Auditing, 12e (Arens)
Chapter 21 Assurance Services: Review and Compilation Engagements
21.1 Describe how assurance engagement general standards are different from and similar to
audit standards
1) “An engagement where, pursuant to an accountability relationship between two or more
parties, a practitioner is engaged to issue a written communication expressing a conclusion
concerning a subject matter for which the accountable party is responsible” is the definition of
a(n)
A) audit engagement.
B) assurance engagement.
C) review engagement.
D) compilation engagement.
2) “An engagement where the practitioner expresses a conclusion on a written assertion about a
subject prepared by a party accountable for the assertion, such as management” is the definition
of a(n)
A) audit engagement.
B) attestation engagement.
C) review engagement.
D) assurance engagement.
3) You have just signed off the audit report on the financial statements of your client. What type
of engagement did you complete?
A) Review
B) Direct reporting
C) Attest and assurance
D) Operational
4) Thermos Inc. is having its financial statements audited by Pilott & Levy, a PA firm. Leon
Levy is the auditor in charge of the audit. The accountable party in this assurance engagement is
A) Leon Levy.
B) Pilott & Levy.
C) management of Thermos Inc.
D) the board of directors of Thermos Inc.
5) The Federal Auditor General provides the results of operational audits to Parliament in
Auditor General reports. What type of engagements are these?
A) direct reporting
B) attest engagement
C) review engagement
D) compilation engagement
6) Locker Building is a new apartment building in a Vancouver suburb. In order to receive a
subsidy from the municipality, it needs to prove that it has complied with the city’s new rules
about “green efficiency”. The “green efficiency” rules are described on the municipality’s
website and list the requirements a building must meet to be considered green and efficient.
Your firm, with the help of an environmental scientist, has been asked to perform a direct
reporting engagement for Locker building. The suitable criteria in this case are the
A) green efficiency rules.
B) auditor’s judgment.
C) environmental scientist’s judgment.
D) federal environmental laws.
7) For the conduct of an assurance engagement, the practitioner is required to identify or develop
criteria to evaluate the subject matter. Identify some characteristics of suitable criteria.
A) relevance, reliability, neutrality, understandability, completeness
B) reliability, accuracy, neutrality, timeliness
C) understandability, completeness, timeliness, free from bias
D) completeness, timeliness, free from bias, competent
8) In addition to having modifications of wording for the financial statement audit opinion, other
types of opinions can have modifications as well. Which one of the following describes a
situation where there would be a qualification or disclaimer of opinion for a direct reporting
engagement? The
A) subject matter does not conform to the criteria.
B) information is not presented fairly.
C) practitioner conducted alternative procedures where there was a scope limitation.
D) practitioner and management disagree about the content of the report.
9) Leon Levy, a partner at the audit firm where you work, asked you to work on the audit of the
balance sheet of Geminy Corp. Geminy is not a public company and has not been required to
have audited financial statements in the past. This year, due to a new bank loan, its bank
requested that audited financial statements be provided. Who are the primary users in this
assurance engagement?
A) Leon Levy
B) The bank
C) Management of Geminy Corp
D) Shareholders of Geminy Corp
10) What is the purpose of an auditor reporting on the effectiveness of internal control over
financial reporting? To
A) attest to the effectiveness and efficiency of internal controls at an organization.
B) state an opinion on management’s assessment of the effectiveness of internal controls.
C) provide an alternative to the operational audits conducted by internal auditors.
D) state that the controls are in conformity with standards with respect to internal controls.
11) An engagement for applying specified auditing procedures to financial information other
than financial statements provides no assurance. This results in
A) a report that can be readily tailored to any type of engagement.
B) a broad set of audit procedures being conducted for specific information.
C) frequent disagreement between auditor and client with respect to results.
D) distribution of the report normally being restricted.
12) Which of the following matters would be addressed in a report on the results of applying
specified auditing procedures to financial information other than financial statements?
A) An opinion with respect to the quality of the information examined
B) Explanations of the differences between audit, review and special engagements
C) The factual results of the procedures
D) Provision of negative assurance with respect to the accounts examined
13) Define “assurance engagements.”
14) Define “attest engagements.”
15) Define “direct reporting engagements.”
16) Outline the three performance standards of CICA Handbook section 5025, “Standards for
Assurance Engagements.”
17) As part of a loan agreement that it is thinking of obtaining, Always Quick Manufacturing
Limited has decided that it will use accounts receivable and inventory as security for working
capital funds.
The bank has indicated that in addition to an annual financial statement audit, that it would
require quarterly assurance on the accounts receivable and inventory amounts. The type of
assurance required has not been stated.
The bank has told Jose, the owner of the company, that he would need to provide a detailed
inventory list and an aged accounts receivable trial balance on the fifteenth of each month for the
information as at the preceding month end. Jose would like to know what his alternatives are.
Required:
Your partner is going to meet with Jose next week, and would like you to prepare a memo to file
that will be used as part of the meeting. The memo should include a list of alternative types of
engagements that could be used to provide assurance on the accounts receivable and inventory
balances.
21.2 Explain the importance of review and compilation services
1) Which of the following would be required in a compilation?
A) An understanding between the client and the accountant for the services to be provided
B) A formal engagement letter signed by the client
C) Management’s acknowledgements for its responsibility with regards to the financial
statements
D) A confirmation of the auditor’s independence
2) A review engagement requires what amount of evidence to be accumulated?
A) Minimal
B) Moderate
C) Extensive
D) Maximum
3) Four different engagements that the auditor can complete are: compilation, bookkeeping, audit
and review. Rank these engagements with respect to the level of assurance provided from highest
assurance level to lowest assurance level.
A) audit, review, compilation, bookkeeping
B) audit, compilation, review, bookkeeping
C) review, audit, compilation, bookkeeping
D) review, audit, bookkeeping, compilation
4) The level of assurance that is provided by the public accountant on a compilation report is
A) none.
B) low.
C) medium.
D) high.
5) Which of the following components of an engagement letter would apply to both a review
engagement and a compilation engagement?
A) negative assurance will be provided, so there is no assurance that fraud will be detected
B) no assurance will be provided, since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and inquiry
D) a statement that an audit is not to be performed and that no opinion will be expressed
6) Which of the following components of an engagement letter would apply to both a review
engagement and a compilation engagement?
A) negative assurance will be provided, so there is no assurance that fraud will be detected
B) no assurance will be provided, since only mathematical accuracy will be verified
C) procedures used during the engagement will be limited to analytical review and inquiry
D) a statement that each page of the statements should be clearly marked “unaudited”
7) Performing inquiry, analytical procedures and discussion with the limited objective of
assessing whether the information being reported on is plausible within the framework of
appropriate criteria, is the definition of a(n)
A) compilation.
B) review.
C) audit.
D) examination.
8) A review engagement includes
A) obtaining an understanding of the internal controls.
B) tests of controls or transactions.
C) inquiry, analytical procedures and discussion.
D) independent confirmation or physical examination.
9) Before performing a review of an entity’s financial statements, an accountant should
A) complete a series of inquiries concerning the entity’s procedures for recording, classifying,
and summarizing transactions.
B) apply analytical procedures to provide limited assurance that no material modifications should
be made to the financial statements.
C) obtain a sufficient level of knowledge of the accounting principles and practices of the
industry in which the entity operates.
D) inquire whether management has omitted substantially all of the disclosures required by
generally accepted accounting principles.
10) As part of the review engagement for a small manufacturing company, which of the
following would be a typical review procedure for the sales cycle?
A) review of internal controls over the granting of credit
B) examination of sales documents to ensure credit approval is documented
C) recalculation of the taxes and extensions on a sample of invoices
D) comparison of sales and gross profit to the prior year
11) As part of the conduct of a review engagement, which of the following would be a typical
procedure used for the assessment of the ending accounts receivable balance?
A) circularization of positive confirmations to all balances exceeding materiality
B) comparison of the age of the accounts receivable to the prior year
C) use of negative confirmations on all large balances
D) detailed examination of all accounts over 120 days to assess the bad debt allowance
12) As part of the conduct of a review engagement, which of the following procedures would be
appropriate for assessing the ending value of inventory?
A) discussion with management with respect to the costing method used
B) observation of the inventory count
C) observation of the warehouse, paying particular attention to dusty and damaged goods
D) confirmation with customers that are holding consignment inventory with respect to quantity
and condition of the inventory
13) As part of the conduct of a review engagement, which of the following procedures would be
appropriate for assessing the ending value of accounts payable?
A) sending zero balance confirmations to frequently used suppliers
B) use of negative confirmations to suppliers with material balances
C) comparison of the accounts payable balances by supplier to the prior year
D) examination of invoices received after the year end to ensure that they were recorded in the
proper period
14) You have just recently become a member of your local non-profit housing co-op by moving
into the largest unit. The Board of Directors has asked that you handle the review engagement,
but you are concerned about independence. What is a practical way for you to stay in the co-op
but also perform the review engagement?
A) Request a bylaw stating that the accountant cannot vote for Board members.
B) Do a compilation rather than a review engagement.
C) Have all the preparation work for the review engagement completed by a Board member.
D) Include a paragraph in the review engagement report stating that you are not independent.
15) When assessing the plausibility of the financial statements for a review engagement, the
auditor will use which of the following criteria for auditing a small, privately held company?
A) standards of efficiency and effectiveness
B) the audit objectives associated with the audit of financial statements
C) an acceptable reporting framework such as ASPE
D) an enterprise risk management framework, to help detect fraud
16) An accountant who reviews the financial statements of an entity should issue a report stating
that a review
A) does not constitute an audit.
B) provides negative assurance that the internal control structure 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.
17) When would the public accountant conduct audit procedures during a review engagement?
When
A) junior staff are assigned to the engagement.
B) required to assess plausibility.
C) it is a first time review engagement.
D) a higher level of assurance is required for the bank.
18) When conducting a review engagement, how is materiality calculated?
A) materiality is not calculated as a lower level of assurance is being provided
B) the concept of significance is used, rather than the concept of materiality
C) always as a percentage of net income before income taxes
D) in the same manner as an audit engagement
19) When is negative assurance used during a review engagement?
A) when the standards applicable to a review engagement have been met
B) if a qualification is required during the review engagement
C) when the criteria associated with a review engagement have not been satisfied
D) when the practitioner is unable to set appropriate criteria for the review engagement
20) Why is it important for the review engagement report to state that the review is not an audit?
A) to make sure that the public accountant is not sued
B) to clarify that only review engagement procedures were used during the engagement
C) to make users aware that a review provides a lower level of assurance
D) so that the user does not ask any unnecessary questions about the engagement
21) 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
22) The fact that a client has a material accounting departure for failure to follow ASPE would
require the accountant to disclose that fact in a separate reservation paragraph, when the
accountant is performing
A) a compilation.
B) a review and an audit.
C) either a compilation or a review.
D) neither a compilation nor a review, only an audit.
23) Which of the following techniques would be conducted by a practitioner when conducting a
review of compliance with agreements and regulations?
A) use of a specialist to ensure that the terms of the agreement are complied with
B) inquire about how the client monitors its compliance with the provisions
C) testing control procedures throughout the year that pertain to the provisions of the agreement
D) discussions with client’s legal counsel to identify any legal liabilities with respect to potential
violations of the agreements
24) Richard is performing a compilation engagement. Richard is concerned that the information
is
A) arithmetically correct.
B) accurate.
C) complete.
D) in accordance with ASPE.
25) A compilation presents information, in the form of financial statements, that is the
representation of management. The public accountant who prepares the compilation undertakes
to express
A) limited assurance on the statements.
B) minimal assurance on the statements.
C) no assurance on the statements.
D) full assurance on the statements.
26) Which one of the following engagements would most likely be a compilation engagement?
An engagement with respect to financial statements
A) attached to a personal tax return.
B) for a large public company.
C) for a company that has a large bank loan.
D) that accompany future oriented information to obtain financing.
27) Which one of the following procedures would most likely be conducted by an accountant
during a compilation engagement?
A) Enquire of management with respect to the purpose of new capital assets.
B) Compare gross profit on a year-by-year basis over the last five years.
C) Circularize negative accounts receivable confirmations.
D) Assemble and re-calculate the financial statement allocations.
28) The accountant is working on an engagement with respect to the client’s financial statements.
Which of the following engagements would omit an assessment of the client’s accounting
policies’ compliance with GAAP?
A) Review
B) Compilation
C) Audit
D) Attestation
29) Which of the following items includes criteria for accepting a compilation engagement?
A) evaluation of whether the financial statements are in accordance with ASPE
B) no reason to believe that the financial statements are false or misleading
C) completion of an independence threat analysis, ensuring that there are no threats to
independence
D) completion of a client risk analysis, with the conclusion that risks are low
30) A public accounting firm can issue a compilation report
A) only if the partners are independent.
B) only if all the partners and the staff in the office performing the engagement are independent.
C) if the partners have no material or direct immaterial interest in client.
D) even if it is not independent.
31) You are a public accountant retained by the manager of a cooperative retirement village to do
“write-up work.” You are expected to prepare unaudited financial statements with each page
marked “unaudited” and accompanied by a disclaimer of opinion stating no audit was made. In
performing the work, you discover that there are no invoices to support $25,000 of the manager’s
claimed disbursements. The manager informs you that all the disbursements are proper. What
should you do?
A) Submit the expected statements but omit $25,000 of unsupported disbursements
B) Include the unsupported disbursements in the statements since you are not expected to make
an audit
C) Obtain, from the manager, a written statement that you informed him of the missing invoices
and include his assurance that the disbursements are proper
D) Obtain further information about the $25,000 unsupported items and withdraw if the situation
is not satisfactorily resolved
32) Which one of the following is a professional standard that must be followed by an accountant
when conducting a compilation engagement?
A) work being adequately planned and properly executed
B) having adequate technical training and proficiency in auditing
C) obtaining an adequate understanding of the business and its industry
D) documenting the processes used to compile and record transactions
33) A financial statement review emphasizes four broad areas, one of which is to “Perform
analytical procedures.” State the other three areas emphasized.
34) Yvan is preparing the audit plan for Share the Wealth, a non-profit organization. Share the
Wealth is a large Montreal based organization and receives corporate donations and also has
many stores that collect and re-sell costume jewelry and clothing. The purpose of the
organization is to build recreation areas for children in less fortunate areas of the city.
Share the Wealth was started by two sisters. One of the sisters is still actively involved in the
organization, but the other sister has been devoting less time to the organization since she has
had triplets.
Share the Wealth has a total of 8 stores in the city where individuals can drop off donations and
where customers can also purchase the second hand clothing and costume jewelry. Share the
Wealth has a total of 12 employees who work in the different stores across the city. Depending
on the schedule and availability, the employees will randomly be assigned to a store for the
week.
Required:
Provide three procedures that Yvan should consider when performing the review engagement of
Share the Wealth?
35) Describe the professional standards that must be followed when undertaking a compilation
engagement as specified by the CICA Handbook.
36) Identify the reporting standards for compilation engagements.
37) Always Quick Manufacturing Limited is a small business that manufactures metal and
plastic components for a variety of industries. The bulk of the business is in the computing
industry, although the occasional contract is for the automotive industry.
Jose, the owner, would like to expand the business so that he can bid on larger contracts. This
requires an investment of about $500,000 to finance capital assets and about $300,000 for a
working capital loan. Jose has financed the business himself to this point, and has been given
some alternatives by the bank.
The alternatives pertain to which assets are used as guarantees, and whether Jose also guarantees
the loans personally (as he has substantial personal assets). The bank also stated that if Jose
personally guarantees the loan, the company will only require a review engagement, whereas if
the loan is only secured by corporate assets, then an audit of the company will be required.
Jose understands the differences among the guarantees, but is not sure about the difference
between a review and audit engagement. Presently, the company financial statements are
prepared using a compilation engagement.
Required:
Explain to Jose the difference between a review and audit engagement in the context of his
present compilation engagement.
21.3 Describe the type of report that the public accountant provides for interim financial
information for public companies
1) What is the title of a compilation report?
A) Opinion
B) Criteria Schedule
C) Engagement Report
D) Notice to Reader
2) Prospective financial information prepared using assumptions reflecting management’s
judgment as to the most probable courses of action for the entity is called a(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
3) ABC Company has requested PA to prepare prospective financial information to assist with
the acquisition of a bank loan. The prospective financial information is being prepared using
management’s best estimate of future sales and expenses. The type of information being prepared
is a(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
4) Financial information prepared using one or more assumptions (hypotheses) that do not
necessarily reflect the most likely course of action in management’s judgment is called a(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
5) ABC Company is considering three different alternatives with respect to expansion. To assist
with the decision process, the company has requested PA to perform simulations and prepare
prospective financial information using several sets of assumptions. Some of these assumptions
are likely, while others are less likely. What type of information is being prepared? A(n)
A) forecast.
B) projection.
C) prospective financial statement.
D) prospectus.
6) Special use prospective financial statements are intended for
A) internal management only.
B) any third party.
C) third parties with whom negotiations are being conducted directly by the responsible party.
D) the relevant provincial securities commissions.
7) With respect to working on an engagement to examine a financial forecast or projection
included in a prospectus or other public offering document, the public accountant and the client
should agree upon
A) allocation of the responsibility of creating the assumptions to the public accountant.
B) the period of time to be covered.
C) delegation of forecast preparation to the public accountant.
D) the fact that the forecast may not be prepared in accordance with standards.
8) Prior to accepting an engagement to examine a financial forecast or projection included in a
prospectus or other public offering document, the public accountant should
A) obtain an understanding of the controls over preparation of internal forecasts such as budgets.
B) increase the risk profile of the client with respect to management integrity.
C) ensure that management will provide sufficient evidence to conduct the engagement.
D) inform the client that the engagement may not detect errors in the client’s forecasts.
9) A public accountant has been engaged to conduct an examination of future-oriented financial
information. Which of the following procedures would be included in the examination?
A) creation of assumptions that fit the projected information
B) developing the hypotheses with the assistance of management
C) assessment of internal controls over the development of internal future-oriented information,
such as budgets
D) assessing the plausibility of hypotheses
10) What type of opinion does the auditor provide with respect to FOFI (future-oriented financial
information)? An opinion about the
A) underlying assumptions.
B) achievability of the forecast.
C) statistical nature of projections.
D) plausibility of forecasts.
11) Describe the purpose of
i) a forecast
ii) a projection, and
iii) prospective financial statements