as a basis for conclusions in a review engagement.

C. Incorrect... Performing appropriate analytical procedures is a major activity of the accountant as a basis for conclusions in a review engagement.

D. Correct! Obtaining corroborating external evidence.

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Question 5

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:

  1. Determining whether the prospective financial information is based on reasonable assumptions.
  2. Expressing a limited opinion that the financial information is presented in conformity with the applicable financial reporting framework.
  3. Deciding whether to perform substantive audit procedures prior to the balance sheet date.
  4. Reporting whether material modifications should be made for such information to conform with the applicable financial reporting framework.

The correct answer is: D.

A. Incorrect... This answer is nonsensical. Interim financial information is not prospective information.

B. Incorrect… A review report on interim financial information does not express any type of "opinion." It provides negative assurance by indicating whether or not the accountant is aware of material modifications which should be made for the interim financial information to conform with the applicable financial reporting framework.

C. Incorrect… A review does not encompass the performance of substantive auditing procedures other than inquiries of management and other applicable personnel, analytical procedures, and certain other procedures, such as reading the financial information and the minutes of meetings of those charged with governance.

D. Correct! The objective of a review of interim financial information is to provide the accountant with a basis for reporting whether material modifications should be made for such information to conform to the applicable financial reporting framework.

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End of Quiz

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